On August 13, 2018, Vice Chancellor Travis Laster of the Delaware Court of Chancery ordered Domain Associates, LLC (“Plaintiffs,” “Domain,” or the “Firm”), a venture capital firm, to pay its former member, Nimesh Shah (“Defendant” or “Shah”), the fair value of his 12.1% member interest as of the date he was forced to withdraw from the LLC, potentially worth millions of dollars. Domain had contended that Shah was entitled only to the amount of his capital account balance, or approximately $438,000. In his post-trial opinion, Vice Chancellor Laster also found the individual members of Domain jointly and severally liable for breaching the Domain LLC Agreement when they voted to force him to withdraw on April 18, 2016 but did not pay him his share of the fair value of the business. Significantly, after concluding that the LLC Agreement was silent as to the payout for a forced-out member, the Court looked not only to the Delaware Limited Liability Company Act (the “LLC Act”) but also to the Delaware Revised Uniform Partnership Act (the “Partnership Act”) for guidance because Domain operated in a manner akin to a general partnership, as distinct from other governance structures. The decision provides important guidance for drafting operating agreements governing Delaware entities, understanding the potential sources of law that may guide a court adjudicating intra-entity disputes, and in litigating disputes involving these agreements.

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Two recent decisions by the Delaware Court of Chancery underscore that the outcome of an appraisal proceeding often will turn on the quality of a company’s sale process. While recent Delaware Supreme Court appraisal jurisprudence supports relying on the negotiated merger transaction price as the most reliable evidence of a seller’s fair value, flaws in the sales process, even if not rising to the level of a breach of fiduciary duty by the seller’s board, can lead the court to reject reliance on merger consideration. As a result, appraisal decisions likely will continue to focus on many of the same issues that courts examine when considering breach of fiduciary duty claims in the merger context as well as assessing whether the seller’s stock trades in an efficient market.

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On July 26, 2018, Vice Chancellor Glasscock of the Delaware Court of Chancery denied in part and granted in part Defendants’ motion to dismiss in Sciabacucchi v. Charter Communications Corporation et al. We discussed the Court’s prior ruling in this action here. In brief, the action challenged certain transactions between Charter Communications, Inc. and its largest stockholder, Liberty Broadband Corporation, which owned approximately 26% of Charter’s outstanding common stock and had the right to designate four of ten directors on Charter’s Board. In particular, a Charter stockholder challenged a voting proxy agreement between Charter and Liberty and two stock issuances worth $5 billion made by Charter to Liberty, allegedly as a part of the “financing” of Charter’s $78.7 billion merger with Time Warner Cable and its purchase of Bright House Networks, LLC. Ultimately, 86% of Charter stock not affiliated with Liberty voted, in a single vote, to approve (i) the share issuances and the voting agreement, (ii) the merger with Time Warner Cable and (iii) the purchase of Bright House. Both third-party transactions were conditioned on Charter stockholders’ approval of the share issuances to and voting agreement with Charter.

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On March 28, 2018, in In re Tesla Motors, Inc. Stockholder Litigation, the Delaware Court of Chancery denied a motion to dismiss a lawsuit brought by stockholders of Tesla Motors, Inc. (“Tesla” or the “Company”). The plaintiffs alleged that Tesla’s Board of Directors, along with its Chairman and CEO, Elon Musk, breached their fiduciary duties by approving the $2.6 billion acquisition of SolarCity, which allegedly benefitted SolarCity stockholders to the detriment of Tesla stockholders. At the time of the transaction, Mr. Musk was the Chairman of the Board, Chief Executive Officer and Chief Product Architect of Tesla, and owned approximately 22.1% of Tesla’s outstanding common stock. He was also Chairman of the Board of SolarCity and SolarCity’s largest stockholder, owning approximately 21.9% of SolarCity’s outstanding common stock. In their motion to dismiss, the defendants argued that Mr. Musk was not a controlling stockholder of Tesla and that, because the transaction was approved by an uncoerced, fully informed majority vote of disinterested stockholders, the transaction should be reviewed under the deferential business judgment rule in accordance with Corwin v. KKR Financial Holdings LLC. The Court denied the motion to dismiss and found that “it is reasonably conceivable that Musk, as a controlling stockholder, controlled the Tesla Board in connection with the Acquisition.” If so proven, the transaction will be reviewed under the more stringent entire fairness standard. The decision is the latest in a line of cases (as discussed in our prior post) in which Delaware courts have found that minority stockholders can, in certain circumstances, exercise corporate control.

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On February 1, 2018, the Delaware Court of Chancery granted defendants’ motion to dismiss an action brought by minority unitholders of Trumpet Search, LLC (“Trumpet” or the “Company”). The defendants were other unitholders that collectively held a majority of the membership units in Trumpet and, under the governing operating agreement (“OA”), had the power to appoint four of the seven managers on the Trumpet board of directors. Vice Chancellor Glasscock’s decision, Christopher Miller et al. v. HCP & Co., et al., C.A. No. 2017-0291-SG (Del. Ch. Feb. 1, 2018), is a powerful reminder that the broad freedom of contract that Delaware law accords entities such as LLCs offers both the promise of great latitude to contracting parties and the threat of serious pitfalls for parties that fail to carefully protect their interests in the agreement. The decision also underscores the limits on an implied covenant breach claim under Delaware law.

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On August 18, 2017, the Delaware Court of Chancery granted defendants’ motion to dismiss a class action brought by former minority stockholders of Martha Stewart Living Omnimedia, Inc. (“MSLO”) against Martha Stewart and Sequential Brands Group, Inc. (“Sequential”). In his opinion in In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation, C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017), Vice Chancellor Slights held that the business judgment rule, rather than the entire fairness standard, applied at the pleadings stage to a challenge to a controlling stockholder’s sale to a third party, applying the Delaware Supreme Court’s seminal holding in Kahn v. M&F Worldwide Corp. (“MFW”) to such “single-side” controller transactions. Chancellor Slight’s ruling represents the first time the business judgment rule has been applied to single-side controller transactions at the pleadings stage pursuant to the MFW framework; prior decisions involved situations where the controller was on both sides of the transaction.

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