Chancery Transactional


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The Chancery Transactional - March 6, 2018




In this week's edition, we bring you a pair of rulings regarding the continuing effectiveness of a right to remove a manager of an LLC after a prior breach (REJV5), a decision from the Complex Commercial Division of the Delaware Superior Court holding that insuring for fraud is permissible (Arch Insurance), a Court of Chancery decision finding that plaintiffs adequately alleged that a general partner failed to act in subjective good faith (Dieckman) and a reminder that good corporate governance practices are not tantamount to legal obligations (Orexigen). 
LLC Removal Right Not Defeated by Alleged Prior Breach
REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018)
  • The Court found plaintiff was entitled to exercise its right to remove defendant as LLC, rejecting defendant's affirmative defenses that plaintiff precluded defendant's performance and that plaintiff's prior breach excused performance.
  • GRANTED IN PART AND DENIED IN PART: Plaintiff's motion for judgment on the pleadings
  • Plaintiff, a member of nominal defendant LLC, brought suit seeking to removed defendant as manager of the LLC for failing to complete obligations under the LLC Agreement by a specified Completion Date. Defendant asserted as affirmative defenses that plaintiff prevented defendant from timely completing its obligations under the "prevention doctrine," and that plaintiff's prior breach of a "best efforts" clause and prior breach of the implied covenant of good faith and fair dealing excused defendant's untimely performance. The Court, in an oral ruling, granted plaintiff's motion in part, finding that the express terms of the LLC Agreement unconditionally permitted plaintiff to remove defendant, and rejecting defendant's "prevention doctrine" and prior breach defenses, but permitted defendant to amend its answer to replead its implied covenant defense.

    This transcript is available for purchase from the Chancery Court Reporters. To order, call (302) 735-2152.
Contract Interpretation; Prevention Doctrine; Express Term; Implied Term; Performance Obligation; Conditional Obligation; Frustrate Performance; Unconditional Right; Ct. Ch. R. 12(c); Judgment on Pleadings; Contract Provision; Best Efforts Clause; Reasonable Efforts; Breach of Contract; Prior Breach; Contract Performance; Excuse Performance; 6 Del. C. § 18-1101(c); Implied Covenant; Limited Liability Company; Fiduciary Duty; Waive Fiduciary Duty; Bad Faith; Affirmative Defense; Pleading Standard; Ct. Ch. R. 9(b); Improper Motivation; Ct. Ch. R. 15(aaa); Ct. Ch. R. 15(a); Amend Pleading; Amend Answer
Certification of "Prevention Doctrine" Appeal Denied
  • The Court denied certification of interlocutory appeal of a prior ruling finding that the "prevention doctrine" did not preclude plaintiff's exercise of an unconditional removal right under an LLC Agreement.
  • DENIED: Defendant's application for certification of an interlocutory appeal
  • Plaintiff, a member of nominal defendant LLC, brought suit seeking to removed defendant as manager of the LLC for failing to complete obligations under the LLC Agreement by a specified Completion Date. Defendant asserted as affirmative defenses that plaintiff prevented defendant from timely completing its obligations under the "prevention doctrine," and that plaintiff's prior breach of a "best efforts" clause and prior breach of the implied covenant of good faith and fair dealing excused defendant's untimely performance. The Court previously granted plaintiff's motion in part, finding that the Agreement permitted plaintiff to remove defendant, and rejecting defendant's "prevention doctrine" and prior breach defenses. Defendant moved for certification of interlocutory appeal or entry of partial final judgment on the prior rulings. The Court, in this Opinion, denies defendant's motion for certification, finding that the prior rulings did not determine a substantial issue or establish a legal right, and defendant's motion for partial final judgment, citing Delaware policy against piecemeal litigation.
Supr. Ct. R. 42(b)(i); Interlocutory Appeal; Certification; Legal Standard; Supr. Ct. R. 42(b); Prevention Doctrine; Contract Interpretation; Substantial Issue; Legal Right; Express Terms; Supr. Ct. R. 42(b)(iii); Waiver; Judicial Discretion; Implied Covenant; Good Faith; Objective Standard; Mental State; Reasonable Belief; Ct. Ch. R. 54(b); Partial Final Judgment; Piecemeal Litigation
DE Policy Permits Insurance Coverage For Loyalty Breach By Fraud
  • The Superior Court, ruling on plaintiff insurer's motion for summary judgment in an insurance coverage dispute, concludes that Delaware public policy does not prevent coverage for a breach of the duty of loyalty based on fraud.
  • GRANTED IN PART AND DENIED IN PART: Plaintiffs' motion for summary judgment
  • Plaintiff insurers brought this action in the Complex Commercial Litigation Division of the Delaware Superior Court for a declaration that they had no obligation to indemnify defendants following the settlement of two actions arising out of a transaction pursuant to which one individual defendant took corporate defendant private. Defendants counterclaimed for fraudulent inducement and bad-faith coverage denial. The Court grants plaintiffs' motion for summary judgment in part and denies it in part in this Opinion, ruling that defendants are collaterally estopped from relitigating fact issues ruled upon in an underlying Court of Chancery post-trial Opinion, that Delaware law applies to the policies, that Delaware public policy does not preclude insurance coverage for liability arising out of breach of the duty of loyalty as a result of fraud, that the record is insufficiently developed to allow judgment on the bad faith counterclaim and some of plaintiffs' arguments, and that the fraudulent inducement counterclaim must be dismissed.
Summary Judgment; Legal Standard; Burden; Burden Shift; Issue Preclusion; Claim Preclusion; Res Judicata; Collateral Estoppel; Choice of Law; Elements; Privity; Opportunity to Litigate; Dismissed Claim; Untimely Claim; Procedural Ruling; Merits Ruling; Fact Finding; Final Judgment; Dismissal With Prejudice; Voluntary Dismissal; Interlocutory Ruling; Finally Adjudicated; Merits Judgment; Post-Trial Opinion; Settlement; Conflict of Law; Actual Conflict; Contract Claim; Most Significant Relationship Test; Restatement of Conflict of Laws; D&O Insurance; Insurance Coverage; Principal Place of Business; State of Incorporation; Most Significant Relationship; General Liability Coverage; Willful Conduct; Wanton Conduct; 8 Del. C. § 145; 8 Del. C. § 145(g); Fraud; Public Policy; Reckless Conduct; Knowing Conduct; Willful Action; Wanton Action; Punitive Damages
Complaint Adequately Challenges Directors' Subjective Belief
  • The Court found that MLP unitholder plaintiff adequately alleged that defendants breached an LP Agreement having a contractual duty to approve conflicted transactions subjectively believed to be in the partnership's best interest.
  • GRANTED IN PART AND DENIED IN PART: Defendants' motion to dismiss
  • Plaintiff, a former unitholder of a master limited partnership, brought suit challenging the LP's merger with another entity, both controlled by the same parent. The conflicted transaction received special approval by a conflicts committee and approval by a majority of unaffiliated unitholders, which defendants alleged satisfied LP Agreement safe harbor provisions precluding plaintiff's challenge. The Court of Chancery previously dismissed the action, but the Delaware Supreme Court reversed, concluding that plaintiff's allegations challenging the conflict committee members' independence conceivably rendered the safe harbors unavailable. Plaintiff amended his complaint and defendants again moved to dismiss. The Court, in this Order, denies defendants' motion to dismiss plaintiff's claim for breach of the LP Agreement, finding it reasonably conceivable that the general partner did not believe the merger was in the partnership's best interests, but grants the motion as to plaintiff's implied covenant, aiding and abetting, and tortious interference claims.
Ct. Ch. R. 9(b); Contract Interpretation; MLP; LP Agreement; Contractual Duty; Subjective Belief; State of Mind; Pleading Stage; Subjective Good Faith; Personal Knowledge; Special Approval; Implied Covenant; Good Faith; Contractual Gap; Aiding and Abetting; Breach of Contract; Fiduciary Duty; Tortious Interference; Contract Right; Agency; Pleading Standard; Intentional Act; Limited Partnership; Pass-Through Entity
Disuse of Best Practices Distinguished from Violation of Law
  • The Court dismissed derivative claims challenging defendants' disclosure of clinical trial data, which plaintiff alleged constituted violation of positive law, finding that plaintiffs' allegations only established failure to follow best practices.
  • GRANTED: Defendants' motion to dismiss
  • Plaintiff, a stockholder of nominal defendant pharmaceutical company, asserted derivative claims alleging that the company's board violated regulations and an agreement with the Food & Drug Administration in connection with a drug approval process by disclosing interim clinical trial results. Defendants moved to dismiss for failure to allege demand futility; plaintiff argued that demand was excused because defendants knowingly violated positive law, and thus faced a substantial likelihood of personal liability. The Court, in this Opinion, granted defendant's motion, finding that plaintiffs' allegations failed to identify any law that defendants purportedly violated or any agreement with the FDA that defendants allegedly breached; plaintiff only alleged that the company failed to comply with "best practices" regarding confidentiality of clinical trial data, which did not create a likelihood of liability. The Court also found that plaintiff failed to allege reliance as an element of a claim for breach of the duty of loyalty for knowing disclosure of false information to stockholders in the absence of a request for stockholder action.
Ct. Ch. R. 23.1; Derivative Claim; Derivative Demand; Ct. Ch. R. 8(b); Particularized Pleading; Demand Futility; Rales; Aronson; Likelihood of Liability; Violation of Law; Actual Knowledge; Regulatory Guidance; Fiduciary Duty; Stockholder Communication; Duty of Disclosure; Duty of Loyalty; Stockholder Action; Claim Elements; Scienter; Knowing Falsity; Reliance; Fraud on the Market; Business Judgment Rule; Rational Purpose; Corporate Waste; Good Faith
CASE ACTIVITY
REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018)
Plaintiff REJV5, a member of nominal defendant LLC (AWH Orlando Holding), formed to renovate and redevelop a hotel, brought suit against defendant AWH Orlando Member for failing to relinquish management of nominal defendant after plaintiff exercised its right to remove defendant as manager upon defendant's failure to complete renovation work by a specified "Completion Date" under AWH Orlando Holding's LLC Agreement. Plaintiff seeks specific performance and declaratory judgment of its right to remove defendant, and injunctive relief precluding defendant from taking action inconsistent with plaintiff's rights as manager.

Section 6.5(a)(vi) of the LLC Agreement provides that plaintiff may remove defendant if "the Completion Date has not occurred on or before September 1, 2017." Defendant did not complete the renovation by that date.

Plaintiff moved for judgment on the pleadings in its favor as to its specific performance, declaratory judgment, injunctive relief, and breach of contract claims. Defendant asserted affirmative defenses that the "prevention doctrine" precluded plaintiff from exercising its removal right because plaintiff prevented defendant from completing the project by the Completion date; that plaintiff's prior breach of a best efforts provision of the Agreement (Section 10.1) excused defendant's obligation; and that plaintiff breached the implied covenant of good faith and fair dealing by causing delay that precluded defendant from timely completing its obligations;

The Court, in an oral ruling, granted plaintiff' motion in part, finding that the express terms of the LLC Agreement unconditionally permitted plaintiff to remove defendant for failure to complete the project by the Completion Date. The Court rejected defendant's "prevention doctrine" and prior breach defenses, but permitted defendant to amend its answer to replead its implied covenant defense.
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Section 10.1 of the LLC Agreement states:

Each Member agrees to execute, acknowledge, deliver, file, record and publish such further reasonable certificates, amendments to certificates, instruments and documents, and do all such other reasonable acts and things as may be reasonably requested by a Member or required by law, or as may be required to carry out the intent and purposes of this Agreement so long as any of the foregoing do not increase any Member's obligations hereunder or decrease any Member's rights hereunder.
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The Court granted plaintiff's motion for judgment of the pleadings that it was entitled, under an LLC Agreement, to remove defendant as manager of the LLC because defendant failed to complete performance of obligations by a specified "Completion Date," rejecting defendant's argument under the "prevention doctrine" that plaintiff frustrated defendant's performance. The Court found that the prevention doctrine only applies when a party frustrates another's satisfaction of a condition to performance, but that the disputed provision provided plaintiff with an unconditional removal right, and that application of the prevention doctrine to an unconditional right would permit defendant to avoid the removal right based on any unrelated or non-material breach of the Agreement by plaintiff.
". . . Plaintiff maintains that [the disputed removal provision] simply sets forth the parties' expectations regarding the Completion Date and the consequences of the Defendant's failure to meet it. Viewed this way, the provision simply sets a deadline. It does not impose any performance obligations on the Defendant and, therefore, the Defendant cannot be found to have breached the contract by failing to deliver the completed project by the Completion Date. With this construction in mind, Plaintiff contends that the so-called prevention doctrine invoked by the Defendant doesn't fit here because the doctrine applies only when the 'promissor prevents or hinders the occurrence or fulfillment of a condition to the duty of performance.' And that's a quote from [Williston on Contracts]. Since [the disputed removal provision] doesn't impose a duty of performance, according to Plaintiff, there can be no prevention of performance by the Plaintiff.

After carefully reviewing [the disputed removal provision], I don't think the Plaintiff's construction of that provision is the only reasonable construction. Another reasonable construction is that performance is implicit in the provision, meaning that the Manager commits to perform the contract such that the Completion Date is met. If the Manager fails to deliver on time, then the provision states that the consequence for failing to perform is removal.

With that being said, I still don't think the prevention doctrine works here because the parties addressed the Plaintiff's role in contributing to a condition for removal expressly in the LLC Agreement. As I understand the prevention doctrine, it implies a term within a contract that, in essence, says that a party cannot claim breach if its own conduct causes or contributes to the breach. If applicable here, this doctrine would allow Defendant to point to any breach of contract by, or any other arguably unreasonable conduct of the Plaintiff, and then argue that the conduct nullifies the Plaintiff's otherwise unconditional removal rights under [the disputed removal provision]. But that construction would frustrate the bargain these parties reached and would render superfluous several of the other removal provisions within [the Agreement] where the parties agreed that the removal right was conditionable.

For instance . . . the Defendant may be removed in the event of a loan default, but only if the Defendant was responsible for the default. [The disputed removal provision] is not similarly conditioned. It provides that the Defendant may be removed if the Completion Date is not met. The right is clearly unconditional and the language of the provision gives no indication that the parties envisioned an inquiry as to why the Completion Date was not met. Accordingly, Defendant cannot avoid removal simply by pointing to non-material breaches of the LLC Agreement by the plaintiff or by pointing to other benign conduct of the Plaintiff that may have caused or contributed to the delay. More is needed."
REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling at 10-12, 19-22 (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018)
The Court discussed legal standards applicable when considering a plaintiff's motion for judgment on the pleadings under Ct. Ch. R. 12(c).
"[Ct. Ch. R. 12(c)] governs a motion for judgment on the pleadings. In reviewing such motions when brought by the plaintiff, the movant is entitled to judgment as a matter of law only if there is no material fact in dispute and, in this regard, the Court is required to view the facts pled and the inferences to be drawn from such facts in a light most favorable to the non-moving party. This well-established standard was laid out in Chancellor Allen's decision in [Warner Communications, Inc., et al. v. Chris-Craft Industries, Inc., C.A. No. *10965-CA, opinion (Del. Ch. Sept. 7, 1989),] and has been followed in many other precedents of this Court."
REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling at 13 (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018)
The Court granted plaintiff's motion for judgment of the pleadings that it was entitled, under an LLC Agreement, to remove defendant as manager of the LLC because defendant failed to complete performance of obligations by a specified "Completion Date," rejecting defendant's argument that its performance was excused by plaintiff's prior breach of a best efforts clause (Section 10.1), which expressly did not decrease any party's obligations under the Agreement, and which was not tied to any other obligation under the Agreement, finding that plaintiff's breach of that clause would not defeat the purpose of the contract and thus could not nullify plaintiff's unconditional removal right.
". . . [The best efforts clause], in my view, is not a standard further assurances clause. To borrow from Chancellor Chandler in [True North Communications v. Publicis, SA, et al., C.A. No. *16039-CC, opinion (Del. Ch. Dec. 23, 1997; rev. Jan. 15, 1998)], 'simply read,' [the best efforts clause] provides far more than just best efforts to consummate the transaction. In addition to obligating each Member to consummate the transaction, [the best efforts clause] obligates each Member to do '. . . all such other reasonable acts and things as may be reasonably requested by a Member or required by law, or as may be required to carry out the intent and purposes of this Agreement so long as any of the foregoing do not increase any Member's obligations hereunder or decrease any Member's rights hereunder.'

With that said, while [the best efforts clause] does impose a general obligation of reasonableness, that obligation of reasonableness must be read against the obligations and duties imposed by specific provisions in the LLC Agreement. As our Supreme Court reiterated in [Peter Brinckerhoff v. Enbridge Energy Co., Inc., et al. and Enbridge Energy Partners, LP, No. 273, 2016, opinion (Del. Mar. 20, 2017; rev. Mar. 28, 2017)], the 'settled rules of contract interpretation requir[e] that the Court prefer specific provisions over more general ones.' Moreover, the last clause of [the best efforts clause] makes clear that the provision is not intended to 'increase any Member's obligations hereunder or decrease any Member's rights hereunder.' . . . Therefore, to allege a material breach of [the best efforts clause], Defendant must tie that alleged breach to another provision of the LLC Agreement. And that hasn't been done here.

After reviewing all of the pleadings and the record before the Court. I can't reasonably conceive of how it could be done. Again, the removal right here is unconditional. A simple breach of that contract, in my view, is not enough to nullify that right. And to plead a material breach as a defense here, Defendant would have to plead that the Plaintiff engaged in conduct, or failed to engage in conduct, '. . . that is so fundamental to [the] contract that the failure to perform that obligation defeat[ed] the essential purpose of the contract or [made] it impossible for the [Plaintiff] to perform under the contract.' And that's a quote from [Shore Investments, Inc. v. Bhole, Inc., et al., C.A. No. S09C-09-013-ESB, letter op. (Del. Super. Nov. 28, 2011)], which, in turn, was quoting from [Williston on Contracts] discussion of material breach.

At best, Defendant could plead that Plaintiff's conduct made it more difficult for it to perform, but it couldn't plead that it made it impossible for it to perform. Indeed, the Defendant continues to perform to this day, albeit in an arguably holdover capacity. Moreover, the material breach scenario is not reasonably conceivable given Plaintiff's broad, bargained-for discretion in the approval process. For these reasons, I don't see material breach as an avenue to avoid removal, even if that were pled."
REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling at 13-16 (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018)
The Court granted plaintiff's motion for judgment of the pleadings that it was entitled, under an LLC Agreement, to remove defendant as manager of the LLC because defendant failed to complete performance of obligations by a specified "Completion Date," rejecting defendant's argument that plaintiff breached the implied covenant of good faith and fair dealing by causing delay that prevented defendant from timely performing its obligations, where provisions of the Agreement contemplated delay.
". . . [O]ur Supreme Court reiterated last year in [Adrian Dieckman v. Regency GP, LP, et al., No. 208, 2016, opinion (Del. Jan. 20, 2017),] that 'The implied covenant is inherent in all contracts and is used to infer contract terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated.' Even if parties contractually waive fiduciary duties, as in the case here . . . the implied covenant still adheres to the LLC Agreement because [6 Del. C. § 18-1101(c)] bars parties to an LLC Agreement from disclaiming the implied covenant.

So with that said, the next question is whether there's any basis to find that the implied covenant is implicated here. The gravamen of Defendant's implied covenant affirmative defense is that Plaintiff caused delay to extract concessions from the Defendant and that delay prevented Defendant from meeting the Completion Deadline. At the outset, I have to note that Plaintiff's implied covenant position raises red flags since it is difficult to conceive that sophisticated parties engaged in the business of commercial construction, which is inherently fluid, failed to contemplate delays, especially in light of the approval mechanism instituted in [the Agreement] and the unconditional removal right [asserted by plaintiff]. So, again, pointing to any delay, even an unreasonable delay, is not going to do it here. More is going to be needed to plead an implied covenant claim or defense."
REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling at 16-17 (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018)
The Court granted plaintiff's motion for judgment of the pleadings that it was entitled, under an LLC Agreement, to remove defendant as manager of the LLC because defendant failed to complete performance of obligations by a specified "Completion Date," rejecting defendant's argument that plaintiff breached the implied covenant of good faith and fair dealing by causing delay that prevented defendant from timely performing its obligations, finding that defendant failed to adequately allege that plaintiff caused delay in bad faith.
"Having reviewed the cases cited by the parties and other authority, I'm satisfied that a party seeking to imply covenant of good faith and fair dealing in a contract like this one must adequately plead facts that allow a reasonable inference of bad faith. I don't think our law has departed from that basic requirement, even as the law regarding implied covenant has recently been refined.

In [Peter Brinckerhoff v. Enbridge Energy Co., Inc., et al. and Enbridge Energy Partners, LP, No. 273, 2016, opinion (Del. Mar. 20, 2017; rev. Mar. 28, 2017)], decided by our Supreme Court last year, where the Court tackled the implied covenant in the master limited partnership context, again, focusing on the obligations of a general to a limited partner, our Supreme Court held that the Court should view whether the covenant of good faith has been breached through the lens grounded by our entity law, which is to say that the Plaintiff must plead facts that support a reasonable inference that the Defendant failed to act in a manner that it reasonably believed was in the best interests of the Company. That definition does not divorce bad faith from the analysis. When a fiduciary intentionally acts in a manner that he believes to be not in the best interests of the company he serves, he acts, by definition, in bad faith.

Indeed, as Chancellor Chandler observed in [Mahyar Amirsaleh v. Board of Trade of the City of New York, Inc., et al., C.A. No. 2822-CC, memo. op. (Del. Ch. Nov. 9, 2009)], a breach of the implied covenant of good faith 'implicitly indicates bad faith conduct.' That concept, of course, as recognized by our Supreme Court in [William Brehm, et al. v. Michael D. Eisner, et al., No. 411, 2005, opinion (Del. June 8, 2006)], is highly fact intensive and not susceptible to categorical definition.

. . . The Defendant maintains that the Plaintiff exceeded its authority under the LLC Agreement by delaying certain key decisions as a means to coerce Defendant to make accommodations not otherwise required by the LLC Agreement. . . .

In [GreenStar IH Rep, LLC, et al. v. Tutor Perini Corp., C.A. No. 12885-VCS, memo. op. (Del. Ch. Oct. 31, 2017)], I noted that our general pleading standards recognize that Defendant bears the burden of pleading its affirmative defenses in a non-conclusory manner in order for those defenses to raise material issues of fact that would preclude judgment on the pleadings. Stated differently, the Defendant must support the defenses with more than just summary pleading. Similarly, in [Marvin M. Speiser v. Leon C. Baker, et al., C.A. No. *8694-CA, opinion (Del. Ch. Mar. 19, 1987)], Chancellor Allen held that in testing the sufficiency of an answer's pleading of an affirmative defense, '. . . the task is to evaluate the sufficiency of the facts alleged while ignoring wholly conclusory statements.' Then-Vice Chancellor's Strine's opinion in [Cypress Associates, LLC v. Sunnyside Cogeneration Associates Project, et al., C.A. No. 1607-VCS, opinion (Del. Ch. Mar. 8, 2006)] is also in accord. And then, finally, this Court noted in [Clean Harbors, Inc. v. Safety-Kleen, Inc., C.A. No. 6117-VCP, memo. op. (Del. Ch. Dec. 9, 2011)] that while allegations relating to the implied covenant and bad faith are not subject to [Ct. Ch. R. 9(b)], the pleading must plead facts that allow for a reasonable inference of 'a sufficient improper motivation.'

Nothing in the Defendant's amended answer and the attached affidavit at this point comes close to raising a reasonable inference of bad faith to trigger the implied covenant. What's missing is how Plaintiff's delay, albeit allegedly routine delay, especially in the construction context where delays are common, amounts to actions taken not in the best interests of the company -- essentially the construction project -- when that delay is the result of Plaintiff wanting to vet and hire the right general contractor, guarantee that money -- 95 percent of which Plaintiff invested -- is spent appropriately and to ensure that all aesthetics are in order so as to achieve the parties' vision for the project. Nor do the facts pled or averred by affidavit allow a reasonable inference that Plaintiff delayed the project to interfere with Defendant's ability to complete the project on time."
REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling at 17-21 (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018)
The Court, having granted plaintiff's motion for judgment of the pleadings that it was entitled, under an LLC Agreement, to remove defendant as manager of the LLC because defendant failed to complete performance of obligations by a specified "Completion Date," and having rejected defendant's affirmative defense that plaintiff breached the implied covenant of good faith and fair dealing under the Agreement, permitted defendant leave to amend its answer to re-plead its implied covenant defense under the permissive Ct. Ch. R. 15(a) standard, finding that the restrictive Ct. Ch. R. 15(aaa) standard applies only to amendment of a complaint, not amendment of an answer.
"Like the situation that then-Vice Chancellor Strine faced in [Cypress Associates, LLC v. Sunnyside Cogeneration Associates Project, et al., C.A. No. 1607-VCS, opinion (Del. Ch. Mar. 8, 2006), Defendant's pleading defects appear in the answer, not a complaint, and therefore the restrictive standard on certain motions for leave to amend under [Ct. Ch. R. 15(aaa)] does not apply here. Accordingly, Defendant's right to amend its answer is governed by the permissive standard of [Ct. Ch. R. 15(a)], which provides that 'A party may amend the party's pleading . . . by leave of Court . . . and leave shall be freely given where justice so requires.' As then-Vice Chancellor Strine advised in Cypress Associates: 'Rule 15(a) reflects the policy that, in the absence of prejudice to the other party, disputes should be decided on their merits instead of on technical or procedural grounds.'

With this policy in mind, I grant the Defendant leave to amend its answer one last time to plead its implied covenant defense. Having granted this leave, however, I must also admonish the Defendant, just as then-Vice Chancellor Strine admonished the Defendant in Cypress Associates, that if you elect to amend, that pleading must contain well-pled facts that state a claim for bad faith that prevented the Defendant from completing the project on time, in compliance with the obligations owed to the Court and to the Plaintiff under [Ct. Ch. R. 11]. Needless to say, if those facts don't exist, then an amendment should not be attempted. . . ."
REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling at 21-22 (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018)
Plaintiff REJV5, a member of nominal defendant LLC (AWH Orlando Holding), formed to renovate and redevelop a hotel, brought suit against defendant AWH Orlando Member for failing to relinquish management of nominal defendant after plaintiff exercised its right to remove defendant as manager upon defendant's failure to complete renovation work by a specified "Completion Date" under AWH Orlando Holding's LLC Agreement. Plaintiff seeks specific performance and declaratory judgment of its right to remove defendant, and injunctive relief precluding defendant from taking action inconsistent with plaintiff's rights as manager.

Plaintiff moved for judgment on the pleadings in its favor as to its specific performance, declaratory judgment, injunctive relief, and breach of contract claims. Defendant opposed, arguing that the "prevention doctrine" precluded plaintiff from exercising its removal right because plaintiff prevented defendant from completing the project by the Completion date, and that removal violated the implied covenant of good faith and fair dealing.

The Court, in an oral ruling, granted plaintiff' motion in part, finding that the express terms of the LLC Agreement unconditionally permitted plaintiff to remove defendant for failure to complete the project by the Completion Date. The Court rejected defendant's "prevention doctrine" and implied covenant defenses. REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018). Defendant moved for certification of interlocutory appeal under Supr. Ct. R. 42, or entry of partial final judgment of the oral ruling under Ct. Ch. R. 54(b).

The Court, in this Opinion, denies defendant's motions, finding that the prior ruling did not determine a substantial issue or establish a legal right under Supr. Ct. R. 42, did not misapply the applicable pleadings standard for an implied covenant defense, and did not adjudicate all issues in the litigation, so that just reason for delaying appeal existed under Ct. Ch. R. 54(b).
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The Court discussed standards applicable when considering a motion to certify an interlocutory appeal under Supr. Ct. R. 42.
"[Supr. Ct. R. 42(b)(i)] provides that '[n]o interlocutory appeal will be certified by the trial court or accepted by [the Delaware Supreme] Court unless the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment.' Instances where the trial court certifies an interlocutory appeal 'should be exceptional, not routine, because [interlocutory appeals] disrupt the normal procession of litigation, cause delay, and can threaten to exhaust scarce party and judicial resources.' For this reason, 'parties should only ask for the right to seek interlocutory review if they believe in good faith that there are substantial benefits that will outweigh the certain costs that accompany an interlocutory appeal.' When certifying an interlocutory appeal, 'the trial court should identify whether and why the likely benefits of interlocutory review outweigh the probable costs, such that interlocutory review is in the interests of justice. If the balance is uncertain, the trial court should refuse to certify the interlocutory appeal.'"
The Court denied defendant's motion for certification of interlocutory appeal of rulings interpreting LLC Agreement provisions due to allegedly improper application of the "prevention doctrine," noting that the ruling concluded that the doctrine did not apply based on the Agreement's plain terms, and thus did not determine a substantial issue or establish a legal right.
"The Defendant argues that the Court improperly construed and applied the so called 'prevention doctrine' [under which] 'If a promisor prevents or hinders the occurrence or fulfillment of a condition to the duty of performance, the condition is excused. . . . The prevention doctrine thus operates as an exception to the general rule that one has no duty to perform under a contract containing a condition precedent until the condition occurs.' Whether true or not, this aspect of the Ruling does not justify interlocutory review. The Ruling did not extend or restrict the prevention doctrine under Delaware law but rather simply applied the doctrine to the facts as pled and to the contractual language at issue. . . . . [A]pplying the clear terms of the parties' agreement the Court determined that the prevention doctrine did not apply. This holding neither 'determine[d] a substantial issue' nor 'established a legal right' under [Supr. Ct. R. 42(b)]."
The Court denied defendant's motion for certification of interlocutory appeal of rulings interpreting LLC Agreement provisions, noting that contract interpretation rulings generally are not appropriate for interlocutory appeal.
"As a general matter, issues of contract interpretation are not worthy of interlocutory appeal. [Defendants' asserted bases for appeal] address this Court's construction of discrete provisions of the LLC Agreement. . . . [T]he Court was simply interpreting what it viewed as clear and unambiguous terms of the LLC Agreement. This exercise in contract construction does not implicate any of the criteria in [Supr. Ct. R. 42(b)(iii)] to warrant interlocutory appeal."
The Court denied defendant's motion for certification of interlocutory appeal of a holding that plaintiff did not waive an argument, noting that such rulings are generally are not appropriate for interlocutory appeal
"Defendant urged the Court to find that certain of Plaintiff's arguments had not been properly raised in the briefs and were, therefore, waived. The Court disagreed. The determination of whether vel non an argument is waived is highly contextual and ultimately a matter within this Court's discretion; as such, it is classically not an issue for interlocutory appeal."
The Court denied defendant's motion for certification of interlocutory review of a prior ruling granting plaintiff's motion for judgment on the pleadings that it was entitled to remove defendant as Manager of nominal defendant LLC under the terms of the LLC Agreement, which found that defendant failed to plead an implied covenant of good faith and fair dealing defense, rejecting defendant's argument that the prior ruling improperly required defendant to plead a culpable mental state.
"Defendant [argues] that the Court's 'holding that bad faith is necessary to state an implied covenant claim conflicts with other Court of Chancery decisions.' Specifically, Defendant asserts the Ruling requires Defendant to plead a culpable mental state in order to plead bad faith sufficient to invoke the implied covenant defense. . . . Defendant has mischaracterized the Ruling. What the Court actually observed and held is that:

[O]ur Supreme Court held that the Court should view whether the covenant of good faith has been breached through the lens grounded by our entity law, which is to say that the [Defendant] must plead facts that support a reasonable inference that the [Plaintiff] failed to act in a manner that it reasonably believed was in the best interests of the Company.


[T]he use of the qualifier 'reasonably' imposes an objective standard of good faith. The Court observed that even under the clarified good faith standard, 'a breach of the implied covenant of good faith implicitly indicates bad faith conduct.' Therefore, when one fails to act in a manner that one reasonably believed, or should have believed, was in the best interest of the Company, one is failing to act in good faith and, consequently, one is acting in bad faith. The Ruling recognizes that good faith and bad faith are two sides of the same coin. Contrary to Defendant's characterization, the Ruling did not (and does not) require Defendant to plead a culpable mental state (i.e. the waste standard) to state a claim for breach of the implied covenant. Stated differently, the Court did not hold Defendant to the bad faith standard struck down in [Peter Brinckerhoff v. Enbridge Energy Co., Inc., et al., C.A. No. 11314-VCS, memo. op. (Del. Ch. Apr. 29, 2016)]. To the contrary, the Court acknowledged that Delaware's pleading standard for the implied covenant requires pled facts that support a reasonable inference that a party failed to act in a manner reasonably believed to be in the best interests of the Company."
The Court discussed legal standards applicable when considering a motion for entry of partial final judgment under Ct. Ch. R. 54(b), noting that policy considerations disfavoring piecemeal litigation favors grant of such motions sparingly.
"[Ct. Ch. R. 54(b)] provides this Court with discretion to enter a final judgment on individual claims if the party seeking that relief is able to demonstrate certain procedural imperatives. The Court should exercise its discretion to grant a partial final judgment sparingly, however, and should reserve such relief for the infrequently 'harsh case.' The reluctance to enter partial final judgments is a product of Delaware's policy against piecemeal litigation. Therefore, to demonstrate that a partial final judgment is warranted, the requesting party bears the burden to show that: (1) the action involves multiple claims or parties; (2) at least one claim or the rights and liabilities of at least one party has been finally decided; and (3) there is no just reason for delaying an appeal."
Plaintiff excess insurance carriers brought suit in the Complex Commercial Litigation Division of the Delaware Superior Court against individual defendants Murdock and Carter and entity defendants Dole Food Company and DFC Holdings, seeking a declaration that plaintiffs have no obligation to fund settlements of fiduciary duty actions arising out of a transaction in which Murdock took Dole private. Dole and DFC are Delaware entities. Dole's principal place of business is in California. Prior to the events at issue in the underlying litigation, Murdock was a director, CEO, and 40% owner of Dole. Carter was the company's COO and general counsel.

Insurance policies covering director, officer, and corporate liability executed by plaintiffs and Dole did not include choice-of-law provisions. Each contained a "Written Consent Provision," which stated:

The Insureds shall not admit any liability, settle, offer to settle, stipulate to any judgment or otherwise assume any contractual obligation with regard to any Claim or Insured Inquiry without the Insurer's prior written consent, which shall not be unreasonably withheld.


A "Cooperation Clause" in the policies stated:

The Insurer shall have the right and shall be given the opportunity to effectively associate with the Insureds in the investigation, defense and settlement, including but not limited to the negotiation of a settlement, of any Claim that appears reasonably likely to be covered in whole or in part hereunder. . . . The Insureds shall provide the Insurer with all information, assistance and cooperation which the Insurer reasonably requests and shall do nothing that may prejudice the Insurer's potential or actual rights of recovery with respect to Loss paid; provided the failure of one Insured Individual to comply with this provision shall not impair the rights of any other Insured Individual under this Policy.


Murdock took the company private in 2013. Stockholder litigation challenging the transaction in the Court of Chancery resulted in a 2015 post-trial ruling in the stockholder plaintiffs' favor - included findings of fraudulent activity - found Murdock, Carter, and DFC Holdings (Murdock's acquisition vehicle) liable for breach of loyalty, and entered a $148 million judgment. In re Dole Food Co., Inc. Stockholder Litigation, C.A. No. 8703-VCL (consol.), memo. op. (Del. Ch. Aug. 27, 2015). Dole informed plaintiffs that it was considering settlement, which it asked plaintiffs to consider funding. Plaintiffs cited potentially applicable exclusions in the policies and requested more information. Defendants maintain that they kept plaintiffs informed of settlement negotiations and provided them with draft term sheets and that plaintiffs did not ask to participate. Parties to the Chancery litigation reached a settlement, without plaintiffs' consent, pursuant to which Murdock agreed to pay the full judgment in lieu of appeal.

Murdock's acquisition of the company was also challenged in a District of Delaware action filed against Dole and Murdock, which proceeded to a mediation that two plaintiffs attended. Others received telephonic updates. Dole and Murdock agreed to a settlement, which they asked plaintiffs to fund prior to execution. Plaintiffs did not agree to funding and did not provide written approval. Dole sought coverage for both settlements, which plaintiffs oppose through this action. Defendants counterclaimed for fraud in the inducement and bad-faith coverage refusal. Plaintiffs moved for summary judgment, arguing that California law applies and prohibits insurance coverage for conduct like that found in the Court of Chancery's Opinion, that collateral estoppel bars relitigation of facts found in the Court of Chancery's Opinion, that coverage is barred because defendants failed to abide by the Written Consent Provision and Cooperation Clause, and that defendants counterclaims must fail because plaintiffs have no duty to indemnify. Defendants argue that Delaware law applies and collateral estoppel is inapplicable, and otherwise oppose plaintiffs' arguments.

The Court grants the motion in part and denies it in part in this Opinion, ruling that collateral estoppel and Delaware law will apply, that Delaware public policy does not preclude insurance coverage for liability arising out of breach of the duty of loyalty as a result of fraud, that defendants failed to show prejudice as a result of any violation of the Written Consent Provision, and that fact issues preclude summary judgment as to violation of either that provision or the Cooperation Clause and as to the bad faith counterclaim. The Court dismisses the fraudulent inducement counterclaim.
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The Superior Court set forth standards applicable when considering a motion for summary judgment.
"The standard of review on a motion for summary judgment is well-settled. The Court's principal function when considering a motion for summary judgment is to examine the record to determine whether genuine issues of material fact exist, 'but not to decide such issues.' Summary judgment will be granted if, after viewing the record in a light most favorable to a nonmoving party, no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law. If, however, the record reveals that material facts are in dispute, or if the factual record has not been developed thoroughly enough to allow the Court to apply the law to the factual record, then summary judgment will not be granted.

The moving party bears the initial burden of demonstrating that the undisputed facts support his claims or defenses. If the motion is properly supported, then the burden shifts to the non-moving party to demonstrate that there are material issues of fact for the resolution by the ultimate fact-finder."
The Superior Court distinguished the doctrines of issue preclusion (aka collateral estoppel) and claim preclusion (aka res judicata) and observed that Delaware law governs determination of whether an earlier Court of Chancery Memorandum Opinion would have preclusive effect.
"The Court will look to Delaware law to determine whether the collateral estoppel doctrine applies . . . on factual issues litigated and decided by the Memorandum Opinion. In Delaware, res judicata refers to claim preclusion and collateral estoppel refers to issue preclusion. The two principles are distinct. 'Under the doctrine of res judicata, a judgment in a prior suit involving the same parties, or persons in privity with them, bars a second suit on the same cause of action.' The doctrine of collateral estoppel prohibits a party from relitigating a factual issue that was adjudicated previously."
The Superior Court discussed the doctrine of collateral estoppel, including the role of privity and the elements that must be shown by a party seeking to invoke the doctrine.
"Under collateral estoppel 'a judgment in a prior suit does not operate to bar a subsequent cause of action but rather precludes the relitigation of a factual issue which was litigated and decided in [a] prior suit between the same parties.' '[O]nly parties to the former judgment or their privies may take advantage of or be barred by it.' 'A privy is one who, after the rendition of the judgment, has acquired an interest in the subject matter affected by the judgment through or under one of the parties. . . .' The Court expanded the notion [in Joanna Michell v. Wendy Cook, et al., C.A. No. 00C-03-261-CHT, memo. op. (Del. Super. Dec. 10, 2001)] and found that 'privity, need not be present in order to apply collateral estoppel . . . [if the party] had a full and fair opportunity to present [its] case.' In order to adopt the previous court's ruling on an issue, the party wishing to enforce that ruling must show 'that (1) a question of fact essential to the judgment (2) be litigated and (3) determined (4) by a valid and final judgment.' Further, new issues being estopped must involve a party from the first case and that party must have had a 'full and fair opportunity to litigate the issue in the prior action.'"
The Superior Court discussed Jane Stephenson v. Capano Development, Inc., opinion (Del. May 24, 1983), where a plaintiff brought a fraud claim in Superior Court after the Court of Chancery dismissed the claim as untimely and the Superior Court ruled that the Court of Chancery's factual findings would have preclusive effect under collateral estoppel but res judicata would not apply because the earlier decision was not on the merits.
"Collateral estoppel only prevents particular issues previously litigated from being challenged. In [Jane Stephenson v. Capano Development, Inc., opinion (Del. May 24, 1983)], the plaintiff filed several claims in the Court of Chancery. The Chancellor refused to consider plaintiff's fraud claim because it was untimely filed. Following this decision, the plaintiff filed suit in the Superior Court based on the defendant's fraud. The Superior Court judge found that any findings of fact would receive collateral estoppel effect, but res judicata was inapplicable because the Chancellor did not address the legal merits of the plaintiff's fraud claim for procedural reasons."
The Superior Court discussed the "final judgment" requirement for establishing the preclusive effect of a prior judgment under collateral estoppel, observing that the requirement is not precise or rigid and noting the extent to which dismissal with prejudice, voluntary dismissal, and interlocutory rulings are final.
"Generally, a dismissal with prejudice has the effect of a final adjudication on the merits.' When parties 'voluntarily dismiss[ ] the action, knowing that they either received the full relief to which they were legally entitled, or that they waived their rights to seek further relief, the dismissal is tantamount to a judgment on the merits.' '[F]inality is neither a precise nor a rigid concept.' 'It is widely recognized that the finality requirement is less stringent for issue preclusion than for claim preclusion.' '[F]inality may mean little more than that the litigation of a particular issue has reached such a stage that a court sees no really good reason for permitting it to be litigated again' or include 'any prior adjudication of an issue in another action that is determined to be sufficiently firm to be accorded conclusive effect.'

The Delaware Supreme Court has found that 'once interlocutory rulings achieve finality at the trial level, through incorporation in the final judgment of the trial court, review of those subsidiary rulings must be achieved through a timely appeal of that final order.'"
The Superior Court, in an action brought by plaintiff insurers for a declaration that they had no obligation to cover defendant insureds for liability arising out of individual defendants' breaches of fiduciary duty as found by the Court of Chancery, ruled that factual determinations in the Court of Chancery's post-trial Memorandum Opinion - which was followed by a settlement in lieu of appeal - would preclude relitigation of those issues under the doctrine of collateral estoppel.
"[The Court of Chancery's] Memorandum Opinion is sufficiently firm to be accorded conclusive effect for collateral estoppel. [The Court of Chancery] issued a 106-page opinion discussing [individual defendants'] breach of the duty of loyalty after a trial. The trial lasted nine days and involved: (i) the introduction of 1,800 exhibits; (ii) the live testimony of ten fact witnesses and three expert witnesses; (iv) the lodging of twenty-nine depositions; (v) a 419 paragraph pre-trial order; and (vi) pre- and post-trial briefing that totaled 668 pages. Although the Memorandum Opinion may not be sufficient under res judicata, the lengthy opinion goes into detail about the findings of [one individual defendant's] fraudulent activities that breached the duty of loyalty to the shareholders. [The Court of Chancery] specifically found that '[individual defendants'] conduct throughout the Committee process . . . demonstrated that their actions were not innocent or inadvertent, but rather intentional and in bad faith.' Further, the Memorandum Opinion finds that defendants, including [one individual defendant], 'engaged in fraud.' As to the finality of the Memorandum Opinion, [the Court of Chancery] ends the Memorandum Opinion by saying that the 'parties will confer and advise the court as to any issues that remain to be addressed.' After [the Court of Chancery] issued the Memorandum Opinion, the Parties reached the Settlement. The Memorandum Opinion is sufficiently definite to be a final judgment on the merits. The 106 page opinion talks in detail about the scheme used by [one individual defendant] and his co-defendants to drive down the price of [the company they served as fiduciaries]. Additionally, the Settlement rendered the Memorandum Opinion final for collateral estoppel.

The Court holds that collateral estoppel vis a vis the Memorandum Opinion applies to this civil action and the Motion. First, factual issues relevant to this civil action and the Motion are factual issues decided by the Memorandum Opinion. Second, the Memorandum Opinion is 'finally adjudicated' for purposes of collateral estoppel. Third, the Insureds were parties to the litigation memorialized in the Memorandum Opinion. Fourth, the Insureds have had their day in court on the facts addressed in the Memorandum Opinion. For these reasons, the Court will employ collateral estoppel against the Insureds on factual issues determined in the Memorandum Opinion to the extent those factual issues are relevant to issues in this civil action."
The Superior Court discussed the first step in a conflict-of-law analysis - determining whether a conflict exists between the laws of the competing jurisdictions - and observed that there is no conflict if one jurisdiction does not address an issue.
"The first step in a conflict-of-law analysis is to decide whether a conflict truly exists. The Court must compare the competing jurisdictions to determine whether the laws actually conflict on a relevant point.' 'In determining whether there is an actual conflict, Delaware state courts . . . answer a single and simple inquiry: does application of the competing laws yield the same result?' If the answer is yes, then 'the Court should avoid the choice-of-law analysis altogether.'

Further, the laws of competing jurisdictions must actually conflict to require an analysis. When one state's laws failed to address a particular issue, it cannot conflict with the laws of another state. Where one state fails to address a particular issue, the Court should apply the settled law."
The Superior Court observed that Delaware law will apply to a Delaware court's choice of law consideration and set forth factors relevant when considering choice-of-law in a contract action, as set forth in the Restatement (Second) of Conflict of Laws.
"As the forum state, Delaware applies its own choice-of-law rules. The Court must use the most significant relationship test set forth in Restatement (Second) of Conflict of Laws Section 188. Section 188 provides:

(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in [Restatement (Second) of Conflict of Laws] § 6.

(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the contract, and

(e) the domicil[e], residence, nationality, place of incorporation and place of business of the parties.


The Court evaluates the contacts based on their relative importance with each particular issue.

'The state where the thing or the risk is located will have a natural interest in transactions affecting it.' Restatement (Second) of Conflict of Laws § 6 also enumerates several factors to relevant to the choice of law:

(a) the needs of the interstate and international systems,

(b) the relevant policies of the forum,

(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,

(d) the protection of justified expectations,

(e) the basic policies underlying the particular field of law,

(f) certainty, predictability and uniformity of result, and

(g) ease in the determination and application of the law to be applied."
The Superior Court, considering choice of law in an insurance coverage dispute, observed that the most significant factor in a dispute involving general liability coverage is the insured's principal place of business while, in an action involving director-and-officer coverage, the jurisdiction with the most significant relationship is the state of incorporation.
"'In complex insurance cases with risks in multiple states such as this one, Delaware courts have generally held that the most significant factor for the conflict-of-law analysis is the principal place of business of the insured because it is 'the situs which link[s] all the parties together.' However, when the 'risk is the directors' and officers' honesty and fidelity to the corporation, and the choice of law is between the headquarters or the state of incorporation, the state of incorporation has the most significant relationship.' The Court notes that the first legal principle relied upon involves insurance cases with general comprehensive liability policies. The second legal principle is a situation . . . involving director and officer liability insurance coverage."
The Superior Court, considering choice of law in a director-and-officer insurance coverage dispute, concluded that California and Delaware law conflict regarding coverage for willful or wanton actions, recognizing that such coverage is expressly excluded under California law whereas 8 Del. C. § 145 permits coverage "against any liability."
"Delaware and California law conflict regarding whether an insurance policy covers a director or officer's willful or wanton actions. . . . Cal. Ins. Code § 533 ('Section 533') provides that '[a]n insurer is not liable for a loss caused by the willful act of the insured's agents or others.' Section 533 is 'an implied exclusionary clause which by statute is to be read into all insurance policies,' regardless of the policy's language. . . .

Delaware does not have a statute similar to Section 533. However, Delaware law does provide that:

. . . a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, . . . against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.


Under Delaware law, therefore, a corporation is permitted to purchase insurance against any liability asserted against an officer or director even when the corporation would not be able to otherwise indemnify that person under 8 Del. C. § 145. This would include insurance for a breach of the duty of loyalty . . . ."
The Superior Court, considering choice of law in an action brought by plaintiff insurers for a declaration that they had no obligation to cover defendant insureds for liability arising out of individual defendants' breaches of fiduciary duty as found by the Court of Chancery, ruled that Delaware, rather than California, law would apply because the insurance contracts at issue did not include a choice-of-law provision and - under The Mills Limited Partnership, et al. v. Liberty Mutual Co., C.A. No. 99C-11-174-FSS, memo. op. (Del. Super. Nov. 5, 2010) - Delaware had a more significant relationship to the dispute as corporate defendant's place of incorporation than did California as its principal place of business. The Court distinguished Liggett Group, et al. v. Affiliated FM Insurance Co., et al., C.A. No. 00C-01-207-HDR, opinion (Del. Super. May 15, 2001) on grounds that it involved general comprehensive liability coverage rather than director-and-officer policy.
"The Insurers rely heavily on [Liggett Group, et al. v. Affiliated FM Insurance Co., et al., C.A. No. 00C-01-207-HDR, opinion (Del. Super. May 15, 2001)]. That is a very well-reasoned opinion and strong authority on the issue of choice of law in complex insurance coverage situations. Liggett involves defense and indemnification claims arising out of more than one-thousand tobacco health related claims filed throughout the United States. However, Liggett discusses choice of law as it relates to general comprehensive liability policies and not an officer and director insurance policy.

The Court finds that the better authority for this situation is [The Mills Limited Partnership, et al. v. Liberty Mutual Co., C.A. No. 99C-11-174-FSS, memo. op. (Del. Super. Nov. 5, 2010)]. Mills Ltd. Partnership addresses the choice of law issue in the context of an officer and director insurance policy. The underlying loss involved the officers and directors of Mills Ltd. Partnership ('Mills') using their positions to defraud investors in various ways, including lying about Mills' financial pictures. Mills eventually admitted massive fraudulent overstatements of income, shareholders' equity and partners' capital for close to six years.

In Mills Ltd. Partnership, the Court needed to determine whether Virginia or Delaware law applied. Mills was a Delaware corporation. Mills' headquarters was in Virginia and, most likely, Virginia was where most of the fraud occurred. As in this case, the insurance companies failed to provide a choice of law provision in the policy. The Court undertook a choice of law analysis using the Restatement. The Court held that:

When the insured risk is the directors' and officers' 'honesty and fidelity' to the corporation, and the choice of law is between the headquarters or the state of incorporation, the state of incorporation has the most significant relationship.


The Court found that Mills insured its officers and directors under Delaware law--8 Del. C. § 145(g). The Court noted that, ultimately, Delaware law would determine whether an officer or director had breached a duty owed to Mills, Mills' shareholders, and Mills' investors. Unlike Liggett, the Court noted that the underlying suit did not involve products liability, consumer fraud or an embezzlement situation. In Mills Ltd. Partnership, the Court found that the place of incorporation is a more significant contact because '[w]hen the conduct of a corporation's directors and officers is centrally implicated, the place of incorporation is important.'

In this case, the Policies covered directors, officers and corporate liability. The Policies do not contain a choice of law provision. In addition, [corporate defendant] is a Delaware corporation and [individual defendants] are directors and officers of a Delaware corporation. The suit was brought by stockholders of [corporate defendant] in the Chancery Court. The situs of [corporate defendant's] stock is Delaware. The Chancery Court applied Delaware law in holding that the duty of loyalty had been breached and that the value of [corporate defendant's] stock had been artificially decreased due to fraudulent conduct. Under these facts, Delaware and not California has the more significant interest and Delaware law will apply in this civil action[.]"
The Superior Court concluded that Delaware public policy does not prohibit a directors-and-officers insurance contract from covering liability for breach of loyalty arising out of fraud, finding no Delaware case law that recognizes such a policy and noting that Clyde J. Whalen, Jr v. On-Deck, Inc., et al., No. 18, 1986, opinion (Del. Aug. 26, 1986) found no policy against insurance coverage for punitive damages.
"A court may not enforce an insurance provision that is contrary to Delaware public policy. A court will not void an otherwise valid contract provision based on public policy 'in the absence of clear indicia that such a policy actually exists.' The Court has found no Delaware decision that holds that a corporation cannot obtain directors and officers liability insurance that covers breach of loyalty based on fraud. Moreover, [8 Del. C. § 145(g)] provides that a corporation has the power to purchase and maintain insurance on behalf of directors and officers against any liability that could be asserted against them.

In [Clyde J. Whalen, Jr v. On-Deck, Inc., et al., No. 18, 1986, opinion (Del. Aug. 26, 1986)], the Delaware Supreme Court found that Delaware public policy did not prohibit insurance provisions that cover punitive damages. The Court reasoned that although the 'purposes of punitive damages would be frustrated if such damages were insurable, we cannot infer from that concern a policy against such insurance.' A person insured for punitive damages could be 'punished through higher insurance premiums or the loss of insurance altogether.' Finally, a court will not void an otherwise valid provision in 'the absence of clear indicia that such a policy actually exists.'

In this case, any alleged fraud would be reckless or knowing conduct. Although it may strain public policy to allow a director to collect insurance on a fraud, it does not appear to explicitly prohibited by Delaware statutory law. In fact, the Whalen court found that public policy did not prohibit insurance companies from covering punitive damages. Punitive damages are awarded for willful or wanton actions. Therefore, Delaware public policy does not clearly prohibit Insurers from indemnifying the Insureds' fraud."
Plaintiff, a former unitholder of master limited partnership Regency Energy, brought suit against the limited partnership's general partner, Regency GP, challenging the acquisition of the limited partnership by Energy Transfer Partners ("ETP"). All of the entities involved in the transaction were indirectly owned by defendant Energy Transfer Equity ("ETE"). Plaintiff asserted claims for breach of Regency's LP Agreement (which eliminated fiduciary duties and put in place contractual duties), and breach of the implied covenant of good faith and fair dealing, alleging that the transaction was conflicted and unfair.

Defendants moved to dismiss, maintaining that general partner complied with safe harbor provisions under the LP Agreement by obtaining special approval of a conflicts committee and approval by a majority of unaffiliated unitholders. Plaintiff countered that the conflicts committee safe harbor was ineffective because the committee was itself conflicted, and the unitholder approval safe harbor was ineffective because unitholders were not fully informed of the conflict committee's conflicts.

The Court of Chancery previously dismissed the action, finding that contractual disclosure obligations in connection with the merger were satisfied, and because the LP Agreement waived fiduciary duties including the duty of disclosure, imposition of express contractual disclosure obligations left no gap for an implied covenant to fill. Adrian Dieckman v. Regency GP, LP, et al., C.A. No. 11130-CB, memo. op. (Del. Ch. Mar. 29, 2016). The Supreme Court reversed, concluding that plaintiff sufficiently alleged that general partner breached the implied covenant by appointing a conflicted conflicts committee and misleading unitholders regarding the committee's independence. Adrian Dieckman v. Regency GP, LP, et al., No. 208, 2016, opinion (Del. Jan. 20, 2017).

Plaintiff amended its complaint, asserting claims for breach of the LP Agreement by approving a merger that the general partner did not believe to be in the best interests of the limited partnership, breach of the implied covenant, aiding and abetting breach of the LP Agreement, and tortious interference with the LP Agreement. Defendants moved to dismiss the amended complaint.

The Court, in this Order, the Court denies defendants' motion to dismiss plaintiff's claim for breach of the LP Agreement, finding it reasonably conceivable that the general partner did not believe the merger was in the partnership's best interests, but grants the motion as to plaintiff's claim for breach of the implied covenant, finding that the provision of the Agreement defining "good faith" left no gap to be filled by an implied covenant, and grants the motion as to plaintiff's other claims.

Plaintiff's allegations that the Court found conceivably sufficient to challenge defendants' subjective belief that the merger was in the partnership's best interests are listed on pp. 8-9.
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Section 7.9(a) of the LP Agreement states:

Unless otherwise expressly provided in this Agreement or any Group Member Agreement, whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership, any Group Member or any Partner, on the other, any resolution or course of action by the General Partner or its Affiliates in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement, of any Group Member Agreement, of any agreement contemplated herein or therein, or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is (i) approved by Special Approval, (ii) approved by the vote of a majority of the Common Units (excluding Common Units owned by the General Partner and its Affiliates), (iii) on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties, or (iv) fair and reasonable to the Partnership, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership). The General Partner shall be authorized but not required in connection with its resolution of such conflict of interest to seek Special Approval of such resolution, and the General Partner may also adopt a resolution or course of action that has not received Special Approval. If Special Approval is not sought and the Board of Directors of the General Partner determines that the resolution or course of action taken with respect to a conflict of interest satisfies either of the standards set forth in clauses (iii) or (iv) above, then it shall be presumed that, in making its decision, the Board of Directors of the General Partner acted in good faith, and in any proceeding brought by any Limited Partner or by or on behalf of such Limited Partner or any other Limited Partner or the Partnership challenging such approval, the Person bringing or prosecuting such proceeding shall have the burden of overcoming such presumption. . . .



Section 7.9(a) of the LP Agreement states:

In order for a determination or other action to be in "good faith" for the purposes of this Agreement, the Person or Persons making such determination or taking or declining to take such other action must believe that the determination or other action is in the best interests of the Partnership.
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The Court denied defendants' motion to dismiss master limited partnership unitholder plaintiff's claim for breach of the limited partnership's LP Agreement by approval of a conflicted merger on allegedly unfair terms, finding it reasonably conceivable, based on plaintiff's allegations, that the limited partnership's general partner did not subjectively believe the merger was in the best interests of the partnership, and thus did not satisfy an LP Agreement safe harbor provision permitting approval of conflicted transactions.
"Delaware courts have held that contractual language similar to [the LP Agreement provision defining 'good faith'] requires directors to have subjectively believed that a transaction was in the best interests of the partnership. But 'state of mind and knowledge may be averred generally pursuant to [Ct. Ch. R. 9(b)] because any attempt to require specificity in pleading a condition of mind would be unworkable and undesirable.'

As our Supreme Court has recognized, 'it may be virtually impossible for a . . . plaintiff to sufficiently and adequately describe the defendant's state of mind at the pleadings stage.' Accordingly, 'objective factors may inform an analysis of a defendant's subjective belief to the extent they bear on the defendant's credibility when asserting' he believed a transaction was in the best interests of the partnership. When a court undertakes such an analysis, '[t]he directors' personal knowledge and experience will be relevant to a subjective good faith determination, which must focus on measuring the directors' approval of a transaction against their knowledge of the facts and circumstances surrounding the transaction.'

Here, plaintiff has pleaded sufficient facts from which, when viewed collectively, it is reasonably conceivable that the General Partner . . . did not subjectively believe that the Merger was in the best interests of the Partnership."
The Court granted defendants' motion to dismiss master limited partnership unitholder plaintiff's claim for breach of the implied covenant of good faith and fair dealing, finding plaintiff's allegation that defendants approved a conflicted transaction that was unfair to unitholders was covered by express language of the LP Agreement requiring that the limited partnership's general partner subjectively believe conflicted transactions are in the best interests of the partnership, leaving no gap for an implied covenant to fill.
". . . [Plaintiff's implied covenant claim] impermissibly repackages . . . plaintiff's breach of contract claim. 'The implied covenant of good faith and fair dealing is the doctrine by which Delaware law cautiously supplies terms to fill gaps in the express provisions of a specific agreement.' If 'the language of the contract expressly covers a particular issue,' then 'the implied covenant will not apply.'

Plaintiff argues that 'the [LP Agreement] does not address whether [the General Partner] could ever be said to act in good faith if it agrees to a merger designed and timed solely for the benefit of [the limited partnership's general partner and its parent] and that is highly unfair to the limited partners.' [The LP Agreement provision defining 'good faith'], however, is sufficiently broad to cover such a scenario. It provides that, for the General Partner . . . to have acted in good faith, they had to have believed the transaction was 'in the best interests of the Partnership.' A transaction that is in the best interests of the Partnership logically should not be 'highly unfair to the limited partners.' Thus, the [Agreement] 'sets a contractual standard by which to evaluate' the actions of the General Partner . . . so that '[t]here is no gap in the [Agreement] to fill in this regard.'"
The Court granted defendants' motion to dismiss master limited partnership unitholder plaintiff's claim for aiding and abetting breach of an LP Agreement, finding that Delaware law does not permit liability for aiding and abetting breach of a contractual duty, and an exception to the rule permitting such claims for breach of contractual fiduciary duties did not apply because the LP Agreement eliminated fiduciary duties.
". . . [T]here can be no liability for aiding and abetting a breach of a contractual duty created by the [LP Agreement] under Delaware law. 'Delaware law does not recognize a claim for aiding and abetting a breach of contract.' An exception to this rule arises where a contract creates fiduciary duties, but that exception does not apply here.

The [LP Agreement] did not create fiduciary duties contractually. The . . . Agreement eliminated all fiduciary duties and replaced them with a contractual obligation requiring the General Partner to subjectively believe that its actions were in the best interests of the Partnership. Thus, because the [Agreement] established a 'purely contractual relationship, a theory of aiding and abetting a breach of contract is unavailable in this case.'"
The Court granted defendants' motion to dismiss master limited partnership unitholder plaintiff's tortious interference with contract claim, finding plaintiff's allegations that general partner's directors caused the general partner to breach contractual obligations insufficient to establish that directors exceeded the scope of their agency, and that plaintiff did not allege general partner's parent or affiliate entities intentionally interfered with the LP Agreement.
". . . In order to state a claim for tortious interference with contractual rights, a plaintiff must allege the existence of '(1) a contract; (2) about which Defendant knew and (3) an intentional act that is a significant factor in causing the breach of such contract (4) without justification (5) which causes injury.'

Directors tortiously interfere with their company's agreements 'if and only if [they] exceed the scope of [their] agency in so doing.' Simply alleging that an officer or director caused his company to breach its contract, as plaintiff does here, without more, is insufficient for a tortious interference claim. This analysis does not change merely because a pass-through entity (i.e., the General Partner) sits between the members of the [limited partnership's] Board and the company they control . . . .

Plaintiff argues that '[t]ortious interference claims are also properly asserted against . . . the ultimate parents and affiliates, respectively, of [the General Partner].' This assertion of the possibility of liability may be correct under Delaware law, but whether an entity can be sued is distinct from actually stating a claim against that entity. The Amended Complaint fails to allege facts from which it reasonably can be inferred that [the parents and affiliates of general partner] had the requisite mental state or committed any 'intentional act' necessary to state a tortious interference claim."
Plaintiff, a stockholder of nominal defendant Orexigen, a pharmaceutical company, brought derivative claims alleging that the company's directors and officers caused the company to violate applicable regulations and an agreement with the U.S. Food & Drug Administration in connection with the approval of a drug ("Contrave").

According to plaintiff's complaint, Orexigen originally sought regulatory approval of Contrave for weight loss, and the FDA required that the company conduct a clinical trial to rule out the risk that the drug increased risk to cardiovascular health (referred to in this Opinion as the "CVOT," or the "Light Study"). The company reached an agreement with the FDA to expedite approval if results of the trial, when 25% complete, met a threshold of cardiovascular safety -- though approval would be subject to post-marketing requirements including successful completion of the trial. The FDA expressed concern regarding confidentiality of the interim results (referred to in this Opinion as the "25% Results"), which, if not properly maintained, could adversely affect the integrity of the ongoing trials, and committees of the board put in place a plan to limit access to the data.

The interim trial results satisfied the FDA's safety threshold, but additionally suggested that Contrave might reduce cardiovascular risk independent of weight loss. If true, Contrave could be the most effective, and valuable, cardiovascular drug in history. Subsequently, the interim data were disclosed to a large number of individuals. The FDA approved Contrave based on the interim data, but due disclosure of the data to a sufficiently large number of individuals, the FDA concluded that the continuing clinical trial could not be used for post-marketing requirements, and that a new trial -- which could cost as much as $200 million -- would be required. The FDA added that even absent extensive disclosure of the interim data, the results of the ongoing trial were likely to have been compromised due to a significant number of subjects having dropped out.

The company then disclosed the interim clinical trial results and the possibility that Contrave might reduce cardiovascular risk in a patent application, which was made public, and in SEC filings, and the company's stock price increased. Subsequently, clinical data from completion of 50% of the ongoing trial revealed that the cardiovascular benefit suggested by the 25% interim data was an aberration. The company halted the ongoing trial, publicly disclosed the 50% interim results, and its stock price dropped significantly.

Plaintiff alleged that the company's board failed to comply with the terms of its own confidentiality plan and used the 25% interim data for business purposes, in violation of applicable regulations, and in breach of an agreement with the FDA. Defendants moved to dismiss plaintiff's claims for failure to make demand. Plaintiff opposed, arguing that director defendants faced substantial likelihood of personal liability because they knowingly violated positive law, knowingly provided stockholders with false information, and thus could not impartially consider a litigation demand.

The Court, in this Opinion, grants defendants' motion to dismiss, finding that plaintiff's allegations failed to identify any law that defendants purportedly violated or any agreement with the FDA that defendants allegedly breached; rather, plaintiffs alleged only that defendants failed to follow best practices for maintaining confidentiality of clinical trial data, which did not create a basis for personal liability. The Court also found that defendants did not face a substantial likelihood of liability for disclosing false information to stockholders because plaintiff failed to allege reliance -- a necessary element of such a claim.
*  *  *  *  *  *  *  *
The Court discussed the pre-litigation demand requirement for derivative claims under Ct. Ch. R. 23.1 and Delaware's two demand futility tests under Senior Aronson, et al. v. Harry Lewis, No. 203, 1983, opinion (Del. Mar. 1, 1984), and Steven M. Rales, et al. v. Alfred Blasband, No. 210, 1993, opinion (Del. Dec. 22, 1993; rev. Dec. 23, 1993), noting that both standards address the same question.
"'[D]irectors are empowered to manage, or direct the management of, the business and affairs of the corporation.' This necessarily includes the right to bring lawsuits on behalf of the corporation; 'the right of a stockholder to prosecute a derivative suit [therefore] is limited . . . .' For a derivative suit to proceed, 'the complaint must allege with particularity that the board was presented with a demand and refused it wrongfully or that the board could not properly consider a demand, thereby excusing the effort to make demand as futile.' . . .

Pleadings under [Ct. Ch. R. 23.1] 'must comply with stringent requirements of factual particularity that differ substantially from the permissive notice pleadings governed solely by [Ct. Ch. R. 8(a)].' In other words, the complaint 'must set forth particularized factual statements that are essential to the claim' of demand futility. 'Rule 23.1 is not satisfied by conclusory statements or mere notice pleading,' nor is 'mere speculation or opinion . . . enough.' 'In evaluating whether demand is excused, [however,] the Court must accept as true the well pleaded factual allegations in the Complaint,' 'as well as 'all reasonable inferences that logically flow from [those] facts.''

The seminal demand futility cases in Delaware are [Senior Aronson, et al. v. Harry Lewis, No. 203, 1983, opinion (Del. Mar. 1, 1984),] and [Steven M. Rales, et al. v. Alfred Blasband, No. 210, 1993, opinion (Del. Dec. 22, 1993; rev. Dec. 23, 1993)]. In Aronson, the Delaware Supreme Court held that a stockholder who challenges an action taken by the board considering the demand must allege particularized facts sufficient to raise a reasonable doubt that: '(1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.' Under Rales, a derivative plaintiff who does not challenge actions taken by a majority of the board members considering demand must allege particularized facts sufficient to 'create a reasonable doubt that, as of the time of the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.' This Court recently stated [in In re Duke Energy Corp. Derivative Litigation, C.A. No. 7705-VCG, memo. op. (Del. Ch. Aug. 31, 2016),] that Aronson and Rales both address the same question of whether the board can exercise its business judgment on the corporate behalf in considering demand."
The Court observed that derivative demand under Ct. Ch. R. 23.1 may be excused where director defendants are alleged to have failed to act in good faith, including by knowingly violating positive law, and are thus face substantial likelihood of personal liability.
". . . '[T]he fiduciary duty of loyalty is not limited to cases involving a financial or other cognizable fiduciary conflict of interest. It also encompasses cases where the fiduciary fails to act in good faith.' The Delaware Supreme Court [in William Stone, et al. v. C. Dowd Ritter, et al. and AmSouth Bancorp, No. 93, 2006, opinion (Del. Nov. 6, 2006),] has articulated situations when a fiduciary fails to act in good faith, including when 'the fiduciary acts with the intent to violate applicable positive law.' '[B]ecause sophisticated and well-advised individuals do not customarily confess knowing violations of law, a plaintiff following this route effectively must plead facts and circumstances sufficient for a court to infer that the directors knowingly violated positive law. "[D]irectors' good faith exercise of oversight responsibility may not invariably prevent employees from violating criminal laws, or from causing the corporation to incur significant financial liability, or both.' But, '[w]ithout a connection to the board, a corporate calamity will not lead to director liability. Without a substantial threat of director liability, a court has no reason to doubt the board's ability to evaluate a demand.' In order '[t]o plead a sufficient connection between the corporate trauma and the board, the plaintiff's first and most direct option is to allege with particularity actual board involvement in a decision that violated positive law.' In [In re Caremark International, Inc. Derivative Litigation, C.A. No. *13670-CA, memo. op. (Del. Ch. Sept. 25, 1996)], Chancellor Allen framed the test as whether the directors 'knew or . . . should have known' about illegality. In Stone, the Delaware Supreme Court tightened the test to require actual knowledge: '[I]mposition of liability requires a showing that the directors knew they were not discharging their fiduciary obligations.'

. . . 'The analysis of whether a majority of the board faces a substantial likelihood of personal liability is conducted on a claim-by-claim basis.' 'The complained-of conduct must be so egregious on its face that the board could not have exercised its business judgment in responding to a stockholder demand to pursue those claims.' . . . "
The Court granted defendants' motion to dismiss stockholder plaintiff's derivative claims for failure to make demand, rejecting plaintiff's argument that demand was excused because nominal defendant's board knowingly and intentionally violated positive law in connection with the regulatory approval process for a new drug, where plaintiffs' allegations established only failure to follow best practices for the handling of clinical trial data, but did not identify any law purportedly violated, or any agreement with a regulatory agency purportedly breached.
". . . Plaintiff attempts to plead knowing and intentional violations of the law without any violation of the law. Instead, Plaintiff paints a picture of directors who, at worst, failed to follow best practices. But, a failure to follow best practices does not create a substantial likelihood of liability. . . .

. . . Plaintiff asserts that the Director Defendants 'act[ed] with the intent to violate applicable positive law' by knowingly and intentionally disseminating confidential interim data . . . in violation of FDA regulations and in breach [of] its agreement with the FDA. Plaintiff's theory of the case, as best I can discern, is that [the company] suffered a corporate trauma when the FDA determined a new [clinical trial], costing around $200 million, would be necessary . . . . But, it is unclear to me exactly what law or agreement Plaintiff plead [defendants] violated. . . .

. . . A vague reference to a law that allows fines [for failing to comply with obligations in conducting clinical trials] does not explain how the Director Defendants violated that law by disregarding internal documents and procedures. . . .

. . . Merely discussing [statutes that govern drug approval] in vague, broad terms does not support an inference that Director Defendants' decisions somehow violated these statutes.

Plaintiff's brief and the Complaint also discuss, and quote from, various FDA guidance. All of the guidance is just that -- guidance. This is obvious from the notation on the top of every page of each document that says 'Contains Nonbinding Recommendations.' Pleading violations of nonbinding recommendations does not constitute pleading a violation of positive law such that the board faces a substantial likelihood of liability and cannot consider demand.

. . . Plaintiff does not argue that the FDA concluded that there was any violation of any agreement with the FDA. . . . Plaintiff has not pled any particularized facts for the Court to infer differently, and thus, Plaintiff has not adequately pled a violation of positive law such that the board faces a substantial likelihood of liability and cannot consider demand."
The Court observed that corporate directors may breach their duty of loyalty by deliberately providing stockholders with false information in the absence of a request for stockholder action, noting that stating a claim for such a breach requires a showing of reliance, causation, and damages.
"'Whenever directors communicate publicly or directly with shareholders about the corporation's affairs, with or without a request for shareholder action, directors have a fiduciary duty to shareholders to exercise due care, good faith and loyalty.' Thus, 't follows [i]a fortiori that when directors communicate publicly or directly with shareholders about corporate matters the sine qua non of directors' fiduciary duty to shareholders is honesty.' 'The issue in this case is not whether [the] directors breached their duty of disclosure.' . . . As the Delaware Supreme Court explained in [Doran Malone, et al. v. John N. Brincat, et al., No. 459, 1997, opinion (Del. Dec. 18, 1998)], there is a difference between the duty of disclosure in the context of requesting stockholder action and the more general requirement to communicate honestly with stockholders under the duty of loyalty and good faith. . . . Instead, the issue 'is whether they breached their more general fiduciary duty of loyalty and good faith by knowingly disseminating to the stockholders false information about . . . the company.

To successfully state a duty of loyalty claim against directors for providing information in the absence of a request for shareholder action, a stockholder must allege that he received 'false communications' from directors who were 'deliberately misinforming shareholders about the business of the corporation.' Under Malone v. Brincat, '[w]hen shareholder action is absent, plaintiff must show reliance, causation, and damages' in order to establish a breach of the duty of loyalty. 'The decision by the Supreme Court to set a high bar for Malone-type claims was not . . . inadvertent.' The purpose was 'to ensure that [Delaware] law was not discordant with federal standards.' This also helps ensure that Delaware law does 'not encourage a proliferation of disclosure claims outside the discretionary vote or tender context by exposing corporate directors to an additional host of disclosure claims that did not involve the need to show reliance or scienter.'"
The Court granted defendants' motion to dismiss stockholder plaintiff's derivative claims alleging breach of the duty of loyalty based on alleged disclosure of false information to stockholders in the absence of a request for stockholder action for failure to plead demand futility, where plaintiff failed to plead reliance, which is an element of such a claim, and thus failed to establish that a majority of director defendants faced a substantial likelihood of liability.
". . . Plaintiff has failed to sufficiently plead all the necessary elements of his disclosure claim; thus, the Director Defendants cannot face a substantial likelihood of liability for a breach of the duty of loyalty such that demand would be excused.

In [Paddy Wood v. Charles C. Baum, et al. and Municipal Mortgage & Equity, LLC, No. 621, 2007, opinion (Del. July 1, 2008)], the Delaware Supreme Court considered a case where 'the plaintiff attempted to create a 'reasonable doubt' that the Board would have properly exercised its business judgment by alleging that the Board was disabled because of a substantial risk of liability.' The Supreme Court described the issue before it as 'whether the Complaint alleges particularized facts that, if proven, would show that a majority of the defendants knowingly engaged in 'fraudulent' or 'illegal' conduct or breached in 'bad faith' the covenant of good faith and fair dealing.' The Supreme Court held 'that the plaintiff's factual allegations [were] insufficient to establish demand futility,' because 'the Complaint [did] not even purport to state a cause of action for fraud, let alone plead the specific facts required to support such a claim,' and '[t]he Complaint alleges many violations of federal securities and tax laws but does not plead with particularity the specific conduct in which each defendant 'knowingly' engaged.'

The same is true here. Plaintiff has not pled a single fact related to an element of his claim -- individual reliance. . . . And 'if a complaint does not allege statements made to shareholders in conjunction with a request for shareholder action, a plaintiff cannot rely on a rebuttable presumption of reliance' i.e. 'the fraud on the market theory.' As reflected in Wood, a failure to plead an element of a claim precludes a finding that the directors face a substantial likelihood of liability for that claim such that demand is excused. Therefore, Plaintiff cannot show that a majority of the Director Defendants face a substantial likelihood of personal liability for knowingly allowing the dissemination of false information to stockholders."
The Court discussed the legal test for corporate waste, and the pleading requirements of a derivative claim for waste capable of establishing demand futility.
"'A board of directors enjoys a presumption of sound business judgment, and its decisions will not be disturbed if they can be attributed to any rational business purpose. A court under such circumstances will not substitute its own notions of what is or is not sound business judgment.' 'Irrationality is the outer limit of the business judgment rule. Irrationality may be the functional equivalent of the waste test or it may tend to show that the decision is not made in good faith, which is a key ingredient of the business judgment rule.'

'[T]o excuse demand on grounds of waste the Complaint must allege particularized facts that lead to a reasonable inference that the director defendants authorized an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.' In order '[t]o prevail on a waste claim . . . the plaintiff must overcome the general presumption of good faith by showing that the board's decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests.'"