Delaware Business Litigation Report

Delaware Business Litigation Report

Chancellor Explains When Demand Is Required For Compensation Claim

Posted in Derivative Claims

Friedman v. Khosrowshahi, C.A. 9161-CB (July 16, 2014)

Recently derivative suits claim that there is no need to make a pre-suit demand on the board because that board violated the terms of an incentive compensation plan and is thus disqualified from considering a demand it file suit.  As this decision by the new Chancellor points out, the prior case law that excused demand turned on the alleged fact that the incentive plan was clearly violated by the board.  Here, in contrast, the plan might reasonably be interpreted to permit just what the board was accused of doing when it amended the plan to grant the extra incentive the complaint alleged was wrong.  Hence, the board was not disqualified out of fear the members would be held liable for doing what they did to intentionally violate their duties.

Morris James LLP Welcomes New Attorney Meghan A. Adams

Posted in News
Adams_4X6 (2)July 8, 2014

Morris James LLP is pleased to announce that Meghan A. Adams has joined the Firm’s Wilmington office as an associate in its Business Litigation Group. Her practice will focus on Corporate and Commercial Litigation.

Ms. Adams’ experience includes stockholder litigation, corporate governance, officer and director fiduciary obligations and the resolution of limited partnership and limited liability disputes. During law school, she served as a Judicial Extern to the Honorable Myron T. Steele, then Chief Justice of the Supreme Court of Delaware.

Managing Partner, David Williams, said of Meghan, “We are thrilled to bring such a capable lawyer to our Business Litigation group. Her experience in both the Delaware Court of Chancery and the Delaware Superior Court makes her a great addition to our firm.”

Ms. Adams graduated from Widener University School of Law in 2007, ranking in the top 10% of her class and receiving the Dean Santoro Scholarship and Outstanding Service Award. She served as the Articles Editor for The Delaware Journal of Corporate Law at Widener. Meghan received her B.S. in Business Administration from the University of North Carolina at Chapel Hill in 2003, which she attended on a golf scholarship while serving as captain of the women’s varsity golf team. She is admitted to practice law in Delaware and the United States District Court for the District of Delaware.

Stockholder Derivative Actions With Pending Federal Securities Actions

Posted in Articles

Authored By Albert Manwaring
This article was originally published in the Delaware Business Court Insider July 2, 2014

While not adhering to the first-to-file rule, Delaware courts have long recognized that a stay of an action in favor of another action may be appropriate in the interests of comity and judicial efficiency when there is identity of the parties and issues in the two actions. The Court of Chancery has frequently stayed derivative actions (in favor of federal securities fraud actions) where the derivative action simultaneously seeks to prosecute fiduciary-duty claims based on similar facts and claims for misrepresentations and insider trading, or seeks indemnification from the directors based on a company’s potential liability in the federal securities action.

In these circumstances, the court has recognized a company may be unfairly prejudiced if forced to adopt conflicting positions and litigation strategies where the company is simultaneously a defendant in the federal securities action and a nominal plaintiff in the stockholder derivative action. Indeed, a company faces an inherent litigation conflict if forced to simultaneously defend against allegations that the directors and the company lacked knowledge of purported wrongdoing in a federal securities action while at the same time, a stockholder asserts derivative claims, on behalf of the same company, against the directors, alleging that they had knowledge of the wrongdoing.

But, a stockholder derivative action that seeks distinct damages based on different claims and theories of liability, and does not seek indemnification contingent on liability in a federal securities action, does not implicate the same comity and judicial-efficiency considerations that might justify a stay in favor of a federal securities action. In its recent decision, In re Molycorp Shareholder Derivative Litigation, C.A. No. 7282-VCN (Del. Ch. May 12, 2014) (Noble, V.C.), the Court of Chancery granted the plaintiff stockholders’ motion to lift a stay of a stockholder derivative action, which had been previously stayed by the court based on an overlapping federal securities-fraud class action pending in the U.S. District Court for the District of Colorado. In Molycorp, the court found “good cause” to lift the stay because the plaintiff stockholders’ amended complaint no longer contained overlapping claims and theories of liability with the federal securities action.

Background

The Court of Chancery had stayed the plaintiff stockholders’ derivative action based on a pending federal securities-fraud class action. The initial plaintiffs’ derivative complaint asserted claims for breach of fiduciary duty against the directors and officers for permitting expedited stock offerings without allowing the company to participate in such equity financings, for material misstatements in the offerings, for indemnification for potential liability that the company may incur in the federal securities action, and a Brophy insider-trading claim. Similarly, the federal securities action asserted securities fraud and insider-trading claims. In granting the stay, the court had found that both the derivative stockholder and federal securities actions implicated a substantially similar scheme of securities fraud and insider trading, and that the derivative indemnification claims were dependent upon a finding of liability against the company in the federal securities action. The plaintiffs subsequently amended their complaint to eliminate their fiduciary-duty claims for material misstatements, indemnification and Brophy insider-trading claims, and on this basis, the plaintiffs subsequently moved to lift the stay of their stockholder derivative action.

Motion to Lift Stay

While there was still some factual overlap with the federal securities action, the plaintiff stockholders had eliminated their overlapping misrepresentation, insider trading and indemnifications claims from their amended complaint. The focus of the plaintiffs in their amended complaint was the alleged duty of loyalty violation of the directors for unfairly favoring the preferred stockholders over the company and the other stockholders by not permitting the company to participate in reasonably-priced equity financing that was critical for the company to modernize and expand its capacity at a Mountain Pass facility that was its primary asset and business focus. A number of recent Court of Chancery decisions have emphasized the board’s potential violation of its fiduciary duty of loyalty by unfairly discriminating in favor of the preferred stockholders, with whom the majority of the board members were aligned, at the expense of common stockholders. (See, for example, In re Trados Shareholder Litigation, 73 A.3d 17, 46-47 (Del. Ch. 2013), and Carsanaro v. Bloodhound Technologies, 65 A.3d 618, 638 (Del. Ch. 2013).) This important Delaware corporate-law claim was not raised in the federal securities action, and is not a claim governed by federal securities laws—laws that are rooted in regulating disclosures, reporting, and securities manipulation in public companies.

In sum, the court concluded that Delaware’s interest in deciding this important question of Delaware corporate law “promptly, uniformly, and authoritatively” militated in favor of the court’s lifting the stay. The court reasoned that liability under the plaintiff stockholders’ amended complaint was separate from, and not contingent upon, a finding of liability in the federal securities action, and that lifting the stay would therefore not offend the principles of comity or judicial efficiency.

Lessons Learned

The Court of Chancery will likely not stay a stockholder derivative action with closely related factual underpinnings to a pending federal securities action where neither the claims nor the theories of liability overlap. Thus, directors of publicly traded Delaware corporations may face the inherent risk of being defendants in two simultaneous lawsuits with the same factual underpinnings, where the claims and theories of liability do not overlap.

Court Of Chancery Upholds Right To Indemnifcation In Face Of Bylaw Amendment

Posted in Attorney Fees

Branin v. Stein Roe Investment Counsel LLC, C.A. No. 8481-VCN (June 30, 2014)

Can a company defeat a former officer’s claim for indemnification by simply amending its bylaws?  If the right to indemnification has already accrued, such as by the filng of a suit against that director, the short answer is “no.”

Court Of Chancery Dismisses Merger Case

Posted in Uncategorized

Dent v. Ramtron International Corporation, C.A. 7950-VCP (June 30, 2014)

There is a general sense that it is hard to have the Court of Chancery grant a motion to dismiss litigation attacking a proposed merger. While that may be true when the merger involves insiders, this decision demonstrates that an arms length transaction subject to typical deal protection provisions is not easily attacked absent some hard facts supporting the claim. Without those well-pleaded facts, the Court will dismiss the suit.

Court Of Chancery Explains Member Fiduciary Duty

Posted in LLC Agreements

Xcell Energy and Coal Company LLC v. Energy Investment Group LLC, C.A. No. 8652-VCN (June 30, 2014)

The question of whether the members of an LLC owe fiduciary duties to the other members  is dependent on the terms of the LLC agreement. When there is a manager designated by the LLC agreement, the members as members will not ordinarily have fiduciary duties.

Chancery Court Rejects Trading Restriction as Condition of Receipt

Posted in Case Summaries

Authored By Thomas Hanson
This article was originally published in the Delaware Business Court Insider July 2, 2014

Under 8 Del. C. Section 220, stockholders of Delaware companies are entitled to inspect certain books and records of the company upon stating a proper purpose. A long-recognized proper purpose for a books-and-records demand is an interest in valuing one’s stock. In The Ravenswood Investment L.P. v. Winmill & Co., C.A. No. 7048-VCN (Del. Ch. May 30, 2014), the Court of Chancery decided the “novel” issue of whether a company, in response to a books-and-records demand, may condition the provision of nonpublic financial information on a trading restriction. Finding that the trading restriction would “inappropriately frustrate a fundamental stockholder right” to value its stock, the court held that the company could not require an agreement on the part of the requesting stockholder not to trade its stock for a certain period of time after receipt of the requested information. Continue Reading

Thomas E. Hanson, Jr. Presented DuPont MCN Torchbearer Award

Posted in News
54The DuPont Minority Counsel Network awarded Morris James partner, Thomas E. Hanson, Jr., the 2014 Hinton J. Lucas, Jr. Torchbearer Award at its annual conference held in Atlanta from June 25-27, 2014. The award is named for DuPont’s retired Vice President and Assistant General Counsel, Hinton J Lucas, Jr., who is known for his many years of dedicated community service and leadership in the advancement of diversity in the legal profession. This prestigious award recognizes an attorney who exhibits unparalleled efforts to support and promote initiatives that create opportunities for diverse attorneys. Continue Reading