Court of Chancery Comes Down Hard on Trading by Plaintiffs in Representative Litigation

Authored by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider | January 25, 2012

Defendants in class and derivative litigation often view the plaintiffs in those cases, especially the repeat players whose names are familiar to devoted readers of Court of Chancery opinions, as minor investors with little directly at stake in the litigation. Sometimes, however, the plaintiffs have significant equity stakes in the companies whose transactions they seek to enjoin. In those cases, the plaintiffs may be sharp investors who value the investment more than the principle at stake. What happens, then, to these investors when they see the chances at success in litigation passing them by? In any other circumstance, they might be inclined to trade out of their position or arbitrage the risk appropriately. When, however, these investors have chosen to be the plaintiff in a case seeking to halt the challenged transaction, the ability to act like an ordinary investor is severely restricted.

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Court Of Chancery Awards Damages In Corporate Opportunity Decision

Dweck v. Nasser, C.A. 1353-VCL (January 18, 2012)

This is a classic example of just about everything that you should not to do in running a closely-held company.  Everybody involved seems to have ignored his or her fiduciary duties.  Hence, it is a useful precedent because the breaches cover all sorts of misconduct, any one of which might be found in your case.

Another important point about this decision is its recognition that breaches of duty may be waived if not objected to, particularly when some benefit is received by the party who later objects to what was done.

Court Of Chancery Enjoins Loan Restructuring

Trilogy Portfolio Company Inc. v. Brookfield Real Estate Financial Partners LLC,  C.A. 7161-VCP (January 13, 2012)

This decision is an example of the growing Court of Chancery litigation over enforcement of loan agreements.  The court reviewed the recent deicisions over when to issue an injunction or instead leave the parties to a damages remedy.  Here the decision is affected by the procedural stance of the litigation because the burden the plaintiff must bear is somewhat less at the TRO stage and the decision fully explains how that affected its conclusion to issue an injunction.

Jason C. Jowers and James H. McMackin III Become Partners

Morris James LLP is pleased to announce that Jason C. Jowers and James H. McMackin, III became partners, effective January 1, 2012.  David H. Williams, the firm’s Managing Partner, made the announcement and stated “the elections will expand and strengthen several of the firm’s practice groups.”

Jason C. Jowers joined Morris James LLP in 2003 and is a member of the firm’s Corporate and Fiduciary Litigation Group.  He primarily focuses on corporate, alternative entity, and commercial litigation in the Delaware Court of Chancery and the Delaware Superior Court.  Mr. Jowers has litigated matters involving a variety of substantive issues, including:  LLC governance; fiduciary duties of officers and directors of corporations; inspection of books and records of corporations and LLCs; complex contracts; director and officer liability insurance coverage; trade secret misappropriation; and covenants not to compete.  In addition to his corporate and fiduciary litigation practice, he regularly handles pro bono cases before the U.S. District Court for the District of Delaware as a member of the Federal Civil Panel.  Mr. Jowers also serves as Chair of the Delaware High School Mock Trial Competition, and is a member of the Board of the Delaware Law Related Education Center.  He is admitted in Delaware, Pennsylvania, Tennessee, the U.S. District Court of Delaware and the U.S. Court of Appeals, Third Circuit.  Mr. Jowers received his B.A., cum laude, With Honors, in 2000 from Rhodes College and his J.D., in 2003, from The George Washington University Law School.  While in law school, he was the Regional Champion and National Quarterfinalist in the Association of Trial Lawyers of America's Student Trial Advocacy Competition in 2003.

James H. McMackin, III joined Morris James LLP in 2004.  In his employment, education and governmental relations law practice, he appears before the Delaware courts, arbitrators and administrative bodies. Mr. McMackin frequently counsels and represents clients on matters involving non-compete agreements, suits alleging discrimination and retaliation, and contractual obligations.  He serves as counsel in negotiating and drafting contracts and complying with Delaware education laws.  Mr. McMackin is a former chair of the Labor and Employment Section of the Delaware State Bar Association and a frequent panelist and presenter on employment and education law topics.  Mr. McMackin received his B.A. in 1996 from Muhlenberg College and his J.D., cum laude, in 2002 from Widener University School of Law.  He was an Intern for The Honorable Jane R. Roth, U.S. Court of Appeals, Third Circuit.  Mr. McMackin was a Honey F. Colby Memorial Scholarship recipient and a member of the Moot Court Honor Society, Phi Delta Phi Society and the Phi Kappa Phi Society.  Mr. McMackin is admitted in Delaware, the U.S. District Court, District of Delaware and the U.S. Court of Appeals, Third Circuit. 

Morris James Welcomes Bryan Townsend as an Associate in its Corporate and Fiduciary Litigation Group

Mr. Townsend focuses his practice on litigation involving complex corporate, commercial and fiduciary matters. He clerked for Chancellor William B. Chandler III in the Delaware Court of Chancery from 2009-2010 after graduating from Yale Law School in 2009, where he served as Co-Editor-In-Chief for the Yale Journal on Regulation. Mr. Townsend earned an M.Phil. in Chinese Studies from the University of Cambridge in 2006 after attending Peking University (Beijing Daxue) in 2005, where he studied Chinese language, economics, and politics. He received three degrees from the University of Delaware: an Honors B.A. with Distinction in Philosophy and Biology in 2004, and an M.A. and Honors B.S. in Economics in 2003.

Mr. Townsend is a volunteer attorney for the Delaware Office of the Child Advocate, Delaware Volunteer Legal Services, and Widener Law School’s Veterans Law Clinic. He is a director on the board of the University of Delaware Alumni Association and served from 2004-2005 on the University’s Board of Trustees. Mr. Townsend is an ardent supporter of Special Olympics Delaware and is a volunteer Big Brother with Big Brothers Big Sisters of Delaware. For his commitment to leadership in the public service, Mr. Townsend was selected as a 2003 Harry S. Truman Scholar, one of seventy-six individuals nationwide to receive the honor. He is a member of the bars of Delaware (2010) and the United States District Court, District of Delaware (2011).

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Delaware Federal District Court Adopts ESI Discovery Guidelines

This article was originally published in the Delaware Business Court Insider   l   January 11, 2012
 
Litigation now costs too much. Pretrial discovery of electronically stored information (known as ESI) is a major cause of this litigation cost escalation. E-mail alone has greatly increased the recording of what used to be private conversations that largely escaped discovery or human memory and facilitated communication that in the past would not have been sent if only because it was too much trouble to write a letter. This trend has only accelerated with the rise of social media. Is all this ESI worth the cost to uncover?

The U.S. District Court for the District of Delaware has now taken a bold step to address the cost of civil litigation due to ESI discovery. The court recently adopted its "Default Standard for Discovery, Including Discovery of Electronically Stored Information." These new standards expand the court's previous ESI standards, first adopted in 2004 and later amended in 2007. As was the case with the 2007 standards, the parties are still free "to reach [their own, different] agreements cooperatively on how to conduct discovery." While the parties to litigation have frequently done just that and crafted their own ESI discovery procedures, the 2007 standards successfully prodded parties to reach agreements and provided useful guidelines to do so. These new standards will have a similar, laudatory effect.
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Court Of Chancery Limits Implied Duties

Gerber v. Enterprise Products Holdings LLC, C.A. 5989- VCN (January 6, 2012)

This is an important decision because it reaffirms the ability in an LLC agreement to severely limit the right to sue.  Here the LLC agreement first said that if the committee appointed to review conflict of interest decisions did so,  then there was no right to sue for breach of fiduciary duty by the controllers. The Plaintiff tried to argue that the implied duty to act in good faith and fairly still meant the controllers could not have acted in good faith by submitting the conflicted transaction to the committee.  However, the LLC agreement also said that if the controllers acted after receiving expert advice the transaction was fair, then they were conclusively presumed to have acted in good faith. The Court agreed that cut off the claim based on implied duties.

Third-Party Beneficiaries Lack Standing to Seek Reformation of Contracts

Authored by Katherine J. Neikirk
This article was originally published in the Delaware Business Court Insider | January 4, 2012

Reformation is an equitable remedy whereby the Court of Chancery will modify a written agreement to reflect the "true" intent of the parties. To obtain reformation, a party must establish by clear and convincing evidence that the written contract does not reflect the actual intent of the parties as a result of fraud, mutual mistake or unilateral mistake plus fraud by the other party. Reformation is not a means for courts to rewrite parties' agreements. Rather, it is a way for courts to modify an agreement so that it conforms with the parties' prior, actual intent.

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Court Of Chancery Explains Right To Advancement For Pre-Merger Conduct

Danenberg v. Fitracks Inc., C.A. 6454-VCL (January 3, 2012)

Delaware officers and directors are usually entitled to have their litigation expenses advanced when they are sued for their conduct in those corporate capacities.  Exactly what conduct is alleged to be wrongful is key to determining if that right to advancement applies.  For example, if after a merger a director ceases to be a director, then he is not entitled to advancement for litigation over that conduct.  This decision illustrates how the Court will decide what conduct is involved in the underlying litigation so as to decide if advancement is required.

Supreme Court Explains Contract Analysis

GMG Capital Investments LLC v. Athenian Venture Partners I, LP, No. 514, 2010 (January 3, 2012)

This decision is a clear explanation of how to determine if a contract is ambiguous on a point.  If it is, then evidence of the parties' intentions is necessary to decide what the contract provides.

Court of Chancery Circulates Draft Practice Guidelines

 Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | December 28, 2011

The Delaware Court of Chancery has long followed unwritten practices that knowledgeable attorneys follow. Recently, the court began circulating a draft "Guidelines to Help Practitioners Litigating in the Court of Chancery."

A product of consultation between the court and its rules committee, the guidelines are still a work in progress. They should not be cited to the court and do not set a standard of conduct or practice that the court requires be followed.

Yet a wise attorney will follow these established practices, if only to avoid unnecessary conflict with the court or appearing to be ignorant of its traditions. This is a brief summary of the 18 pages of guidelines.

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Court Of Chancery Extends Stockholder Meeting Date

Sherwood v. Chan,  C.A. No. 7106-VCP (December 20, 2011)

There is nothing more sacred in Delaware corporate law than the right of the stockholders to elect directors.  This decision illustrates that point and what the Court of Chancery will do when it feels that right has been improperly infringed, including extending the meeting date.

Delaware Supreme Court Addresses Scope of Relief in Section 220 Actions

Authored by Katherine J. Neikirk
This article was originally published in the Delaware Business Court Insider | December 14, 2011

Espinoza v. Hewlett-Packard Co. reflects the Delaware Supreme Court's latest guidance on the scope of relief available to a stockholder under 8 Del C. § 220. This decision arose from the departure of defendant Hewlett-Packard's former CEO and chairman, Mark Hurd.

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Court Of Chancery Provides More Guidance On Fee Awards

In re Compellent Technologies Inc. Shareholder Litigation, C.A. 6084-VCL (December 9, 2011)

How do you set the fee to be awarded when there is no monetary recovery in a representative action?  For example, if the litigation creates a benefit to shareholders by reducing deal protection measures to permit a possible topping merger bid, but no topping bid appears, what should be the fee?   Using studies that attempt to calculate the benefits of such litigation, this decision sets out a methodology to guide applicants.

Court Of Chancery Clarifies Pleading Rules For Bad Faith Claims

Clean Harbors Inc. v. Safety-Kleen Inc.,  C.A. 6117-VCP (December 9, 2011)

This decision clarifies the detail that must be pled to assert a claim that the defendant acted in "bad faith."  The short answer is that any set of facts that warrants such an inference is enough to state such a claim.