CURRENT MONTH (November 2023)
Business Litigation
Delaware Court of Chancery Recognizes Potential Consequences of Excluding Officers from Fiduciary Duty Waivers
By Gurtej Grewal, Penn State Law
In Cygnus Opportunity Fund, LLC v. Washington Prime Group, LLC, the Delaware Court of Chancery denied dismissal of claims alleging that company officers breached their fiduciary duties by failing to provide adequate information to minority investors in connection with a tender offer by the controlling member (“Controller”) and a subsequent squeeze-out merger. In doing so, the Court recognized a significant tension between company officers’ duties owed to the board of managers versus officers’ fiduciary duties owed to the members of the corporation.
This lawsuit arose in connection with a squeeze-out merger that eliminated the minority investors in Washington Prime Group, LLC (the “Company”), a Delaware limited liability company. The Controller initially offered a two-tiered tender offer to purchase the minority holders’ shares. Notably, no recommendation was made by the Controller or the board in connection with the tender offer, and no financial information was provided to the minority investors. The minority investors’ numerous attempts to contact Company counsel yielded no new information beyond what had already been disclosed in an eight-page document sent to investors several months after the tender offer was made. Additionally, the Court noted that there were legitimate concerns relating to the independence of the minority-approved manager.
Importantly, Delaware law provides parties with wide latitude to restrict or eliminate fiduciary duties in LLC agreements. The Company’s limited liability agreement provided for a structure that mimicked a corporation and contained a “plain and unambiguous” fiduciary duty waiver in regard to the members of the Board and Controller; however, the Court noted that “[b]y its express terms,” the fiduciary duty waiver “does not protect the Officer Defendants,” and thus, plaintiffs argued that “the Officer Defendants breached their fiduciary duties because the Company provided no disclosures whatsoever in connection with the Tender Offer.”
Ultimately, the Court: denied dismissal of the breach of fiduciary duty claims against the officers; denied dismissal of the claim against all the defendants for breach of the implied covenant of good faith and fair dealing; and denied dismissal of aiding and abetting claims against the Board and the Controller relating to the breach of fiduciary duty claims against the officers. This decision serves as a reminder that while Delaware law allows significant flexibility when drafting fiduciary duty waivers, drafters should be careful to consider the potential unintended consequences of excluding officers from those waivers.
First Circuit Upholds Application of Chevron Doctrine Regarding Federal Fishery Law
In Relentless, Inc. v. United States Department of Commerce, 62 F.4th 621 (2023), the First Circuit affirmed the judgment of the district court, finding that a rule that required vessels fishing for herring to carry monitors on board was a permissible exercise of agency authority.
The National Marine Fisheries Service (“the Agency”) implemented a rule that required the use of industry-funded monitoring on fishing vessels to reduce uncertainty around catch estimates (“the Rule”). The rule did not require monitors on all vessels; rather, it had a goal that 50 percent of herring trips would be monitored. The government bore the administrative expenses associated with the rule, while the vessel owners were obligated to procure certain monitors with their own funding. Plaintiffs, owners of fishing vessels that harvest herring, challenged the Agency’s authority to enact this rule, arguing that the Agency exceeded its statutory authority in promulgating the Rule. Their primary argument was that the rule was not authorized by the Magnuson Steven Fishery Conservation and Management Act (“MSA”), the statute regulating Atlantic herring fishing.
In considering a challenge to an agency’s authoritative interpretation of a statute, the court followed the Chevron two-step analysis, as established in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S (1984). The Chevron doctrine directs courts to defer to a federal agency’s reasonable interpretation of an ambiguous statute. First, the court considers whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, then no further inquiry is necessary. If the statute is silent or ambiguous with respect to the specific issue, the court then asks whether the agency’s answer is based on a permissible understanding of the statute.
Here, the court held that Congress expressly authorized the Agency to require vessels to carry monitors on board: Fishery management plans may “require that one or more observers be carried on board a vessel of the United States engaged in fishing for species that are subject to the plan, for the purpose of collecting data necessary for the conservation and management of the fishery.” 16 U.S.C. § 1853(b)(8). Therefore, implementing the rule was a reasonable exercise of authority for the Agency.
Although the First Circuit upheld the application of the Chevron doctrine in this case, its fate rests with the U.S. Supreme Court, which granted certiorari in October 2023. Oral arguments are scheduled to begin in January 2024.
Dispute Resolution
Which Came First: Forum Selection Clause or Arbitration Provision? SCOTUS to Decide
By James W. Sandy, McGlinchey Stafford, PLLC
For the second time in as many years, the Supreme Court of the United States has agreed to hear an appeal from a prominent cryptocurrency exchange regarding the enforceability of the arbitration clause in the exchange’s user agreements. The latest case, Suski v. Coinbase, Inc., involves a decision from the Ninth Circuit that affirmed a lower court’s decision to deny the defendant’s motion to compel arbitration, finding that a forum selection clause in the “Official Rules” of a sweepstakes sponsored by the exchange superseded an arbitration clause in the user agreement.
When consumers created their accounts with the exchange, they agreed to its “User Agreement,” which contains an arbitration provision. Consumers then later opted into the Sweepstakes’ “Official Rules,” which included a forum selection clause providing that California courts had exclusive jurisdiction over any controversies regarding the sweepstakes. A putative class action was filed on behalf of a number of defendant’s users, asserting various claims under California state law. In response, defendant sought to compel the putative class action to arbitration, but the district court disagreed, finding: (1) the delegation clause in the arbitration provision did not delegate to an arbitrator the issue of which contract governed the dispute, and (2) that under California contract law, the Sweepstakes’ Official Rules superseded the user agreement, and, therefore, the applicability of the arbitration provision.
Defendant appealed, and the Ninth Circuit affirmed. First, the Ninth Circuit found that the issue was one of existence, and not scope, of the arbitration agreement. Thus, the delegation clause did not apply to the question of whether the issue was delegated to an arbitrator to decide because this was a contract formation issue that could not be delegated in the first place. Second, the Ninth Circuit agreed with the district court that the forum selection clause in the Sweepstakes’ Official Rules superseded the arbitration provision.
Under California law, “[a] contract containing a forum selection clause supersedes an arbitration agreement where “the forum selection clause[] . . . sufficiently demonstrate[s] the parties’ intent to do so.” To that end:
. . . the general rule is that when parties enter into a second contract dealing with the same subject matter as their first contract without stating whether the second contract operates to discharge or substitute for the first contract, the two contracts must be interpreted together and the latter contract prevails to the extent they are inconsistent.
The Ninth Circuit followed the general rule and disregarded defendant’s arguments to the contrary, including the claim that the User Agreement and Official Rules concerned different subject matters and that the agreements should be read harmoniously.
Defendant prevailed on its previous appeal to the Supreme Court last term. In Coinbase Inc. v. Bielski, the justices held that defendant should not have had to face discovery while its appeal on the merits of the denial of its arbitration motion was pending.
