Corporate

Delaware Court of Chancery Addresses Dilution Claims

 Capella Holding, Inc. v. Anderson, C.A. No. 9809-VCN (Del. Ch. July 8, 2015), is a Delaware Court of Chancery decision that addresses recurring corporate litigation issues that make it a useful addition to the litigator’s toolbox (even as a duplicate), for the businesslike manner in which it treats the perennial fact pattern of a co-founder and former officer/director who was both unceremoniously ousted from the company he brought into the world, and as a parting insult, they diluted his ownership interest. His claims were presented as counterclaims [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance].

  • • The only counterclaim that survived the motion to dismiss was whether an executive compensation agreement was breached, to the extent he was not given severance payments based on the company’s argument that he was fired for cause. His agreement (and his fiduciary duties while he was a director) prevented him from disclosing confidential information which he did in a lawsuit filed in Tennessee. The court doubted the strength of the claim but allowed it to survive a motion to dismiss in order to provide an opportunity for discovery on the factual issues.
  • • The court treated the dilution claims as direct, instead of derivative, by reading the claims to allege the dilution of voting rights by a controller.
  • • The court reasoned that there were insufficient well-pleaded allegations that the price at which the challenged recapitalization took place was unfair, and the court concluded that even if the entire fairness standard applied to the challenge, the allegations of unfairness did not suffice to survive a motion to dismiss.
  • • The court’s summary of the claims against the directors and the applicable pleading standard are worth quoting:

A classic duty of loyalty claim involves self-interested conduct, and a good faith claim (also under the loyalty umbrella) arises “where corporate directors have no conflicting self-interest in a decision, yet engage in misconduct that is more culpable than simple inattention or failure to be informed.” As a general matter, directors are presumed to make business decisions “on an informed basis, in good faith and in the honest belief that the action taken [i]s in the best interests of the company.” Even when entire fairness scrutiny would otherwise seem to apply, a plaintiff must first “make factual allegations in its complaint that, if proved, would establish that the challenged transactions are not entirely fair” to state a claim. (footnotes omitted.)

  • • Regarding whether the consideration of documents outside the pleadings converted the motion to dismiss counterclaims into a motion for summary judgment, the issue was avoided because: Delaware Rule of Evidence Rule 201(b) allows the Court to take judicial notice of facts that are “‘capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.’”

 Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.

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