To the best of The Chancery Daily's collective recollection, occasions on which the Court of Chancery has been confronted with contractual language so unartfully drafted that the Court is compelled to dub the unfortunate prose "nonsense" are vanishingly rare. But the focus of today's edition, Julia Haart v. Silvio Scaglia and Freedom Holding, Inc., et al., C.A. No. 2022-0145-MTZ, memo. op. (Del. Ch. Aug. 4, 2022), provides just such an example.

The legal instrument in question - an agreement drafted by non-attorneys and intended to reorganize a holding company's assets in preparation for a potential SPAC transaction - comes to the fore in one holding company stockholder's action against her sole fellow stockholder (and estranged husband) to challenge her purported removal as a director and officer.

Sordid interpersonal details aside (and below), suffice it to say that the Court interprets the key language on which plaintiff relies as "a meaningless incorrect recital" that inaccurately depicts the parties' respective ownership percentages in an agreement that unambiguously did not attempt to alter them. 

Perhaps the upshot of the Freedom Holding case is to carefully consider whether or not it's wise to have an accountant and staff draw up foundational legal documents. We leave it for readers to draw their own conclusion. 

. . .

TCD also briefly notes Camden Capital, LLC v. K-5 Holdings, LLC, C.A. No. 2022-0413-MTZ, order (Del. Ch. July 29, 2022) -- in which plaintiff LLC brought suit against entity defendant, a former LLC member, seeking a declaration that entity defendant's individual owner violated restrictive covenants in plaintiff's LLC Agreement, and that plaintiff is excused from making payments to defendant.

There is a form of order popularly referred to as the "Fitracks Order" (named for Noam Danenberg v. Fitracks, Inc., C.A. No. 6454-VCL, opinion (Del. Ch. Mar. 5, 2012), in which its terms were originally proposed). A Fitracks Order establishes a procedure for presenting and resolving disputes over the reasonableness of attorneys' fees incurred by a litigant found to be entitled to advancement and submitted to the party obligated to provide advancement for payment.

The popularity of the Fitracks Order has grown over time, and as explicated in our June 18, 2019 edition (collecting exemplary forms of order), had been adopted by all then-sitting members of the Court of Chancery. By all appearances, it has been successful in limiting disputes over payment of invoices brought to the Court. In Camden Capital, the parties submitted a proposed stipulated Advancement Order -- a Fitracks Order establishing procedures for defendant's submission of invoices to plaintiff for advancement, including that:

. . . If the parties are unable to resolve any unpaid disputed fees and expenses, not more frequently than quarterly, [defendant] may submit an application under Court of Chancery Rule 88 seeking a ruling on the disputed amounts. Briefing shall consist of a motion, an opposition filed within 15 business days of the motion, and a reply filed within 10 business days of the opposition. The parties shall not raise any arguments not previously raised with the other side in the applicable Demand, response, or reply, and shall only cite authorities identified in writing in the applicable Demand, response, reply. The court will determine if a hearing is warranted.

Camden Capital, LLC v. K-5 Holdings, LLC, C.A. No. 2022-0413-MTZ, order (Del. Ch. July 29, 2022).

As a general matter, the Court of Chancery has embraced application of the Fitracks Order in advancement proceedings. Whether the Court has legal authority to order or oversee advancement in the absence of a filed advancement claim, however, is unclear. Camden Capital suggests that it does not, while also providing a useful lesson on the topic of private ordering:

This action is not an advancement action. There is no claim for advancement pending before the Court. The parties are free to come to a private and binding agreement on advancement terms, but there is no dispute pending before the Court that would be resolved by a Court order.

• The Court rules that a corporate restructuring document prepared by non-lawyers, though flawed to the point of "nonsense," unambiguously did not alter the parties' respective stock holdings, such that defendant remained the top-level controller.
• ENTERED: Partial judgment favoring defendant
• Plaintiff - an alleged 50% stockholder of nominal defendant holding company and an alleged officer of its subsidiary LLC - brought this action against the holding company's other alleged 50% stockholder (plaintiff's estranged husband), for declarations under 8 Del. C. § 225 and 6 Del. C. § 18-110(a) that plaintiff owned half of the holding company's outstanding shares and that defendant had not validly removed her as a director of the holding company and as CEO of the subsidiary, and further seeking appointment of a custodian under 8 Del. C. § 226 to manage the allegedly deadlocked holding company. Defendant counterclaimed for mirror-image declaratory relief.
  
  Although defendant had transferred half of the holding company's common shares to plaintiff after he formed the entity, defendant did not initially reveal that - then acting as sole director and stockholder - he had also caused the holding company to issue a large number of voting preferred shares to himself. The parties later executed an Entity Restructuring Agreement ("ERA"), governed by New York law, to reorganize the holding company's assets with the goal of placing a modeling business under the subsidiary LLC and taking it public. As described by the Court, the ERA contained multiple errors, rendering parts of it "nonsense."
  
  Months later, plaintiff learned of the issuance of the voting preferred shares. The parties subsequently executed a Stock Power by which defendant transferred sufficient preferred shares to plaintiff to leave himself with a tiny majority. Plaintiff allegedly believed that she had received equal co-ownership. After disagreements arose, defendant purportedly acted by written consent to remove plaintiff as a holding company director and as CEO of the subsidiary. This action followed and proceeded to trial on all but a bifurcated breach of fiduciary duty claim.
  
  The Court rules for defendant in this Opinion, finding that: (1) though plagued by errors, the ERA unambiguously did not transfer preferred shares from defendant to plaintiff, and defendant therefore remains the holding company's controlling stockholder; (2) to the extent New York law mandates treating the ERA as ambiguous due to the relevant provisions' nonsensical language, extrinsic evidence in the record supports the conclusion that the ERA was not intended to alter the holding company's ownership; (3) extra-contractual documents and communications relied upon by plaintiff, in which the parties were inaccurately described as equal co-owners of the holding company, are explicable based on business and interpersonal considerations and do not alter the Court's previous conclusions; (4) plaintiff's ratification and acquiescence arguments fail because she failed to demonstrate existence of any transaction to which they could apply; and (5) plaintiff's unclean hands argument fails because, as a defendant pressing only mirror-image declaratory counterclaims, defendant sought no relief that he could forfeit under the doctrine, and because plaintiff herself had acted with unclean hands.

Legal Scholarship

Natural Person Shareholder Voting (Simkovic)

". . . This article presents a stylized model in which corporations are run according to the preferences of individual beneficial owners in proportion to their share voting power.

. . . Under various plausible assumptions regarding the distribution of negative externalities and beneficial ownership, it can be shown that allocating votes according to shareholdings (one-share, one-vote) leads to inefficient negative externalities and redistribution through corporate decision making. Moreover, shareholder-value oriented [Environmental, Social and Governance] will do more to limit negative externalities that adversely affect property than those that adversely affect health and safety.

Allocating shareholder votes according to the principal of 'one natural person beneficial owner, one vote' can create the opposite problem, excessively reducing negative externalities and inefficiently undervaluing corporate profits.

Compared to either extreme, there is typically an intermediate voting rule that is more efficient. One such intermediate voting rule, granting bonus votes to each beneficial owner whose fractional beneficial ownership crosses a threshold, reduces negative externalities without inefficiently undervaluing corporate profits. This threshold should be set close to the level at which individual externality exposures and profit entitlements are equal."

A Critique of the American Law Institute's Draft Restatement of the Corporate Objective (Bainbridge)

See also Do We Need a Restatement of the Law of Corporate Governance? (Bainbridge)

"The American Law Institute is currently working on a Restatement of the Law of Corporate Governance. . . . [Section] 2.01, which purports to restate the objective of the corporation . . . differentiates between what the drafters refer to as common law jurisdictions and stakeholder jurisdictions. The latter are those states that have adopted a constituency statute (a.k.a. a non-shareholder constituency statute).

. . . In both sets of jurisdictions, the drafters assert that the corporation 'may devote a reasonable amount of resources to public-welfare, humanitarian, educational, and philanthropic purposes, whether or not doing so enhances the economic value of the corporation.'.

This article . . . offers a critique of § 2.01 and offers suggestions so as to clarify important open questions . . . : Do corporations have objectives? What is the corporate objective? Are tradeoffs allowed? Is opting out allowed? Should § 2.01 mandate obedience to the law? Does § 2.01 embrace Caremark? How does § 2.01 apply in takeovers? What rules govern corporate charitable activities? Why did the drafters ignore the special problems of multinationals?"

The Intersection of Corporate Legal Theory and The First Amendment: An Analysis of Citizens United (Moon)

"This paper analyzes the underpinnings of the Supreme Court of the United States' decision in Citizens United v. FEC from a corporate legal theory perspective."

Greenwashing & the First Amendment (Shanor; Light)

"Recent explosive growth in environmental and climate-related marketing claims by business firms has raised concerns about their truthfulness. Critics argue (or at least question whether) such claims constitute greenwashing, which refers to a set of deceptive marketing practices in which an entity publicly misrepresents or exaggerates the positive environmental impact of a product, service, or the entity itself. The extent to which greenwashing can be regulated consistent with the First Amendment raises thorny doctrinal questions that have bedeviled both courts and scholars, the answers to which have implications far beyond environmental marketing claims. This Essay is the first to offer both doctrinal clarity and a normative approach to understanding how the First Amendment should tackle issues at the nexus of science, politics, and markets. It contends that the analysis should be driven by the normative values underlying the protection of speech under the First Amendment in the disparate doctrines that govern these three arenas. When listeners are epistemically dependent for information on commercial speakers, regulation of such speech for truthfulness is consistent with the First Amendment and subject to the laxer review of the commercial speech doctrine. This is because citizens must have accurate information not only to knowledgably participate at the ballot box but also to have meaningful freedom in economic life itself."

• Nature of Action: Breach of Fiduciary Duty
• Additional Plaintiff(s): City of Sarasota Firefighters Pension Fund; Steamfitters Local 449 Pension Plan; Steamfitters Local 449 Retirement Security Fund
• Plaintiff's Counsel: LABATON SUCHAROW
• Individual Defendant(s): Keith R. Dunleavy; Andre Hoffmann; Isaac S. Kohane; Mark A. Pulido; Denise K. Fletcher; William D. Green; William J. Teuber; Lee D. Roberts
• Entity Defendant(s): Inovalon Holdings, Inc.; Meritas Group, Inc.; Meritas Holdings, LLC; Dunleavy Foundation; Cape Capital SCSp; Sicar-Inovalon Sub-Fund

• Nature of Action: Violation of Delaware's Deceptive Trade Practices Act; intentional and tortious interference with business and contractual relations by misleading Plaintiff's customers and by causing confusion.
• Plaintiff's Counsel: HEYMAN ENERIO GATTUSO & HIRZEL
• Individual Defendant(s): Jonathan Carfield; Hanna Carfield
• Entity Defendant(s): AVID USA Technologies LLC

• Plaintiff(s): City of Sarasota Firefighters Pension Fund; Steamfitters Local 449 Pension Plan; Steamfitters Local 449 Retirement Security Fund
• Plaintiff's Counsel: LABATON SUCHAROW - Ned Weinberger (#5256)
• Individual Defendant(s): Keith R. Dunleavy; Andre Hoffmann; Isaac S. Kohane; Mark A. Pulido; Denise K. Fletcher; William D. Green; William J. Teuber; Lee D. Roberts
• Entity Defendant(s): Inovalon Holdings, Inc.; Meritas Group, Inc.; Meritas Holdings, LLC; Dunleavy Foundation; Cape Capital SCSp; Sicar-Inovalon Sub-Fund
• Related Actions: Steamfitters Local 449 Pension Fund, et al. v. Inovalon Holdings, Inc., et al., C.A. No. 2021-0914-KSJM; City of Sarasota Firefighters' Pension Fund v. Inovalon Holdings, Inc., C.A. No. 2021-0967-KSJM; Steamfitters Local 449 Pension Fund v. Inovalon Holdings, Inc., C.A. No. 2021-0977-KSJM; The Arbitrage Fund v. Inovalon Holdings, Inc., C.A. No. 2022-0016-KSJM
• Field of Law: Corporation Law
• Basis for Jurisdiction: 10 Del. C. § 341 - jurisdiction over matters and causes in equity

• Plaintiff(s): Next Level Ventures, LLC
• Plaintiff's Counsel: HEYMAN ENERIO GATTUSO & HIRZEL - Kurt E. Heyman (#3054); Kelly E. Rowe (#6199)
• Individual Defendant(s): Jonathan Carfield; Hanna Carfield
• Entity Defendant(s): AVID USA Technologies LLC
• Nature of Claim(s): Count I: Successor Liability or Business Continuation
  Count II: Uniform Deceptive Trade Practices Act - 6 Del. C. § 2531 et. seq.
  Count III: Intentional Interference with Economic Relations
  Count IV: Tortious Interference with Contractual Relations
  Count V: Unjust Enrichment
  Count VI: Alter Ego
  Count VII: Defamation
  Count IX: Civil Conspiracy
• Field of Law: Commercial Law
• Basis for Jurisdiction: 10 Del. C. § 341 - jurisdiction over matters and causes in equity
• Preliminary Motions: Motion for temporary restraining order