Delaware Business Litigation Report

Delaware Business Litigation Report

Does the Business Judgment Rule Protect a Board’s Stock Award?

Posted in Articles
Manwaring (1)

Authored By Albert H. Manwaring, IV
This article was originally published in the Delaware Business Court Insider September 17, 2014

In In re 3Com Shareholders Litigation, C.A. No. 16721 (Del. Ch. October 25, 1999), the Delaware Court of Chancery emphasized that “when the shareholders knowingly set the parameters of the plan, approved it in advance, and directors implemented the plan according to its terms … precedent in [the Court of Chancery] clearly establishes that … director transactions made under a stock option plan approved by the corporation’s shareholders are entitled to the benefit of the business judgment rule.” Accordingly, when directors issue stock or cash awards in accordance with “definite” or “sufficiently defined” terms of an employee incentive or compensation plan approved by the shareholders, their decisions are subject to protection under the business judgment rule. Continue Reading

Chancery Court Confirms Fluctuating Interest Rate Is Appropriate

Posted in Articles

Authored By Thomas E. Hanson, Jr.
This article was originally published in the Delaware Business Court Insider September 10, 2014

In lengthy disputes where a judgment is entered as of a date several years in the past, prejudgment interest may constitute a more than trivial amount. In Levey v. Brownstone Asset Management, Consolidated C.A. No. 5714-VCL, the plaintiff, who prevailed at trial, sought to recover interest on the judgment amount at the constant rate of 10.25 percent from Jan. 26, 2006, forward. The defendants took the position that the interest rate should float, i.e., change whenever the Federal Reserve discount rate changed. The court agreed with the defendants and found that an award of a fluctuating rate of interest serves the dual purposes of compensating the judgment creditor for the loss of use of its capital during the pendency of the action and causes the disgorgement of the benefit the judgment debtor has enjoyed during the same period of time. Continue Reading

Will Chancery Court Remedy Your Problems in Another Tribunal?

Posted in Articles

Authored By Edward M. Mcnally
This article was originally published in the Delaware Business Court Insider September 3, 2014

Recently, in LG Electronics v. Interdigital Communications, Del. Ch. C.A. 9747-VCL (August 20, 2014), the Chancery Court declined to enjoin a litigant from violating a nondisclosure agreement in an arbitration proceeding. LG Electronics alleged that its opponent in that arbitration, Interdigital Communications, was using information that they had agreed to keep confidential and sought an injunction to prevent Interdigital from using those materials. The Chancery Court dismissed LG Electronics’ complaint, however. In doing so, the court invoked the McWane doctrine, which permits a Delaware court to dismiss an action when there is a prior-filed action involving similar issues between those parties in another jurisdiction that is able to afford “prompt and complete justice.”We are often asked to seek an injunction in the Delaware Court of Chancery to prevent a perceived abuse by our client’s opponent in another tribunal. Those requests are not always far-fetched. After all, the Chancery Court will sometimes enjoin a litigant from proceeding in another forum in violation of a forum selection clause. And there are other examples of such Chancery Court intervention in other proceedings, such as to prevent vexatious plaintiffs from abusing process by repeatedly filing duplicative, meritless litigation. But those judicial interventions are rare. Continue Reading

Court Of Chancery Declines To Intervene In Arbitration

Posted in Arbitration

LG Electronics, Inc. v InterDigital Communications Inc., C.A. 9747-VCL (August 20, 2014)

This is the first decision by the Court of Chancery that dismissed a case over which it has jurisdiction because an arbitration proceeding had been filed first.  As the court points out, this is unusual because the court usually dismisses cases in favor of arbitration when the court lacks jurisdiction to hear disputes subject to an arbitration provision.  Here, however, both the court and the arbitration panel had jurisdiction so that a dismissal on those grounds was not appropriate.  Instead, the Court applied the McWane doctrine whereby a case is dismissed when a first-filed proceeding elsewhere will do justice between the parties.

The decision is interesting because it also holds that the court will not interfere in how another proceeding is being conducted.  While that may not always be true, it is a useful reminder of the limits of what the Court of Chancery will get involved in most of the time.

Delaware Supreme Court Adopts Exception to Attorney-Client Privilege

Posted in Articles
Manwaring (1) (1)

Authored By Albert H. Manwaring, IV
This article was originally published in the Delaware Business Court Insider August 13, 2014

In Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), the U.S. Court of Appeals for the Fifth Circuit recognized a fiduciary exception to the attorney-client privilege “where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.” Thus, upon a showing of “good cause,” Garner allows stockholders to invade the corporation’s attorney-client privilege to prove fiduciary-duty breaches of directors, officers or those in control of the corporation. The Fifth Circuit listed the following factors relevant to show “good cause” under the Garner exception to the attorney-client privilege: “the number of shareholders and the percentage of stock they represent; the bona fides of the shareholders; the nature of the shareholders’ claim and whether it is obviously colorable; the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; whether the communication is of advice concerning the litigation itself; the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.” Continue Reading

Court Of Chancery Awards Fee Despite Confusion Over Causation

Posted in Attorney Fees

Sample v. Gumbiner C.A. No. 8873-VCN (July 31, 2014)

In settling a class or derivative suit, the plaintiff’s attorney will seek a fee if she has caused a corporate benefit, such additional disclosures in a merger.  But what happens when there is a dispute over why those added disclosures were made?  The Court, as here, is left with a causation dispute where the record is not clear.  This decision illustrates how a court will try to reason its way to a conclusion and, in effect, split the baby by lowering the fee when causation is not clear.

Court Of Chancery Holds Corporation Does Not Owe Fiduciary Duty

Posted in Case Summaries, Fiduciary Duty

Buttonwood Tree Value Partners L.P. v. R.L. Polk & Co. Inc., C.A. No. 9250-VCG (August 7, 2014)

A Delaware corporation does not itself owe a fiduciary duty to its stockholders and may not be charged with aiding and abetting a breach of that duty by its directors.  This holding has ample precedent and is important because it may avoid the expansion of the company’s disclosure obligations beyond the duty to avoid fraudulent disclosures.

Court Of Chancery Discusses Bylaw To Remove Officers

Posted in Corporate Charters

Salamone v. Gorman, C.A. No. 8770-VCN (July 31, 2014)

This is an unusual case involving a director deadlock created by a stockholder voting agreement, despite the presence of a majority stockholder.  Frustrated by his inability to get his way due to the director deadlock, the stockholder adopted a bylaw that purports to give stockholders the right to remove officers.  That may conflict with the provisions of the DGCL that vest control of management in the directors, absent a different order in the certificate of incorporation. While the Court expressed some doubt the bylaw was valid it did not need to decide the issue.

Chancery Court Reforms Management Agreements

Posted in Articles

Authored By Thomas E. Hanson, Jr.
This article was originally published in the Delaware Business Court Insider August 5, 2014

In Delaware, the Court of Chancery has the power to reform an agreement that “fails to express the [parties'] real agreement or transaction,” as in Miller v. National Land Partners LLC, C.A. No. 7977-VCG, at 34 (Del. Ch. June 11, 2014), citing Amstel Associates LLC v. Brinsfield-Cavall Associates, (Del. Ch. May 9, 2002). However, for a plaintiff to obtain reformation based on a mutual mistake, he or she must demonstrate by “clear and convincing evidence” that the written agreement failed to reflect accurately the oral agreement reached by the parties. Continue Reading