Delaware Chancery Court Finds Scope of Restrictive Covenants Unreasonable in the Context of a Business Sale
A recent Delaware Chancery Court decision addressed whether a restrictive covenant agreement was enforceable against a defendant who entered into that agreement willingly (and who waived his right to contest its reasonableness) as part of a sale of a business. Kodiak Building Partners, LLC v. Adams (Del. Ch. Oct. 6, 2022). The court held that the restrictive covenants were unreasonable in their geographic scope and scope of restricted activities because they were broader than necessary to protect the acquirer’s legitimate economic interests. This decision provides lessons for lawyers seeking to draft clear, effective and enforceable restrictive covenant provisions.
Contractarian Principles Carry the Day in De-SPAC Merger Dispute
As previously covered in this blog, the recent increase in litigation arising out of de-SPAC mergers has left some open questions as to how courts will apply traditional legal principles to the unique SPAC structure. The Delaware Court of Chancery, for example, stated in Lordstown Motors that SPAC litigation “raises emerging issues of Delaware law,” while at the same time cautioning in MultiPlan that “well-worn fiduciary principles” generally apply to claims for breach of fiduciary duty in a de-SPAC merger. There understandably is some uncertainty in this space — particularly given the recent stipulation of settlement filed in the MultiPlan litigation, which some commentators had hoped would provide further insights. Thankfully, the Delaware Court of Chancery has recently provided some potentially helpful guidance in the ongoing P3 Health Group Holdings litigation. There, Vice Chancellor Laster addressed claims for breach of a limited liability company agreement related to a de-SPAC merger. In granting in part and denying in part defendants’ motion to dismiss, the Vice Chancellor provided some clarity on how to assess the nature of the pre- and post-de-SPAC merger entities, and in doing so adhered closely to standard principles of Delaware contract law.
Delaware Reminds LLCs: Breaking Up Is Hard to Do
In In re: Dissolution of Doehler Dry Ingredient Solutions, LLC (Sept. 15, 2022), the Delaware Court of Chancery recently restated the high bar for a claim for judicial dissolution to succeed. Following his removal by written consent, a minority member and former manager of a Delaware limited liability company brought a claim for judicial dissolution of the entity. The former manager alleged that judicial dissolution was warranted due to alleged breaches of the company’s operating agreement, a potential voting deadlock on important matters, and alleged breaches of fiduciary duties.
Camping World Plaintiffs Left Out In The Cold: Application of Zuckerberg Test For Demand Futility Bars Claim
In October 2021, in United Food v. Zuckerberg, the Delaware Supreme Court adopted a new three-part test for evaluating whether demand is futile in derivative suits. Prior to Zuckerberg, demand futility was long governed by Aronson v. Lewis (1984) and Rales v. Blasband (1993). The Aronson test excuses demand as futile if the allegations raise a reasonable doubt that “the directors are disinterested and independent” or that “the challenged transaction was otherwise the product of a valid business judgment.” The Rales test excuses demand if the allegations create a reasonable doubt that a majority of the board in place at the time of the demand “could have properly exercised its independent and disinterested business judgment in responding to a demand.” Without expressly overruling Aronson and Rales, the Delaware Supreme Court in Zuckerberg adopted a new three-part test, applied on a director-by-director basis, that excuses demand as futile if any of the three parts is true for at least a majority of the members of the board. The Delaware Supreme Court’s affirmance of the Court of Chancery’s holding in In re Camping World that the plaintiffs did not properly plead that demand was futile further cements the utilization of the Zuckerberg standard as the governing law in demand futility analysis.
Thoughts on Third-Party Liability – Tortious Interference vs. Aiding and Abetting the Breach of a Fiduciary Duty
A recent Delaware Court of Chancery ruling provides useful clarity on the differences between two commonly asserted claims of third-party liability: tortious interference and aiding and abetting the breach of a fiduciary duty. In Atlantic NWI, LLC v. The Carlyle Group Inc., et al., https://courts.delaware.gov/Opinions/Download.aspx?id=339620, Vice Chancellor Glasscock discussed how and why these claims differ.
The Forum Selection Saga Continues
On October 24, 2022, the Ninth Circuit granted en banc review in Lee v. Fisher 34 F.4th 777 (9th Cir. 2022), vacating the Circuit’s prior ruling that the forum selection clause in the bylaws of Gap Inc. (“Gap”) is enforceable. This is the latest chapter in the saga of forum selection enforceability that has gripped the Courts and litigants for years. With this ruling, the Ninth Circuit is set to consider whether forum selection clauses are enforceable, even if they result in a waiver of substantive rights under federal law. A ruling enforcing Gap’s clause will leave the Ninth and Seventh Circuits in direct conflict, while a ruling against Gap could bring the two circuits back into alignment.
