Court Of Chancery Rejects SLC Report

Posted on March 11, 2010 by Edward M. McNally

London v Tyrrell, C.A. 3321-CC (March 11, 2010)

When should the recommendations of a SLC to not pursue a derivative suit be accepted? As this opinion points out, certainly not when the defendants appoint their relative to the SCL and those that are indebted to them. Nor will the SCL be respected when its members approach their investigation with views fixed before their investigation was performed and when their non-Delaware counsel does not understand Delaware law.

This decision summarizes the Zapata principles for examining the report of a SLC, including a good summary of prior case law.  Apart from the basic rules it sets down on burden of proof, independence and the scope of any SLC investigation [all of which alone are worth reading], the decision's analysis of the internal logic of the SLC report is critical. Put simply, the Court wants the report to make sense under an objective review and when it does not, trouble will follow.

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Court Of Chancery Explains Rights Of Preferred Stock

Posted on March 8, 2010 by Edward M. McNally

LC Capital Master Fund, Ltd. v. James,  C.A. 5214-VCS (March 8, 2010)

 Lately, there seems to be a lot of interest in the rights of preferred stock compared to the rights of common stock and how the board of directors should act when caught in the middle of their conflicting claims. This decision summarizes the past decisions and explains what to do.

Here are some "rules" to go by:

1. When the certificate of incorporation speaks to the preferred stock's rights on an issue, that controls and the board does not need to consider granting greater rights to the preferred. The charter ends the discussion.

2. When the certificate of incorporation is silent on an issue and leaves the prefererd in the same position as the common [such as on the right to get the highest price for the company in a merger] then the board needs to consider the preferred and common as having the same rights and owed the same fiduciary duty.

3. When the issue somehow falls in a gap between the preferreds rights under the certificate of incorporation and the rights of the common stock, get a good lawyer. Seriously, the board needs to do its best to strike a  fair balance under the circumstances.

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Court Of Chancery Upholds Nullification Claim

Posted on March 5, 2010 by Edward M. McNally

Thor Merritt Square LLC v. Bayview Malls LLC, C.A. 4480-VCP (March 5, 2010)

On occasion, the members of an LLC try to end its life by filing a certificate of cancellation with the Delaware Secretary of State. This is done in the hope that it will provide a defense to suits over the LLC's obligations. Well, that does not work. As this decision explains, a creditor may then file a claim to nullify the certificate of cancellation and to seek a receiver.

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Court Of Chancery Applies Brophy To Insider Trading

Posted on March 3, 2010 by Edward M. McNally

Pfeiffer v. Toll, C.A. 4140-VCL (March 3, 2010)

The by now ancient Brophy decision upheld a claim against insiders for trading on confidential corporate information. This decision affirms that Brophy is still good law in Delaware.  That is no real surprise, given the Court's strict enforcement of the duty of loyalty. The Court's discussion of possible damages that might be recovered also is very expansive.

On a different level, the opinion is revealing on how the Court goes about the task of deciding what is the law of Delaware. It is apparent that the Court is willing to conside a wide range of sources in a detailed  analysis. This raises the bar for brief writers as well.

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Court Of Chancery Upholds NOL Pill

Posted on February 26, 2010 by Edward M. McNally

Selectica Inc. v. Versata Enterprises, Inc., C.A. 4241-VCN ( February 26, 2010)

In a case with an unusual factual setting, the Court of Chancery has upheld a poison pill with a 5% trigger. The very low trigger is explained by the need to protect a NOL that might be adversely affected by the acquisition of 5% of a company's stock.

In its discussion of the Unocal standard of review that applies to defensive measures, the Court applied a very differential approach to the board's decisions. Arguably, that is not the higher standard of review that had been suggested by Moran as applicable to the adoption of a poison pill.

This decision illustrates the Court's limited role in reviewing board's decisions that are not affected by any conflict of interest on the part of directors. Briefly, unless there is a duty of loyalty issue involved, directors just will not be second guessed in Delaware. 

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Court Of Chancery Discusses Scope Of Arbitration

Posted on February 25, 2010 by Edward M. McNally

RBC Capital Markets Corp. v. Thomas Weisel Partners LLC, C.A. 4709-VCN (February 25, 2010)

Many decisions discuss when arbitration is required by an agreement.  This one deals with the rarer problem of what claims may be presented to arbitrators in a matter that the parties concede must be arbitrated.  The Court will usually leave that decision to the arbitrators in the first instance, but will at least consider if a claim is so far outside  the scope of the arbitration clause that its presentation should be barred.

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Court Of Chancery Interprets Exculpation Clause In LLC Agreement

Posted on February 24, 2010 by Edward M. McNally

Kelly v. Blum, C.A. 4516-VCP (February 24, 2010)

It is well known that an LLC agreement may limit the right to sue for breaches of fiduciary duty. What is less well thought out is what language needs to be used to do so. This decision tells you what to say if you want to limit liability.

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Court Of Chancery Explains How To Apply For Fees

Posted on February 24, 2010 by Edward M. McNally

Global Link Logistics Inc. v. Olympus Growth Fund III, L.P., C.A. 4444-VCP ( February 24, 2010)

This decision explains what should be in a fee application to the Court of Chancery. Redacted bills, explainations of what the time was for and why it was spent are all required in a contested matter.

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Court Of Chancery Explains Damage Calculations In Trade Secret Litigation

Posted on February 18, 2010 by Edward M. McNally

Agilent Technologies Inc. v. Kirkland, C.A. 3512-VCS ( February 18, 2010)

Calculating damages in trade secret litigation is often difficult.  Lost profits may overlap with unjust enrichment claims and the whole process may be affected by possible injuntive relief. This decision explains how a court will decide the right remedy and calculate damages.  It is also a particularly good example of the Court of Chancery's thoughtful approach to remedies.

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Court Of Chancery Denies Power To Eliminate Board Seats

Posted on February 9, 2010 by Edward M. McNally

Kurz v. Holbrook, C.A. 5019-VCL  (February 9, 2010)

This significant decision holds that you cannot eliminate a director by amending the bylaws to reduce the number of seats on the board of directors.  Of course, this only came up in the odd context of a stockholder who could not vote for directors and hence could not vote to eliminate them as well. Nonetheless, it is interesting as a limit on the power to amend bylaws

Perhaps more importantly, the decision explains the complicated and often misunderstood ways in which proxies are obtained to vote the shares of public companies. Those shares are mostly held in the name of Cede & Co., a depository for brokers and banks.  Getting the proxy from Cede, and then to the brokers and then to the actual beneficial owners has proved cumbersome in fast proxy battles. This decision helps that process by letting the records of Cede act as a list of owners.

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