Delaware Court of Chancery Spotlight
Disclaimer: The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of the Court, its judges, or Wake Forest University School of Law.
Delaware Court of Chancery Update: March 23, 2018
Equity Trust Company v. Interactive Brokers LLC
By: Joseph M. Dougherty
In Justice William Carpenter’s Memorandum Opinion, dated March 6, 2018, the Court of Chancery granted the Interactive Brokers’ (“Defendant”) motion to dismiss as the parties were “sophisticated business parties represented by counsel.” The issue in this case is whether Interactive Brokers’ notice not to renew the service agreement was a “termination of the agreement” or “required notice . . . to not renew the [a]greement.”
Defendant and Delaware Charter Guarantee & Trust Company (“Delaware Charter”) entered into a service agreement on December 31, 2000, in which Delaware Charter agreed to provide trust and related services for Defendant’s customers’ retirement accounts, and in exchange Defendant paid the quarterly fees of all outstanding accounts and the fees for all closed accounts of Delaware Charter. Defendant and Delaware Charter established a fee schedule and amended the schedule in 2012. The amended fee schedule removed retainer fees and lump quarterly fees and created Non-Bulk Closing Fees of $20 per account and Bulk Closing Fees of $40. The term of the original service agreement was a one-year non-cancelable agreement and contained an auto-renewal clause for an additional year unless either party terminated the agreement within 60-days of the renewal date, January 1.
For fifteen years, Defendant and Delaware Charter renewed the original service agreement and amended the original service agreement on four occasions. In one amendment, the parties allowed Delaware Charter to assign its rights and obligations to Equity Trust Company (“Plaintiff”). Two years after Delaware Charter assigned its rights to Plaintiff, Defendant decided not to renew the agreement and provided notice of its intent to terminate the agreement on October 28, 2016. Plaintiff and Defendant disputed whether this notice to terminate was a “termination of the agreement” or “required notice . . . to not renew the [a]greement.” Plaintiff claimed it was a termination of the agreement, ultimately, a breach of contract and sought $2.75 million in termination fees of the 46,317 accounts that were terminated. Defendant filed a motion to dismiss for failure to state a claim under Rule 12(b)(6).
In determining whether there was a breach of contract, the plaintiff must allege: (1) the existence of a contract; (2) the breach of an obligation imposed by that contract; and (3) resulting damages from the breach. The issue in this case depends on whether the Defendant’s notice of ending the contractual relationship constituted a breach of an obligation imposed by the service agreement. The Court of Chancery interprets contractual obligations based on their “common or ordinary meaning” and only if the terms are ambiguous will the Court consider extrinsic evidence to determine the parties’ intent. In interpreting the termination rights, Defendant claimed there are three possibilities: (1) to allow the parties to automatically renew the contract; (2) termination during the one-year term; or (3) not renew the agreement for an additional year. Conversely, Plaintiff claimed there was either a renewal option or a termination option, and Defendant terminated its obligations on October 28, 2016 and was liable for breach of contract damages.
The Court found in favor of Defendant and granted its motion to dismiss. The Court agreed that the agreement provided for a non-renewal option which Defendant properly executed, and Defendant’s notice of the termination did not terminate the agreement during the calendar year.
In short, Defendant terminated the agreement pursuant to its contractual rights and informed the Plaintiff that “December 31, 2016 will be the last day the [a]greement is effective.” By including “December 31, 2016” in the termination notice, Defendant promised to preserve its contractual obligations to Plaintiff until that date. The Court of Chancery read the “common or ordinary meaning” of the notice and contract as saying just that. This case reaffirms the Court of Chancery’s interpretation of contracts by reading within the four corners of the document as well as granting deference to the parties as they are sophisticated business parties represented by counsel.
Delaware Court of Chancery Update: March 1, 2018
CompoSecure, L.L.C. v. CardUX L.L.C. f/k/a Affluent Card, L.L.C.
By: Joseph M. Dougherty
On February 12, 2018, Vice Chancellor Laster’s opinion of the CompoSecure case was published for the Delaware Court of Chancery, in which the Vice Chancellor describes how an unfavorable contract is still valid based on the plain meaning of the document and the parties’ failure to evade the contract.
CompoSecure manufactures and sells metal credit cards to banks. Metal credit cards are much more expensive than a traditional plastic credit card, so to generate additional profits, CompoSecure hired CardUX to assist with co-branding opportunities and promotion of the CompoSecure metal credit cards. CompoSecure and CardUX entered into a sales agreement that provides for CardUX to receive a 15% commission on all sales from a list CompoSecure compiled of approved prospects. Nowhere in the agreement did the parties stipulate that CardUX needed to facilitate the transaction to receive their commission. Neither parties’ board of directors approved the transaction, but both parties assumed the sales agreement was valid. A few months later, Amazon coordinated between Bank of America, Chase, and CompoSecure to determine which bank would work better for its new credit card. It should be noted that Amazon was considered as an approved prospect, however, Bank of America and Chase were not approved prospects. Additionally, CardUX was not involved with any of the initial negotiations between the parties. Ultimately, Chase and Amazon finalized a deal and placed a massive order of metal credit cards from CompoSecure. At this point, CompoSecure’s Chief Executive Officer tried to invalidate the agreement so CardUX would not receive a commission. Just before trial, CompoSecure sent a letter to CardUX stating that the sales agreement was invalid because it was not approved by their board of directors. At trial, CardUX was still promoting CompoSecure’s products.
The main issues presented at trial were whether the sales agreement was invalid because it was not approved by CardUX’s board of directors, and whether CompoSecure’s Chief Executive Officer lacked authority to bind CompoSecure to the sales agreement. Applying New Jersey law, the Court of Chancery found both arguments unpersuasive because both parties treated the sales agreement as valid. CardUX raised the defense of “implied ratification” under New Jersey law which validates contracts that were not properly approved by an entity; the Court found this compelling. The Court considered the conduct of the parties to make its finding. After the sales agreement was signed, CardUX began promoting and marketing CompoSecure’s products. In addition, CompoSecure included the expenditures from the sales agreement in its annual budget. Even after the initial negotiations of the Amazon deal, CompoSecure informed CardUX of the potential deal and CardUX made Amazon their top priority.
Vice Chancellor Laster based the majority of his findings on the “plain meaning” of the sales agreement. Under New Jersey law, parties are allowed to produce extrinsic evidence to defeat the plain meaning. Here, CompoSecure attempted to raise contentions about “pay for performance,” which the Court found did not outweigh the plain meaning of the sales agreement. Although the Court did agree that CompoSecure’s Chief Executive Officer lacked authority, as previously mentioned, CompoSecure ratified the contract through its conduct. Therefore, this evidence was not convincing in overturning the plain meaning of the sales agreement. As a result, the Court found CardUX was entitled to its full commission.
The effects of this case reinforce common law contract principles. A contract is binding regardless of their authority if the parties’ actions validate the contract. Contracts should be drafted to remove any ambiguity and resolve any issues to avoid litigation. Here, CompoSecure and CardUX did not properly address the issues, like the “pay for performance” issue. This case demonstrates the Court of Chancery’s reluctance of intervening in contractual issues between two sophisticated parties.
Delaware Court of Chancery Update: November 12, 2017
Court of Chancery Exercises Restraint Amidst Stockholder Litigation Dispute
By: Zachary Young
Vice Chancellor Laster recently penned the In re Good Technology Corporation Stockholder Litigation opinion for the Court of Chancery, in which he demonstrated the Court of Chancery’s willingness to exercise restraint regarding its capacity to resolve disputes when parties previously agreed to mediate outside of court. The plaintiffs, stockholders of the Good Technology Corporation, brought suit against the corporation, its directors, and its officers; the parties ultimately reached an agreement in principle to settle the suit, memorialized in a term sheet. Unfortunately, while attempting to finalize the settlement, a dispute broke out between the parties. The agreed upon mediator, who was given sole and exclusive authority and jurisdiction to resolve the disputes, recused himself from his role, as he believed he had too many confidential communications with each side during the dispute.
The mediator suggested to the parties that they agree upon and appoint a neutral successor to replace him, but the parties in dispute declined. Instead, they brought the action to the Court of Chancery to resolve their dispute. Vice Chancellor Laster instead found it inappropriate for the Court to weigh in despite claims that the mediation had failed. He held that the parties must follow their chosen mediator’s advice and select an alternative arbitrator, relying upon an informative 7th Circuit opinion, Green v. U.S. Cash Advance IL, LLC. Vice Chancellor Laster’s opinion turned primarily on the 7th Circuit’s decision, holding that “[t]these parties selected private dispute resolution. Given that selection, this court’s role would not be to resolve the dispute, but rather to supply the details in order to make the arbitration work.” The Court of Chancery was found to not have jurisdiction over the parties to this litigation.
This holding demonstrates the Court of Chancery’s commitment to procedural clarity and judicial efficiency. By upholding the agreed-upon terms of the settlement term sheet between the parties, Vice Chancellor Laster’s opinion affirms the notion that parties who may come before the Court of Chancery, especially those who have previously agreed to some form of alternative dispute resolution, must exhaust the resources available to them before the court will entertain having jurisdiction to hear and settle their dispute(s). Here, the parties did not exhaust all resources available to them to resolve their dispute, so their case could not be appropriately resolved by the Court of Chancery. Consequently, Vice Chancellor Laster’s opinion promotes judicial efficiency, providing potential future parties who find themselves at an impasse after agreeing upon alternative dispute resolution measures with a benchmark for the effort they need to put in to try and settle their dispute before coming before the Court. This opinion should help lend more credibility to arbitrators and mediators assisting with alternative dispute resolution and afford more power to this avenue of resolving issues, opening up the Court’s judicial resources to other potential matters.
Delaware Court of Chancery Update: October 30, 2017
Dow Chemical Company, et al. v. Organik Kimya Holding A.S., et al.
By: Zachary Young
In an October 19, 2017 Memorandum Opinion, Vice Chancellor Glasscock dismissed in part and granted in part Defendant Organik Kimya Holdings’ (“Organik”) motion to dismiss a misappropriation of trade secrets action brought by Plaintiff Dow Chemical Company (“Dow”). Organik, a Turkey-based international chemical company with several international subsidiaries, argued there was no personal jurisdiction over it or its subsidiaries in Delaware, Dow’s choice of forum for bringing this action. Dow, on the other hand, contended that Organik’s incorporation of its U.S. subsidiary in Delaware established sufficient contact with Delaware for the case to proceed in the Court of Chancery. Vice Chancellor Glasscock allowed Dow’s suit against Organik, the parent company, and its U.S. subsidiary (“Organik U.S.”) to proceed in the Court of Chancery, while simultaneously granting the Organik’s motion to dismiss its other international subsidiaries from this litigation.
Dow alleged that Organik hired top talent away from Dow and a newly-acquired subsidiary and used these employees’ intimate knowledge of Dow’s proprietary information to develop new polymer-based opaque paint products for Organik. This alleged misappropriation of Dow’s trade secrets for polymer development led to Organik wresting away from Dow a key contract with Behr, a large U.S. paint manufacturer. Dow contented that Organik U.S. was established solely to facilitate this trade secret misappropriation scheme and that each entity in the Organik family of companies was aware of and played a significant role in the scheme. Dow sought to establish personal jurisdiction over every Organik entity, regardless of location.
Vice Chancellor Glasscock, however, did not find that every international Organik subsidiary was subject to personal jurisdiction in Delaware. Rather, he held that Dow’s action could only proceed against Organik U.S. and the Turkish Organik parent company in the Court of Chancery. “Drawing all reasonable inferences in favor of the plaintiffs, as I must at this stage of the proceedings, I find that these facts plausibly suggest that the formation of Organik Kimya U.S. was a key component of Organik’s scheme to misappropriate Dow’s trade secrets,” he wrote. Vice Chancellor Glasscock found the connection was enough to justify jurisdiction over the parent as well: “[h]aving incorporated a Delaware entity to further its unlawful scheme, a defendant cannot plausibly maintain that an exercise of jurisdiction over it in this forum in regard to that scheme was unforeseeable.”
The Court of Chancery’s decision in Dow Chemical v. Organik serves to illustrate how the Court will analyze a personal jurisdiction claim made using Delaware’s long-arm statute. In his analysis, Vice Chancellor Glasscock calls special attention to the importance incorporation in Delaware has relative to a scheme as a whole; further, he draws a line of what type of entity can or will be found to have sufficient personal jurisdiction in Delaware. Most notably, an entity that, based on the particularized facts stated in a plaintiff’s complaint, was formed in Delaware to facilitate a particular scheme will be found to have sufficient contact with Delaware to establish personal jurisdiction under Delaware’s long-arm statute, regardless of where that entity’s principal place of business is located (Organik U.S.’s principal place of business is in Massachusetts).
Vice Chancellor Glasscock’s opinion here also highlights the importance of pleading particularized facts that support a case’s progression in the Court of Chancery. Unlike the plaintiffs in Chester County v. New Residential (covered previously), here Dow did plead particularized facts sufficient to merit that its misappropriation of trade secrets suit against Organik and Organik U.S. proceed in the Court of Chancery. This case promises to be a fascinating one to follow as Dow’s action against Organik and Organik U.S. proceeds.
Delaware Court of Chancery Update: October 17, 2017
Chester County v. New Residential
By: Zachary Young
In the Chester County Employees’ Retirement Fund v. New Residential Investment Corp. opinion, published October 6, 2017, Vice Chancellor Montgomery-Reeves of the Delaware Court of Chancery granted the Defendants’ Motion to Dismiss under Court of Chancery Rules 23.1 and 12(b)(6). As noted by Vice Chancellor Montgomery-Reeves, this was Plaintiff’s third challenge of Defendants’ transaction underlying the original derivative claim, a sale of assets, the most recent of which had been decided on October 7, 2016. Chester County Employees’ Retirement Fund (“Chester County”), a New Residential Investment Corp. (“New Residential”) stockholder, brought derivative breach of duty claims against the members of New Residential’s board of directors and New Residential’s investment manager, Fortress Investment Group LLC (“FIG”).
Chester County alleged that New Residential overpaid in its purchase of Home Loan Servicing Solutions, Ltd.’s (HLSS’s) assets, and consequently, that FIG “received ‘large financial benefits,’… increased management fees, increased incentive fees, millions of options of New Residential stock, and advantages to the real estate assets of other Fortress-related entities.” Though Vice Chancellor Montgomery-Reeves held the facts alleged did give rise to a derivative claim, she also held that Chester County “did not plead particularized facts sufficient to raise a reasonable doubt that a majority of the directors on the New Residential board could have exercised their independent and disinterested business judgment in responding to a demand.” Consequently, Chester County’s demand was not excused as futile. Further, the Vice Chancellor held that Chester County’s claim for declaratory judgment was not ripe for judicial review.
Citing the seminal Aronson v. Lewis decision, Vice Chancellor Montgomery-Reeves held that “demand is futile if the plaintiff alleges particularized facts 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.’” This analysis is performed on a case-by-case basis, in which the Court of Chancery accepts a plaintiff’s particularized allegations of the facts as true; however, absent particularized facts in the eyes of the court, it cannot find demand to be excused as futile. Chester County failed to raise particularized facts that created a reasonable doubt regarding the independence of the New Residential board, and further to show that the board in purchasing HLSS paid well beyond what was reasonable. New Residential’s motion to dismiss was thus granted.
This decision illustrates a few important points under Delaware law worth considering. First, the business judgment rule is alive and well in Delaware and will be deferred to by the Court of Chancery as often as possible so long as some reasonable support for a business decision is apparent. New Residential and FIG took on significant liabilities in the HLSS purchase, and further, the directors were found to be appropriately independent and disinterested of the transaction; regardless of the alleged increase in fees FIG may have gained in the wake of this purchase, these facts lend themselves to deference by the court to the business judgment of the directors.
Second, this decision reaffirms and reinforces the requirements of the landmark Aronson test determining whether a derivative claimant’s demand may be excused as futile. Most especially, pleading particularized facts were highlighted as critical under this analysis, something Chester County failed to compel the Court of Chancery with in its complaint. The takeaway here is to be as particular as possible when bringing a derivative action and seeking demand futility, as failure to clear the Court’s bar will have an otherwise potentially-valid claim thrown out.
Delaware Court of Chancery Update: September 29, 2017
BTG International, Inc. v. Wellstat Therapeutics Corporation
By: Zachary Young
On September 19, 2017, the Delaware Court of Chancery decided a breach of contract suit, BTG International, Inc. v. Wellstat Therapeutics Corporation. In its decision, the Court of Chancery found for Wellstat Therapeutics (“Wellstat”) on its counterclaim against its distributor, BTG International, Inc. (“BTG”), and awarded Wellstat $55.8 million plus interest. The dispute arose from BTG’s failure to satisfy its contractual obligations to help Wellstat with the distribution of Wellstat’s new drug, Vistogard, an antidote for chemotherapy drug overdose.
Vice Chancellor Laster’s opinion provides an in-depth look into the issues leading to BTG’s initial suit and Wellstat’s countersuit. Simply put, BTG and Wellstat’s relationship frayed as Wellstat’s Vistogard was undergoing the Food and Drug Administration’s (“FDA’s”) approval process. Wellstat believed BTG did not take adequate staffing steps to facilitate a successful Vistogard launch. Wellstat then demanded BTG return the distribution rights to Vistogard and compensate Wellstat for a product “relaunch;” instead of complying, BTG filed a suit against Wellstat seeking a declaratory judgment that it did not breach the distribution agreement and damages for Wellstat’s alleged breach of contract. Wellstat filed a countersuit against BTG for breach of contract, which led the parties to trial before the Court of Chancery.
The Court of Chancery held that BTG failed to use diligent efforts as the contracted distributor of Vistogard, citing a failure to anticipate a possible early FDA approval and being grossly understaffed to help bring Vistogard to the market. Further, BTG failed to develop and implement any commercial plan for distributing Vistogard, a direct violation of the distribution agreement between it and Wellstat. The Court was not convinced by BTG’s arguments that Wellstat had violated the agreement first and its breach was justified; ultimately, the Court relied upon calculations performed by BTG’s expert to determine the amount in damages to which Wellstat was entitled.
The Court’s decision involved significant reliance upon testimony provided at trial, as well as a fair amount of discernment by the Court in determining what the objective facts actually were, given the “stark differences” in the stories each side told. Vice Chancellor Laster mentions that in its analysis, the Court relied heavily upon contemporaneous documents to substantiate most of what was put forth at trial and create a usable set of objective facts.
This decision illustrates the Court of Chancery’s approach to contentious cases, where truth may be hard to come by. Additionally, it offers readers a roadmap to how a party to such a suit might benefit by recording or documenting as much as possible to help the Court construct an operable record. Vice Chancellor Laster also offers a thorough analysis of how appropriate damages can be calculated before ultimately relying upon BTG’s expert’s damages calculation, but the exercise still has value for those seeking to predict how damages in a breach of contract suit may be calculated if the suit is heard by the Court of Chancery. For those seeking an introduction to how the Court of Chancery analyzes a breach of contract case, a fairly popular action brought before the Court, before deciding it, BTG International v. Wellstat offers an excellent primer.
Introduction to the Delaware Court of Chancery
By: Zachary Young
Starting this Fall 2017 semester, Wake Forest’s Journal of Business and Intellectual Law (“JBIPL”) is proud to bring you a report on the cutting-edge business-law related decisions of the Delaware Court of Chancery. This first post is aimed at offering readers a brief overview and introduction to Delaware’s Court of Chancery and will kick off an ongoing look at what the United States’ (and possibly the world’s) foremost business-focused judiciary is deciding upon, and what impacts those decisions may have on the business community. We hope to both serve as a resource for recent Delaware Court of Chancery decisions as well as offer our analytical insights on how these decisions might shift business law.
Most people familiar with corporate law, in the United States and elsewhere, have heard of and have relied heavily upon the guidance of Delaware’s Court of Chancery. The Court of Chancery is a non-jury trial court of equity made up of one chancellor and four vice chancellors, each of whom must be a Delaware citizen and who sits for a 12-year term following an appointment by the Delaware Governor. The Court of Chancery is oft-regarded as the authority on American corporate law, given its efficiency in deciding matters brought before it and the prolific body of work over its history on a wide variety of corporate law-related matters, dating back to its inception in 1792.
At the helm of the Court of Chancery is Chancellor Andre G. Bouchard, sworn into his position as Chancellor in 2014. Prior to his appointment, Chancellor Bouchard was a distinguished corporate and commercial litigator in Delaware. The vice chancellors are the Honorable J. Travis Laster, appointed in 2009, the Honorable Sam Glasscock III, appointed in 2011, the Honorable Tamika Montgomery-Reeves, appointed in 2015, and the Honorable Joseph R. Slights III, appointed in 2016. The Chancellor and Vice Chancellors are also joined by Masters of Chancery Morgan Zurn and Patricia Griffin, both of whom are assigned matters with which to assist by the Chancellor and Vice Chancellors as needed.
JBIPL is excited to begin this new segment of the JBIPL Blog this semester, and we hope you will enjoy the updates we plan to provide from Delaware. Stay tuned for the latest and greatest happenings from the preeminent authority on all things business law!
Zack Young is a fourth-year JD/MBA candidate at Wake Forest University. He has undergraduate degrees in Political Science and Philosophy from Marquette University. Zack plans to practice law as a corporate transactions and securities attorney upon graduation.