Zimmerman v. Crothall
62 A.3d 676
Del. Ch.2013Background
- Zimmerman, a co-founder/former CEO, is a minority unitholder in Adhezion Biomedical LLC.
- Adhezion’s Board amended its Operating Agreement and authorized new units through multiple financings; Zimmerman challenged these actions as exceeding authority and fiduciary breaches.
- Trial lasted three days; evidence led the Chancellor to find the Board acted outside authority but without fiduciary breach.
- Court declined to reimburse defendants’ attorneys’ fees, but held the Board’s actions breached the Operating Agreement; no damages beyond nominal damages.
- The court awarded nominal damages of $1 and denied claims for direct fiduciary breach or aiding/abetting; indemnification and advancement were addressed.
- Procedural posture: derivative action on behalf of Adhezion, with post-trial findings of fact and conclusions of law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Board could increase authorized units without Common unitholder consent | Zimmerman contends consent required for increasing authorized units. | Defendants argue Section 3.8 allows unilateral issuance/create of units, with Section 15.11 handling amendments. | Board breach of the Operating Agreement; authorized unit increase required amendment and Common consent. |
| Whether the Board’s challenged transactions were entirely fair under fiduciary duties | Zimmerman asserts entire fairness review due to conflicted interest and control by investors. | Defendants argue Section 6.13 provides safe harbors; at least one safe harbor satisfied; or business judgment applies. | Challenged transactions were found to be comparable to third-party deals and, given findings, were entirely fair; burden shifting acknowledged. |
| Whether Liberty and Originate owed fiduciary duties or acted as controlling shareholders | Zimmerman contends Liberty/Originate controlled Adhezion and breached duties. | No single controlling group; Liberty/Originate not acting in concert; no controlling shareholder. | No controlling shareholder; no breach by Liberty/Originate. |
| Remedy for breach of contract; whether damages or reformation are appropriate | Seek reformation and promissory notes to reflect breach. | Reformation would be windfall; damages not proven since terms benefited the Company. | Nominal damages of $1; no rescission or substantial damages; equitable remedy declined. |
| Attorney's fees advancement and indemnification | Seek reimbursement of fees advanced by the Company. | Indemnification provisions apply; advancement permitted only for indemnifiable acts. | Indemnification applies; advancement allowed; Company may not be compelled to reimburse beyond indemnifiable context. |
Key Cases Cited
- Lorillard Tobacco Co. v. American Legacy Found., 903 A.2d 728 (Del. 2006) (burdens on fiduciary review and whole fairness concepts discussed)
- Auriga Capital Corp. v. Gatz Props., LLC, 59 A.3d 1206 (Del. 2012) (LLC default duties; section 6.13 analysis and safe harbors explained)
- Auriga Capital Corp. v. Gatz Props., LLC [Auriga I], 40 A.3d 839 (Del. Ch. 2012) (initial characterization of fiduciary duties in LLC context)
- In re Cysive, Inc. S'holders Litig., 836 A.2d 531 (Del. Ch. 2003) (standard of review and burden of proof in fiduciary disputes)
- Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156 (Del. 1995) (burden-shifting framework when fiduciaries’ conduct is challenged)