Delaware Court Dismisses Hedge Fund Steel Partners Japan Strategic Holdings’ Counterclaims Against Former Consultant Who Started a Competing Japanese Hedge Fund

In 2001, two Japanese investment bankers, Kenzo Kuroda, the plaintiff, and Yusuke Nishi, formed a relationship with the individual defendants, Thomas J. Niedermeyer, Jr. and Warren G. Lichtenstein.  The defendants had created a complex web of corporate entities with the intent to target Japanese publicly traded companies through an aggressive hedge fund investment strategy.  Kuroda and Nishi joined as non-managing members of one entity, defendant Steel Partners Japan Strategic Holdings, LLC (SPJS), the general partner for hedge funds: SPJS Fund, L.P., (Feeder Fund) and SPJS Fund (Offshore), L.P. (Master Fund).  They also co-owned SPJ-KK, a Japanese firm they formed to provide consulting services to SPJ Asset Management (SPJAM), the investment manager for the Funds.  In 2006, Kuroda left SPJS and formed a competing investment fund.  Kuroda demanded full payment for amounts due him as a member of SPJS, and the defendants refused.  Kuroda sued for those sums, and brought claims based on defendants’ purported disparagement of him and of his new business.  On April 15, 2009, the Delaware Chancery Court dismissed all of his claims against the defendants, except for one sounding in breach of contract.  Kuroda v. SPJS Holdings, L.L.C., et al., 971 A.2d 872 (Del.Ch. 2009).  Two weeks later, the defendants brought counterclaims under the SPJS LLC agreement of misappropriation of trade secrets, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing and breach of contract.  They did not assert counterclaims based on violations of the consulting agreement between SPJ-KK and SPJAM because that contract mandated arbitration in Japan.  On March 16, 2010, the Chancery Court granted the plaintiff’s motion to dismiss the counterclaims.  We summarize the series of events leading up to the instant action and the Chancery Court’s legal analysis.

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