This Week in Chancery Court: Chegg, Deloitte, Texas Pacific

Education technology company Chegg Inc.'s board—as well as its auditors at Deloitte LLP—will ask the Delaware Court of Chancery this week to dismiss investor litigation over allegations that company leaders made millions of dollars on stock sales, while keeping shareholders in the dark about a business model based on academic cheating. Meanwhile, major shareholders who opposed a Texas Pacific Land Corp. plan to issue additional shares will seek a reversal of a Chancery court ruling against them.

Here’s a look at more from the calendars for the Chancery Court and the Delaware Supreme Court this week:

Monday: Golden Rule Fin. Corp. v. S’holder Rep. Servs. LLC, Del. Ch., No. 2022-0065, trial 2/19/24.

At issue: A UnitedHealth Group Inc. unit filed suit in 2022 against the former owners of USHealth Group Inc., a business it bought in 2019, accusing them of breaching the sale agreement by relying on nonstandard accounting metrics when they initially calculated the size of an eight-figure post-closing adjustment. Last year, Shareholder Representative Services LLC—the legal entity that won an earlier, related case on behalf of USHealth Group’s former owners and shareholders—sought a partial summary judgment in the case. Vice Chancellor Paul Fioravanti Jr. partly granted that motion regarding pre-judgment interest. The parties now go to trial, with the UnitedHealth unit arguing the acquired company’s error “required the buyer to make a $38.3 million true-up payment that reflected no increase in the company’s true economic value,” according to a pre-trial brief. The defendants argue, in their own pre-trial brief, that the plaintiffs’ “theory is built on a house of cards.”

Court action: A three-day trial opens Monday in Wilmington, Del.

UnitedHealth Unit Reopens Fight Over $750 Million Insurer Deal

Tuesday: Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube LLC, Del. Ch., No. 2022-0378, telephonic hearing 2/20/24.

At issue: An affiliate of Black Diamond Capital Management LLC, the investment firm run by billionaire Stephen Deckoff, faces fraudulent transfer claims stemming from a fast-tracked auction that handed over virtually the entire business of Boomerang Tube LLC, an oil-rig tubing manufacturer also controlled by Black Diamond. Vice Chancellor Lori Will previously ordered that the claims against PTC Liberty Tubulars LLC could proceed, though she dismissed claims against Black Diamond. Now the plaintiffs, affiliates of steelmaker Cleveland-Cliffs Inc., have filed a motion for partial default judgment, alleging Boomerang has failed to “timely answer or otherwise respond” to the litigation.

Court action: Oral arguments on the motion for partial default judgment will be heard via teleconference.

Black Diamond Capital Affiliate to Face Sham-Auction Claims

Wednesday: City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings Inc., Del., No. 305, 2023, oral argument 2/21/24.

At issue: Last July, Inovalon Holdings Inc. and founder Keith Dunleavy defeated shareholder litigation in the Chancery Court over the health analytics company’s $7.3 billion sale to a private equity consortium led by Nordic Capital. The pension funds behind that litigation now ask the Delaware Supreme Court to reverse the ruling from Chancellor Kathaleen St. Jude McCormick, arguing the lower court “erred in holding that the stockholder vote was fully informed despite three material disclosure violations,” among other errors. Inovalon wants the Chancery Court’s ruling upheld, arguing in a reply brief that McCormick “correctly held that Plaintiffs did not sufficiently plead that the operative proxy statement failed to disclose material facts.”

Court action: Oral arguments before the Delaware Supreme Court will be heard in Dover, Del.

Inovalon, Founder Beat Challenge to $7 Billion Take-Private Sale

Wednesday: Horizon Kinetics LLC v. Texas Pacific Land Corp., Del., No. 478, 2023, oral argument 2/21/24.

At issue: Last December, Vice Chancellor J. Travis Laster sided with Texas Pacific, ruling that its major shareholders should have followed the Permian Basin land giant’s board recommendation and voted to increase the number of authorized shares of common stock at the company’s 2022 annual meeting. Those shareholders have appealed to the state’s highest court, arguing in a brief that Laster’s opinion disenfranchised them “by judicial fiat on a hugely consequential change to TPL’s charter that eliminated a key feature of the company’s capital structure that had been in place since its establishment in 1888.” The high court should affirm Laster’s ruling, Texas Pacific said in an answering brief. The company argues the shareholders “now purport to champion the rights of ‘all TPL stockholders,’ but they themselves tainted the stockholder vote with their wrongful campaign against Proposal Four. Neither law, policy, nor equity can relieve Defendants of their broad Voting Commitment.”

Court action: Oral arguments before the Delaware Supreme Court will be heard in Dover, Del.

Texas Pacific Wins Lawsuit Against Leading Shareholders

Thursday: Stansell v. Rosenweig, Del. Ch., No. 2023-0180, oral argument 2/22/24.

At issue: Both Chegg and Deloitte seek to dismiss the lawsuit that accuses Chegg’s directors, with Deloitte’s help, of soliciting investor votes for important corporate decisions with misleading claims about the company’s ethical standards and its practice of “helping” students. The investor argues the case should proceed, writing in an answering brief that Deloitte “aided and abetted” the Chegg directors’ breach of fiduciary duties, and if Chegg’s directors “disclosed that Chegg primarily supplies answers to textbooks and exam questions, stockholders could then decide if they want to continue their investments given the attendant risks of such a business model and make decisions regarding election of directors accordingly.”

Court action: Oral arguments on the motions to dismiss will be heard in Wilmington, Del.

Chegg’s Core Business Is Academic Cheating, Investor Suit Claims

Friday: Newman v. Sports Ent. Acquisition Holdings LLC, Del. Ch., No. 2023-0538, oral arguments 2/23/24.

At issue: An investor filed a lawsuit in May against the architects of the blank-check merger between online gambling company Super Group (SGHC) Ltd. and a shell entity, claiming they duped shareholders into approving a lousy deal that made insiders rich. The lawsuit targets the finance and sports industry veterans—including former senior executives at Goldman Sachs & Co. and the NFL—who sponsored Sports Entertainment Acquisition Corp., the special purpose acquisition company that combined with Super Group to take it public. Super Group operates the digital sports betting platform Betway and Spin, an online casino. The defendants filed a motion to dismiss, arguing the investor hasn’t adequately alleged a failure to disclose information or an “unfair dealing” in a case where “seasoned sports and entertainment executives founded a single SPAC, appointed two independent directors with a wealth of senior management experience to its board, and negotiated a merger with an already-profitable, cash-generating online sports betting and gambling platform.” The investor argues in an answering brief that the complaint’s unjust enrichment claim should proceed because “each defendant was positioned to profit handsomely from his or her founder share windfall resulting from a fiduciary breach.”

Court action: Oral arguments on the motion to dismiss will be heard in Wilmington, Del.

Super Group’s Blank-Check Backers Hit With SPAC Deal Challenge