Trial victory against LG Electronics affirmed

On March 10, 2025, the Delaware Supreme Court affirmed the post-trial decision of Vice Chancellor Nathan Cook of the Delaware Court of Chancery holding that our clients’ removal from the board of Alphonso, Inc. was invalid and that certain of our clients retain a continuing right to appoint directors to the Alphonso board. Davis Polk served as lead trial counsel and appellate counsel for the plaintiffs in the action, who are founders, minority stockholders and former employees of Alphonso, a technology company that specializes in advertising technology for smart TVs.

In January 2024, Vice Chancellor Cook found after a two-day trial that our clients were fired from Alphonso as part of a bad-faith scheme orchestrated by Alphonso’s controlling shareholder, an affiliate of LG Electronics, Inc., to eviscerate the rights for which our clients had bargained in a stockholders’ agreement entered into at the time LG invested in Alphonso in December 2020. The stockholders’ agreement provided our clients with certain liquidity rights and the right to appoint minority directors to Alphonso’s board, so long as our clients remained employed with the company. In December 2022, the LG-affiliated directors on Alphonso’s board, at LG’s direction, terminated our clients’ employment for the express purpose of eliminating our clients’ director-appointment rights. As the trial court found, LG, in firing our clients, also hoped to clear the way to terminate the stockholders’ agreement entirely – relying on a provision in the stockholders’ agreement that permitted our clients to block any termination or amendment so long as they remained employed. The trial court concluded that LG’s ultimate goal was to eliminate LG’s contractual commitments to provide liquidity to Alphonso’s minority stockholders at fair market value, through required tender offers and/or an IPO, so that LG could capture for itself a greater share of Alphonso’s significant value.

In April 2023, our clients sued LG and the LG-appointed directors on Alphonso’s board, asserting a claim under section 225 of the Delaware General Corporation Law, challenging the removal of our director clients, as well as additional breach of fiduciary duty claims. In litigating the section 225 claim, which was expedited and tried in September 2023, Davis Polk argued that the defendants’ actions were taken for the bad-faith purpose of eliminating the minority stockholders’ board-appointment and liquidity rights under the stockholders’ agreement. We argued, among other things, that the defendants’ scheme constituted a breach of an express provision in the stockholders’ agreement that required Alphonso to use reasonable efforts to preserve our clients’ contractual rights and also violated the implied covenant of good faith and fair dealing. In a 104-page opinion, Vice Chancellor Cook agreed with our core factual arguments and held, on the basis of our express breach claim, that the removal of our clients was invalid and that certain other of our clients remain entitled going forward to appoint directors to the Alphonso board on behalf of minority stockholders.

On appeal, LG argued that the trial court erred in finding that the termination of at-will employees could ever constitute a breach of a company’s reasonable efforts obligations and that our clients assumed the risk of losing their rights under the stockholders’ agreement insofar as those rights were conditioned on their continued employment at the company. In response, we argued, among other things, that LG’s interpretation of the stockholders’ agreement would render the entire agreement illusory, allowing LG to fire our clients at any time – indeed, even moments after the agreement had been signed – for the express, bad-faith purpose of eliminating their rights under the contract, including the director-designation right. In a brief summary decision, the Delaware Supreme Court rejected LG’s arguments and affirmed the trial court’s post-trial decision in its entirety.

The Davis Polk team included partners Brian M. Burnovski (who argued the appeal) and Andrew Ditchfield, counsel Nikolaus Williams and associates Marie Killmond, Deborah S. Mazer, Laixin Li, Cristina Lauren Lang, Melissa English, Zachary A. Zaremba and Emily Park. All members of the Davis Polk team are based in the New York office.