Key Delaware Corporate & Commercial Decisions of 2024 - Part 2

Wilmington, Del. (January 30, 2025) - In Part 2 of his 20th annual listing of key Delaware commercial and corporate decisions, Wilmington Managing Partner Francis G.X. Pileggi explores significant rulings from the Delaware Supreme Court and Court of Chancery in 2024.

View Part 1 here.

Claims for Impeding Milestones Allowed to Proceed, and Integration Clause Examined

In a common fact pattern involving allegations that the buyer of a company intentionally derailed the attainment of milestones that would trigger additional payments, the Court of Chancery allowed several claims to survive a motion to dismiss in Trifecta Multi-Media Holdings, Inc. v. WCG Clinical Services LLC, C.A. No. 2023-0699-JTL (Del. Ch. June 10, 2024). The claims included fraud, breach of the implied covenant of good faith and fair dealing, breach of contract, and indemnification.

Highlights:

• The court recited the elements of fraud that must be pled to prevail on that claim, but also explained that in Delaware there is no difference between fraud and fraudulent inducement. See page 20 and footnote 34.
   
• The court described the scienter element of a fraud claim as requiring allegations with enough factual detail to support an inference that the speaker had no intent to perform when a promise was made. Slip op. at 22 – 23.
   
• Regarding the requirement of reliance, the court explained that this element is typically not suitable for a motion to dismiss unless a fully integrated contract has as an anti-reliance clause. See Slip op. at 24 – 25 and footnote 47.

Required Reading

• The court instructs on the interfacing between an integration clause and the requirements of an anti-reliance clause if someone seeks to prevent the use of statements outside the four corners of an agreement. See Slip op. at 24 – 28.

Indemnification

• Also noteworthy is the court’s observation that the agreement at issue did not require any specific form of notice and therefore the court found that filing the complaint sufficed for the notice requirement in the indemnification provisions. See Slip op. at 37 – 39 and footnote 93.

Special Master Appointed to Investigate Claims Against Court-Appointed Receiver for Defunct Corporation

Issues with the receivership of a defunct corporation and the report of a Special Magistrate appointed to investigate claims against the court-appointed receiver, were addressed in B.E. Capital Management Fund LP v. Fund.com Inc., C.A. No. 12843-VCL (Del. Ch. July 18, 2024). The court reviewed the report de novo of a Special Magistrate who chronicled the misdeeds of a Receiver appointed by the court for a defunct corporation and noted that DGCL Section 226(a)(3) limits the appointment of receivers for a defunct corporation in a manner that is analogous to Chapter 7 in bankruptcy–not a Chapter 11 bankruptcy. See footnote 1. The court also observed that DGCL Section 226(a)(3) does not authorize a receiver to revive the defunct corporation, but rather a receiver can be appointed when the corporation “has abandoned its business and had failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.” See DGCL Section 226(a)(3).

Chancery Explains Remedies of Judgment Creditors

The Court of Chancery recently explained that a charging lien is the exclusive remedy of a judgment creditor against a member’s interest in an LLC, in XRI Investment Holdings LLC v. Holifield, C.A. No. 2021-0619-JTL (Del. Ch. July 24, 2024). The parties structured several special purpose vehicles in an effort to circumvent an existing lien on LLC membership units by designing the right of a subordinate creditor to receive proceeds from the sale of the membership units already encumbered—as opposed to a security interest in the membership units themselves.

The court focused on several issues that arose in connection with the debtor not fully disclosing to an existing creditor, who had an existing encumbrance on the units, that there would be an attempt to obtain a lien on the proceeds from the sale of the units, in an effort to provide new collateral for a new loan. Acquiescence and other equitable defenses were addressed in an analysis of which of those defenses might be used against legal claims, but the seminal CompoSecure II decision barred the defense of acquiescence in this matter.

Chancery Examines Transfer of Membership Interests in LLC

In Gurney-Goldman v. Goldman, C.A. No. 2023-1124-JTL (Del. Ch. July 12, 2024), the court explained key aspects of the Delaware LLC Act in connection with the transfer of membership interests. In the court’s words: “To put it mildly, [. . .this] is not a well-developed area of Delaware law.” There are many principles in this epic decision of both well-settled and not well-traveled aspects of Delaware LLC law that should be of interest to anyone who either forms or litigates Delaware LLCs.

Key Points

• Management of an LLC: Under the LLC Act, the default rule is that an LLC is member-managed. See 6 Del. C. § 18-402.
   
• LLC Agreement Terms/Formation: The statute allows for oral or implied terms. The court explained that an implied agreement is one inferred from the conduct of the parties “though not expressed in words.”
   
• Appointment of Manager: The court referred to “manager” as a term of art under the LLC Act, which defines it as a person who is either named as a manager in the LLC agreement or designated pursuant to a similar instrument.
   
• Transfer of Membership Interests in LLC: The default rule under the LLC Act when a member transfers its member interest is that the recipient of the interest does not automatically become a member. See § 18-702. Rather, the recipient only holds the right of an assignee. Slip op. at 20-21.
   
• Assignee Becomes a Member: § 18-301 describes how an assignee becomes a member. After the formation of an LLC, the requirements for becoming a member are described in § 18-704(a). Those two ways include: (1) pursuant to provisions in the LLC Agreement; or (2) upon the affirmative vote or written consent of all the members of the LLC.
   
• Death of a Member: The court instructed that the death of a member who was a natural person terminates that person’s membership. See footnote 52 and accompanying text. A member’s interest in an LLC, like other personal property, transfers by operation of law to the estate of the deceased member.

Court of Chancery Addresses Meaning of “Officer” in Advancement Case

A recent Court of Chancery decision determined whether persons seeking advancement satisfied the undefined term “officer” under the Bylaws and the Delaware General Corporation Law (the “DGCL”). In Gilbert v. Unisys Corp., No. 2023-0513-PAF (Del. Ch. Aug. 13, 2024), the court was tasked with determining whether the plaintiffs, a former Senior Vice President and Vice President of a Delaware corporation, were “officers” entitled to advancement for fees incurred to defend themselves in a Pennsylvania action.

Rarely Discussed Absolute Litigation Privilege Examined in Connection With Non-Disparagement Clause

In Seva Holdings Inc. v. Octo Platform Equity Holdings, LLC, C.A. No. 2022-0437-PRW (Del. Ch. Aug. 29, 2024), the court discussed the rarely-addressed absolute litigation privilege, which generally bars claims of defamation based on pleadings filed with the court. The decision clarified Delaware law in determining that an alleged violation of a non-disparagement clause could be the basis to trigger repurchase rights under an LLC Agreement. The absolute litigation privilege was not being used as a defense against the non-disparagement claims under the employment agreement but rather was being used to oppose the right to repurchase under the LLC Agreement.

Chancery Issues Instructive Opinion on Formal Opinion Letters

For anyone involved with any aspect of formal legal opinion letters, Vice Chancellor Laster's opinion in Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Sept. 9, 2024), deserves a close examination. It provides a detailed analysis of the differences between the various types of opinion letters and highlights the importance of supporting documents in drafting those letters.

The court engaged in an instructive discussion of the important distinctions between a "reasoned" and a "non-reasoned" formal opinion letter, as well as a "non-explained" or "clean" opinion letter. It also emphasized that, while it did not conduct a de novo review of the formal opinion letter, it did review objective facts to make a determination as to bad faith, and gave examples of how one's conduct can, in certain circumstances, reveal one's state of mind.

Entire Fairness Test Satisfied Despite Common Stock Appraised at Zero Value

The opinion in Jacobs v. Akademos, Inc., C.A. No. 2021-0346-JTL (Del. Ch. Oct. 30, 2024), addressed the not-uncommon situation in which only preferred stockholders receive consideration in the sale or merger of a distressed company, and concluded that the preferred stockholders proved that the fair value of the common stock for appraisal purposes was zero, and that the transaction satisfied the entire fairness test.

In so finding, the court engaged in a useful analysis of principles of Delaware appraisal law, discussing the elements of a breach of fiduciary duty, the differences between standard of conduct and standard of review, and elaborated on the fair price and fair dealing elements of the entire fairness test. It also helpfully discussed a comparison of competing expert valuation reports.

Reincorporation Without Supermajority Vote

A recent topic of interest has been the reincorporation of Delaware entities in other states. In Gunderson v. The Trade Desk, Inc., C.A. No. 2024-1029-PAF (Del. Ch. Nov. 8, 2024), the court reconciled juxtaposed provisions in the certificate of incorporation and the Delaware General Corporation Law to allow reincorporation of a Delaware corporation in Nevada with a majority vote—rather than a supermajority vote.

In essence, the company proposed to reincorporate pursuant to a conversion under Section 266 of the DGCL, which allows a conversion by a majority of the outstanding shares of stock entitled to vote on the proposal. However, Article X of the company's Certificate of Incorporation required the approval of 66 2/3 of the outstanding stock, voting as a single class, to take certain actions. A stockholder alleged that the conversion resulted in an amendment of the Certificate of Incorporation, and therefore, triggered the supermajority requirement. The court disagreed.

The court emphasized that Delaware has long adhered to "application of the doctrine of independent legal significance, and refused to extend charter-based voting requirements to mergers and consolidations absent clear language[.]" It underscored that high vote requirements must be unambiguous, leaving "no doubt that the shareholders intended that a supermajority would be required."

The court reiterated the fundamental principle that: "When it comes to construction and interpretation of a certificate of incorporation, the agreement as a whole includes the DGCL and all of its amendments, which the Delaware legislature has determined shall be a part of the charter, or certificate of incorporation of every corporation except so far as the same are inapplicable and inappropriate to the objects of the corporation."

Court of Chancery Relies on Promissory Estoppel to Resolve LLC Ownership Dispute

In Rostowsky v. Hirsch, 2024 WL 4491902 (Del. Ch. Oct. 15, 2024), the Court of Chancery found that, based on the equitable doctrine of promissory estoppel, Ari Rostowsky owned 15% of Aither Health LLC, a Delaware LLC, notwithstanding the fact that he was not identified in the company’s formation documents nor was he admitted as a member in accordance with the company’s LLC agreement.

Rostowsky was heavily involved in Aither Health from the time of its formation based on the individual defendants’ promise that he had a 15% ownership interest in the company. When Rostowsky resigned from the company years later the individual defendants claimed that his interest was inchoate and had not vested.

In resolving the dispute, the Court of Chancery held that even though Rostowsky was not technically a member, the doctrine of promissory estoppel entitled him to the 15% interest he was promised. The evidence the Court relied on included numerous emails between the parties which suggested, and in one case expressly confirmed, that Rostowsky held a 15% ownership interest, the lack of communications by the individual defendants disabusing Rostowsky of his belief, the identification of Rostowsky as a “Founder” in the company's business plans and projections, and Rostowsky’s significant role in the company (which included working 80-90 hours per week for eighteen months without compensation, securing the company’s first client, securing a critical loan which would not otherwise have been available, and participating in high-level strategy, employment, and financial decisions).

The defendants attempted to downplay Rostowsky’s contributions, however, the Court rejected those efforts. The court explained that: only an “unreasonable person” would expect a non-equity holder to perform those services without compensation.

For more information on these cases, contact the author of this alert. Visit our Complex Business & Commercial Litigation Practice and Directors & Officers Litigation Practice pages for more information about Lewis Brisbois’ capabilities in this area.