Delaware Vice Chancellor Laster issued a new corporate opportunity opinion yesterday, Dweck v. Nasser. It's not going to replace Broz v. Cellular Info. Sys., Inc., 673A.2d 148 (Del. 1996) in my casebook, but it's an interesting case nonetheless.

Gila Dweck was CEO and 30% stockholder of Kids International Corporation. Albert Nasser was Chairman of the Board and the controlling stockholder. Kids was a successful manufacturer of private-label clothing for discount retailers, like Wal-Mart and Target. Dweck wanted to own a larger share of the company, but Nasser declined to accommodate her, so Dweck took matters into her own hands, establishing two competing companies and eventually appropriating many of Kids' accounts.

In 2005, Dweck and Nasser split, accusing each other of breaching their fiduciary duties in various ways. The claim that most interests me is a corporate opportunities claim against Dweck. Although some of the background facts relating to Kids' ownership structure are complicated, VC Laster describes Dweck's treachery with admirable simplicity: Dweck established "competing companies that usurped Kids' corporate opportunities and converted Kids' resources to the point of literally using Kids' own employees, office space, letters of credit, customer relationships, and goodwill to conduct their operations."

If this seems like a pretty easy corporate opportunity case, that's because it is (with all due respect to VC Laster, who had to deal with 930 exhibits!). The first defense offered by Dweck was a rather lame "line of business" argument: because Kids manufactured private-label clothing, the other companies could enter the market for branded clothing. As VC Laster noted, this was not much of a defense to the claim of disloyalty: "Although Kids primarily operated in the private label business, Kids easily and readily could have expanded into the branded business."

Dweck also claimed that Nasser consented to the branded-label businesses, but VC Laster rejected Dweck's testimony, stating that Nasser was never informed of the new companies.

The most interesting defense was based on an operating agreement of Essential Childrenswear, a company formed by Nasser, Dweck and Dweck's brother, Haim. That agreement had a so-called "free-for-all provision," which read as follows:

Any Member and any of their respective affiliates may engage in or possess any interest in other business ventures of any kind, independently or with others, including but not limited to any business similar in nature to or competitive with the business of [Essential]. The fact that a Member or any of their respective affiliates may encounter business opportunities and may take advantage of such opportunities himself and/or herself and/or itself or introduce such opportunities to entities in which he/she/it has or has not any interest, shall not subject such Member or affiliate to liability to [Essential] or any of the other Members on account of the lost opportunity. Neither [Essential] nor any Member shall have any right by virtue of this Agreement or otherwise in or to such ventures, or to the income or profits derived therefrom, and the pursuit of such ventures, even though competitive with the business of [Essential], shall not be deemed wrongful or improper. . . . [Essential] and each Member hereby waives all right or remedy against the Members with respect to any damage, injury, lost profits or revenue as a result of any competitive business activities on the part of any Member.

Waivers of fiduciary duties have become common in Delaware LPs and LLCs -- see Mohsen Manesh's forthcoming paper, Contractual Freedom under Delaware Alternative Entity Law: Evidence from Publicly Traded LPs and LLCs -- but I haven't seen as much discussion of waivers in the corporate context, outside of DGCL Section 102(b)(7), which permits a waiver of sorts (allowing corporations to include an exculpation clause in a corporation's certificate of incorporation, limiting or eliminating the personal liability of a corporation's director for a breach of fiduciary duty).

The provision above would probably be analyzed under DGCL 122(17) (which I blogged about a long time ago). This provision permits a corporation to "[r]enounce, in its certificate of incorporation or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or one or more of its officers, directors or stockholders." (emphasis added)

In Dweck, the provision was in an operating agreement, which may have been authorized by Essential's board of directors (the court doesn't say). But VC Laster rightly observed that even if this provision were effective for Essential's affairs, it could not "eliminate broadly the duty of loyalty for all other business entities formed by the same parties."

Unfortunately for Dweck, a Kids stockholders' agreement, which had a similar provision, was never signed by Nasser. According to VC Laster, "The free-for-all provision never became effective, and Dweck cannot rely on it to justify her conduct. I therefore need not reach the complex legal issues that the provision would raise."

Would the "free-for-all provision" survive under DGCL Section 122(17)? I found only one case citing this code section -- Wayne County Employees' Retirement System v. Corti, 2009 WL 2219260 (Del.Ch.2009) -- and Chancellor Chandler did not rule on the provision because there was no actual controversy touching on the provision. Nevertheless, the issue raised in that case is the same issue that would likely have arisen in Dweck: are the opportunities pursued by Dweck "specified business opportunities or specified classes or categories of business opportunities"? My view is that the identification of "other business ventures of any kind" is not sufficient specification.

Thanks to Kurt Heyman for the tip on the case and to Mohsen for an insightful email on the free-for-all provision.

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