Demand Futility and the Newark Country Club

In Jennifer L. Stritzinger v. Dennis Barba et al., Stritzinger, a non-dues-paying member of nominal defendant Newark Country Club (the “Club”) brought derivative claims against the twelve members of the Club’s board of directors (the “Board”) for breach of fiduciary duty and the appointment of a receiver related to certain decisions the Board elected to take in light of the Club’s financial difficulties.

The Club operated at a deficit for a number of years preceding the litigation at issue.  Although operating at a loss, the Club rebuked numerous offers to purchase and develop the Club’s land.  Without sufficient cash flow, the Board considered several options to raise financing for club operations.  The Club’s members discussed four options at a “town hall meeting.”  The options were (i) merging with another club; (ii) selling the Club to a land broker but allowing the Club to continue its operations for ten years; (iii) working with the city of Newark for it to purchase the development rights of the property; and (iv) forming Newark Country Club Mortgage Company, LLC to make a loan to the Club.  The Club decided to form the LLC to make a loan to the Club. The loan was secured by the Club’s land with an interest rate of 5.75% and was to be used to repay certain of the Club’s short-term obligations but would not be used to address the issues surrounding the Club’s long-term financial stability.

Five of the twelve Board members invested in the LLC.  These five members recused themselves from the vote authorizing the loan.  After Stritzinger’s Motion to Expedite was denied and two amendments to the Complaint, Defendants moved to dismiss for failure to make a pre-suit demand on the Board and for failure to state a claim.

The Court agreed with Defendants and dismissed Plaintiff’s claims. The Court’s inquiry started with demand requirements in derivative cases.  The Court noted that Stritzinger failed to make a demand or allege demand futility. Under the Aronson test, to show demand futility, Stritzinger was required to plead “particularized factual allegations that raise a reasonable doubt that (1) [a majority of] the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.”

Stritzinger alleged that the remaining seven members of the Board were not disinterested because they acted in bad faith when they approved the loan transaction and thus faced a substantial threat of personal liability for taking the action. Although the Court questioned whether a substantial threat of personal liability applied to the first or second prong of Aronson, regardless of what prong that factor applied to, Stritzinger did not allege demand futility.  The Court found that Stritzinger’s complaints boiled down to “a disagreement with the substance of the decision the Board made to approve the transaction.”

As to the receiver count, the Court stated that without a statutory basis for the appointment of a receiver, the Court could only appoint a receiver in cases of, “fraud, gross mismanagement, positive misconduct by corporate officers, breach of trust, or extreme circumstances showing imminent danger of great loss which cannot otherwise be prevented.”  The Court found that none of the allegations in Plaintiff’s Second Amended Complaint reached anywhere near the level necessary to appoint a receiver and dismissed the Complaint.

Read the full opinion here.

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Calculating the Appropriate TRO Bond Amount

In Applied Energetics, Inc. v. George Farley and AnneMarieCo., LLC, CA No. 2018-0489-TMR, the Vice Chancellor addressed the appropriate bond the Plaintiff must post in connection with a preliminary injunction.  Court of Chancery Rule 65(c) requires that any applicant seeking a restraining order or injunction post sufficient security for the payment of costs and damages suffered by a party that is improperly enjoined. The bond represents that maximum amount that the enjoined party may recover.

Courts “err on the high side in setting a bond” because actual damages are difficult if not impossible to calculate. The party seeking a bond must show a credible basis for the amount of claimed damages, however the bond need not be calculated with mathematical certainty.

The Defendants sought a bond of $1,750,000 –  representing 50% of the value of their 25,000,000 shares on July 5, 2018 with per-share damages of $0.07.

Plaintiff sought a nominal bond because of the strength of Plaintiff’s claims.  Even if the Court were to award more than a nominal bond, Plaintiff contended that Defendants’ damages were speculative and exaggerated because the Defendants cannot legally or practically sell all their 25,000,000 shares.

The Court held that the appropriate measure of damages for the shares “is the difference between (1) the price of Applied Energetics stock on the date Defendants could have and would have sold their shares at a higher price but for the injunction … and (2) the as-yet-unknown price of Applied Energetics stock on the date Defendants sell the shares.”  To calculate the unknown price, the Court analyzed the historical prices of Applied Energetics stock since the date the injunction was issued to find an average intraday low price of $0.111 per share. The per-share damages estimate was the difference between $0.14 (the share price when Defendants could have sold their shares) and $0.111, or $0.029.

The Court agreed, in part, with Plaintiff and found that AMC could not sell more than 1,911,949 of its 20,000,000 shares per quarter.  The Court found AMC’s estimated damages to be $55,446.52 –  1,911,949 shares multiplied by $0.029.  No trading restrictions applied to Farley’s 5,000,000 shares and thus the bond as applied to Farley’s shares was $145,000.  The Court set a bond of $200,446.52 – the total damages of AMC’s and Farley’s nearly 7,000,000 shares to be posted within five days of the Order.

The Court’s opinion is available here.


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The Delaware Keno Lottery Goes Awry

In Brookings, et al. v. Kirk, et al., three Plaintiffs brought claims against the Director of the Delaware Lottery, the Delaware Lottery, and the State of Delaware alleging that Defendants refused to honor Plaintiffs’ seven Keno Lottery tickets, each worth $1,000,000.00.  Defendants filed a Motion for Summary Judgment arguing that the tickets are invalid because an anomaly occurred with the Keno Computer on December 17, 2015 that caused five consecutive Keno Lottery tickets to generate a combination of the same twenty winning lottery numbers.  As a result, they alleged that the lottery was illegal because it did not possess the legally required element of chance.

When the State learned of the anomaly, it instructed Scientific Games International, the operator of the Keno Computer system, to place a hold on all claims related to the tickets in question. Over $23,000.00 was disbursed to ticket holders who purchased tickets during the anomaly.

The Court concluded that a legal lottery requires three elements: prize, consideration, and chance.  During the time of the anomaly, the Keno Computer caused the same twenty numbers to repeat themselves.  This continued until an individual manually restarted the Keno Computer.  Until the Keno Computer was restarted, there was a 100% chance that the same twenty numbers would win.

Plaintiffs argued that chance was present from their perspective because (1) they did not know the numbers were repeating, and (2) even if they did know the numbers were repeating, they did not know how long the numbers would continue to repeat.  The Court found the Plaintiffs’ subjective knowledge did not create chance where it otherwise did not exist and granted the Defendants’ Motion for Summary Judgment.

Read the full opinion here.

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Contracting Away the Corporate Opportunities Doctrine

The Delaware Court of Chancery in a recent opinion explained how companies may contract away the duty of loyalty and the corporate opportunities doctrine and how those provisions limit the Court’s power in finding or remedying a breach.  In Holdings, Inc. v. ABS Capital Partners, C.A. No. 2017-0583-JTL (Del. Ch. June 15, 2018), Alarm brought suit against ABS, who acquired a controlling stake in Alarm through a subsidiary, for breach of DUSTA in connection with ABS partners serving on the boards of Alarm and related competing companies.  The Court found Plaintiff failed to state a claim under DUSTA and dismissed the complaint.

Background Facts:

Plaintiff alleged that an ABS partner who served on the Alarm board communicated confidential information he gleaned through various Alarm meetings to ABS.  ABS then communicated that information to a different ABS partner who then began to serve on the board of a competing company of Alarm and used Alarm’s confidential information to Alarm’s detriment.

Key Statements of Law:

To survive a 12(b)(6) motion to dismiss a DUSTA complaint, plaintiff must plead:

(i) A trade secret exists;

(ii) The plaintiff communicated the trade secret to the defendant;

(iii) The communication was made pursuant to an express or implied understanding that the defendant would maintain the secrecy of the information; and

(iv) The trade secret has been misappropriated within the meaning of that term as defined in DUTSA.


Although the Court assumed that, for purposes of the opinion, Alarm met the first three elements, the Court found Plaintiff failed to plead the misappropriation of a trade secret and dismissed the complaint.   The Court acknowledged that misappropriation is rarely proven by direct evidence, but through inferences drawn from circumstantial evidence.  The complaint failed even this relaxed standard.

The Court relied on prior contract language between the parties concerning Alarm’s confidential information to find that both Alarm and ABS understood that ABS would invest in companies that competed with Alarm and such investments would not raise to the level of a violation of DUSTA.

Under Article 8 of the Amended Charter, ABS, Terkowitz, and the other ABS representatives on the Alarm board had “no duty (contractual or otherwise) not to, directly or indirectly, engage in the same or similar business activities or lines of business as the Corporation.” This provision waived “any claim for breach of the duty of loyalty against ABS, Terkowitz, or the other ABS director representatives based on either usurpation of a corporate opportunity or anticompetitive activity.”

The Court also dismissed Count Two of the complaint, which asserted a claim for common law misappropriation, as preempted by DUSTA.

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Court of Chancery Addresses Availability of Appraisal Rights

City of North Miami Beach General Employees’ Retirement Plan Et al. v. Dr. Pepper Snapple Group, Inc. Et al.

Dr. Pepper’s stockholders initiated this litigation due to their purported inability to exercise appraisal rights pursuant to Section 262 of the DGCL in connection with a merger.

A merger subsidiary of Dr. Pepper Snapple Group and the parent of Keurig Green Mountain entered into a reverse triangular merger to combine their businesses to create a more diversified beverage company.  Keurig was to become an indirect wholly-owned subsidiary of Dr. Pepper.  The Dr. Pepper stockholders would receive a substantial dividend and retain their shares while the indirect owners of Keurig would receive shares of stock in Dr. Pepper.

Dr. Pepper issued a Preliminary Proxy that informed its stockholders that they would not have appraisal rights under the merger.  This led Dr. Pepper stockholders to initiate the instant litigation seeking to enjoin the merger until they are provided appraisal rights under section 262.  Section 262(b) affords appraisal rights for the shares of stock of a “constituent corporation” in a merger.  Additionally, section 262(b) contemplates that the stockholder will forfeit their shares of stock as a result of the merger.

The Court found that the term “constituent corporation” means “an entity actually being merged or combined and not the parent of such an entity.” Because Dr. Pepper is the parent of one of two merging corporations, their stockholders do not have appraisal rights.

The Court also found, alternatively, that since the Dr. Pepper stockholders retained their shares of stock throughout the transaction, they were not entitled to appraisal rights.  Summary Judgment was granted in favor of Defendants.


Read the full opinion here.

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Forum Non Conveniens Denial Does Not Warrant Interlocutory Appeal

In Lincoln Benefit v. Wilmington Trust, the Superior Court determined that the denial of a Motion to Dismiss based on forum non conveniens did not warrant an interlocutory appeal.

Lincoln filed a declaratory judgment action against Wilmington Trust seeking to declare a life insurance policy void ab initio under Mississippi law.  Wilmington Trust subsequently filed a breach of contract action in the Mississippi District Court and filed a Motion to Dismiss the Delaware action based on forum non conveniens.  The Superior Court denied the Motion to Dismiss and an Application for Certification of Interlocutory Appeal followed.  The Superior Court refused to certify the interlocutory appeal because the appeal did not meet the strict standards outlined by Supreme Court Rule 42.

To certify an interlocutory appeal, the trial court must have “decid[ed] a substantial issue of material importance that merits appellate review before a final judgment.”  Even if a substantial issue is decided, the court is not required to grant the interlocutory appeal.  Interlocutory appeals are exceptional and should be granted sparingly so as to preserve party and judicial resources.  Several factors outlined in Rule 42 guide the Court’s analysis.

The Court found that although Its denial of Wilmington Trust’s Motion to Dismiss decided a substantial issue, on balance, the factors in Rule 42 did not warrant an interlocutory appeal.  Only one factor, whether the appeal could terminate the litigation, weighed in favor of certification.

The Delaware Supreme Court subsequently refused the application for interlocutory review.

Read the Superior Court’s opinion here.

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The Coleman Analysis Applies to Untimely Expert Reports

In Kent v. The Dover Ophthalmology, et al., the Superior Court recently clarified the appropriate standard in reviewing a party’s motion to file untimely expert reports.

The Defendants sought to file an untimely supplemental expert report after the Court excluded a portion of Defendants’ causation expert’s opinions, finding them unreliable.  The Defendants urged the Court to apply factors from Christian v. Counseling Resource Associates, Inc., and Drejka v. Hitchens Tire Services Inc. in support of its argument to allow the supplemental report.  The Court found these cases inapplicable and noted that their holdings are confined to situations where a trial court is deciding whether to dismiss a case for discovery violations.

Although the Court’s decision here did exclude a significant portion of the Defendants’ causation expert, the Court noted that the Defendants did not bear the ultimate burden of proof at trial, Defendants’ expert could attack the Plaintiffs’ expert’s opinions, and the Defendants intended to call other witnesses to rebut liability and damages.

The Court found the Coleman standard applicable and balanced the following factors to deny Defendants’ Motion to File a Supplemental Disclosure:  1) the terms of the original scheduling order; 2) whether good cause exists to allow the supplemental disclosure; 3) prejudice to the opposing party; and 4) possible trial delay. Applying the above factors to the case sub judice, the court found: a six month delay in complying with the original scheduling order evinced “substantial noncompliance;” good cause was not shown because the Defendants had three opportunities to disclose the bases for their causation expert’s opinions; Plaintiffs would face substantial prejudice as trial was only days away; and trial would be delayed because based on Defendants’ representations, a second motion to reargue, accompanied by full briefing, would follow.

Read the full opinion here.

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Forum Non Conveniens and an Alternate Forum

In a set of consolidated appeals originating from personal injuries allegedly sustained by Argentinian farmers and their children due to the mandatory use of Roundup in tobacco cultivation, the Delaware Supreme Court addressed a singular question – “whether the trial court must first determine that an available alternative forum exists before dismissing a case for forum non conveniens.”

The Court held that the availability of an alternative forum is a factor that should be considered in the forum non conveniens analysis; however, an alternative forum is not a prerequisite to obtaining dismissal.

The Court acknowledged that while federal courts and most state courts require a finding of an available alternative forum before considering dismissal, Delaware Courts do not.  Delaware Courts have routinely considered the availability of an alternative forum as a factor in the forum non conveniens analysis, but it has never been a prerequisite.  The sine qua non of the forum non conveniens analysis has been and remains the inconvenience on the defendant, not the availability of an alternative forum.

The Superior Court’s decision denying the Plaintiffs’ request that the Defendant’s dismissal be conditioned on a waiver of any jurisdictional defenses was similarly affirmed as the Court found an available alternative forum was not necessary to dismiss a case for forum non conveniens.

Of note, Justice Vaughn concurred in the judgment but agreed with the federal courts and a majority of state courts that an available alternative forum should be a precondition to obtaining dismissal for forum non conveniens.

Read the full opinion here.

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Deposition Transcripts and Errata Sheets

Vice Chancellor Slights recently addressed the appropriate course of action when a party challenges substantive changes to a deposition transcript made through the use of an errata sheet.

In Mediacom Delaware LLC v. Sea Colony Recreational Association, Inc., Sea Colony moved to strike the errata sheet of Mediacom’s 30(b)(6) witness as either a sham affidavit or under the Court’s rules.

The Court found neither argument persuasive due to Mediacom’s compliance with Chancery Rule 30(e).  The Court noted that it has the authority to strike an errata sheet, but the preferable practice is to allow substantive changes and to consider the changes when assessing the witness’s credibility.  Further, the Vice Chancellor explained that he would reconsider his ruling if Mediacom did not make the witness available for cross examination at an upcoming evidentiary hearing on injunctive relief.

Read the opinion here.

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The Middle Ground of Forum Non Conveniens

The Delaware Supreme Court recently affirmed but clarified an opinion out of the Court of Chancery addressing dismissal based on forum non conveniens in the case of Gramercy Emerging Markets Fund, et al. v. Allied Irish Banks, P.L.C., et al.

In Gramercy, a Cayman Island investment fund and two of its Delaware subsidiaries initiated suit in Illinois against a bank organized under Delaware law with offices in Bulgaria and Illinois and an Irish bank headquartered in Dublin.  The claims arose under Bulgarian law.  The Defendants moved to dismiss on forum non conveniens grounds, which the Illinois Court granted.  Afterward, the Plaintiffs refiled in Delaware, and the Defendants again moved to dismiss based on forum non conveniens.

Until recently, Delaware utilized a two-tier forum non conveniens approach.  If the Delaware action was first-filed, our courts would apply the traditional Cryo-Maid factors, which include: (1) the access to proof; (2) the availability of a compulsory process for witnesses; (3) the possibility of viewing the premises; (4) factors that would make trial easy, expeditious and inexpensive; (5) whether the controversy is dependent upon Delaware law; and (6) the pendency or nonpendency of a similar action. Based on these factors, a party need show “overwhelming hardship” and inconvenience to be awarded a dismissal of a first-filed Delaware action.

If the Delaware case was not the first-filed, courts apply the McWane factors, which include whether there is: “(1) [] a prior action pending elsewhere; (2) in a court capable of doing prompt and complete justice; (3) involving the same parties and the same issues.”  Dismissal under this standard is discretionary, if all three factors are met.

In the present action, the procedural history did not fit neatly into Cryo-Maid nor McWane.   There was a first-filed Illinois action that the Illinois court dismissed on forum non conveniens grounds.  The court noted that Bulgaria was the appropriate forum as the suit addressed an issue of first impression under Bulgarian law and many of the witness were in Bulgaria.

Based on the odd procedural history, the Court of Chancery turned to a recent decision out of the Delaware Supreme Court, Lisa, S.A. v. Mayorga, due to the similarity of facts and issues to the present case.  In Lisa, the Supreme Court utilized the McWane factors to dismiss Plaintiff’s claims where there was a prior pending suit in another jurisdiction but where that case was dismissed with prejudice.  Based on Lisa, the Court of Chancery applied a mixture of the Cyro-Maid and McWane factors, without requiring a showing of overwhelming hardship as it found “the two doctrines of overwhelming hardship and McWane … operate consistently and in tandem to discourage forum shopping…”

The Supreme Court affirmed the Court of Chancery’s decision, but did so with clarification.  The Court found that “[b]etween Cryo-Maid’s overwhelming hardship standard and McWane’s discretionary standard lies an intermediate analysis that applies to situations like Gramercy’s: a straightforward assessment of the Cryo-Maid factors, where dismissal is appropriate if those factors weigh in favor of that outcome.”  Thus, the Supreme Court utilized the Cyro-Maid factors in granting dismissal, but did so without requiring the Defendants to show overwhelming hardship.

Read the full opinion here.

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