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Holifield v XRI: Delaware Supreme Court reinforces primacy of freedom of contract for LLC agreements

In Holifield v. XRI Investment Holdings LLC, No. 407, 2022 (Del. Sept. 7, 2023), the Delaware Supreme Court affirmed the lower court’s determination that the defendant violated XRI Investment Holdings’ LLC agreement when he transferred his member units “for consideration” to a special purpose vehicle. The court held that the “No Transfer Provision” in the LLC agreement, which stated that a noncompliant transfer is “void” rather than “voidable,” prevailed over equitable considerations and required the Court to find the transfer incurably void. In reaching this decision, the Court reaffirmed its ruling in CompoSecure L.L.C. v. CardUX, LLC (CompoSecure II). This decision reaffirmed that LLCs are “creatures of contract” and that nothing in Delaware public policy prohibits LLC members from tailoring their rights and obligations through LLC agreements.

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Anderson v. Magellan: Delaware Court of Chancery elevates standard to justify mootness fees

In Anderson v. Magellan Health, Inc., the Delaware Court of Chancery raised the standard for awarding mootness fees in settled M&A disclosure cases that resulted in supplemental disclosures, holding that fees can be awarded only where the plaintiff secures supplemental disclosures that are “plainly material” rather than just “helpful,” which was the prior standard. The court issued its ruling after substantial briefing, including the submission of an amici curiae brief by two professors, and found that the heightened standard was necessary to reduce the number of strike suits in Delaware courts and end what it termed a problematic “merger tax” created by “legally meritless disclosure claims.”

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Gandhi-Kapoor v. Hone Capital, LLC: Court issues US$1,000-a-day Order to Enforce Advancement Order

In Gandhi-Kapoor v. Hone Capital, LLC, No. 2022-0881-JTL (Del. Ch. July 19, 2023), the Delaware Court of Chancery held respondents Hone Capital LLC and certain related companies in contempt for failing to either object to or advance litigation expenses to its former CFO. In doing so, the Court found that, though contempt is not generally available to enforce money judgments, it was appropriate for an advancement order because untimely advancement may prejudice the covered person’s ability to defend the underlying litigation. The Court therefore imposed equitable relief in the form of a daily US$1,000 fine. This case warns Delaware corporations that serious consequences can arise from a decision to entirely ignore advancement obligations.

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Newman v. KKR: Suit dismissed by Delaware Chancery Court for failure to plead demand futility

In Newman v. KKR, the Delaware Court of Chancery dismissed a shareholder suit against Transphorm, Inc.’s Board and KKR, the largest shareholder, for failure to plead demand futility. The plaintiff alleged that the Board breached its fiduciary duties by approving an equity financing transaction (the Private Placement) in which KKR participated. The Court held that the plaintiff failed to plead demand futility because the plaintiff did not allege with particularity that Transphorm’s Audit Committee lacked independence from KKR. The plaintiff also failed to adequately allege that the Audit Committee faced a substantial likelihood of liability on the claims asserted, which distinguished this case from the recent decision in Ontario Provincial Council of Carpenters’ Pension Tr. Fund v. Walton (Del. Ch. Apr. 26, 2023). Plaintiff’s “disagreement” with the Audit Committee over the Private Placement did not amount to the allegations necessary to support a bad faith claim.

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