Annual Survey of Judicial Developments Pertaining to Venture Capital

By the Annual Survey Working Group of the Jurisprudence Subcommittee, Private Equity and Venture Capital Committee, ABA Business Law Section¹

The Annual Survey Working Group reports annually on the decisions we believe are the most significant to private equity and venture capital practitioners.² The decisions selected for this year’s Annual Survey are the following:

1.  Huff Energy Fund, L.P. v. Gershen (shareholders’ agreements and fiduciary duties in the context of dissolution following an asset sale)

2.  Calesa Associates, L.P. v. American Capital, Ltd. (determining when a minority investor is a “controlling stockholder”)

3.  Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund (finding of control group liability for portfolio company pension plan obligations)

4.  In re ISN Software Corp. Appraisal Litigation (statutory appraisal of a privately held corporation)

5.  Frederick HSU Living Trust v. ODN Holding Corp. (fiduciary and statutory obligations in connection with preferred stock redemption rights)

1.  HUFF ENERGY FUND, L.P. V. GERSHEN (SHAREHOLDERS’ AGREEMENTS AND FIDUCIARY DUTIES IN THE CONTEXT OF DISSOLUTION FOLLOWING AN ASSET SALE)

SUMMARY

In this case,³ the Delaware Court of Chancery granted the defendants’ motion to dismiss a complaint brought by The Huff Energy Fund, L.P. (“Huff Energy”), the owner of approximately 40 percent of the outstanding common stock of Longview Energy Company (“Longview”), that challenged the decision of Longview’s board of directors and stockholders to dissolve Longview following a sale of a significant portion of its assets.⁴ The complaint alleged that Longview and certain members of its board breached a shareholders’ agreement entered into in connection with Huff Energy’s investment in Longview (the “Shareholders’ Agreement”),⁵ and also that the Longview board breached its fiduciary duties by adopting a plan of dissolution without exploring more favorable alternatives in violation of Revlon⁶ and as an unreasonable response to a perceived threat in violation of Unocal.⁷ In coming to its conclusion, the court held that the Shareholders’ Agreement, which required unanimous board approval of certain actions, did not prevent Longview from adopting a plan of dissolution by a majority vote of the board.⁸ In addition, the court held that neither Revlon nor Unocal applied to the board’s approval of Longview’s dissolution,