Delaware Chancery Court Denies Plaintiff’s Motion to Dismiss Its Own Case, But Grants Defendant’s Motion to Dismiss on Other Grounds
By Yanna Banks, Reed Smith LLP
In what Chancellor Kathlaleen St. J. McCormick described as “a spin-off novella of the TransPerfect saga,” TransPerfect Global, Inc.’s legal malpractice claims against Ross Aronstam & Moritz LLP (“RAM”) have been dismissed, adding yet another “episode” to the ongoing story of corporate control.
In 2014, TransPerfect Global, Inc. (the “Company”), received a court order for the Company to be sold via modified auction (the “Sale Order”) and the appointment of Robert Pincus (“Custodian”) as custodian. In opposition to the sale, Shirley Shawe, one of the owners, brought two lawsuits against the Company, and both were dismissed. The Custodian obtained RAM to represent the Company in both actions.
In August 2020, the Company, now owned by Shawe, sued RAM and one of its partners (the “Defendants”), alleging that the Defendants acted improperly as a result of having been retained by and having taken directions from the Custodian, who was purported to be a conflicted agent for the Company (the “New York Action”). The Defendants moved to redirect the New York Action to the Court of Chancery of the State of Delaware (the “Court”) in accordance with the Sale Order’s exclusive jurisdictional provisions.
In January 2021, the Company amended the New York Action to drop its claims of equitable relief and later filed a nearly identical action in Delaware (the “Delaware Action”). Subsequently, the Defendants moved to dismiss the Delaware Action for failure to state a claim. In what the Court described as “a twist of Shyamalan-ian proportions,” the plaintiffs also moved to dismiss their own complaint, arguing that, because it was seeking only legal relief, the Court lacked subject matter jurisdiction.
Although neither party wished to proceed with the suit, the Court found it necessary to issue an opinion, as the legal basis for dismissing the Delaware Action could affect the New York Action. Under Delaware law, cases dismissed for lack of subject matter jurisdiction are not barred from later being asserted. However, a dismissal for failure to state a claim will typically be granted with prejudice to the dismissed claims.
With regard to the Plaintiff’s motion, the Court analyzed whether the Company’s claims fell within the Court’s inherent authority to enforce its own orders. This question happened to have been previously resolved in the affirmative by the Court in an earlier ruling. The Court held the New York Action violated the Sale Order, as the action directly implicated their supervisory authority with regard to custodians.
The Court then turned to the Defendant’s motion for failure to state a claim for legal malpractice. The Company asserted that the Defendants neglected their professional obligations by violating the Delaware Rules of Professional Conduct (the “Rules”) preventing a lawyer from representing a client if there is a concurrent conflict of interest, or in this case, the Custodian’s receipt of fees from the Company. The Court found that the Defendant’s actions fit squarely within the Sale Order, and therefore, it could not be reasonably conceived that the payment of the Custodian’s fees gave rise to a concurrent conflict under the Rules. Ultimately, the Court denied the Company’s motion while granting Defendant’s finding that the Company failed to establish that the Defendants neglected their professional obligations.
Delaware Chancery Court Preserves Common Stockholders’ Claims in Connection with Merger
By Luke Barbour, Reed Smith LLP
On March 1, 2022, the Delaware Court of Chancery (the “Court”) preserved the majority of claims brought by a group of common stockholders of WinView Inc. (“WinView”) arising out of a May 2020 merger (the “Merger”) of WinView with two Canadian companies.
WinView, a private company that primarily focused on sports betting, held an asset portfolio comprised largely of patents related to the gambling industry. Over the course of WinView’s existence, the company engaged in several funding rounds, including both Series A and Series B preferred equity offerings and several bridge loans. Simultaneously with these bridge financings, the Company also engaged in patent litigation in an attempt to monetize its patents.
In late 2019, WinView’s board, which consisted of WinView’s largest stockholder and several secured noteholders, executed a term sheet in connection with the Merger. Notably, the terms of the Merger eliminated the Company’s common stock, and the common stockholders ultimately received no cash and no shares in the resulting entity. Rather, the common stockholders received a contractual right to 50% of any recoveries on successful resolutions of WinView’s patent litigation. By contrast, the preferred stockholders and the secured creditors of WinView received stock in the resulting entity, meaning that the Merger treated WinView’s common stockholders differently from the preferred stockholders and secured noteholders. The Merger closed in May of 2020, and for fourteen months thereafter, no patent lawsuits were filed. As a result, no payments were made to the former WinView common stockholders.
In their amended complaint against the directors, the plaintiffs brought suit for breaches of fiduciary duty, civil conspiracy, and unjust enrichment. The gist of their claim was that the directors, who were holders of preferred stock as well as debt instruments, sanctioned a transaction that benefited themselves to the detriment of the common stockholders. In response, the defendants maintained that WinView was insolvent, and that their actions were ultimately favorable to the common stockholders, who otherwise would have received nothing given WinView’s insolvency.
Writing for the Court, Vice Chancellor Sam Glasscock III concluded that the defenses proffered by the directors “may prove dispositive upon a fuller record, but [were] not sufficient at this plaintiff-friendly stage of the proceedings to support a dismissal.” The Court ultimately concluded that it was conceivable the director defendants had breached their duty of loyalty to WinView given the disparity in merger consideration, and that the plaintiffs’ claims should survive as a result. With respect to the defendants’ claim that WinView was insolvent, Vice Chancellor Glasscock pointed out that the plaintiffs’ amended complaint did not allege that WinView was insolvent, and so he concluded that “the question of WinView’s solvency is a factual issue that awaits a developed record.” The Court also preserved the plaintiffs’ unjust enrichment claim, although Vice Chancellor Glasscock expressed skepticism that the unjust enrichment claim would provide any relief separate and distinct from the breach of fiduciary claim. The Court did, however, toss out the civil conspiracy claims against the defendants, holding that a civil conspiracy claim does not apply to defendants who owe a direct fiduciary duty, which the director defendants in this case did.