The Delaware Supreme Court recently reinstated the compensation package that Tesla awarded to Elon Musk and that the Delaware Court of Chancery invalidated in two separate prior rulings, in the matter styled In re Tesla, Inc. Derivative Litigation, Del. Supr., No. 534, 2024 (Dec.19,2025). As one might expect, commentary about this ruling has already been extensive in the short time since the decision was handed down. A representative sample of the many articles in legal publications and the mainstream press is the recent Wall Street Journal editorial.

I typically eschew writing about opinions that have already been the subject of extensive analysis, so for this opinion I will simply provide my pithy insights on what I think are its most noteworthy aspects.

The most consequential aspect of this decision is the result—as compared to the reasoning. Delaware’s high court did not find that the Chancellor was wrong in deciding that the compensation package did not satisfy the entire fairness test, but instead the court found it would be “inequitable” not to pay Musk for the six years covered by the compensation package during which he performed work.

The most notable part of the Supreme Court’s reasoning was that rescission was not an appropriate remedy to the extent that the parties could not be returned to their respective positions before this litigation started—if the compensation package was denied to Musk. For example, the period of time that the compensation package covered had already expired.

Instead, the High Court awarded nominal damages of $1 and granted attorneys’ fees based on quantum meruit and an hourly rate as opposed to the more typical method in these cases which awards fees on a percentage basis, and which was used by the Court of Chancery.

Much more can be written and will be written about this decision, but for my limited purposes another observation is that the court, in a per curiam decision, avoided substantial blowback that would have resulted if the trial court’s rejection of the compensation package were upheld.

The court made its decision on the merits alone. But judges are human. A different result, at the very least, would have generated a reaction from the person whose compensation was at issue and who has over 230 million followers on his social media platform. He has an impact on this planet, and beyond this planet, far greater than any human being in many generations.

A recent decision from the Delaware Court of Chancery is a gem of a pithy ruling that is chock-full of practical principles. The elements of a claim for fraud, which is the same in Delaware as fraudulent inducement, may be basic, but this letter ruling provides a useful restatement of the law.

In iSense, LLC v. Biomerieux, Inc., et al., C.A. No. 2023-1221-SKR (Del. Ch. Dec. 4, 2025), the court also features the somewhat unusual requirements for a successful motion to strike under Rule 12(f), which permits a party to strike a pleading for several reasons, including the one employed here, for “any insufficient defense.” The court referred to several other related lawsuits in Delaware involving a dispute over the licensing and sub-licensing of certain medical patents.

This short blog post will only highlight the noteworthy basic and esoteric rules and substantive law that have widespread application for corporate and commercial litigators.

Highlights

  • Court of Chancery Rule 12(f) allows a party to move to strike from a pleading “any insufficient defense.” Though not applicable here, it also allows a party to move to strike any material that is “redundant, scandalous, immaterial, or not pertinent.”
  • The court explained that such motions are “granted sparingly and only when clearly warranted with all doubt being resolved in the non-moving parties’ favor.” Slip op. at 6.
  • The court instructed that a motion to strike “reaches formal defects only” and will be denied “if the defense is sufficient under law.” Id. (footnotes omitted).
  • The affirmative defense at issue was a rejoinder to a breach of contract claim and the argument was that fraudulent inducement was a defense to the enforcement of the contract if it existed.
  • The court recognized fraudulent inducement as an appropriate affirmative defense to a breach of contract, but the court concluded that the defendant failed to allege the required element of reliance. Id.
  • The court recited the five necessary elements for a fraud claim, which in Delaware are the same as for fraudulent inducement. Id. at 7.
  • Court of Chancery Rule 9(b) provides the fraud must be pled with particularity including when it is raised as an affirmative defense, although “conditions of a person’s mind may be alleged generally.” Id. at 7. (footnotes omitted).
  • The reliance required for establishing fraud as a claim or an affirmative defense requires a party to “allege—at minimum—particularized actual allegations from which the court may reasonably infer reasonable reliance. The court and plaintiff “should be able to understand how the alleged fraud caused this injury.” Id. at 8. (footnotes and internal quotations omitted).
  • Even though the issue of reliance is generally not suitable for a motion to dismiss based on the fact intensive inquiry needed, the court found that reliance was not alleged in the affirmative defense, even in a conclusory fashion, which prevented the court from reasonably inferring a basis for reliance. Id. at 9.
  • As a procedural practice tip, the court refused to accept an explanation about reliance at oral argument because it was not included in the actual pleadings. Id. at 10 and footnote 43.
  • In closing, the court the court hinted at the possibility that the defendant might seek leave to amend his affirmative defenses.

Postscript: The author of this decision was Superior Court Judge Sheldon K. Rennie, who was sitting by designation as a Vice Chancellor.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 40 years, prepared this article.

The Delaware Court of Chancery recently barred Credit Glory Inc.‘s president from bringing breach of fiduciary duty claims against an ex-officer/director of their credit aid company based on the same ‘” abhorrent” sexual harassment conduct that caused his termination and $1.8 million in judgments against him and the company in New York courts. Brola v. Lundgren, C.A. No. 2024-1108-LWW (Del. Ch.  Dec. 1, 2025). 

The court dismissed plaintiff Alex Brola’s derivative suit, finding it seeks to extract a second recovery “this time under the expansive theory of fiduciary duty”. Brola argued that ex-officer/director Christopher Lundgren’s actions were selfish, illegal, and thus a breach of the duty of loyalty. 

But “Delaware law does not reach so far. The defendant’s misconduct was interpersonal, not a matter of corporate internal affairs,” the vice chancellor ruled.  “After the New York court provided a remedy through the employment laws, this court cannot—and should not—supply a second one.”

Corporate law specialists will want to examine the court’s differentiation between the duty of officers and supervisors, the reasoning for its conclusion that plaintiff Brola cannot rely on Court of Chancery Rules 12(b)(2), 12(b)(6), and 23.1.12, and why  the complaint fails to plead demand futility or damages.

Background

According to the record, Lundgren misused his positions as director, Vice President and Secretary of a Delaware-chartered credit repair assistance company based in New York to victimize two female employees so intensely that they resigned and successfully brought actions before the Equal Employment Opportunity Commission and lawsuits in New York state court against both him and Credit Glory.

CGI founder Brola then brought a derivative action in Delaware to recover the economic damage that Lundgren’s allegedly disloyal conduct caused to the closely held company. Lundgren moved to dismiss on procedural and jurisdictional grounds.  The court found Brola failed to carry his burden on both requirements.

Jurisdiction’s two bedrock requirements:

  • statutory basis for service of process.

Because Brola claims that Lundgren breached the duty of loyalty he owed to Credit Glory as an “officer and director,” the second clause of Section 3114(a) is satisfied, the court said. 

  •  requisite ‘minimum contacts’ with the forum:

Whether the alleged abuse of power states a claim for breach of fiduciary duty, rather than a personal issue, is a merits question, like the issue of whether  Lundgren’s alleged use of his corporate seat to carry out the challenged acts satisfies due process, the court found.

Demand futility

The vice chancellor ruled that, “The core issue is whether corporate law can be broadened to encompass interpersonal workplace disputes. It cannot.” That’s because, “Delaware law governs internal affairs—the discretionary management of business assets, oversight of enterprise-level risks, and fulfillment of the fiduciary promise,” she wrote.

She explained that fiduciary duty, “guards against self-dealing, conflicted transactions,” and bad faith conduct comprises both “fiduciary conduct motivated by an actual intent to do harm” and “intentional dereliction of duty.”  She said that doctrine is “exacting, but narrow.”

This ruling distinguished the recent Chancery decision in McDonald’s, highlighted on these pages. That opinion found, under different facts, a breach of fiduciary duty related to a more pervasive sexual harassment set of circumstances–but one cannot ignore the obvious tension between the two cases.

In the instant decision, the court held that Brola distorts the meaning of bad faith beyond recognition, wrongly seeking to transform it into a “general morality code” that includes every instance when “an officer engages in unlawful harassment,” the court warned, concluding that Lundgren’s deplorable actions were taken as a supervisor—not a corporate officer.

“The legal system worked as intended,” the vice chancellor concluded.  “Equity must not sanction collateral litigation that exposes victims to unwanted scrutiny in the service of a corporate recovery and attorneys’ fees.“

Much commentary has been published about this important decision in the short time since it was issued. See, e.g., Professor Bainbridge’s extensive insights at this link.

A recent decision of the U.S. District Court for the District of Delaware addressed a federal statute that allows, under certain circumstances, discovery in a U.S. federal court to aid a lawsuit pending in another country, in the matter styled: In re Application of Vestolit GmbH and Celanese Europe B.V., Misc. No. 24-cv-1401-CFC (D.Del. Nov. 24, 2025).

Background

  • The court described the ex parte application for a subpoena that was originally granted–but emphasized that it did not prevent any other parties from moving to quash the subpoena or challenging any deficiencies in it.
  • The court also described the procedural history of the related litigation in a Dutch Court in Amsterdam, as well as comparing the prior rulings by the Dutch Court on discovery with the discovery that was sought in the U.S. Court.

Highlights

  • The court explained the authority to grant an application for discovery in aid of foreign litigation based on § 1782 of Title 28 of the United States Code if three statutory conditions are met: (1) The person from whom discovery is sought “resides or is found” within the district; (2) The discovery is “for use in a proceeding before a foreign or international tribunal”; and (3) The application is made by an “interested person.” 28 U.S.C. § 1782(a). Slip op. at 5-6.
  • The court described the four factors described in the U.S. Supreme Court’s Intel decision that are relevant to the exercise of the discretionary determination in these matters. Id. at 6.
  • The court discussed other cases that expounded on the various nuances of the requirements to be satisfied and the need to interface with any determinations the foreign courts may have made about discovery.
  • The court declined to award a request for fees from Shell Chemical under Rule 45 ([d])(1), 28 U.S.C. § 1927, or under the court’s inherent power and broad discretion because the subpoenas in this case were “not fairly characterized as blatantly defective.” Id. at 19.
  • In sum, the court concluded that the applicant appeared to be using § 1782 to circumvent Dutch discovery rules. Therefore, it granted the motion to vacate the order regarding the application to obtain discovery for use in a foreign proceeding, and quashed the subpoena.

In a recent letter ruling in an LLC books and records action, the Court of Chancery, in a Magistrate’s letter ruling, found that privilege was waived despite the inadvertent disclosure of those privileged communications. Straub v. Persolve, LLC, C.A. No. 2025-0636-DH (Del. Ch. Oct. 8, 2025).

The reasoning for the result was intertwined with the finding that there was a violation of both discovery orders and deadlines in a scheduling order. My intent in this short blog post is only to provide a few of the highlights that I find most noteworthy and of widespread usefulness.

Highlights

  • In connection with the inadvertent disclosure of privileged information, out-of-state counsel, which the court refers to as OOSC, admitted that they did not take the “most reasonable step” of reviewing the documents before they were disclosed. Specifically, the court found that he “elected not to conduct a final review of the .zip production file. That basic step would have prevented the inadvertent production. OOSC’s behavior is at odds with the reasonable precautions taken by the attorneys in Kent. [In re Kent County Adequate Public Facilities Ordinance’s Litigation, 2008 WL 185 1790 (Del. Ch. Apr. 18, 2008)]. Slip op. at 9.
  • The court referred to Delaware Rule of Evidence 502 which defines the attorney-client privilege and also defines when such communications are considered confidential. Slip op. at 6.
  • The court found in this case that “a cursory, non-contextual scan of the images would have revealed a volume of documents far beyond what OOSC initially designated as responsive. This type of review could have been accomplished in minutes, is not burdensome, and is a basic responsibility of counsel.” Slip op. at 9.
  • Unlike the Kent case referred to above, the inadvertent disclosure in this case dwarfed previous disclosures and the inconsistency and shear volume would have been apparent had counsel conducted a cursory check. Id. at 10.
  • The court discussed the three criteria that will be considered to determine when disclosure will not operate as a waiver:  “(1) The disclosure is inadvertent; (2) The holder of the privilege or protection took reasonable steps to prevent disclosure; or (3) The holder promptly took reasonable steps to rectify the error, including following any applicable court procedures to notify the opposing party or to retrieve or request destruction of the information disclosed,” citing DRE 510(c). Slip op. at 7.
  • The court discussed all the factors in detail, but the most notable is that the disclosing party failed to previously disclose that he possessed relevant information, but instead created an inference that he had no access to them, even though they were discoverable. Slip op. at 11.
  • Among the important principles with broad application that the court relied on include the following: “Discovery abuse has no place in Delaware courts, and the protection of litigants, the public, and the bar demands nothing less than that Delaware trial courts be diligent in promptly and effectively taking corrective action to secure the just, speedy and inexpensive determination of every proceeding before them.” Slip op. at 12-13.
  • Also noteworthy is the court’s observance that disregarding provisions in the scheduling order that governs discovery is engaging in discovery abuse. Slip op. at 13. See Court of Chancery Rule 37(b)(2) regarding possible sanctions for discovery violations.
  • The court found that it was a misrepresentation to give the impression that the disclosing party had no access to the relevant, discoverable emails. The court found that it was a violation of the discovery rules when he failed to accurately depict his access to discoverable emails in the most general terms. Slip op. 13-14.
  • The inadvertent production revealed that the disclosing party possessed a group of responsive emails that he did not intend to provide. The court found that this was a violation of the “spirit of discovery and the scheduling order” and required sanctions. Slip op. at 15.
  • Especially noteworthy is the recitation by the court of the well-settled Delaware discovery standard that self-collection by interested parties is not a best practice. Slip op. at 15-16.
  • Lastly, the court addressed an alleged violation of the Delaware Lawyers’ Rule of Professional Conduct 4.4(b). Importantly, the court noted that Rule 4.4(b) requires notification when a party receives inadvertently produced information, but it does not govern whether an attorney receiving an inadvertently received document must return the document. Id. cmt. [2] Rather, Delaware caselaw determines such a question. Slip op. at n.4.
  • The court also observed that the Delaware Supreme Court supervises compliance with the Rules of Professional Conduct and, in general, trial judges have no independent jurisdiction to enforce them. Id. at 17.
  • The court noted in closing that the animosity between counsel led to a communication breakdown, and many, if not all, of the problems presented here could have been avoided had the lines of communication remained open. Id. at n.6.

Takeaways:

  • Even inadvertent disclosure of privileged documents can lead to waiver of a privilege.
  • The court discussed the minimum level of review of documents that will be considered reasonable prior to production in order to avoid waiver in the context of inadvertent disclosure of arguably privileged documents.
  • The Rules of Professional Conduct may require that the recipient of inadvertently disclosed data notify the sender, but only nuanced case law resolves the issue of when and under what circumstances one is entitled to claw back those documents.
  • Rule of Evidence 502 defines attorney/client privilege and when a document should be considered confidential.

A recent Delaware Court of Chancery decision is noteworthy for several key principles applied to a set of facts that involve company counsel using corporate machinery and corporate funds to join with a faction of the board to oust a board member. Dalby v. Kastner, C.A. No. 2025-0136-NAC (Del. Ch. Aug. 29, 2025), is a 100-page post-trial decision in a Section 225 action that went to trial less than three months after the complaint was filed. It deserves careful review. In this blog post I only intend to highlight certain aspects of the decision.

Key Facts

Many of the key facts in this decision raise important issues, but the narrow focus of the court’s opinion in this Section 225 action was primarily to determine whether a board member was properly ousted. He was not. The key facts include the following:

  • The founder of a company, who also owned 49% of the shares, designed a cell phone that was suitable for younger children. After bringing on investors, he was the subject of a scheme by management and a faction of the board, who were aided by outside corporate counsel, to remove the founder. Outside corporate counsel invoiced the company for all of their fees.
  • The founder, Stephen Dalby, was unaware that management and a faction of the board were secretly using company resources to further his removal from the board. When he learned of the removal effort and asked if company resources were being used to fund the effort, management and the board faction did not respond.
  • To avoid being seen as the face of the effort to oust the director, outside counsel for the company collaborated with a board faction to use an apparently neutral stockholder as the face of the removal effort. But that stockholder contributed little more than its name. The company’s outside counsel drafted all the documents for the removal and the company management continued to spearhead the effort, along with in-house counsel. When the removal was presented to the stockholders, management solicited stockholder votes and its outside counsel kept the official tally.
  • The company’s outside counsel devised a plan that would get rid of the founding director. Slip op. at 3.
  • An earlier settlement agreement that resolved prior litigation gave the founding director certain rights including an anti-dilution right. Nonetheless, outside corporate counsel prepared written consents to approve stock options that would arguably dilute the founding director as part of a plan to sideline him from the company. Slip op. at 14.
  • A board faction persuaded a lender who had already agreed to extend the due date for a note, to refuse an extension of the note in order to pressure Dalby to agree to terms that would push him aside. Slip op. at 26-29.
  • Despite at least one outside corporate counsel advising that replacement of a board member was not a default of a loan agreement, another outside corporate attorney worked with a board faction to tell Dalby that it would be a default if he exercised his right to replace a board member. This was part of the plan to coerce his consent to a scheme to oust him. Slip op. at 36-37.
  • Then the outside corporate counsel came up with another plan along with the board faction to remove Dalby from the board–and billed all of the work to the company. Slip op. at 39-40.
  • As part of the plan, the outside corporate attorney enlisted new Delaware corporate counsel to help with the plan to remove Dalby as a director. Slip op. at 40-41.
  • Delaware corporate counsel also billed the company for the plan to oust Dalby from the board. An additional firm was also hired to investigate Dalby, and they also billed the corporation for their investigation. Slip op. at 49-52.
  • Continuing to charge the company, Delaware counsel for the company contributed to a plan to have a stockholder be the “façade” to solicit stockholders to remove Dalby as a board member at the same time they were devising a plan to dilute his shares. Slip op. at 55-62.
  • The court observed that the primary goal of the board faction was not to save the company from its financial distress–but rather to oust Dalby from the board and dilute his 49% ownership. Slip op. at 70 and footnote 373.

Highlights of the Court’s Reasoning

  • The court provided extensive reasoning for why it determined that the solicitation of the stockholder votes to oust Dalby was misleading and materially false. Slip op. at 87-89.
  • Notwithstanding a vote of approximately 50.1% of the stockholders to remove Dalby as a director, the court determined that the vote was invalid because it was procured by misleading and materially false solicitation materials sent to stockholders. Slip op. at 75-79 and 86-91.
  • Notably, the court did not decide if the high bar for removal of a director “for cause” was met in this case.
  • A noteworthy procedural aspect of this case is that after Dalby sued to challenge his ouster, the corporation “took no position” in its filings with the court. Slip op. at 83.
  • Although other claims such as specific performance and details of the dilution efforts discussed by the court were not covered here, a final noteworthy aspect of this decision is that the court copied and pasted handwritten notes by board members in the body of the opinion. That should be a reminder to be careful what you write. Quotes from text messages also featured prominently in the factual portion of the opinion.

Takeaways

Two of many takeaways from this opinion are:

  • As a general matter, counsel for the company should not use company resources to oust a board member—or, in particular, pretend that a stockholder initiated a solicitation of other stockholders when the materials were prepared by management and a board faction with company counsel. For that and related reasons, the court concluded that the shareholder votes were procured by misleading and materially false proxy materials.
  • Company counsel should be more interested in the best interests of the entire company and not be advocating for a particular board faction that, according to the court, had a primary goal of ousting a board member as opposed to what might be in the best interest of the company.

Postscript

  • After this opinion, the court denied a motion seeking to stay enforcement of the court’s ruling, that denied a request for specific performance, pending an appeal. See Dalby v. Kastner, C.A. No. 2025-0136-NAC, Order (Del. Ch. Oct. 7, 2025).

Also notable: About a month before trial, the court ruled on a motion to compel by the plaintiff which was granted a few days after it was filed, but the court does not discuss in this post-trial opinion the details of that motion. One can surmise that attorney/client privilege issues abound, based on the facts of this case. See footnote 465, referencing the oral argument and rulings of the court on April 4, 2024. There was also a request for contractual fee shifting which this decision does not address.

——————————————————–

A recent Delaware Court of Chancery decision explained why a lack of candor resulted in discovery abuses that justified fee-shifting. In Legent Group, LLC v. Axos Financial, Inc., C.A. No. 2020-0405-KSJM (Del. Ch. Nov. 7, 2025), the court explained the factual basis for its findings that the lack of candor created unnecessary expenses, requiring the sellers to engage in motion practice three times to access documents that had no confidentiality designation and were not subject to any protective order—contrary to what the buyers had argued throughout the case.

Key Background Facts and Procedural Posture

The detailed facts involved in this matter were recited in a post-trial memorandum opinion in the same case that was issued on the same day as this ruling. The sellers in this case served subpoenas for documents relating to a FINRA arbitration, including deposition transcripts, hearing transcripts, pleadings and responses to discovery. In response to a motion to compel, the buyers moved to quash the subpoenas, arguing that the protective order entered in the FINRA arbitration prevented the discovery of the documents. The buyers also represented to the court that they were not taking legal positions in the Delaware litigation that contradicted those taken in the FINRA arbitration. Those two material statements turned out to be less than true.

Based in part on the representations of the buyers that the documents sought were confidential, the court granted the initial motion to quash without prejudice to renew it based on new facts.

But on the eve of trial, the sellers discovered that some of the testimony in the FINRA arbitration had been publicly filed as part of litigation in New York, so they filed an emergency motion to compel. After trial and the production of the transcripts, the sellers moved for sanctions. This is the court’s resolution of that request for fee-shifting after post-trial briefing.

Highlights of Court’s Analysis

  • There were two reasons why the court found that the buyers misled the court: (i) contrary to their representations when moving to quash the subpoenas, the buyers took positions in the arbitration directly contradicting their positions in this Delaware litigation; and (ii) The buyers’ arguments and motion practice concerning the FINRA documents “elided key distinctions on which they now rely in a way that misled the court.” Slip op. at 7.
  • The dictionary.com definition of elided is to omit or suppress. So, leaving out or suppressing key facts or distinctions could be a lack of candor that equates with misleading the court. A separate recent decision in another case involving a lack of candor to the court also resulting in fee-shifting was highlighted on these pages here.

The court determined that the various representations to the court on the confidentiality of the FINRA documents could not be reconciled. Several quotable key principles in this decision that are useful references in almost all litigation include the following:

  • “When a party fails to comply with the discovery orders of the court or otherwise engages in discovery abuses, the award of attorneys’ fees and expenses to the opposing party is mandatory, absent a showing by the wrongdoer that his actions were substantially justified or that other circumstances make the award unjust. Id. (citation omitted).
  • The court emphasized that: “The integrity of the civil litigation process depends largely on a client and counsel living by an honor code. That requires documents at issue in litigation to be discussed openly and plainly so that the court can make efficient determinations.” Id. (citations omitted).
  • The court cited Court of Chancery Rule 11(c)(4) which refers to fees and costs being awarded only so much as to “deter repetition of the conduct or comparable conduct by others similarly situated. Id.
  • The court concluded by reasoning that the buyers’ lack of candor created unnecessary expenses, requiring sellers to engage in motion practice three times to access documents that had no confidentiality designation and were not subject to any protective order. Id. at 8.
  • Thus, the court awarded reasonable fees and costs associated with the filing of motions and responses to motions that were incurred due to the lack of candor resulting in discovery abuse. Id. at 8.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 40 years, prepared this article.

The Chancellor of the Delaware Court of Chancery recently allowed a Regions Bank investor to continue her derivative Caremark suit against bank directors to recover the $191 million dollars Regions paid federal banking regulators for three years of charging illegal overdraft fees, in Brewer v. Turner Jr. et al, C.A. No. 2023-1284-KSJM (Del. Ch.Sept.29, 2025).

One month later, Chancellor Kathaleen McCormick denied a petition by defendant directors to certify an interlocutory appeal of several major issue rulings in her September opinion.  She found that at best, defendants had provided only “soft support” for one of the eight key factors that could qualify a decision for immediate appeal.  Brewer v. Turner Jr.et al, C.A. No. 2023-1284-KSJM (Del. Ch. Oct. 30, 2025).

In her September opinion denying the directors’ motion to dismiss for failure to plead demand futility, Chancellor McCormick found that a majority of board saw but did not properly act on red flag Caremark warnings that Regions Bank’s overdraft fees violated the Consumer Financial Protection Act of 2010, which tightened scrutiny of consumer transactions involving any “unfair, deceptive or abusive act or practice”.  She said the board allegedly continued the practice for three years so they could develop replacement revenue sources.  In re Caremark Inl. Inc. Deriv. Litigation, 698 A.2d 959 (Del. Ch. 1996).

An “unusual” Caremark claim

Chancellor McCormick ruled that 14 of the 22 directors who had served on the board during the three years the overdraft practice continued faced liability for breaching their duty and thus could not objectively evaluate the merits of the suit, so the plaintiff passes the pre-suit demand test as to those defendants.   She also noted that the case was unique in that it included a whistleblower claim by Region’s former general counsel re overdrafts.

She did not find that the directors who only served after the bank discontinued the overdraft practice or before it began had any conflicting liability and they were dismissed.

Background

Regions shareholder Katherine Brewer filed a derivative breach of duty suit on behalf of all investors in the bank and its parent company alleging that the bank’s board failed to heed warnings from federal banking regulators that its overdraft practice was illegal. She claimed the directors exposed Regions to liability by keeping the allegedly manipulative practice in effect while they sought replacement revenue streams.  She asked the court to hold the directors liable for the $191 million consent agreement with banking regulators.

The consent order that Regions agreed to in 2022 came in one of the most recent of a series of enforcement actions to settle claims brought by the federal Consumer Financial Protection Bureau targeting deceptive and manipulative practices affecting customers.  Several large regional banks, including Bank of America, Wells Fargo and JP Morgan Chase agreed to consent orders regarding its overdraft practices.  Bank of America, for example, paid $410 million to settle banking regulators’ overdraft violation claims, the court said.

Regions Bank, an Alabama-chartered regional bank operated by Regions Financial Corporation, which is incorporated in Delaware and based in Alabama, learned of the regulators’ investigations of illegal overdraft practices –including theirs –but decided to continue it until they could replace those fees with other revenue streams, the court said.  The Chancellor noted that Regions’ Board has both a Risk Committee and an Audit Committee—each of which are responsible for monitoring risk associated with federal regulations – and that in 2018, Regions established a Customer Transparency Working Group to review the Company’s overdraft practice.

No “straight-faced” info system charge

She concluded that in keeping with the Caremark ruling, Regions had the proper reporting systems to keep the board informed about risks that were central to its business, but for three years the board did not properly respond to the reported red flags by halting the illegal overdraft practice.  Hiring a law firm and forming a working group of directors to access the adequacy of the bank’s response was insufficient, because “Merely hiring an attorney in response to a red flag, does not provide the absolution Defendants seek,” she ruled.

A risk leading to corporate trauma

Moreover, the Chancellor said, plaintiff’s pre-suit demand argument was supported by:

*The firing of and whistleblower suit settlement with a deputy counsel who had warned that continuing the illegal overdraft practice was a risk (which the court identified as “plaintiff’s most powerful red flag”

*The fact that the working group had no power to stop or change the overdraft practices.

*The board’s apparent failure to discuss repeated warnings from Senators and regulators-although that charge was not in itself a red flag.  The defendant demand directors knew that regulators viewed the overdraft practice of manipulating the posting of withdrawals to generate fees was illegal was a known risk to Region’s core business, but they kept it in effect for financial reasons.

No overdraft involvement proof = D&O dismissal

Plaintiff alleged that later-arriving director defendants who came aboard after Regions halted its overdraft scheme should have investigated those wrongs and charged its authors damaged the business.  But the Chancellor dismissed those defendants ruling that those later directors did not breach their fiduciary duties by failing to investigate and charge the other directors for their handling of the overdraft issue.

She said she dismissed charges against all Regions officers because the plaintiff did not defend those charges in any briefing in response to assertions by those defendants that none of the allegations in the complaint establish a claim.

Not an “exceptional” appeal

In her October order, the Chancellor said her decision boiled down to the Regions directors’ insufficient support under Supreme Court Rule 42 for the three of eight factors which could be the basis of immediate appeal of an issue of material importance that merits appellate review before a final judgment because none were “exceptional.”  She found that:

“Factor B” – which asserted that the September opinion conflicted with the “settled law” of other Chancery Court rulings as to demand futility requirements, was insufficient because the standard for conducting this inquiry at the demand futility stage is well balanced, requiring that the plaintiff plead facts with particularity, but also requiring that this Court draw all reasonable inferences in the plaintiff’s favor.

Factor (G) asks whether interlocutory review could terminate the litigation. “This factor is rarely dispositive; were it so, then it would be appropriate to certify all decisions denying motions to dismiss in whole or in part,” the Chancellor said. “This factor does not weigh in favor of interlocutory appeal here in any event.”

Factor (H) asks whether “[r]eview of the interlocutory order may serve considerations of justice.” But although “Defendants advance a floodgates argument”, casting the Opinion as likely to “sow uncertainty” because it supposedly departs so dramatically from Delaware law,” regarding the standard of proof for Caremark claims.  “Not so,” the Chancellor said. “The approach of the Opinion has been deployed repeatedly since Marchand,” referring to the most recent guidepost ruling on Caremark claims.  Marchand v. Barnhil, 212 A.3d 805, 821 (Del. 2019).

 Yet Caremark claims remain “among the hardest claims to plead and prove.”  Since Marchand, this court has dismissed nearly 80% of derivatively pled Caremark claims,” Chancellor McCormick concluded.

My 9th Edition as Editor-in-Chief of the Delaware Corporate and Commercial Law Monitor published by The National Review is now available.

We collect articles from around the country, by practitioners and academics, about the latest developments on the titular topic.

In a recent bench ruling, the Delaware Court of Chancery addressed an issue that it acknowledged had not been squarely decided by the court in a prior published decision: corporate counsel’s role and scope of engagement for a two-member deadlocked board. In Kundrun v. AMCI Group, LLC, C.A. No. 2025-0570-LM-VCL (Del. Ch. Oct. 22, 2025), in a transcript ruling and an Order encapsulating the decision, the court considered exceptions to a Magistrate’s Final Report and held that counsel for the company must remain neutral as between the two equal owners of the LLC who also comprised the two-member board of directors.

Key Background Facts

Defendant AMCI Group, LLC (the “Company”) was governed by an agreement (the “LLC Agreement”) that structured the governance of the LLC in a manner similar to a corporation to the extent that it provided for the board of directors (the “Board”) to exercise authority collectively over the business and affairs of the Company as its sole manager.

The LLC Agreement established an officer position, for one of the two equal owners who was also one of the two members of the Board, Hans Mende, with the title Executive Chairman. He was given authority over day-to-day operations of the business with the full powers of the Board—within that scope of authority limited to day-to-day operations. But outside that scope of authority he did not exercise the full powers of the Board, nor could he act on other matters where the operating agreement specifically required action by the Board.

The litigation involved requests for information by Fritz Kundrun who was one of the two directors comprising the Board, and one of the Company’s two equal members.

The court explained that some types of books and records actions might fall within the day-to-day operations of an entity, but an action, such as this one, by one of two directors who was also a 50% member does not.

The court reasoned that because the specific issues in this litigation fall outside the day-to-day operations of the Company, Mende lacked authority as Executive Chairman to address them on his own.

Highlights of the Order

  • Company counsel cannot take instructions from Mende or from officers who report to Mende. Order at 2.
  • The court also ruled that although the full Board can give instructions to Company counsel, which currently requires joint action by both Kundrun and Mende, the Board is deadlocked on governance issues that include whether and to what extent Kundrun can obtain the information in his capacity a director.
  • The court held that the Board is also deadlocked as to whether the Board as sole manager will seek the information.

Key Rulings

  • The court ruled that because the Board is deadlocked, Company counsel cannot take direction from the Board on those matters relating to the request for information by one of the two directors. The court also reasoned that Company counsel cannot side with one faction of the other,  citing to In re Aerojet Rocketdyne Holdings, Inc., 2022 WL 552653 at *4 (Del. Ch. Feb. 23, 2022). See Order at 3.
  • The court also ruled that Company counsel must carry out any order from the court and that it must comply with discovery requests relating to matters such as what documents or information exist and the burden associated with providing that data. Id.
  • The court held that Company counsel must provide neutral, complete, and accurate responses to requests about the basic information requested.
  • The court explained that: “Otherwise, Company counsel must remain neutral in this action. Company counsel cannot take a position adverse to either Kundrun or Mende.” Id.
  • The court concluded that although this matter is styled as a dispute involving Kundrun and the Company, it is actually between Kundrun and Mende. The court allowed Mende and his personal counsel leave to intervene for purposes of defending the proceeding, citing to Engstrum v. Paul Engstrum Asssocs., Inc., 124 A.2d 722, 723-24 (Del. Ch. 1956).
  • Other cases that address similar issues but that did not involve identical facts include: Kalisman v. Fridman, 2013 WL 1668205 (Del. Ch. Apr. 17, 2013); In re Carlisle Etcetera LLC, 114 A.3d 592 (Del. Ch. Apr. 30, 2015); Hyde Park Venture P’rs Fund II, L.P. v. FairXchange, LLC, 292 A.3d 178 (Del. Ch. 2023); and In re Information Management Services, Inc. Deriv, Litig., 81 A.3d 278 (Del. Ch. 2013).

Highlights of the Transcript Decision

Many of the court’s rulings involved an interpretation of the LLC Agreement, including the following:

  • Referring to one of the two board members, the court observed that: “Mende isn’t the company. The Board is the company.” Transcript at 108:13-14.
  • The Vice Chancellor interpreted the LLC Agreement in the following manner: “the company is a series LLC that established a manager-managed structure in which a board of directors acts as the sole manager for the LLC and its series with a delegation of authority to conduct day-to-day matters to a senior officer.” Tr. 88:22-89:3.
  • The Vice Chancellor further explained that: “I draw that inference from the following language in the operating agreement. It states, ‘As a general rule, governance is a company-level responsibility and in particular is the responsibility of the company’s board of directors.’ It further states, ‘The board of directors, acting as a body, will manage the business and affairs of the company, and unless the members of any particular series agree otherwise, “the series.”’ It then says, ‘The board collectively acts as the statutory manager of the company, and each company managed series under Delaware law, but no single director has the authority in that capacity to bind the company or any company-managed series unless the board has explicitly empowered him or her to do so.’” Id. at 91:10-24.
  • The Vice Chancellor reasoned that: “Just as in the general corporate context, the officers are going to have a lesser and more limited scope of authority than the board, which has plenary authority over the entity.” Id. at 92:20-24.  Further, the Vice Chancellor also found: “The provision is then saying that within that scope of authority, the officer can also exercise board powers, but only within the day-to-day operation of the business.” Id. at 95:20-23. 
  • The court further opined that: “The fact that Mende has control over the day-to-day operations as executive chairman doesn’t make him the company.” Id. at Tr. 106:19-21.
  • The Vice Chancellor, importantly, held: “there’s even a deadlock over whether directors can get information because Mende supposedly won’t go along with his fellow director in exercising managerial information rights. I pause to say that I’m deeply skeptical of that argument. It seems to me that just as the board acting as a whole can exercise board-level authority to tell a company or its officers to provide information to the board, so too here the manager can exercise manager-level authority to tell the entity to provide information to the board/manager. I don’t think that inherently means that the director, who is one of the two human components of the manager, is frozen out of exercising a director-level information right simply because of that structure. I don’t think it makes sense as a governance model, and I do think that the settlement agreement is inconsistent with that assertion.”  Id. at 107:1-18.
  • The Vice Chancellor elaborated that Kundrun is entitled to “information about the day-to-day management of the business” and noted that Mende could assert privilege or the work product doctrine regarding Mende’s own personal counsel.  Id. at 110:13-22. 
  • But the court otherwise found that there was a limited privilege and work product concern for “the period of time when … [corporate counsel] have been operating in the belief that they could represent the company in active litigation.”  Id. at 110:23-111:8.

Over the last 20 years these pages have highlighted a few hundred or so decisions regarding the challenges of seeking corporate records, in both the corporate and LLC context–even for directors and managers. Although this ruling is most noteworthy for its solution for a deadlocked board, and the role of counsel for the deadlocked board, it also provides an example of why asserting a right to seek business books and records by a member/manager or shareholder/director is not for the fainthearted and is not as simple, or inexpensive, an exercise as it may seem to those not well-versed in the intricacies and nuances of enforcing those rights.

Postscript: The author was co-counsel for Kundrun in this matter. Other counsel are listed in the transcript ruling linked above.