Partners Lewis Lazarus and Peter Ladig participated in a podcast on behalf of the Committee on Director and Officer Liability of the Business Law Section of the ABA discussing attorney-client privilege implications for directors and officers. Listen here.
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
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.
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.
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.
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
Delaware’s courts are going through a period of rapid change. While it is too early to decide whether those changes are for the better, some preliminary comments are possible. In general, the recent events are a cause for optimism that Delaware is maintaining its position as the best forum for corporate litigation. There is, however, one dark cloud on the horizon. Continue Reading
Morris James has announced that Albert J. Carroll has joined the Firm’s Business Litigation Group as an associate in its Wilmington office. His practice will focus on Corporate and Commercial Litigation. “Albert’s experience as a corporate litigator will be a great asset to Morris James. We look forward to his contributions to the growth of our business litigation team,” said Managing Partner David Williams.
Mr. Carroll’s experience includes representing stockholders, directors, officers, and companies in the Court of Chancery in matters involving breaches of fiduciary duty, breaches of contract, and summary proceedings under the Delaware General Corporation Law. Albert has also assisted in counseling special committees of boards of directors formed to investigate alleged wrongdoing. His commercial experience also includes representing companies in breach of contract matters in arbitrations governed by the AAA Commercial Arbitration Rules. Continue Reading
The Delaware courts apply a high standard of review in sale transactions where a plaintiff pleads a conflict of interest. Where a board sells to a third party and the plaintiff pleads no conflict of interest, however, the Delaware Supreme Court has noted that “an extreme set of facts” is “required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties.” Lyondell Chemical v. Ryan, 970 A.2d 235, 243 (Del. 2009). Only where a plaintiff pleads facts showing a conscious disregard of duties would a plaintiff be able to allege that the directors had acted in bad faith in approving a sale transaction. And if a plaintiff cannot plead facts showing disloyalty or bad faith, and assuming the board is protected by a Section 102(b)(7) provision, then a plaintiff will not be able to plead any non-exculpated conduct and hence the court will dismiss at the pleadings stage any claim for monetary damages. The recent case of Dent v. Ramtron International, C. A. No. 7950-VCP (Del. Ch. June 30, 2014), illustrates these principles and provides guidance as well into the court’s application of the materiality standard in assessing claims of breach of the duty of candor that might give rise to a quasi-appraisal remedy. Continue Reading
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.