Delaware Business Litigation Report : Delaware Business Litigation Lawyer & Attorney : Morris James Law Firm : Delaware Business Litigation Report

Tinney v. Geneseo Communications, Inc., C.A. No. 03-1126-SLR (D. Del. Oct. 10, 2006).

In this securities action, the shareholder of a parent company, Airgate, brought a claim against the principal shareholders (the defendants) of a wholly owned subsidiary called iPCS for "short-swing trading" under Section 16(b) of the Exchange Act. Airgate purchased iPCS in a stock deal, in which the defendants received .1594 shares of Airgate common stock per iPCS share. Within six months of the transaction, though, the defendants sold nearly 4 million of their newly issued shares. Plaintiff argued that these sales constituted "short-swing trades" and sought damages in the amount of any profits realized. Defendants, in turn, brought a motion for judgment on the pleadings.

The Court ended up denying defendants' motion on the ground that a number of material issues of fact remained in the case. Nonetheless, in route to this holding based on the facts, the Court did resolve an interesting legal question involving federal securities law and Third Circuit precedent.

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Smith v. McGee, C.A. No. 2101-S (Del. Ch. October 16, 2006).

In this decision, the Court of Chancery discusses the application of Delaware's three year statute of limitations to claims for breach of fiduciary duty. The Court applied the statute to bar claims that arose three years before the suit was filed and declined to apply the potential saving rules such as when a claim is hidden from the plaintiff.

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Bakerman v. Frank Importing Co. Inc., C.A. No. 1844-N (Del. Ch. October 16, 2006).

When directors own shares in both the parent and its subsidiary, the question arises whether they are disinterested in considering a demand under Rule 23.1 in a case challenging a transaction between the two entities. This decision holds that the Court will test their interest in the transaction by focusing on their interest in the dominant party and will not also take into account their interest in the entity on the other side of the transaction. This makes sense because otherwise the Court would need to do a complex balancing to see if the interest in the subsidiary was as important as the interest in the parent. That involves tax and other issues that are difficult to determine. Note, however, that after discovery, those interests may be balanced in deciding on the merits if the directors should be given the benefit of the Business Judgment Rule.

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On October 5, 2006, the Delaware State Bar Association sponsored a symposium entitled "Good Faith After Disney: The Role of Good Faith in Organizational Relations in Delaware Business Entities." The speakers included Chief Justice Steele and Justice Jacobs of the Delaware Supreme Court, and Chancellor Chandler and Vice Chancellor Strine of the Delaware Court of Chancery.

The participants discussed whether a separate fiduciary duty of good faith exists under Delaware law. This debate stemmed from footnote 112 of the Delaware Supreme Court's opinion affirming Disney in which the Court explained it would "not reach or otherwise address the issue of whether the fiduciary duty to act in good faith is a duty that, like the duties of care and loyalty, can serve as an independent basis for imposing liability upon corporate officers and directors."

The speakers explained that the Court of Chancery could not ignore the Delaware Supreme Court's opinion in Caremark, in which a separate duty of good faith was addressed. Attempting to reconcile the Caremark decision, the Court of Chancery explained in footnote 463 of Disney that "[i]n the end, so long as the role of good faith is understood, it makes no difference whether the words 'fiduciary duty of' are placed in front of 'good faith,' because acts not in good faith (regardless of whether they might fall under the loyalty or care aspects of good faith) are in any event non-exculpable because they are disloyal to the corporation."

The lesson? There is no clear majority as to whether there is a separate fiduciary duty of good faith under which directors may be held liable. It is, however, more likely that good faith is merely an extension of the fiduciary duty of loyalty. Because of this uncertainty, it is probably a mistake to seek liability soley based on an independent fiduciary duty of good faith. For now, stick with the basic fiduciary duties of care and loyalty and allege good faith as part of the duty of loyalty.

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Berger v. Intelident Solutions Inc., C.A. No. 1527-N (Del. Ch. October 12, 2006).

Under Delaware law, when a stockholder files suit over a merger she may be limited to appraisal rights when her concern is only over the price to be paid. It is often difficult to decide when a complaint is limited to the price and does not also deal with unfair dealing claims that are appropriate for class litigation. Here, the Court held that a complaint that alleged only 5 days notice of a merger and the right to seek appraisal did properly allege unfair dealing and could proceed as a class claim.

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Polygon Global Opportunities Master Fund v. West Corporation, C.A. No. 2313-N (Del. Ch. October 12, 2006).

Stockholders may seek inspection of corporate records to investigate potential wrongdoing. However, as this case holds, when they have purchased their stock after the wrongdoing is alleged to have occurred, they lack standing to pursue a claim for breach of duty and the court will therefore deny their request to inspect records on that claim.

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ATS, Inc. v. Bachmann, C.A. No. 2374-N (Del. Ch. October 11, 2006).

Delaware corporations frequently ask the Court of Chancery to decide if a proposed course of action is appropriate, particularly when the board of directors' fiduciary duties are implicated. In this decision the Court focused primarily on when the Court may provide that guidance and when the matter is not ripe for judicial action. The Court has rejected becoming involved in hypothetical issues not framed by a real world transaction, but more of a "what if" set of questions. Here, the Court accepted one question for its review and rejected others, thereby illustrating how it will deal with those situations.

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Energy Partners Ltd. v. Stone Energy Corporation, C.A. No. 2402-N (Del. Ch. October 11, 2006).

The Court of Chancery may be called upon to decide the scope of a board of director's duties in appropriate cases. Here, the Court interpreted a common merger agreement provision that limited the board's options in considering third party bids while the merger was pending. The Court held the provision permitted contact with the new bidder.

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Shamrock Holdings v. Arenson, C.A. 06-62-SLR, 2006 WL 2802913 (D. Del. Sept. 29, 2006).

This case involved a dispute between the Class A and Class B members of a Delaware LLC called ALH Holdings. The dispute arose after ALH faced financial trouble and the Class A members voted to sell the company over the objections of the Class B members, who eventually threatened to sue.

To preempt such a suit, the Class A members brought an action for a declaratory judgment that, among others, they did not breach their fiduciary duties or the LLC's operating agreement. In response, the Class B members counterclaimed, alleging breaches of the same. Plaintiffs subsequently moved for summary judgment as to four of the counts in their complaint, and they moved to dismiss the defendants' counterclaim. The Court denied the motion to dismiss and denied the motion for judgment on the pleadings in part (and granted it in part).

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Seinfeld v. Verizon Communications Inc., C.A. No. 624 (Del. Supr. September 25, 2006).

The Delaware Supreme Court has affirmed that the "credible basis" test applies to determine if a stockholder is entitled to inspect corporate records to investigate alleged wrongdoing. The stockholder argued that Delaware should permit his records inspection even if he lacked enough facts to convince the trial court that he had a credible basis to believe that the corporation was paying three top officers inappropriate compensation. He asserted that to require any real proof of his claims before inspection was an insurmountable burden. Both the Court of Chancery and now the Supreme Court rejected his argument and noted that there is considerable precedent granting inspection rights to show that this remedy is available in the right circumstances.

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Fuller v. Gemini Ventures, LLC, C.A. No. 05C-06-019-RFS (Del. Super. Ct. Oct. 2, 2006).

Plaintiff moved for summary judgment on its breach of contract claim, notwithstanding another agreement (the "Release") subsequently executed between the parties that purported to release each of them from any claims related to the contract and cancel the terms of the contract.

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