Chancery Court Discusses Fiduciary Duty of Director to Disclose Information While Negotiating Release with Corporation and Whether Lack of Disclosure Could Invalidate the Release

Chancery Court Discusses Fiduciary Duty of Director to Disclose Information While Negotiating Release with Corporation and Whether Lack of Disclosure Could Invalidate the Release

 
Xu  v. Heckmann Corporation,  No. 4673-CC (Del. Ch. October 26, 2009), read opinion here.
 
The Chancellor of the Delaware Court of Chancery in this opinion decides a Motion to Dismiss Counterclaims involving issues related to fraud allegations against a director. The founder of a selling company, based in China, became a director of a U.S. corporate buyer as part of the deal. It was in this context that claims against the director were made post-closing by the purchaser. Similarly, the purchaser claimed that the fraud of the seller should relieve it of any duty to fulfill the payment obligations of the deal.
 
Background
The factual background involved a purchase via merger by the Heckmann Corporation of a bottled water producer and distributor in China, founded by Xu Hong Bin, a citizen of the People’s Republic of China. The purchase price included $15 million in cash, the right to contingent payments of an additional $15 million, as well as restricted shares in the Heckmann Corporation. The merger also included Xu continuing as the president of China Water and also becoming a director of Heckmann. As a result of post-closing issues that developed, the parties entered into an Escrow Resolution and Transition Agreement (“ERTA”) which required the restricted shares that were part of the Merger Agreement to be returned to Heckmann at a substantially discounted price. The ERTA included a broadly worded mutual release of claims between Xu and Heckmann, as well as an integration clause.
 
Overview of Claims and Counterclaims
Xu sued for specific performance of the ERTA. Heckmann filed counterclaims claiming that Xu breached fiduciary duties he owed to Heckmann as a director and that he also breached the ERTA. Heckmann also asserted that Xu is not entitled to certain payments already made to him. The Court noted that Heckmann asserted that it was fraudulently induced into signing the ERTA by Xu’s failure to disclose fraudulent conduct, which was technically not a counterclaim, but rather was an affirmative defense to enforcement of the ERTA.
 
 
 
Francis X. Pileggi practices primarily in the areas of corporate and commercial litigation. He was the founding partner who started the Wilmington, Delaware, office of Fox Rothschild LLP, one of the country's largest and oldest law firms, in 2001, where he continues to practice in the Litigation Department. Read more about him.