The Court of Chancery’s April 29, 2020 decision in Gilbert v. Perlman et al. supports the conclusion that a company’s minority stockholder cannot be considered part of a “control group” (and therefore will not owe fiduciary duties to the company and other minority stockholder) unless the controlling stockholder cedes some material aspect of its control to the minority stockholder as part of an agreement to act in concert to achieve a corporate action.
Across the United States, the Coronavirus has caused widespread devastation, marking its arrival with debilitating symptoms and tens of thousands of deaths. The virus also is responsible for significant economic destruction, rendering 30 million Americans jobless requiring $660 billion in payroll loans, and necessitating a $2.2 trillion in stimulus package. History likely will reveal that poorly run companies are repeat victims of the financial hardships precipitated by COVID-19. Even without a pandemic, a company likely will fail (or suffer significant harm) if its directors and officers do not adequately oversee the company’s management. But, there is another reason to avoid oversight failures. As the Delaware Court of Chancery’s April 27, 2020 decision in Hughes v. Xiaming Hu et al. reinforces, directors and officers who neglect their oversight responsibilities may be personally liable for resulting harm to the company and its stockholders.
Continue reading BETTER OVERSIGHT THAN HINDSIGHT: Hughes v. Xiaming Hu demonstrates that directors and officers who fail to adequately oversee their company’s management expose themselves to personal liability
On March 18, 2020, the Delaware Supreme Court reversed the Delaware Court of Chancery’s decision in Sciabacucchi v. Salzberg, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018), which had held that federal forum provisions (FFPs) for claims under the Securities Act of 1933 (’33 Act) are facially invalid and therefore cannot be included in a Delaware company’s charter or bylaws.
The Delaware Supreme Court’s holding that Delaware corporations may add FFPs to their charter and bylaws is a positive development for companies that wish to trade the uncertainty and expense of defending multiple lawsuits in various state and federal court jurisdictions for the steady guidance of a venue with the background and experience necessary to resolve disputes under the ’33 Act.
On April 2, 2020, Vice Chancellor Slights dismissed a derivative lawsuit that alleged that a Company’s Board breached its fiduciary duties by rushing to pay an “excessive” severance fee in order to facilitate the CEO’s separation from the Company, and as a means to cover up the Board’s slow and inadequate response to the CEO’s pattern of wrongful conduct. According to the Court of Chancery, Plaintiff’s claims were betrayed by the Complaint’s failure to demonstrate demand futility under either prong of the standard described in Aronson v. Lewis, 473 A.2d 805 (Del. 1984).
Of note in this decision is that the Court of Chancery affirms the principle that, under typical circumstances, a general release provision in a settlement agreement (including the release of claims against directors) cannot form the basis of allegations that a board engaged in an “interested transaction.” That is especially true, where, as in this case, the claim purportedly avoided is one that is so weak that the Plaintiff elected not to bring it and raised it only in an effort to identify the Board’s interest in the Separation Agreement under the first prong of Aronson.
Continue reading A PLAINTIFF CANNOT SATISFY THE FIRST PRONG OF ARONSON BY ALLEGING THAT THE BOARD’S “INTEREST” IN THE SETTLEMENT AT ISSUE WAS TO AVOID A CLAIM SO WEAK THAT PLAINTIFF DECLINED TO BRING IT
By: Oderah C. Nwaeze & Mackenzie M. Wrobel
Once a complaint has been filed, defendants have a finite period of time to decide what to do next. Among the list of options are: (a) ignore it (the U.S. is overly litigious anyways); (b) answer the allegations; (c) move to dismiss; or (d) cower in fear and settle immediately. More often than not, defendants choose option (c).
The reality of moving to dismiss, however, is that the moving party often lacks a credible basis for dismissing the entire complaint. As a result, defendants frequently file a partial motion to dismiss on the day that a responsive pleading is due under the court’s rules (or some other date that the parties have agreed to file and serve a response). In circumstances where a plaintiff has filed a partial motion to dismiss, the parties usually — without formal agreement — focus their efforts on the partial motion, ignoring the fact that as of the deadline to file a responsive pleading, the defendant has not answered those allegations that are beyond the scope of the partial motion to dismiss. According to a recent decision from the Delaware Court of Chancery, that approach is a mistake. While the rules of civil procedure excuse a defendant from answering allegations that are subject to a partial motion to dismiss, nothing in the rules shields the defendant from failing to answer those allegations unrelated to the motion to dismiss in a timely manner.
In almost every lawsuit, as part of the discovery process, the parties will exchange information relevant to the claims and defenses at issue. Discovery, however, is rarely as easy or collaborative as it should be. To the contrary, parties routinely will refuse to produce materials responsive to well-tailored discovery requests without offering anything more than rote, unspecific responses to explain their tenuous positions. In most cases, the objecting party ultimately will produce the requested documents, but only after forcing its opponent to waste time and money exchanging correspondence and participating in meet and confers. Recognizing this unnecessary strain on resources, Delaware courts have spent the better part of a decade waging a not-so-quiet war on boilerplate objections.
Leading the charge on that front are jurists from the Delaware Court of Chancery, who refuse to allow parties to withhold discovery based on the limited details found in formulaic objections. See Transcript of Motion to Compel Argument, Lake Treasure Hldgs. Ltd. v. Foundry Hill GP, C.A. No. 6546-VCL (Sept. 11, 2012) (“Lake Tr. at __”); Transcript of Motion to Compel Argument, Glidepath, Ltd., et al. v. Beumer Corp. et al., C.A. No. 12220-VCL (Del. Ch. Oct. 6, 2016) (“Glidepath Tr. at __”). The Court has emphasized that the point of discovery responses is for the objecting party to detail for its adversary “what [it is] planning not to do” and why. Lake Tr. at 22. Otherwise, parties will waste time and money engaging in letter writing campaigns in order to flesh out objections that should have been described in the “first response.” Lake Tr. at 22; see also Hammer v. Howard Medical, Inc., 2017 WL 1167550 (Del. Super. Feb. 14, 2017) (Stokes, J.) (granting a motion for sanctions, fees, costs against an objecting party for the continued use of general “irrelevant” or “not applicable” objections to interrogatories despite the requesting party’s efforts to seek clarification through correspondence and motion practice).
Although Delaware has not expressly adopted the remedy of reverse piercing of a corporate veil, the United States Court of Appeals for the Fourth Circuit believes that Delaware LLCs may be deemed the alter ego of their sole or controlling equity-holder and held jointly liable for that individual’s (or entity’s) liabilities. Indeed, in Sky Cable, LLC v. DIRECTV, Inc., 886 F.3d 375 (4th Cir. 2018), the Court of Appeals applied reverse veil-piercing to conclude that the LLCs at issue were properly co-debtors to a $2.3 million judgment against the LLCs’ sole member, Randy Coley.
At the trial level, the Western District of Virginia entered a $2.3 million judgment for DirecTV, after finding that Mr. Coley was liable for a fraud scheme involving the unauthorized transmission of DIRECTV’s programming. See Sky Cable, LLC, 886 F.3d at 377. When DIRECTV could not enforce the judgment against Mr. Coley, DIRECTV moved the district court to pierce the corporate veil of three of Mr. Coley’s LLCs, arguing that the LLCs were Mr. Coley’s alter egos. Id. The district court agreed and granted DIRECTV’s motion. Id. Among the reasons for that holding was that: (1) the LLCs were controlled solely by Mr. Coley; (2) Mr. Coley failed to observe corporate formalities and maintain proper accounting records; and (3) Mr. Coley engaged in significant commingling of assets between the LLCs and his personal finances. Id. at 390. Continue reading Does Delaware law support reverse veil-piercing? The Fourth Circuit says: YES!