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The Business Lawyer

Winter 2023/2024 | Volume 79, Issue 1

Annual Survey of Judicial Developments Pertaining to Private Equity and Venture Capital

The Annual Survey Working Group of the Jurisprudence Subcommittee, Private Equity and Venture Capital Committee, ABA Business Law Section

Annual Survey of Judicial Developments Pertaining to Private Equity and Venture Capital

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The Annual Survey Working Group reports annually on the decisions we believe are the most significant to private equity and venture capital practitioners. The decisions selected for this year’s Annual Survey are the following:

  1. Continental Investors Fund, LLC v. TradingScreen, Inc. (Chancery Court Imposes Limitations on the Enforcement of Redemption Rights)
  2. New Enterprise Associates 14, L.P. v. Rich (Chancery Court Holds Contractual Limitations on Fiduciary Duties Are Not Facially Invalid)
  3. Hyde Park Venture Partners Fund III, L.P. and Hyde Park Venture Partners Fund III Affiliates, L.P. v. FairXchange, LLC (as Successor in Liability to FairXchange, Inc.) (Chancery Court Addresses a Corporation’s Ability to Raise Privilege to Withhold Documents from a Former Designated Director and Its Designating Stockholder)
  4. Teuza-A Fairchild Technology Venture Ltd. v. Lindon (Court of Chancery Sustains Fiduciary Duty Claims Asserted Against Creditor and Controller)
  5. Lockton v. Rogers (Court of Chancery Rejects Application of Corwin Cleansing at the Pleading Stage Because of Potential Defects in Cleansing Stockholder Vote)
  6. Stream TV Networks, Inc. v. SeeCubic, Inc. (Delaware Supreme Court Holds that There Is No Insolvency Limitation to Stockholder Vote Requirements)

1. Continental Investors Fund, LLC v. TradingScreen, Inc. (Chancery Court Imposes Limitations on the Enforcement of Redemption Rights)


In Continental Investors Fund, LLC v. TradingScreen, Inc., the Delaware Court of Chancery held that Continental Investors Fund, LLC (“Continental”) failed, in part, to prove that TradingScreen, Inc. (“TradingScreen”) breached its obligation to redeem Continental’s shares of Series D Convertible Preferred Stock (the “Series D Preferred Stock”). In determining that Continental failed, in part, to meet its burden of proof, the court determined that, under the common law, a redemption may not impair a corporation’s ability to continue as a going concern for the foreseeable future. The court’s holding provides a subjective limitation on redemption rights that equity investors should consider before purchasing preferred stock.


Philippe Buhannic co-founded TradingScreen and served from the outset as its Chairman and CEO and held a majority of the company’s common stock.

In August 2007, funds managed by Technology Crossover Ventures (“TCV Funds”) and other investors, including Continental, entered into an agreement with TradingScreen to purchase shares of its Series D Preferred Stock. To facilitate the financing, TradingScreen amended its certificate of incorporation. TCV Funds purchased 52.4 percent of the Series D Preferred Stock, making it a Majority Holder for purposes of exercising the redemption right. Continental purchased 5.3 percent of Continental’s Series D Preferred Stock.

The Majority Holders received the right to require TradingScreen to assist them in selling their shares. If the Majority Holders were unable to find a buyer within nine months, then the Majority Holders were entitled to exercise a redemption right, requiring TradingScreen to purchase “all or a portion of such holders’ shares.” The redemption process involved the following steps: (1) TradingScreen and the Majority Holders would notify the other stockholders of their right to participate; (2) TradingScreen would then negotiate with the Majority Holders in good faith to determine the fair market value of their Series D Preferred Stock; (3) if an agreement could not be reached, they would jointly select an independent financial advisor to determine the fair market value of the shares of Series D Preferred Stock; and (4) thirty days after the receipt of the financial advisor’s price opinion, TradingScreen would redeem the tendered shares of Series D Preferred Stock, with the option to pay in full or in three equal installments over an eighteen-month period.

Additionally, TradingScreen’s certificate of incorporation provided that if TradingScreen defaulted on its redemption obligation, interest would accrue on all amounts then owed at an annual percentage rate of 13 percent.

By 2010, the relationship between TCV and Philippe Buhannic had deteriorated. In June 2012, TCV notified TradingScreen that the fund: (1) intended to sell its Series D Preferred Stock and (2) if the fund were unsuccessful in these efforts, TCV would exercise its redemption rights. In August 2012, to facilitate the sale of TCV’s Series D Preferred Stock, the board formed a special committee. In March 2013, unable to secure a deal, TradingScreen began the redemption process. TradingScreen provided notice to the other holders of Series D Preferred Stock and Continental elected to participate.

The committee recognized the need to determine the amount of funds TradingScreen had available to repurchase shares, so as part of the redemption process, it evaluated debt financing, as well as consulted with legal and financial advisors. Despite multiple efforts, TradingScreen was unable to obtain a material amount of debt financing. Unable to reach an agreement on the redemption price, in February 2014, the committee selected an independent financial advisor, which determined the fair value of TradingScreen was $120 million, resulting in a redemption price of $16.71 per Series D Preferred share.

Upon receiving this financial advice, the committee further evaluated the amount of cash TradingScreen had available for redemptions. The committee took a number of factors into consideration, including, “the requirements of the Company’s business, its financial prospects in the ‘intermediate term,’ and the ‘long-term health of the Company,’” including increased employee compensation and cash bonuses to employees for purposes of retention, as well as “show capital,” which was “the total amount of capital that the Company needed to show on its balance sheet to reassure any counterparties that the Company possessed the financial wherewithal to complete trades.”

In September 2014, Philippe informed the Series D Preferred stockholders that $7.2 million at $16.71 per share was available for redemption, and that the committee would meet regularly to determine the amount of funds legally available for additional redemption payments. A few days later, TCV Funds delivered a notice of default to TradingScreen, which the company disputed.


In September 2014, TCV and Continental filed suit and alleged that TradingScreen failed to use all legally available funds for the redemption. Ultimately, TCV settled its dispute and accepted the redemption price plus a premium of 23 percent. Continental refused to settle and maintained that TradingScreen breached its redemption obligation by not making three (3) equal payments, putting them in default.

Continental argued that all that was needed to prove a prima facie case of breach of contract was to point out that “the Company did not redeem all the shares and pay the full redemption amounts on the dates contemplated by the Charter.” From there, the burden shifted to TradingScreen to prove “that spending a single dollar more on redemptions would have rendered the Company insolvent.”

The court disagreed with Continental’s position, finding it contrary to binding Delaware Supreme Court precedent, holding that the party seeking to enforce a mandatory redemption provision has the burden of proof. The court further held that a redemption obligation that renders a corporation insolvent is unlawful. The court expressed the view that a corporation must be able to “continue as a going concern” to satisfy the common law insolvency limitation. To achieve this, the court held that directors must be able to use judgment to retain resources “to operate for the foreseeable future without the threat of liquidation” and that such foreseeable future is not a bright line period of time.

The court distinguished a redemption right from other contract claims. According to the court, “an equity investor purchased equity, which is presumptively permanent capital,” and that a money judgement based on mandatory redemption rights is different because a plaintiff “seeks to transform itself from a holder of equity into a creditor.”

As a fallback argument, Continental argued that the defendants “acted in bad faith, relied on unreliable methods or data, or reached conclusions so off the mark as to constitute constructive fraud” when calculating the redemption value of the Series D Preferred Stock held by Continental. The court found that the methods and data used by management to be appropriate, lacking constructive fraud, and done in good faith. It emphasized that Continental failed to carry its burden of proof for its assertions. The court consistently showed deference to the committee on how it came up with the redemption amounts, referring to the decision-making process as a “judgment-laden exercise.” The court further noted that courts will “not substitute [their] concepts of wisdom for that of the directors’ as to the amount of funds available for redemptions in the absence of bad faith or fraud on the part of a board.”

The court awarded a money judgment in favor of Continental, but much less than Continental requested. It found TradingScreen did not have “legally available funds” until July of 2020, not 2014 or 2015 as Continental asserted. Therefore, TradingScreen breached the redemption provision and defaulted on its obligation in July 2020 once the company had legally available funds and did not immediately pay out the funds to Continental.


The TradingScreen decision illustrates the limitations of redemption rights and confirms that the enforcement of a redemption right is different from the enforcement of other contracts because of an implied common law obligation that a redemption not impair the company’s ability to continue as a going concern for the foreseeable future. This is because preferred stockholders obtain benefits from holding preferred stock that other contractual claimants do not, such as tax benefits and lower cost of capital. Here, the plaintiff also received payment for its entire portion of shares, just not in the timeframe it desired. The court held that “sophisticated” investors need to take “the bitter with the sweet.” In addition, the court held that it would not substitute the court’s determination in place of a board of directors’ determination regarding the availability of funds to satisfy a redemption provision absent the investor proving bad faith or fraud, providing an extra layer of protection to issuers.

2. New Enterprise Associates 14, L.P. v. Rich (Chancery Court Holds Contractual Limitations on Fiduciary Duties Are Not Facially Invalid)


In New Enterprise Associates 14, L.P. v. Rich, the Delaware Court of Chancery determined that the fiduciary duties of the directors of a Delaware corporation are not “immutable,” but can be “tailored” based on legal principles sounding in trust and principal-agency law, relevant provisions of the Delaware General Corporation Law (the “DGCL”), and Delaware case law.


The plaintiffs in the case were investment funds managed by sophisticated venture capital firms that had invested in Fugue, Inc. (“Fugue”), a startup that failed to achieve either a liquidity event or an exit event for plaintiffs through a third-party sale.

After plaintiffs declined to invest additional funds in Fugue, management pursued a new equity infusion from an investor group (the “Investor Group”) led by George Rich (“Rich”), who demanded that (1) the existing preferred stock of Fugue convert into common stock, (2) Rich and the Investor Group receive a new class of preferred stock with rights superior to plaintiffs, and (3) plaintiffs and certain existing investors enter into a voting agreement (the “Voting Agreement”). The Voting Agreement contained a drag-along provision with a covenant stating that plaintiffs would not sue Rich or the Investor Group in connection with a drag-along sale, including by asserting breach of fiduciary duty claims (the “Negative Covenant”).

Following the reconstitution of Fugue’s board to include Rich, a second director appointed by the Investor Group and Fugue’s CEO, the board approved a follow-on recapitalization (the “Recapitalization”) and within months, the board decided to sell Fugue in a transaction representing a drag-along sale under the terms of the Voting Agreement. Plaintiffs refused to consent to the drag-along sale after Rich and the Investor Group declined to confirm that they had no prior discussions with the potential buyer, and plaintiffs filed a breach of fiduciary duty claim against Fugue’s directors. The directors moved to dismiss, claiming that the Negative Covenant constituted a binding contractual agreement that barred plaintiffs from bringing breach of fiduciary duty claims against the board.


Fiduciary Tailoring. The court first determined that fiduciary relationships between a trustee and beneficiary as well as an agent and principal provide opportunities for “fiduciary tailoring,” and that the DGCL permits private ordering to establish the fiduciary relationship between the directors and the corporation through a purpose clause. The court noted further that “[t]he DGCL also allows more space for fiduciary tailoring and greater limits on fiduciary accountability than is widely understood.” The court noted further that Delaware common law “goes further,” including by permitting the type of contractual restriction contemplated by the Negative Covenant.

Statutorily Authorized Tailoring. The court then examined specific statutory provisions that permit “fiduciary tailoring,” including section 102(b)(7) of the DGCL, which provides exculpatory protection to directors for breaches of the fiduciary duty of care, subject to the exclusions set forth in the statute. Given the distinction between a corporation’s certificate of incorporation and bylaws and a stockholder-level agreement, the court determined that “Section 102(b)(7) does not render the Covenant facially invalid,” and held similarly that the Negative Covenant was not contrary to Delaware public policy. The court further analyzed section 122(17) of the DGCL, which sets forth the corporate opportunity doctrine, stating that the advance renunciation of corporate opportunities “functions like a covenant not to sue,” providing a “powerful indication” that the Negative Covenant is not contrary to Delaware public policy and is not facially invalid.

The court also engaged in an in-depth analysis of the modification of fiduciary duties permitted under section 141(a) of the DGCL, describing the statute as “the cornerstone of Delaware’s board-centric regime,” and noting that, pursuant to the plain language of section 141(a), if a modification of director fiduciary duties appears in a corporation’s certificate of incorporation, then the board’s powers and duties “shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.” Rounding out its statutory analysis, the court examined the types of charter-based modifications that are “permissible and consistent with public policy,” including: (1) Section 351 of the DGCL, authorizing close corporations to provide for management by its stockholders; (2) Section 350 of the DGCL, permitting close corporations to modify the fiduciary duties of the corporation’s directors via a written agreement; and (3) Subchapter XV of the DGCL, which authorizes the certificate of incorporation of a public benefit corporation to set forth a public benefit in its charter that can be considered as a fiduciary matter in addition to the pecuniary interests of the corporation and its stockholders.

The Relevant Test Under Manti and Altor Bioscience. Concluding that the Negative Covenant is not “out of bounds as a form of fiduciary tailoring,” the court then inquired whether it should decline to uphold the Negative Covenant on public policy grounds. Relying on the Delaware Supreme Court’s opinion in Manti Holdings, LLC v. Authentix Acquisition Co., finding that stockholders could waive statutory appraisal rights by contract, and In re Altor Bioscience Corp., upholding a covenant not to sue for breach of fiduciary duty, the court determined that similar contractual provisions should be analyzed utilizing a two-part test derived from Manti and Altor Bioscience:

  • First, the provision must be narrowly tailored to address a specific transaction that otherwise would constitute a breach of fiduciary duty. The level of specificity must compare favorably with what would pass muster for advance authorization in a trust or agency agreement, advance renunciation of a corporate opportunity under section 122(17) of the DGCL, or advance ratification of an interested transaction like self-interested director compensation. If the provision is not sufficiently specific, then a court should determine that it is facially invalid.
  • Second, the provision must survive close scrutiny for reasonableness. In this case, the court’s reasoning in Manti favored the court finding the Negative Covenant reasonable. Those reasons included (1) a written contract formed through actual consent, (2) a clear provision, (3) knowledgeable stockholders who understood the provision’s implications, and (4) the presence of bargained-for consideration.

The court concluded that the Negative Covenant met the first requirement of the two-part test since the Negative Covenant was narrowly tailored to a specific event, as well as the reasonableness requirement given the sophistication of the parties involved and plaintiffs’ ability to block the Recapitalization, force Fugue to seek different terms, or agree to invest additional funds. The court also cited principles of Delaware contract law declining to alter the parties’ bargained-for agreement after the fact since the Negative Covenant served as an inducement for Rich and the Investor Group to invest in Fugue.

Limitations on Fiduciary Tailoring. Despite upholding the facial validity of the Negative Covenant, the court outlined several limitations on similar contractual provisions. First, the court distinguished limitations on director fiduciary duties contained in a corporation’s certificate of incorporation or bylaws and limitations contained in a stockholder-level agreement, the latter of which provided more flexibility for private ordering.

The court further cabined the broad enforceability of similar covenants, noting that “[a] broad waiver of any ability to assert claims for breach of fiduciary duty would be a non-starter. Even a narrowly tailored provision would likely be unreasonable if it appeared in an agreement that purported to restrict the rights of retail stockholders.”

The court likewise characterized several scenarios where a provision analogous to the Negative Covenant would “face deep skepticism and a steep uphill slog,” including:

  • An agreement purportedly binding a retail stockholder;
  • An employee stock grant;
  • A dividend reinvestment plan;
  • An employee stock compensation plan;
  • A stock transmittal letter; and
  • A transaction offering an election between base consideration and incremental consideration coupled with a covenant not to sue.

Having determined that the Negative Covenant “operates permissibly within the space for fiduciary tailoring that Delaware law provides, particularly in a stockholder-level agreement that only addresses stockholder-level rights,” the court nonetheless applied a public policy limitation, reiterating that a contract governed by Delaware law cannot exempt a party to the contract from tort liability for intentional or reckless misconduct, including claims made by plaintiffs that the directors breached their fiduciary duties by acting in bad faith in connection with the Recapitalization and the drag-along sale.


The New Enterprise v. Rich decision is a must-read for corporate practitioners counseling the directors of a Delaware corporation, as well as practitioners drafting stockholder-level agreements that are outside the scope of the corporation’s certificate of incorporation and bylaws, particularly agreements between sophisticated parties versus retail investors and employees. Given the unique nature of the factual dispute in New Enterprise, including well-pled allegations of bad faith conduct by Rich and the Investor Group, it remains to be seen how far the scope of “fiduciary tailoring” will reach, and how frequently the public policy limitation will be invoked by the Delaware courts. As Delaware case law continues to develop, practitioners should ensure that appropriate process guardrails are put into place for self-interested transactions, and that fiduciaries act in good faith and consistent with their fiduciary duty of loyalty in determining whether a potential transaction is advisable and in the best interests of the corporation and its stockholders.

3. Hyde Park Venture Partners Fund III, L.P. and Hyde Park Venture Partners Fund III Affiliates, L.P. v. FairXchange, LLC (as Successor in Liability to FairXchange, Inc.) (Chancery Court Addresses A Corporation’s Ability to Raise Privilege to Withhold Documents from Former Designated Directors and Their Designating Stockholders)


In Hyde Park Venture Partners Fund III, L.P. & Hyde Park Venture Partners Fund III Affiliates, L.P. v. FairXchange, LLC (as successor in liability to FairXchange, Inc.), the Delaware Court of Chancery held that a corporation cannot assert attorney-client privilege against a director to withhold information generated during the director’s tenure. Under longstanding Delaware precedent, a corporation does not have a reasonable expectation of confidentiality as to board designees or the stockholders that designated them.


In November 2019, Ira Weiss (“Weiss”) joined the board of directors of FairXchange Inc. (“FairXchange”) to serve as FairXchange’s preferred director. Weiss was a partner at Hyde Park Venture Partners, the sponsor of both Hyde Park Venture Partners Fund III, L.P. and Hyde Park Venture Partners Fund III Affiliates, L.P. (together, the “Funds”), which owned approximately 15 percent of FairXchange’s outstanding equity. The other two members of the board were FairXchange’s two founders.

In the summer of 2021, Coinbase Global, Inc. (“Coinbase”) made an unsolicited acquisition proposal to acquire FairXchange. While the other FairXchange directors were supportive of the Coinbase transaction, Weiss expressed concerns as to the timing of the transaction and also suggested that FairXchange engage an investment banker to conduct a market check on the deal price being offered. Weiss contends that he was then excluded from the deal process and therefore sent a demand letter to the other members of the board requesting access to the Coinbase transaction documents in his capacity as a director. One day after Weiss’ demand letter was sent, he was removed from the board by a vote of holders of a majority of preferred stock.

After the Coinbase transaction was consummated, the Funds filed an appraisal action. During discovery, FairXchange asserted attorney-client privilege to prevent the sharing of information that was created during Weiss’ tenure as a director. The Funds then brought a motion to compel discovery of the information. The court granted the Fund’s motion and rejected FairXchange’s argument to withhold such information based on attorney-client privilege.


The main question before the court was whether FairXchange had a reasonable expectation of confidentiality as to Weiss and the Funds during Weiss’ tenure as a director. In its analysis, the court relied on two foundational ideas enshrined in longstanding Delaware law precedents—first, that Delaware law treats corporations and members of the board of directors as joint clients for the purposes of privileged material created during a director’s tenure. Joint clients have no expectation of confidentiality as to each other and are considered to be in a circle of confidentiality with each other. Even after a joint client relationship has terminated, the absence of confidentiality that is essential to the privilege does not change. Once a director’s tenure on the board ends, the director leaves the circle of confidentiality only for the purposes of subsequent communications. The absence of confidentiality continues to apply to communications that were generated during the director’s tenure. From these rules, it follows that a corporation cannot invoke privilege against the director to withhold information generated during the director’s tenure. Second, the Court stated that when a director represents an investor, there is an implicit expectation that the director can share information with the investor. Information sharing is unavoidable when a director serves dual roles as a director and a representative of an investor because “a human has only one brain.” Under the joint client approach, the investor presumptively joins the director within the circle of confidentiality.

The court also rejected defendant’s argument that, as the surviving entity resulting from the merger with Coinbase, it gained the right to invoke privilege against Weiss and the Funds. In the court’s view, any privilege that a constituent company held before a merger passes to the surviving company in connection with the merger transaction. Therefore, the ability of FairXchange LLC., as the surviving entity, to invoke privilege against Weiss and the Funds is no greater than the ability of FairXchange Inc. to invoke privilege against Weiss and the Funds in the pre-merger stage. Hence, since FairXchange Inc. did not have the ability to invoke privilege before the merger transactions for the reasons stated above, FairXchange LLC could not gain that right post-merger transaction.

The court held that a corporation can assert attorney-client privilege against its directors (or the investors that designated those directors) in litigation if: (1) the parties agree by way of contract, such as a confidentiality agreement, that the corporation may assert privilege against certain directors and the investors that appointed that director; (2) the board of directors forms a special committee that excludes the director after which the committee can consult with counsel confidentially and retain the privilege against the director and the investor that appointed the director; or (3) sufficient adversity of interests has arisen and becomes known to the director, thus impacting the director’s ability to rely on corporate counsel for matters where the director or the investor that appointed the director and corporation’s interests are adverse.


The decision highlights the protections afforded by Delaware law to former directors who are also entitled to mandatory indemnification in certain circumstances. This difference exists, in part, to ensure that corporations can attract and retain quality director candidates.

4. Teuza-A Fairchild Tech. Venture Ltd. v. Lindon: Court of Chancery Sustains Fiduciary Duty Claims Asserted Against Creditor and Controller


In Teuza-A Fairchild Tech. Venture Ltd. v. Lindon, the Delaware Court of Chancery, among other things, denied a motion to dismiss breach of fiduciary duty claims asserted against a corporation’s controlling stockholder for allegedly entering into a conflicted transaction pursuant to which the corporation’s largest creditor, which was controlled by the same individuals as the controlling stockholder, received a non-ratable benefit. In so holding, the court highlighted the allegations that the individuals controlling the controlling stockholder and creditor used their leverage to cause the corporation to enter into transactions that favored the creditor over the minority stockholders, culminating in the consummation of a merger that disproportionately benefited the creditor.


Bioness was founded in 2004 as a joint venture between Alfred E. Mann (“Mann”) and a medical device manufacturer. Mann, holding stock through the Alfred E. Mann Trust (the “Trust”), was Bioness’s controlling stockholder. Mann also was the company’s primary creditor, operating through his investment vehicle, Mann Group, LLC (the “Mann Group”). Following Mann’s death in 2016, the Trust continued as an administrative trust administered by the defendant-trustees (the “Trustees”). The Trustees controlled Bioness via the Trust, while also controlling Mann Group as its managers.

In 2017, Bioness and the Mann Group entered into an all-assets security agreement for the purpose of consolidating and securing the company’s debt. According to the stockholder-plaintiff, the defendants (i.e., certain directors, the Trustees, and the Trust) allegedly used this leverage to, among other things, block the board’s efforts to obtain outside funding and, subsequently, push Bioness into a merger that favored the Mann Group over the company’s minority stockholders. This began with the appointment of Defendant Mark Lindon as a director and, later, chairman of Bioness, who represented (and continued to represent) the Trust in a variety of legal and consulting matters

In August 2020, after being informed by the Mann Group that it would not be providing any additional loans, Bioness sought alternative sources of funding. In connection therewith, in September 2020, Bioness agreed to a preliminary term sheet with one potential acquirer, Kuhn Global Capital LLC (“Kuhn”). One month later, while negotiations with Kuhn were ongoing, the board approved a letter of intent (the “LOI”) with a new potential acquirer, Bioventus Inc. (“Bioventus”). The LOI contemplated $35 million payable to Bioness at closing (with potential earn-outs), of which $20.5 million would pay off non-Mann Group loans/expenses with the remaining $14.5 million (including any earnouts) going to the Mann Group. The LOI also contained a no-shop provision, which prohibited solicitation of or communications regarding alternative acquisition proposals, and prohibited Bioness from securing new loans from entities other than the Mann Group.

Pursuant to the LOI, the board formed a committee to consider and negotiate the proposed transaction. Defendant Mark Lindon, who also represented the Trust in a variety of legal and consulting matters, led the committee. Plaintiff alleged that throughout the process Lindon and the Trustees sought to enforce the LOI’s no-shop provision to the detriment of the minority stockholders in seeking out a more favorable transaction. One director, Avi Kerbs, however, continued to seek alternative transactions which resulted in the company’s receipt of a competing offer from Accelmed. The Accelmed offer was comprised of an initial payment of $60 million (with potential earnouts) and, importantly, offered the minority stockholders the chance to remain as stockholders post-closing. Bioventus countered by increasing its bid, to which Accelmed responded by presenting a series of improved proposals. Notwithstanding Accelmed’s participation in the process, plaintiff alleged that Bioness remained resolutely focused on the Bioventus deal.

In early 2021, the board experienced significant turnover when three non-party directors, representing a majority of the committee, resigned. Their replacements, who the plaintiff alleged were never screened for conflicts, were appointed by the Trust. The plaintiff alleged that the replacement directors supported the agreement with Bioventus and generally refused to consider alternative transactions on the basis that Bioness was on the verge of bankruptcy and that the Bioventus deal offered greater certainty as compared to Accelmed’s offer.

On March 27, 2021, the board entered into a revised LOI with Bioventus. Two days later, Accelmed responded by submitting a revised offer that, among other things, provided for an increase in the merger consideration and committed to the deal terms Bioness had negotiated with Bioventus. At the board meeting held to discuss the offers, the board viewed the LOI no-shop provisions as prohibiting Bioness from engaging with Accelmed, determining “that the Bioventus deal was preferable because it offered greater certainty.” Thereafter, the board, notwithstanding Accelmed’s delivery of a final proposal on March 30, voted 3-1 to approve the Bioventus merger (with only Kerbs dissenting), which was subsequently consummated on March 31. Thus, plaintiff alleged that the board approved “the Bioventus deal without having ever communicated with Accelmed regarding any of its offers.”

Under the terms of the transaction, the Mann Group would receive a majority of the consideration with the company’s minority stockholders receiving $5 million of the $45 million upfront payment and 2.5 percent of the $65 million in contingent payments. Allegedly, the distribution of the merger consideration to the minority stockholders was conditioned on the waiver of claims against certain Mann Group affiliated director-defendants. Moreover, following the approval of the merger, the company also awarded each of the directors $75,000.

In response, a stockholder brought suit in the Delaware Court of Chancery claiming, among other things, that the Trustees, the Trust, and certain Bioness directors breached their fiduciary duties in connection with the Bioventus deal. Plaintiff also brought aiding and abetting breach of fiduciary duty claims as alternative causes of actions, as well as unjust enrichment, promissory estoppel, and breach of contract claims against the Mann Group and some of Mann Group directors. For their part, defendants moved to dismiss the claims under Rule 12(b)(2) (for lack of personal jurisdiction) and Rule 12(b)(6) (for failure to state a claim).


Personal Jurisdiction. As a threshold matter, the Trustees, both of whom resided in California, argued that jurisdiction was neither conferred by the merger agreement nor proper under the alternative theory of conspiracy jurisdiction. With respect to the merger agreement, which contained a Delaware exclusive jurisdiction provision, the court concluded that the merger agreement did not confer personal jurisdiction over the Trustees, reasoning that the Trustees signed the merger agreement on behalf of the Trust and the Mann Group rather than in their personal capacities. Regarding the conspiracy jurisdiction claim, which imposes jurisdiction over conspirators otherwise absent from the forum state, the court reasoned that there was a sufficient basis to infer the existence of a conspiracy, of which the Trustees were members, to push through a transaction unfavorable to the stockholders. Accordingly, although the court noted that the complaint did not provide a thorough factual showing that the Trustee’s actions in furtherance of the conspiracy created a nexus sufficient to support personal jurisdiction, the plaintiff was permitted to conduct jurisdictional discovery.

Breach of Fiduciary Duty. Plaintiff asserted claims for breach of the duty of loyalty against the Trust, as Bioness’s controlling stockholder, and the Trustees, as the “ultimate human controller[s],” for allegedly causing Bioness to enter into a conflicted transaction pursuant to which the Mann Group received a non-ratable benefit. Under Delaware law, “[w]here a company engages in a transaction in which a controlling stockholder receives a non-ratable benefit, the applicable standard of review is entire fairness.” Here, the court found that the Trust and the Mann group constituted a collective controller despite the fact that the Trust and the Mann Group, respectively, existed as separate entities. The Trustees directly controlled both entities. The court ultimately found the relationship of the parties, “combined with the asymmetrical distribution of merger consideration, [as] sufficient at the pleadings stage to draw a reasonable inference that the Trust or Trustees derived a non-ratable benefit from the consideration paid to the Mann Group.” Accordingly, the court held that the entire fairness standard of review applied and denied the defendants’ motion to dismiss the foregoing claims.

Plaintiff also asserted claims for breach of the duty of loyalty against certain director-defendants (including Lindon) in connection with the merger. First, plaintiff argued that the director-defendants were interested in the transaction because (i) they awarded themselves $75,000 in connection with the merger and (ii) they conditioned the payout of merger consideration on the release of claims against certain director-defendants. The court found neither argument persuasive, reasoning with respect to the bonus argument that the bonus was voted on and awarded after merger approval, there was no evidence presented that the board voted on the merger in anticipation of the bonus, and there was insufficient evidence that the bonus was material to the directors’ decisions to vote on the merger. With respect to the waiver of claims argument, the court reasoned that there were insufficient facts presented to infer that a viable claim against the director-defendants was released or that the director-defendants were not independent from Bioness’s controller (i.e., the Trust). Accordingly, the court granted the director-defendants’ motion to dismiss the foregoing claims.

Similarly, plaintiff brought a breach of the duty of loyalty claim against Lindon due to his relationship with the Trust. Plaintiff argued, among other things, that Lindon, who represented the Trust in a variety of legal and consulting matters, was not independent of the Trust and, therefore, worked to advance the Trust’s interests over that of Bioness’s minority stockholders. At the pleadings stage, the court found the facts presented sufficient and ultimately denied defendant Lindon’s motion to dismiss the foregoing claim.

Aiding and Abetting Breach of Fiduciary Duty. Plaintiff also brought aiding and abetting breach of fiduciary duty claims against the Trustees, the Mann Group, and Bioventus. Under Delaware law, an aiding and abetting claim for breach of fiduciary duty requires a showing of “(i) the existence of a fiduciary relationship, (ii) a breach of the fiduciary’s duty, (iii) knowing participation in that breach by the defendants, and (iv) damages proximately caused by the breach.”Addressing the Trustees and the Mann Group first, the court found the duty, breach, and damages elements present given the foregoing finding that the Trustees and Trust owed and breached fiduciary duties in connection with the merger. The court likewise found the “knowing participation” element present given the Trustees’ role as trustees of the Trust and as controlling managers of the Mann Group. Accordingly, the court denied the Trustees’ and the Mann Group’s motion to dismiss and retained the aiding and abetting claims against them as alternative causes of action, noting that the aiding and abetting claim against the Trustees may be rendered redundant by the court’s finding that the Trustees owed and breached fiduciary duties directly to Bioness.

Regarding the aiding and abetting claim against Bioventus, after similarly finding that a fiduciary duty was owed and breached and thus the associated elements were satisfied, the court addressed the “knowing participation” element. Here, however, the court reasoned that the plaintiff failed to adequately allege that Bioventus’s participation was knowing. The court was unpersuaded by plaintiff ’s argument that Bioventus’s bargained-for indemnification provision in the merger agreement, which specifically addressed similar pending litigation, “leaves little doubt that Bioventus was acutely aware” of the purported fiduciary duty breaches. The court reasoned that “knowledge of an allegation of a breach is not the same as knowledge of the breach itself.” Therefore, the court granted Bioventus’s motion to dismiss the claim.

Unjust Enrichment, Promissory Estoppel, and Breach of Contract. As additional causes of actions, unjust enrichment, promissory estoppel, and breach of contract claims were brought against certain defendants. First, the unjust enrichment claims against the Mann Group and Bioventus were dismissed, with the court reasoning with respect to Bioventus that “[a] low acquisition price alone is not proof of unjust enrichment absent some additional wrongful conduct.”

Next, the promissory estoppel claim against the Mann Group—which was premised on Mann’s alleged “promise” that he never expected repayment for his loans to Bioness—was likewise dismissed. The court reasoned that plaintiff ’s core evidence, an email by Mann, was sufficiently hedged in conditionality and did not rise to the “real promise” (as opposed to “mere expressions of expectation, opinion, or assumption”) standard.

Finally, the court addressed plaintiff ’s argument that the Trust, the Mann Group, and Bioventus breached the merger agreement by failing to pay the merger consideration to the minority stockholders. The defendants cited the conditional waiver of claims, which the plaintiff declined to sign, as their reason for non-payment of the merger consideration. The court ultimately denied the Trust’s and the Mann Group’s motion to dismiss, reasoning that sufficient questions were raised regarding the “waiver’s coerciveness and enforceability.” The claim against Bioventus, however, was dismissed, with the court noting that Bioventus was only required under the merger agreement to pay Bioness or the designated paying agent, which it did.


The decision in Fairchild highlights certain issues that may arise where a controlling stockholder, or one or more of its affiliates, is also a significant creditor of the corporation. Accordingly, in negotiating deals like the one at issue in Fairchild, practitioners should be mindful of the relationship between the seller’s controlling stockholder and its creditors, particularly where the merger consideration involves the repayment of the creditor’s debt, since the interest of the controlling stockholder and/or creditor may not be aligned with the corporation’s minority stockholders.

5. Lockton v. Rogers (Court of Chancery Rejects Application of Corwin Cleansing at the Pleading Stage Because of Potential Defects in Cleansing Stockholder Vote)


In Lockton v. Rogers, the Delaware Court of Chancery held that stockholder plaintiffs had adequately pled breach of fiduciary duty claims against defendant directors in connection with a merger, in which the defendants, holders of corporate debt and preferred equity in the company, allegedly received benefits in the transaction that were not shared with the common stockholders. The court found that the transaction could not be cleansed pursuant to the Corwin doctrine because, despite the fact that the transaction had been approved by a majority of the stockholders and there was no controller, based on the allegations in the complaint, it was reasonably conceivable that the merger was not approved by a majority vote comprised of the company’s disinterested shares.


WinView, Inc. (“WinView”), a company with an asset portfolio consisting primarily of patents relating to sports betting, was co-founded in 2009 by plaintiffs Gordon Wade and David and Kathy Lockton. Over the years, the company undertook a series of debt and equity offerings including a Series A round of preferred equity financing, a Series B round of preferred equity financing, five bridge loans, and four additional debt financings, in which many of the defendants were alleged to have participated in varying degrees. In connection with participating in these financings and offerings, the plaintiffs alleged that the defendants granted themselves a variety of lucrative incentives. All of the defendants, other than Jake Maas (who was the board designee for defendant Graham Holdings Company (“Graham”)), were alleged to hold some combination of preferred stock, secured debt, and/or warrants on the company’s common and preferred stock.

In November of 2019, defendant Thomas Rogers, who was appointed as the WinView’s executive chairman in connection with the Series A equity financing, informed plaintiff Lockton, the company’s co-founder and former CEO, that the board had entered into a binding term sheet to sell WinView’s assets in connection with a plan to merge WinView with two Canadian entities, an entity in which Rogers held an interest named Frankly, and Torque (the “Merger”). The Merger was structured so that Torque would purchase Frankly and WinView would then merge into Torque. The surviving entity would be renamed Engine Media. Pursuant to the terms of the Merger, the common stockholders would receive no cash or shares in the new entity and would, instead, receive a contractual right to 50 percent of any recoveries on successful patent litigation (if any) involving WinView’s patents. By contrast, secured creditors and preferred stockholders (including the defendants) received stock in Torque in connection with the Merger.

WinView’s board at that time consisted of the five director defendants and an individual who was not named as a defendant. Due to Rogers’ interest in Frankly, the board formed a special committee consisting of all of the remaining directors to negotiate the merger. Plaintiffs alleged, however, that Rogers was, in fact, actively involved in negotiating the Merger. The special committee did not commission a fairness opinion or retain outside advisors.

In March 2020, the Merger was approved by the WinView board and a majority of WinView stockholders voting together as one class. The breakdown of the vote was never disclosed, and thus it was unclear what percentage of preferred stockholders versus common stockholders approved the Merger.


The court first examined whether the Merger was entitled to Corwin cleansing. Pursuant to Corwin, a transaction that does not involve a controlling stockholder will be subject to the business judgment rule if it is “approved by a fully informed, uncoerced vote of the disinterested stockholders.” The court found that the preferred stockholders and secured creditors, including many of the defendants, received stock valued at $35 million while the common stockholders were eliminated and were only entitled to 50 percent of successful patent litigation proceeds that might never actually be obtained. Therefore, the court reasoned that the preferred stockholders and “votes of shares held by [d]efendants themselves” were not “disinterested” and could not be counted toward the calculation of the Corwin majority. Furthermore, because no breakdown of the stockholder vote was provided, it was not possible, at least at the pleadings stage, to determine how many of the shares that voted in favor of the merger were “disinterested” for purposes of determining a Corwin majority. Thus, the court found that the transaction was not entitled to Corwin cleansing because, as alleged, it was reasonably conceivable that the Merger was not approved by a majority vote comprised of WinView’s disinterested shares.

The court next determined that the plaintiffs had pled non-exculpated breach of fiduciary duty claims against the director defendants. The court found that the plaintiffs had successfully pled breach of the duty of loyalty claims against the directors because, as secured creditors and preferred stockholders, they received a unique benefit not available to the other stockholders. While the defendants argued that the company was insolvent and they were therefore required to consider the interests of the secured creditors and preferred stockholders, the court noted that the plaintiffs had not pled that the company was insolvent and in order to make such a determination the court would have to improperly consider information outside of the complaint. The court also rejected the argument that the director defendants had no obligation to waive their rights as preferred stockholders and secured creditors to comply with their fiduciary duties. The court pointed out that the allegations in the complaint went far beyond a non-waiver of rights and included claims that defendants prioritized their own unique interests, and ignored potential opportunities and alternatives to the detriment of the other stockholders. In connection with the claims against Rogers, the court rejected Rogers’ argument that he could not be held liable for a breach of the duty of loyalty claim because he abstained from voting for the Merger. The court explained that Rogers was alleged to have participated in the negotiations of the Merger, and mere abstention from a vote did not shield Rogers from fiduciary duty claims in any event.

Finally, the court considered plaintiffs’ claim that Graham owed fiduciary duties to the plaintiffs as a controlling stockholder. Plaintiffs did not allege that Graham held a controlling interest, but rather that Graham and the director defendants formed a control group holding “at least 45 percent of WinView’s voting shares.” The court noted that in order to have a control group, the plaintiffs had to plead more than just mere allegations of “parallel interests” and, instead, had to demonstrate that the defendants were connected in some legally significant way—a standard that plaintiffs failed to satisfy.


Of particular interest in Lockton v. Rogers was the court’s ruling that the Merger was not entitled to Corwin cleansing because the preferred stockholders and the defendants were not “disinterested” for purposes of calculating a Corwin majority. Even when analyzing transactions not involving a controller, obtaining a majority stockholder vote will not be enough to cleanse a transaction to bring it under the protective umbrella of the business judgment rule if it is not clear that the majority vote was comprised of disinterested shares. While this case might be limited to its unique facts, it is important for practitioners to be able to establish, for purposes of calculating a Corwin majority, that a majority of the outstanding stockholder vote was comprised of stockholders who did not receive any non-ratable benefit or special consideration in connection with the challenged transaction.

6. Stream TV Networks, Inc. v. SeeCubic, Inc. (Delaware Supreme Court Holds that There Is No Insolvency Limitation to Stockholder Vote Requirements)

In Stream TV Networks, Inc. v. SeeCubic, Inc., the Delaware Supreme Court reversed a decision of the Court of Chancery which held, among other things, that a common law rule allowed an insolvent Delaware corporation to transfer all or substantially all of the company's assets to creditors without stockholder approval contrary to section 271 of the DGCL. Section 271 of the DGCL provides for a stockholder vote in connection a “sale, lease or exchange” of “all or substantially all” of a corporation’s assets and does not distinguish between solvent and insolvent corporations.

The question arose in the context of the Delaware Supreme Court’s determination of whether a charter-created vote which was similar, but not identical, to section 271 of the DGCL was violated by the company’s entry into an agreement with its secured creditors, which authorized the secured creditors to transfer Stream's pledged assets in what was essentially a private foreclosure transaction. The Court of Chancery determined that “[t]he language of the Class Vote Provision track[ed] Section 271 of the DGCL,” and therefore resulted in the same outcome.


Stream was founded in 2009 to develop and commercialize technology that enables viewers to watch three-dimensional content without 3D glasses. Stream was founded by the Rajan family, who controlled Stream primarily through an investment vehicle owned by Mathu Rajan, his brother Raja Rajan, and their parents. Together, the family holds a majority of Stream's outstanding voting power.

The Rajans took in third-party investments to help fund Stream. In 2009, Stream raised approximately $160 million from third-party investors in the form of debt and equity. Stream's senior secured creditor, SLS Holdings VI, LLC (“SLS”), loaned $6 million to Stream through a series of secured notes (the “SLS Notes”). Stream pledged all of its assets, and the assets of its wholly owned subsidiaries, as security for the SLS Notes and executed a security agreement which authorized SLS to take control of Stream's assets to satisfy the SLS Notes if Stream defaulted.

Beginning in 2019, Stream began to suffer financial difficulties and its investors demanded a restructuring of its debt and equity but discussions broke down. In March 2020, SLS notified Stream that Stream was in default. Due to pressure from SLS’s notice of default and its other investors and creditors, the Rajan family, who up until then controlled Stream’s board of directors, agreed to appoint four outside directors to Stream’s board.

The outside directors quickly concluded that the only answer to Stream’s troubles was a restructuring of its debt and equity and entered into an agreement with SLS, Hawk and some of its equity investors (the “Omnibus Agreement”). The Omnibus Agreement provided that Stream would assign its assets to SeeCubic in lieu of SLS and Hawk continuing to pursue foreclosure.” Further, the Omnibus Agreement gave holders of Stream's common stock, other than the Rajan Brothers and their affiliates, the right to exchange their Stream shares for an identical number of shares of SeeCubic's common stock at no cost. The Omnibus Agreement also provided that Stream would receive one million shares of SeeCubic's common stock.

On September 8, 2020, Stream filed suit in the Delaware Court of Chancery and moved for a temporary restraining order (“TRO”) to bar SeeCubic from seeking to enforce the Omnibus Agreement. SeeCubic filed counterclaims and third-party claims requesting expedition and a TRO. On December 8, 2020, the Court of Chancery found that SeaCubic was entitled to specific performance of the Omnibus Agreement because the Omnibus Agreement did not require a stockholder vote under section 271 or the class vote provision contained in Stream's certificate of incorporation under a common law insolvency exception to the general rule that a corporation may only sell, lease, or exchange all or substantially all of its assets with stockholder approval. The Court of Chancery also found that, because section 272 of the DGCL does not require a stockholder vote for the pledging of corporate assets as collateral (unless the corporate charter specifies otherwise), requiring a stockholder vote under section 271 of the DGCL before a company could otherwise transfer its assets to a creditor “would be contrary to the plain language of Section 272,” and against Delaware public policy. Upon appeal, the Delaware Supreme Court vacated in part, reversed in part, and remanded the case to the Court of Chancery for further proceedings consistent with its opinion.


On appeal, Stream argued, among other things, that the Chancery Court erred in focusing on section 271 of the DGCL because the charter-created vote was distinguishable from section 271 of the DGCL in that it required a stockholder vote in connection with any “sale, lease, exchange or other disposition” of all or substantially all of a corporation’s assets whereas section 271 of the DGCL requires a stockholder vote only in connection with a “sale, lease or exchange” of all or substantially all of a corporation’s assets. Considering the plain and ordinary meaning of the term “disposition,” the Delaware Supreme Court concluded that the Court of Chancery erred in looking to section 271 of the DGCL. Specifically, the court held that the transfer and assignment of all rights, title, and interest in all of Stream's assets for the benefit of Stream's creditors was not a “sale, lease or exchange” of Stream’s assets under section 271 but was an “other disposition” under Stream’s certificate of incorporation. The court reached its conclusion by looking at the plain meaning of the words “other disposition” and “assignment” in Black's Law and Merriam-Webster Dictionaries, as well as in the American Heritage Dictionary, which confirmed that the “assignment” contemplated by the Omnibus Agreement was an “other disposition” within the meaning of Stream’s certificate of incorporation. In addition, although not required, given its prior determination that Stream’s certificate of incorporation, not section 271 of the DGCL, was the operative standard, the Delaware Supreme Court rejected the Court of Chancery’s finding that there was an insolvency exception to section 271. The Delaware Supreme Court noted that there was no precedent in Delaware supporting such an exception and the non-Delaware authorities cited by SeeCubic ranged in date from 1926 to 1948, with no case cited after 1948 upholding such an exception. The court concluded that when the drafters of section 271 comprehensively revised the statute in 1967, they would have codified an insolvency exception to the extent they intended to create an insolvency exception.


The decision in Stream TV Networks, Inc. v. SeeCubic, Inc. serves as a cautionary reminder that venture-backed companies must comply with the blocking rights which are often set forth in their certificate of incorporation. The National Venture Capital Association’s model certificate of incorporation grants the holders of preferred stock a blocking right over the “sale, lease, transfer, exclusive license or other disposition” of a corporation’s assets, which, based on the decision in Stream TV Networks, Inc. v. SeeCubic, Inc., will be construed more broadly than section 271 of the DGCL.

Lisa R. Stark of K&L Gates LLP chairs the Working Group, and she and Helen Reeves of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP are Co-Chairs of the Jurisprudence Subcommittee. Contributors of written summaries in this year’s survey, in addition to Ms. Stark and Ms. Reeves, are Stephanie Norman and Daniel Barrow of Richards, Layton & Finger, P.A.; Tushita Saraf of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP; Pamela L. Millard of Potter Anderson & Corroon LLP; Albert H. Manwaring IV and Kirsten A. Zeberkiewicz of Morris James LLP; Jacqueline Brooks of Duane Morris LLP; and Qiara Butler of Saul Ewing LLP.