Collision Course: The Consequences of Conflicting Forum-Selection Provisions
On January 6, 2023, Vice Chancellor Laster issued an opinion in Fairstead Capital Management LLC v. Blodgett concerning a “dispute-resolution collision” between two applicable forum-selection clauses. The collision arises from the termination of a principal of an investment fund, whose partners fired him for allegedly breaching his employment agreement and also cancelled his member interests in two LLCs that owned rights to the profits generated by the fund. Unhappy with his ouster, the former principal wanted to litigate against his former partners and the LLCs. But that raised the question at the core of this Vice Chancellor Laster’s opinion: where to litigate?
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.
General Counsel’s Natural Habitat: Delaware Court of Chancery Court Holds that LLC Act’s Consent-to-Jurisdiction Statute Extends to a Delaware LLC’s General Counsel
The Delaware Court of Chancery recently interpreted the Delaware Limited Liability Company Act’s (“LLC Act”) provision for service on any “person” who “participates materially in the management” of a Delaware LLC as sufficient to support implied consent to Delaware jurisdiction by a Delaware LLC’s general counsel. In past cases, the Delaware Court of Chancery found that this material-participation standard applies to LLC officers who hold the title of president and perform functions customarily associated with that role. But in In re P3 Health Group Holdings, LLC, No. 2021-0518-JTL, Vice Chancellor Laster considered the plain meaning of “participates materially” and those words’ “natural habitat” in other statutes like the federal tax code and Delaware General Corporation Law’s (“DGCL”) consent-to-jurisdiction statute for corporate officers, and held that the LLC Act’s consent-to-jurisdiction statute extends to any person who holds a “C-suite” position in a Delaware LLC, including an LLC’s general counsel. C-suite executives of Delaware LLCs should thus anticipate that they may be subject to jurisdiction in Delaware for claims involving their actions as senior officers of a Delaware entity going forward.
Vice Chancellor Zurn’s First Post-Trial Opinion Provides a Cautionary Tale Regarding Private Ordering Under the LLC Act
In her first true Opinion for the Court, In re Coinmint, LLC, Vice Chancellor Zurn delved deeply into the tortured relationship between the two founders (and sole members) of Coinmint, LLC, a bitcoin mining firm, and ultimately held that Delaware’s strong preference for private ordering is not unlimited where the parties fail entirely to follow the formalities set out in the founding documents to which they collectively agreed.
Follow the (Stone) Paper Trail: Court Addresses the Difficult Defense of Acquiescence
A recent opinion issued by the Delaware Court of Chancery in Stone & Paper Investors LLC v. Blanch resolved dueling allegations of corporate mismanagement and fraud that pitted a pair of long-time business partners against their protégé and his associates. In the 100+ page opinion, Vice Chancellor Paul A. Fioravanti, Jr., described a years-long scheme to induce a multi-million dollar investment in a new stone-based paper venture and then, when that venture fizzled, to drain the invested funds for personal gain in a series of undisclosed interested transactions. The facts of this case are extreme and involve an extended pattern of intentional wrongdoing. However, as an illustration of what can happen when bad actors take control, Stone & Paper provides important guidance to honest managers and other interested parties who draw salaries from, or otherwise transact with, the companies they control. Interested parties who engage in such transactions should take care that the material facts underlying any interested transactions have been fully disclosed and that they have complied with the requirements of the operating agreement, including documenting any necessary approvals. And if, by inadvertence or mistake, managers fail to secure the necessary approval for these transactions in advance, they should disclose all of the material facts as promptly as possible after the fact, such that the Board may be deemed to have acquiesced in the transactions.
Texas Appeals Court Confirms That Protections Against Usurpation of Corporate Opportunities Under Delaware Law Can Be Contractually “Worked-Around”
A recent Texas Court of Appeals case held that members of a Delaware limited liability company (LLC) can contract around (i.e., waive) the general principle protecting against usurpation of corporate opportunities. This decision is of particular importance to private equity owners that may hold other investments in companies in the same industry and closely follows recent Delaware case law. The case also should limit the ability for parties to forum shop and seek to obtain a different outcome on Delaware legal issues by filing in another forum, in this case Texas.