Court Of Chancery Explains Shared Causation In Fee Award

Smith, Katzenstein & Jenkins LLP v. Fidelity Management & Research Company, C.A. 8066-VCL (April 16, 2014)

This decision explains how to calculate an attorney fee when there are 2 potential causes for a favorable settlement of a class action. The fee is divided based on the Court's views as to what is fair. A class member who hires its own attorney who is a cause of much of the recovery is not for that reason alone able to avoid a fee award to class counsel.

Court Of Chancery Again Explains Revlon-Bad Faith Analysis

Houseman v Sagerman, C.A. 8897-VCG (April 16, 2014)

This decision expands on the holdings of recent Court of Chancery decisions, one of which held directors not liable for breaches of their duty of care in a Revlon case and another that held an investment advisor liable for aiding and abetting the directors' breaches of duty.  Thus, the Court explained that a typical exculpatory charter provision eliminates breaches of duty claims absent a "knowingly and completely failed" observance of a board's duty to get the best price for the sale of the company.  Only such a complete failure is enough to state a breach of the duty of loyalty.   Second, this decision limits the impact of the Rural Metro decision that held an investment advisor liable on an aiding and abetting claim.  Rather, the degree of culpability must be much greater for such a claim to survive.

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Are Noncompete Agreements Only a Click Away?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | April 16, 2014 

Delaware continues to expand its enforcement of agreements not to compete with one's former employer. The latest step in this path to enforcement is the recognition that a noncompete and nonsolicitation agreement may be entered into by a mere click of the "accept" button on a computer screen. The Delaware Court of Chancery just upheld such agreements in Newell Rubbermaid v. Storm, Del. Ch. C.A. 9398-VCN (March 27, 2014). The decision has serious implications for employees who may wish to quit their present jobs to pursue careers at an employer's competitor.

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Guidance on Use of Deposition Testimony in Motions to Dismiss

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider April 9, 2014

The record upon which a court evaluates a motion to dismiss is often outcome-determinative. If based upon the well-pleaded allegations of a plaintiff's complaint, the court cannot determine that it is reasonably conceivable that the plaintiff may obtain a recovery, the court must dismiss the complaint. As a general matter, the plaintiff controls the record by virtue of how and what the plaintiff pleads. The Delaware Supreme Court has held, however, that the record fairly before the court on a motion to dismiss may include documents "integral to and incorporated into the complaint." The recent Court of Chancery decision in In re Gardner Denver Shareholders Litigation, Cons. C. A. No. 8505-VCN (Feb. 21, 2014), provides useful guidance concerning how the Court of Chancery will treat deposition transcripts where, as is happening more frequently, a plaintiff pursues but abandons a preliminary injunction after deposing several witnesses, and then amends the complaint by selectively quoting from the deposition record.

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Court Of Chancery Explains Standard of Review

Chen v. Howard-Anderson, C.A. 5878-VCL (March 8, 2014)

This is a critical decision to understanding the standard of review that the Court of Chancery will apply to a board's actions in selling its company. The decision makes 3 important points.  First, the Court explains how and when the enhanced scrutiny standard of review applies and what that standard's "reasonableness" test means.  The decision's explanation that the "rational basis" test of the business judgment rule standard differs from the "reasonableness" test of enhanced scrutiny is particularly helpful.  Second, the decision explains when conduct that is wrong under a reasonable basis test is not so bad as to avoid exculpation under the director exculpation statute.  This clarifies how far the prior law went in limiting exculpation when the conduct at issue showed an "utter failure" to follow one's duties.   Third, the decision points out that if the board is aware that disclosure materials are inaccurate, then it may not be exculpated because the failure to correct the errors goes beyond a simple duty of care violation.

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Court Of Chancery Upholds Clickwrap Non-Compete Agreement

Newell Rubbermaid Inc. v. Storm, C.A. 9398-VCN (March 27, 2014)

This decision holds that a clickwrap agreement is sufficient to bind an employee to a non-compete agreement.  This is an important innovation as it will permit employers to implement non-compete agreements quickly and without much fuss.

Court Of Chancery Issues Novel Injunction

Numoda Corporation v. Numoda Technologies Inc., C.A. 9163-VCN (March 27, 2014)

It is common in a Section 225 action seeking the determination of the composition of a company's board of directors for the court to issue a status quo order.  Those orders stop the company from taking any actions out-of-the-ordinary course of business until the Court decides who is really in control.  Here the Court issued a similar order pending a decision on whether the plaintiff was entitled to have stock issued to it to take control.  This extends the use of status quo orders to a new realm.

A Strong Message to Bankers Playing Both Sides of Sales Processes

Authored by Albert H. Manwaring, IV
This article was originally published in the Delaware Business Court Insider | March 26, 2014

Investment bankers seeking to profit as both adviser to the seller and financier to the buyer in corporate sales processes have faced increased scrutiny by the Delaware Court of Chancery over the last few years. In a highly publicized 2011 decision that changed the landscape for investment bankers, Vice Chancellor J. Travis Laster criticized investment banker Barclays PLC for acting both as adviser to the seller and financier to the buyer in the sale process of Del Monte Foods Co. Laster found that Barclays "secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buy-side financing fees." Laster explained that Barclays faced conflicts of interest in the sale process, which were not disclosed to the board of Del Monte Foods, in its role as financial adviser to the board, while at the same time profiting by providing staple financing to the buyer, private equity firm KKR & Co.

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Delaware Expands Remedies for Former Employee Misconduct

 Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | March 19, 2014 

What can you do when you discover that a former employee is hurting your business by working for a competitor? If the employee never signed a noncompetition or nonsolicitation agreement, it may seem there is little you can do. However, the Delaware Court of Chancery's recent opinion in Wayman Fire Protection v. Premium Fire & Security LLC, C.A. No. 7866-VCP (Del. Ch. March 5, 2014), provides new remedies if that former employee has breached the duties the court explains in this decision.

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District Court Explains Pleading Rules For Securities Litigation

In re Wilmington Trust Securities Litigation, Master Civ. No. 10-990-SLR (March 20, 2014)

What must be pled to state a claim under the federal securities acts is often a difficult question.  For example, what facts sufficiently allege scienter to state a claim under the heightened rules governing such complaints? This decision explains the applicable pleading rules very clearly.

District Court Clarifies Who Is A Manager

Wakley Limited v. Ensotran LLC, C.A. 12-728-GMS (March 18, 2014)

Under the Delaware LLC Act, a manager or a person who acts like a manager is subject to jurisdiction in Delaware in a breach of duty case arising out of her management.  Because the LLC agreement usually sets out who is a "manager," that is usually not disputed.  However, it is often less clear who had exercised management duties sufficient to be subject to jurisdiction in Delaware. This decision helps decide that question. It points out that just being named an officer is not enough to submit to jurisdiction and that the nature of the defendant's' duties compared to what it is alleged she did improperly may also be determinative.  In other words, if you "managed" X project but are sued for what you did on the Y project, there is no jurisdiction over you..

Delaware Supreme Court Upholds The M&F W Case

Kahn v M&F Worldwide Corp., C.A. 334, 2013 (March 14, 2014)

The Delaware Supreme Court has upheld the important Court of Chancery decision in the M&F Worldwide case that applied the business judgment standard of review to a merger that has the following conditions: (1) the controlling stockholder conditions the merger on the approval of both a special committee and a majority of the minority stockholders, (2) the special committee is independent, (3) the special committee is empowered to freely select its own advisers and to say no indefinitely, (4) the special committee acts with care, (5) the minority vote is informed, and (6) there is no coercion on the minority.   Almost as importantly, the Court upheld the grant of summary judgment to the defendants.  As a result, the structure approved here will now be the gold standard for mergers involving a controlling stockholder.

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District Court Dismissed Derivative Suits Under Delaware Law

New Jersey Building laborers Pension Fund v. Ball, D. Del. No. 11-1153-LPS-SRF (March 13, 2014) and Freedman v Mulva,  D.Del., No. 11-686-LPS-SRF (March12, 2014)

In these 2 decisions, the U.S. Magistrate shows a sound understanding of Delaware corporate law. She recommends the dismissal of these 2 derivative suits under Rule 23.1 because the complaints do not show the directors were disqualified from considering a demand they sue.  The directors' interest in a compensation plan that was only currently applicable to employees did not make them interested under Delaware law.

Is Delaware Closing the Door to Foreign Tort Claimants?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | March 5, 2014 

The Delaware Supreme Court's Feb. 20 decision in an asbestos case brought by an Argentine widow against DuPont Co. is a hot topic in Delaware. Martinez v. E.I. du Pont de Nemours & Co., (Del. Supr. C.A. 669, 2012), upheld the dismissal of the asbestos case despite a vigorous dissent by Justice Carolyn Berger.

Dissenting opinions in Delaware Supreme Court decisions are very rare and that alone generates discussion. In Martinez, the majority opinion takes the time to respond to the dissent, recognizing that Berger makes some good points. Nonetheless, with new Chief Justice Leo E. Strine Jr. as part of the majority (in his capacity as chancellor designated as a justice for this one case), some wonder if this opinion signals an internal rift within the Supreme Court.

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Court Of Chancery Again Explains How To Do Sale Of A Company

Frank v. Elgamal, C.A. 6120-VCN (March 10, 2014)

Whether a stockholder or many stockholders acting as a group are in control of the process to sell a company has profound effects on the judicial review of what is done.  As this decision points out, "control" may be exercised over just part of the process as well.  Hence, this decision is a good explanation of when there is such control.