Delaware Business Litigation Report

Sutherland v. Sutherland, C.A. 2399-VCL (Del. Ch. May 5, 2008)

Once again, the Court of Chancery has shot down a motion to dismiss a derivative suit based on the work of a one person SLC. This time while finding the SLC was independent, the Court felt its work was not adequate because of a lack of effort in reviewing accounting records.

The opinion is a useful collection of SLC law, particularly what not to do if you are going to use a SLC.

Madison Real Estate Immobilien-Anlagegesellschaft Beschrankt Haftende KG v. KanAm USA XIX LP, C.A. 2863-VCP (Del. Ch. May 1, 2008)

This case sets out the law governing the right to inspect a limited partnership's records, particularly in the context of a possible tender offer. Delaware law draws a distinction between seeking inspection to determine the value of one's interest in the partnership and seeking inspection for purposes of making a tender offer. In the later case, inspection may be denied as not being for a purpose truly related to acting as a partner, but instead as an acquiror. While one might argue this distinction is too fine a line to draw, that is the law for now.

The opinion is also noteworthy for dealing with how to interpret a partnership agreement's contractual right to inspect. As the opinion points out, the right to inspect "books of account" is not as broad as the right to inspect "books and records."

Young v. Klaassan, C.A. 2770-VCL (Del. Ch. April 25, 2008)

For the seventh year in a row, Delaware received the highest score in a nationwide survey of state liability systems undertaken by the U.S. Chamber Institute for Legal Reform.  Delaware ranked at the top of eight of the twelve categories ranked, including judicial competence, judicial impartiality, timeliness of summary judgment or dismissal, treatment of class action suits, and overall treatment of tort and contract litigation.  The survey did record a slight decline from last year in Delaware's rankings of jury predictability and jury fairness.  The report can be viewed at www.instituteforlegalreform.com.

Yesterday eBay Domestic Holdings Inc. brought an action in the Court of Chancery, C.A. 3705-CC, against Craigslist and certain of its directors, challenging recent transactions implemented by the Craigslist board.  According to this statement on its website, eBay acquired a minority ownership interest in Craigslist (28.4%) back in 2004.  It now alleges that Craigslist's directors have taken unilateral action in violation of their fiduciary duties and have disadvantaged eBay and its investment. 

The complaint was filed under seal.  The matter has been retained by Chancellor Chandler.   

The WSJ Law Blog has coverage here.  And, The NY Times reports here.   

Transched Sys. Ltd. v. Versyss Transit Solutions, LLC, 2008 WL 948307 (Del. Super. Apr. 2, 2008)

This case illustrates Delaware’s objective theory of contract interpretation and underscores the importance of certain standard contractual provisions. 

The plaintiff purchased software from the defendants and argued that it incurred significant losses due to material misrepresentations, including, for example, the extent of completion of the software.  The defendants argued that the material misrepresentation claim was barred by the plain language of the contract, namely the exclusive remedy clause, integration clause, and disclaimer of extra-contractual representations. 

The contract stated that indemnification was the exclusive remedy “in respect of any breach of or default under this Agreement . . . .”  The integration clause stated that the written agreement was the entire agreement.  And, the reps and warranties clause stated that the seller was making no representation or warranty in respect of any of its assets.  The court held that the thrust of these three provisions was unambiguous: “no representations made outside of the four corners of the Agreement are to be given consideration by the parties in interpreting the terms.”  That is, the provisions precluded the plaintiff’s argument that it justifiably relied on the extra-contractual claims made by the defendants.

Accordingly, the Superior Court dismissed the plaintiff’s negligent misrepresentation claim.   

Levitt Corp. v. Office Depot, Inc., C.A. No. 3622-VCN (Del. Ch. April 14, 2008)

This is a case of bylaws gone bad. While the obvious intent of the company's advance notice bylaw was to obtain notice of what directors a dissident slate might want to nominate, the language of the bylaws was fatally deficient. Thus, this decision gives a good drafting lesson .

The bylaw required advanced notice of an intent to bring a matter before the annual meeting. However, the bylaw made an exception for any matter the company itself had noticed for the meeting. When the company, as always, noticed the meeting would include the election of directors, the court held that included the nomination of directors as part of the matters to be considered. Thus, the court held that the intent to nominate a dissident slate need not be noticed again by the dissidents in accordance with the advance notice bylaw provisions.

The way to avoid this mistake is to make it clear in the bylaws that the intent to nominate a slate different than that proposed by the company is subject to a reasonable advance notice provision in the bylaws. In short, state the rules of the game clearly.

Helaba Invest Kapitalanlagegesellschaft v. Fialkow, C.A. No. 2683-VCL (Del. Ch. April 11, 2008)

Attorneys who cause a benefit for stockholders are entitled to be awarded. However, the benefit must be caused by the litigation they filed and not just happen to follow the institution of litigation. This gets tricky to determine sometimes as the plaintiff's attorneys insert themselves into the process of negotiating a higher merger price and then claim credit for it. Who gets that credit is the question.

That issue will be decided based on a record that includes the views of the participants in the merger discussions. Hence, that needs to be kept in mind and the record made at the time the events occur. 

 In re The Bear Stearns Companies, Inc., Shareholder Litig., C.A. No. 3643-VCP (Del. Ch. Apr. 9, 2008).

In an opinion issued yesterday by Vice Chancellor Parsons (HT: M&A Law Prof and Pileggi), which you can access here, the Court of Chancery ordered a stay of the Delaware actions filed against Bear Stearns in favor of those filed in New York.  The Court’s reasoning recognizes the national importance of the matter and a concern for the stability of the financial markets and national economy.

This blog previously reported here on the class actions filed in Delaware against Bear Stearns and its directors, seeking to enjoin the sale to JPMorgan Chase.  A few days earlier, however, other Bear Stearns stockholders had filed similar suits in the New York Supreme Court.  Based on those earlier New York filings, the defendants moved the Court of Chancery to dismiss or stay the Delaware action.  This blog provided coverage of the oral argument here, remarking that the arguments raised several interesting questions, such as (1) the extent to which Delaware courts would defer to New York courts on matters of Delaware corporate law and (2) how Delaware courts would handle the issue of comity urged by the defendants. 

Those questions have now been answered.  The Court of Chancery decided to exercise its discretion to stay the Delaware proceedings for reasons of comity and the orderly and efficient administration of justice:

As discussed in this memorandum opinion, I have decided in the exercise of my discretion and for reasons of comity and the orderly and efficient administration of justice, not to entertain a second preliminary injunction motion on an expedited basis and thereby risk creating uncertainty in a delicate matter of great national importance.

Corporate Property Associates 14 Inc. v. CHR Holding Corp., C.A. No. 3231-VCS (Del. C. April 10, 2008)

In this case of first impression, the Court of Chancery held that a corporation had a duty to a warrant holder to truthfully answer its inquiries about corporate plans. This is significant because normally there is no fiduciary duty running to warrant holders and no duty to keep them informed. Here, however, finding that when asked about a matter that implicated the warrant holders' financial interest, there was a duty to answer a question truthfully.

Miller v. McDonald, C.A. 07-51350 (Bankr. Del. April 9, 2008)

In a case of apparent fist impression, a bankruptcy court in Delaware has held that Caremark duties apply to corporate officers as well as directors. Thus, corporate officers also have the duty to exercise reasonable care in oversight of corporate operations in their area of responsibility. This is hardly a surprise. However, given that the officer involved in this case was considered the company's general counsel, this decision has some far-reaching implications.

Today is the second and final day of the Tulane Corporate Law Institute conference.

The New York Times DealBook is reporting live, with a look at the private equity market here and coverage of comments by Martin Lipton, Joseph Perella, and Chief Justice Steele here. 

The WSJ Deal Journal is providing live coverage: an interview with Sullivan & Cromwell partner Jim Morphy here; comments by Lipton and Perella here, where Lipton traces a line from Drexel Burnham Lambert to the financial world of today; and the Clear Channel discussion here, featuring Vice Chancellor Strine.

The DealScape is reporting here.

The annual Tulane Corporate Law Institute takes place today and tomorrow in New Orleans.  The conference brings together the country's most prominent corporate law practitioners, judges, and bankers to discuss the important developments in the world of M&A and corporate law.  The panelists this year include Delaware's own Chief Justice Steele, Vice Chancellor Strine, Vice Chancellor Lamb, and Vice Chancellor Parsons, as well as a number of Delaware lawyers.  Among the discussions taking place today: how recent legal and market developments are affecting public M&A deals, including a discussion of MAC clauses, breach provisions, and specific performance remedies--topics that are now taking center stage with cases like United Rentals, which this blog previously discussed here. 

The full program is available here.

The New York Times DealBook is reporting live here, with CNBC video here, the MAC discusssion here, market outlook here, perils of activist shareholders here, and the Deal Professor's insights and coverage of informal discussions here. 

The WSJ is providing live coverage here, discussing MAC's here, the credit crunch here, and the Delaware developments panel here. 

Pileggi is reporting here and here. 

TravelCenters of America LLC v. Brog, C.A. 3516-CC (Del. Ch. March 31, 2008)

This decision confirms that for limited liability companies the rule applies from corporate law that a suit for inspection of books and records is a limited case that may not also include other claims such as breach of fiduciary duty.

In Re IAC/Interactivecorp, C.A. 3486-VCL (Del. Ch. March 28, 2008)

In this widely reported decision, the Court of Chancery applied well established principles of contract construction to determine when a proxy would be upheld. Once again, the Court rejected an attempt to modify the contract language to imply a duty of good faith and fair dealing, or a fiduciary duty that would override the rights given in the contract.

Reinhard  & Kreinberg v. The Dow Chemical Co., C.A. 3003-CC (Del. Ch. March 28, 2008)

Corporate bylaws sometimes provide advancement rights in litigation filed by a director, but that is rare. However, when a director is sued, the question remains if he has advancement rights in that circumstance, and whether he may get those rights to cover a counterclaim in the absence of a bylaw right to do so when bringing litigation. This decision holds that if the counterclaim is compulsory under the rules of procedure, advancement is possible.

Schoon v. Troy, C.A. 2362-VCL (Del. Ch. March 28, 2008)

Directors who rely on advancement rights under a corporate bylaw need to be aware that those rights may be lost if the bylaw is amended. Delaware law, as this decision notes, permits elimination of advancement rights in a bylaw at least up to the moment those rights "vest" by the filling of a suit that entitled the director to advancement.

This decision is also interesting for its discussion of the Levy case that held when a director has his fees paid for by a third party, he may lose his right to seek advancement from the corporation. This decision limits Levy to cases where the third party is obligated to pay the fees.

In The Matter Of The Philadelphia Stock Exchange Inc., Del. Sup., C.A. 613/615, 2007 (Del. March 27, 2008)

This comprehensive decision explains Delaware law on the settlement of a class action when the proceeds of a settlement will involve buyers, sellers, and holders of stock in a Delaware corporation. This allocation problem is a difficult one and the Supreme Court held that allocation issues may be resolved in a separate hearing after the settlement with the defendants is approved.

The opinion is also important in explaining the scope of a release that the court will approve in connection with a settlement. There is often a tension between the interests of the defendants who ask for the broadest release possible and the interests of other litigants who want the release limited. Here, for example, objectors to the settlement had a federal case pending that arose out of the same core facts involved in this settlement. The Delaware Supreme Court permitted the release to include a claim arising out of those core facts even if it might affect the federal litigation.

See latest developments on 03/31/08 above: Last Thursday, a class action complaint was filed against Bear Stearns and its directors in the Court of Chancery.  The complaint alleges that the company has failed to maximize shareholder value by agreeing to be purchased by JPMorgan Chase for $2 per share.  The complaint further alleges that, by agreeing to the deal, the company has favored numerous constituencies over the shareholders.  You can access the complaint here.    

Update: The New York Times reports here that JPMorgan Chase raised its offer to $10 per share.  Professor Ribstein has commented here, along with Pileggi here. 

Further Update: An additional class action was filed against Bear Stearns on Monday by the Wayne County Employees' Retirement System (access the complaint here).  And, yesterday a TRO was filed on behalf of the plaintiffs in both actions, seeking to enjoin the sale, which is set to close on April 8 (access the TRO here).  Both actions, and the accompanying TRO, have been assigned to Vice Chancellor Parsons. 

Certain Underwriters at Lloyds Severally Subscribing Policy Number DP359504 v. Tyson, 2008 WL 660485 (Del. Super. March 7, 2008)

This case is an insurance coverage dispute between Tyson Foods, Inc., and certain of its underwriters over damages caused by Hurricane Katrina.  The underwriters filed two declaratory judgment actions in Delaware seeking denial of coverage.  Two weeks later Tyson filed an action in Mississippi.  Tyson then moved to dismiss or stay the Delaware action.

The Superior Court found that the underwriters’ Delaware action was first filed.  The court then applied the Cryo-Maid factors to determine if the Delaware action should nonetheless be dismissed or stayed on forum non conveniens grounds.  The court considered (1) whether Delaware law governs the case; (2) the relative ease of access to proof; (3) the availability of compulsory process for witnesses; (4) the possibility of a view of the premises; (5) the pendency or nonpendency of a similar action or actions in another jurisdiction; and (6) all other practical considerations that would affect the trial.   

State of Florida, et al. v. Abbott Laboratories et al., Del. District Court 1:08-CV-00155 (filed March 18, 2008).

A group of eighteen states and the District of Columbia filed a complaint in Delaware District Court against Abbot Laboratories, Fournier Industrie et Sante and Laboratoires Fournier S.A. under the Sherman Act, alleging an unlawful monopolization of the fenofibrate market.  Defendants allegedly feared that competition from generic manufacturers would reduce profits from their TriCor product, a drug which regulates triglyceride and cholesterol levels.  The complaint can be viewed here.

In re infoUSA, Inc. Shareholders Litigation, Consol. C.A. No. 1956-CC (March 17, 2008).

A special litigation committee was formed by the board of infoUSA, Inc. at the end of December, after a motion to dismiss derivative litigation had been denied and after a finding had been made by the Court of Chancery that demand was excused.   The SLC moved to stay the ongoing derivative litigation in January, seeking a period of 150 days in which it could investigate the substance of the claims in the action.  The plaintiffs opposed such a stay, asserting that the SLC was formed "too late" and should not be allowed to derail the ongoing litigation.

The Court of Chancery rejected this position:  "The fact that I have already determined that demand is excused demonstrates why the board must act by means of a special committee; it does not in any way explain why it cannot act through an SLC."  Consequently, the requested stay was granted.  The Court also rejected as premature any challenge to the independence of the SLC, finding it serves the purposes of judicial economy to do so after the SLC issues its report.  The letter opinion can be viewed here.

JANA Master Fund, Inc.v. CNET Networks, Inc., C.A. 3447-CC (Del. Ch. March 13, 2008) 

This is a useful decision on the proper interpretation of a bylaw that governs stockholder proxy proposals in light of SEC Rule 14a-8.  The Court held that the bylaw only applied to stockholder requests to have a proposal included in the company's proxy materials under rule 14a-8.  In that way the Court again emphasized that Delaware interprets bylaws so as to increase the ability of stockholders to vote.

Weiss v. Swanson, C.A. No. 2828-VCL (Del Ch. March 7, 2008)

In the latest of the Chancery decisions on complaints challenging the grant of options, the Court has explained what it takes to state a derivative complaint that excuses demand on the Board. Briefly, the Court here focused on what was disclosed to the stockholders when they were asked to approve option plans or elect directors who had received option grants. First, full disclosure is required, particularly of practices that are likely to lead to increasing the value of the options, such as the bullet-dodging alleged in this case.

Second, the fact that a majority of the board received the options also made them interested enough to excuse demand.

In re SS&C Technologies, Inc. Shareholders Litigation, C.A. No. 1525-VCL (March 6, 2008)

For a long time it has been evident that some plaintiffs show up frequently as class representatives. The recent scandal involving perhaps the major securities class action law firm has only reminded everyone of the odd "coincidence" that one person could have so many class actions to bring. Now the Court of Chancery has done something about it and a warning has been issued as a result. This decision awarded attorney fees to the defendants in a man-bites-dog twist to the ending of a class action.

Of course, the facts in this case are highly unusual. When the named plaintiff tried unsuccessfully to have the court approve a settlement basically for attorney fees alone, he then tried to just dismiss the case, conditioned upon defendants' agreement to keep certain information confidential. Instead, the defendants fought back and discovered the named class representative had a string of investment entities that in turn owned very small stakes in many publicly owned corporations. No rational financial purpose justified these investments, except as a way to pursue law suits. When the plaintiff conditioned settlement on secrecy, the court held that was bad faith and awarded attorney fees to the defendants for resisting such a dismissal.

It is now likely that we will see much more aggressive pursuit of oppositions to class certifications. Discovery of the named plaintiff and his connections to the class counsel will be the new trend. As this decision illustrates, the ability to do data searches to find all the actions filed by a plaintiff and any law firm will also aid in that effort.

Wilmington Trust Co. v. Tropicana Entertainment LLC, C.A. 3502-VCN (Del. Ch. February 29, 2008)

The Court of Chancery rarely interprets bond indentures; so in the spirit of the date of this decision, the Court did so here. What is particularly interesting about this case is the way the Court reasoned to the result. While focusing on the specific language of the indenture, the Court did not hesitate to apply that language to circumstances that probably were not considered by the drafters. In this very un-Justice Scalia way, the Court held the indenture was violated.

The lesson here is that the Court is very realistic about what language should mean in the business world. It will not be swayed by hyper-technical interpretations that are not what the drafters would have said had they focused on the circumstances at hand. This does not mean that the Court will stretch language beyond what it really means, however. Instead, a sort of middle ground of interpretation is the mark of Delaware law in this regard.

Postorivo v. AG Paintball Holdings Inc., C.A. No. 2991-VCP (Del. Ch. February 29, 2008)

It has long been recognized that a stockholder may lose her standing to bring derivative litigation by losing her shares in a merger.  There is a recognized exception to this rule for mergers designed just to eliminate derivative litigation.

Here, the plaintiff  sold the assets of his company in return for cash and stock in the buyer. The stock was held in escrow and when a dispute arose, the buyer revoked the stock as compensation for its claims against the seller. When the seller brought a derivative suit, the court dismissed it as he no longer owned stock in the buyer. Thus, the court refused to make another exception to the rule that a derivative plaintiff must continue to be a stockholder through out the litigation.

Yesterday, February 27, 2008, two new complaints were filed against Yahoo! in the Court of Chancery. The first is a class and derivative action, Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Yahoo!, C.A. 3578, which you can access here. The second, Mercier v. Yahoo!, C.A. 3579, an additional class action to those previously filed, can be found here. 

The plaintiff in the second action, Vernon A. Mercier, was also the lead plaintiff in Mercier v. Inter-Tel (Delaware), Inc., 929 A.2d 786 (Del. Ch. 2007), which you can access here. In a decision in that action last August, Vice Chancellor Strine denied the plaintiff’s application for a preliminary injunction and found that directors fearing that stockholders are about to make an unwise decision that poses the threat that all stockholders will irrevocably lose a unique opportunity to receive a premium for their shares have a compelling justification for a short postponement in the merger voting process to allow more time for deliberation.  The decision is worth reviewing for its interesting discussion of the interplay between the Blasius and Unocal doctrines.    

Schoon v. Smith, C.A. No. 554, 2006 (Del. Feb. 12, 2008).

In an important ruling, the Delaware Supreme Court upheld bedrock principles of Delaware corporate law and governance and rejected plaintiff’s argument that directors of Delaware corporations should have standing to bring derivative suits on behalf of companies upon whose boards they sit.

In Schoon, Plaintiff Richard Schoon was a director of Troy Corporation. He was elected to the Troy board by the Series B stockholder, Steel, which had the right to appoint one member to a five member board. Schoon himself owned no Troy shares but rather acted at the behest of Steel. Schoon brought derivative claims purportedly on behalf of Troy alleging breaches of fiduciary duty by his fellow board members.  Steel had also sought books and records pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”).

The defendants moved to dismiss the case, arguing that Schoon lacked standing to assert such derivative claims. The Court of Chancery agreed and dismissed the action. The Court of Chancery relied upon well established precedent, albeit precedent that had never been tested at the Supreme Court level. Schoon appealed.

Millett v. Truelink, Inc., 2008 WL 345937 (D.Del. Feb. 7, 2008)

In this opinion the District Court granted the provider of a credit report monitoring service summary judgment on claims that it violated state consumer protection provisions and contractual obligations. Plaintiffs, who were spouses, had purchased a subscription to Defendant’s service, and alleged that Defendant failed to alert them to activity that resulted from theft of the husband’s social security number. Plaintiffs alleged that Defendant had violated Kansas’ Consumer Protection Act (“KCPA”) as well as breached the Credit Monitoring Member Agreement (“Member Agreement”) that Plaintiffs entered into when purchasing the service. Plaintiffs moved for class certification and summary judgment on their KCPA claims, and Defendant moved for summary judgment on the KCPA and several breach of contract claims. The Court found that neither the activity nor the advertising and marketing activities of Defendant were in violation of the KCPA provisions on unconscionable acts and practices, and Defendant was not in breach of the Member Agreement. 

Drexel v. Harleysville Ins. Co., 2008 WL 356938 (D.Del. Feb. 11, 2008)

Here the District Court evaluated a claim from an insured that a denial of coverage based on policy expiration constituted a breach of contract. The insured owned a property that sustained fire damage, and submitted a claim to Defendant, his insurer. The policy required annual renewal, but the insured did not submit the payment required for renewal until after both the policy expiration date and the subsequent grace period. However, the insured submitted his claim during the grace period, such that Defendant began to process the request and retain an adjuster and contractor. Defendant subsequently determined that the policy had expired prior to the insured’s claimed damages, and the insured had not submitted payment during the grace period. Defendant therefore denied coverage, and the insured sued on a theory of breach of contract, estoppel, and waiver. Defendant moved for summary judgment on all claims, while the insured moved for summary judgment on the breach claim. 

Gantler v. Stephens, C .A. No. 2392-VCP (February 14, 2008).

This decision illustrates the confusion that exists over the scope of review of a board's decision to not pursue a merger and largely eliminates the uncertainty. Briefly, the board here decided not to pursue a merger opportunity and the potential acquirer then withdrew its offer. The court held that the business judgment rule applied to the decision not to take the offer. In doing so, the court declined to apply the heightened scrutiny used under the Unocal decision as the board did not take any defensive steps to stop the suitor from going forward on its own.

Instead, the court held that to invoke a higher level of review, the plaintiff must show the board acted in bad faith or was not properly advised. Mere allegations that the board made the wrong decision are insufficient.

Sutherland v. Sutherland, C.A. No. 2399-VCL (February 14, 2008).

This is another decision that explains what must be done to have the report of a special litigation committee ("SLC") respected by the court. To begin with, the use of a single board member for the SLC "pressed the theory of Zapata to the extreme". Thus, one-member SLCs are generally not a good idea.

In addition, the report of an SLC needs to include sufficient detail to support its conclusions. It is better practice to include documentation of the report's conclusions, such as the documents it relied on, the interviews it conducted and the advice it received. This is controversial for a good reason. If the court refuses to dismiss the derivative litigation despite the SLC recommendation, then the report may serve as a roadmap for the plaintiff going forward.  Thus, the decision on whether to use a SLC should be considered carefully. There are still excellent reasons for using a SLC, but it must be done correctly.

G & G LLC v. White, 2008 WL 205150 (D. Del. Jan. 25, 2008)

In this opinion declining to dismiss for lack of personal jurisdiction, the District Court found that it had personal jurisdiction over both the directors/officers of a Delaware corporation and over a foreign corporation that invested in a Delaware corporation. Plaintiff was a Virginia limited liability company that loaned $2.5 million to a Utah corporation. Plaintiff was granted a security interest in the Utah corporation’s assets, and perfected that interest by filing the required financing statements in Utah. However, the Utah corporation subsequently was merged with and into a Delaware corporation. Plaintiff asserted that this was done at the insistence of various defendants that were seeking to invest in the Utah corporation after Plaintiff informed them that it would not agree to subordinate its security interest to theirs. Plaintiff posited that the investor defendants thereafter controlled the Utah corporation and the Delaware corporation it was merged into, and fraudulently concealed the merger to prevent Plaintiff from perfecting its security interest upon the merger, while at the same time perfecting their own in Delaware. Plaintiff pointed to numerous instances where the Utah corporation, the Delaware corporation, their counsel, the directors/officers of the Delaware corporation (who were appointed by the investor defendants), and the investor defendants failed to notify Plaintiff of the merger and/or made misrepresentations regarding the continuing status of the corporation as a Utah corporation. Taking the allegations as true, the Court found that the actions of the investor defendants and the directors they appointed was sufficient to confer specific jurisdiction over them. 

Pfeffer v. Redstone, C.A. No. 2317-VCL (February 1, 2008).

At first this seems like a common disclosure case. It is more than that, however. The court here shows that it expects claims to be based on more than mere conjecture to survive a motion to dismiss. The Complaint alleged that the key corporate officers knew of a bad cash flow analysis but failed to disclose it in connection with an exchange offer. When the plaintiff''s counsel could not even say he had seen the alleged report or explain how it was disclosed to the defendant directors, the complaint was dismissed.

To support allegations of knowledge of a red flag, the allegation must be based on common sense or specific facts. It is common sense to infer the directors saw a report if it was common knowledge in the corporation and is a type of report that one would expect the board to have seen. It is not common sense to believe that an obscure memo generated by a lower level employee was shown to the board of a publicly traded corporation.

Mizel v. Xenonics, Inc., 2008 WL 116203 (Del. Super. Jan. 11, 2008).

This decision addresses the question of whether an expert can testify as to materiality under the securities laws. The moving party argued that materiality was an ultimate issue in this breach of contract action and thus could not be the subject of expert testimony, citing Hill v. Equitable Banks, 1987 WL 8953 (D. Del. 1987), a case in which the ultimate issue was whether certain alleged misrepresentations and omissions were material. 

The court, however, distinguished this case from Hill, finding that materiality was not the core question before the jury. The critical issue was whether the plaintiff, a warrant holder, was prevented from exercising his purchase rights—a fact the company denied completely.   

Sassano v. CIBC World Markets Corp., C.A. No. 3066-VCL ( January 17, 2008).

It is not widely recognized that Delaware law permits a corporation to grant advancement of attorney fees to employees who are not directors and may even be fairly minor employees. Here, the bylaws provided advancement of fees for an officer with "management supervisory functions". The court carefully went over whether the plaintiff had those duties and found that he did and thus, should be advanced his fees for the defense of an SEC investigation.

Pharmathene Inc. v. SIGA Technologies. Inc., C.A. No. 2627-VCP (January 16, 2008).

Whether an agreement to agree may be enforced seems like an odd question. After all, if the parties really had an agreement then why not just say so and not use a term sheet or other vague type of "agreement to agree" to express their intent. This decision illustrates just why that may occur because the parties apparently were uncertain if they really wanted to bind themselves to one another just yet. Nonetheless, they did list all the essential terms of what they wanted in their contract in a term sheet and when they seemed to have acted to carry out their deal, the court here indicated it will enforce an agreement to agree when to let one party walk away seems inequitable.

Fogel v U.S. Energy Systems, Inc., C.A. No. 3271-CC (January 15, 2008).

This is another in a line of decisions holding that the Court of Chancery may order the holding of a stockholders' meeting even if the company is in a bankruptcy proceeding. The automatic stay does not apply.

Portnoy v. Cryo-Cell International Inc., C.A. No. 3142-VCS (January 15, 2008).

This is the definitive decision on when arrangements to secure a stockholder's vote are invalid. "Vote buying" has long been criticized without much thought. After all, the Delaware General Corporation Code specifically authorizes arrangements to lock up a stockholder's vote. However, paying for that vote seems somehow wrong, perhaps because of political reasons. Here, the court carefully sets out the policy considerations and decides when paying for a vote is invalid.

In general, when a stockholder's agreement to cast his vote for managment pursuant to a contract with the corporation is publicly announced, then it will be valid. If the other stockholders do not like it, then they can vote the other way. The exceptions to this are when corporate assets are used to buy the vote and then it becomes more troublesome. The arrangement will be struck down when it is not in furtherance of a proper corporate purpose and is unreasonable.

This decision also comments on how to conduct a stockholder meeting. Postponing votes by lying about why there is a delay is frowned upon, to say the least.

Delta Eta Corp. v. University of Delaware, 2007 WL 4578278 (Del. Super. Ct., Dec. 27, 2007).

This decision addresses a party’s ability to amend its answer, under Rule 15(a), when the 20-day period to amend as a matter of right has expired. The litigation arose when the University of Delaware terminated a lease it entered into with a fraternity to maintain a chapter house and then took title to the property, triggering a requirement under the agreement that it pay the fraternity the fair market value of the remainder of its leasehold interest.

In its answer, UD admitted that it owed the amount determined by a neutral appraiser to be the value of the interest. But when the fraternity moved for summary judgment, UD moved to amend its answer to deny that the amount was accurate. UD argued that it learned of severe mold damage to the chapter house that should have been taken into account in the valuation.

In re: Asbestos Litig., 2007 WL 4571196 (Del. Super. Ct. Dec. 21, 2007).

In this negligence action, a wife alleged that she was exposed to asbestos while laundering her husband’s work clothes. The employer moved for summary judgment, claiming it owed no duty to an employee’s spouse who had never set foot on company property and had only been injured as a result of take-home exposure.  This argument presented an issue of first impression in Delaware. 

In addressing the core question of when a duty of care arises, the court conducted a review of the doctrinal approaches advanced throughout the history of tort law, from Cardozo’s foreseeability analysis to Learned Hand’s B<PL formula. The court observed that none of these approaches had been adopted in Delaware to the exclusion of the others. Instead, it was up to the court to consider the relationship of the parties in each particular case in light of its peculiar facts.

MAA Real Estate LLC v. Patel, C.A. No. 06C-02-249 (Del. Super. Ct. Dec. 7, 2007).

In this breach of contract action, there was no written agreement, only an unsigned pricing sheet prepared by the contractor making the repairs. The court had to determine whether the parties nonetheless mutually assented to any of the terms on the sheet or otherwise entered into an oral contract.

The court held that there was no mutual assent to the items on the pricing sheet, as it did not state the specific materials required to complete the renovation. The customer could only show that the contractor represented that he would install non-skid tile flooring. That created an oral contract. By failing to install non-skid tile, the contractor breached the agreement.

The measure of damages was the cost of replacement and repair for the proper flooring.

In re James River Group Inc. Shareholders Litigation, C.A. No. 3173-VCL ( January 8, 2008).

Here, the court awarded $400,000 in fees in connection with the settlement of a class action when the relief obtained was a supplement to the proxy statement.

While the company claimed it was always going to send the supplemental materials, the court noted that was contrary to the recital in the settlement agreement. Seems like it is not good to go back on your word in Chancery Court.

Ryan v. Gifford, C.A. No. 2213-CC (January 2, 2008).

This is an interesting decision because it points out how to do almost everything wrong in using a special committee to investigate accusations of misconduct. The result is that any privilege from disclosure that the work of the special committee may have enjoyed was completely lost and all of its extensive efforts were ordered to be turned over to the plaintiffs in the underlying litigation.

The decision also points out the limits on what its holding may have been in other contexts where the special committee's work was properly used and its privileges maintained.

United Rentals Inc v. RAM Holdings Inc. C.A. No. 3360-CC (December 12 and 21, 2007). 

In these two decisions the Court of Chancery sets out how it will interpret a contract. Following the objective theory of contract interpretation, the court searches for the "common understanding" of the parties. It will not hear evidence of a party's subjective mental impressions or unilateral understandings.

However, the court will apply the "Forthright Negotiator Principle" when a contract is ambiguous. Under that approach, a reasonable interpretation of contract language of one of the parties will be binding on the other party to the contract if he knew or should have known of the other party's understanding and did not object to it when the contract was signed. Silence then may be fatal.

The Territory Of The Virgin Islands v. Goldman, Sachs & Co., C.A. No. 2505-VCS (December 20, 2007).

This decision upholds the law that Section 278 of the Delaware General Corporation Law ("DGCL") acts as a statute of repose to bar the filing of all litigation against a Delaware corporation after 3 years from the date of its dissolution.

As the court also notes, that means that a suit against stockholders under Section 325 of the DGCL for having received an improper liquidating distribution are also precluded under those circumstances.

Brown v. T-Ink, LLC ,C.A. No. 3190-VCP (December 18, 2007).

Delaware courts have recently issued several decisions dealing with the scope of an agreement to arbitrate. This is yet another. The opinion is interesting for its explaination of the Delaware approach to determining whether it is for the arbitrator or the court to decide if an issue is subject to arbitration. Generally, that issue will be decided by the court unless there is a clear indication in the agreement that the arbitrator is to decide such questions. As this decision points out, references to the AAA rules and language including "all controversies" arising out of the parties' relationship indicate that an arbitrator should decide such issues.

Rembrandt Technologies, LP v. Harris Corp., 2007 WL 4237752 (Del. Super. Nov. 30, 2007). 

This decision demonstrates the willingness of Delaware courts to uphold the plaintiff’s choice of forum (between the Superior Court and the Court of Chancery), despite an argument by the defendant that transferring courts would allow the hearing of all claims and thus promote judicial economy. 

Fogel v. U.S. Energy Systems, Inc., C.A. No. 3271-CC (December 13, 2007).

Directors often think that if they get together that is a real board of directors'  meeting. Not so. As this decision holds, a board meeting is a formal event that must be preceded by the appropriate notice, be conducted by voting on the issues and otherwise be properly called and conducted. Gatherings of even all the directors that do not meet these tests are void.

Moreover, the consequence of holding a meeting void is that actions taken cannot be ratified later. Thus, even when all but one of the company's directors wanted to fire the CEO, their attempt to do so at a haste gathering of all the directors was ineffective.

Globis Partners LP v. Plumtree Software, Inc., C.A. No. 1577-VCP (November 30, 2007).

This decision explains why some attacks on a merger fail for want of a basis to avoid the business judgment rule and for a failure to make proper disclosure claims. The merger was a third-party transaction and the defendant directors received no unique benefit as a result. The Court held that granting those directors a right to indemnification, an acceleration of options and a cash out of vested options, did not constitute a special benefit that would make the directors interested parties. Hence, the business judgment rule applied.

The court also concluded that the complaint's disclosure claims lacked merit. For the most part, those claims were attacks on the merits of the investment banker's analysis attached to the proxy statement. That is not a claim of inadequate disclosure. Thus, the complaint was dismissed.

Sample v. Morgan, C.A. No. 1214-VCS (November 27, 2007).

In this major decision, the Court of Chancery has upheld its jurisdiction over a non-Delaware attorney who is alleged to have aided and abetted a breach of fiduciary duty by directors. Given the breadth of this decision, it has major implications for counsel to Delaware corporations.

First, the Court held that the attorney's arranging for the filing of a certificate with the Delaware Secretary of State satisfied the single act required to permit service of process on the attorney and his law firm under the Delaware Long Arm Statute. That is nothing new under Delaware law as other decisions have held that filing of such a certificate meets the statutory requirement for service.

Second, the Court held, in what may prove to be its most controversial decision, that Due Process was satisfied in subjecting the attorney to jurisdiction by a Delaware court. Noting that this "is a highly unusual case", the Court had no problem holding that giving advice on Delaware law and controlling the course of litigation in Delaware justified subjecting the attorney to jurisdiction here. What may prove to be controversial, however, are sections of the opinion that suggest that regularly providing advice on Delaware corporate law is sufficient to satisfy the requirement of Due Process in asserting jurisdiction over the non-Delaware lawyer for claims arising out of that advice.

Finally, the opinion holds that an attorney may be held liable for aiding and abetting a breach of fiduciary duty when he knows his advice is being used to carry out the breach. This is important because the knowledge requirement may be satisfied when the lawyer claims expertise in Delaware law and his advice is wrong. The inference then is that he knows his advice is wrong. While this seems to go too far, it is not clear how far the logic of the opinion may be stretched by other courts.

Appriva Shareholder Litig. Co., LLC v. EV3, Inc., -- A.2d --, 2007 WL 3208783 (Del. Nov. 1, 2007)

Deciding whether a motion to dismiss based on lack of standing is considered under Rule 12(b)(6) or 12(b)(1) has implications and has divided some courts. First, lack of subject matter jurisdiction under 12(b)(1) is non-waivable and can be raised by the court sua sponte, whereas failure to state a claim under 12(b)(6) must be raised by motion. Second, a 12(b)(6) motion for failure to state a claim may be converted to a motion for summary judgment, considering matters outside the pleadings, but a 12(b)(1) motion may not. In this consolidated appeal, the Supreme Court held that when the issue of standing is closely related to the merits, a motion to dismiss for lack of standing is properly considered under 12(b)(6) for failure to state a claim. 

Boerger v. Heiman, 2007 WL 3378667 (Del. Super. Oct. 31, 2007)

The three-year statute of limitations under 10 Del. C. § 8106, which begins to run at the time of the alleged breach in the case of a contract claim and at the time the injury occurs for a tort claim, may be tolled by, among other circumstances, the absence of observable factors that would place a layman on notice. This exception is called the date of discovery rule. When it applies, the statute of limitations begins to run when the defect is or should have been discovered.

In this legal malpractice action, the Superior Court held that the statute of limitations expired prior to the filing of the complaint and that it was not tolled because “multiple factors and plaintiff’s own statements indicate knowledge of the relevant facts which establish a potential claim . . . .” The plaintiff argued that the defendant attorneys fraudulently concealed his potential tax liability, but based on the evidence, the court concluded that the plaintiff should have discovered this fact, at the very least, by the time he hired an independent consultant who brought the matter to his attention. 

Melzer v. CNET Networks, Inc., C.A. No. 3023-CC (November 21, 2007).

The scope of inspection rights may be affected by when a stockholder first acquired her stock. If the inspection is to investigate alleged wrongdoing, the rationale for granting inspection is to permit the filing of a derivative suit if the inspection shows that it is warranted. Hence, prior case law has held that inspection of records existing before the petitioner became a stockholder is not warranted because the stockholder has no right to sue for those pre-ownership wrongs under Delaware law.

This decision extends inspection rights when the potential claim is for a Caremark case alleging a "sustained or systematic failure" of oversight. Then, the Court held, showing past failures is relevant to showing a sustained wrong that culminated in damage to the entity after the petitioner became a stockholder. Under that rationale, the scope of inspection may extend to pre-ownership records.

Ryan v. Gifford, C.A. No. 2213-CC (November 21, 2007).

In 2003, Delaware amended its long arm statute to cover corporate officers who served in that capacity after January 1, 2004. Past decisions under the director section of this statute have focused on when a defendant is subject to it for acts committed before the date the statute deems the defendant's holding a corporate office is consent to jurisdiction by a Delaware court. Consistent with that case law, this decision holds that prior bad acts do not constitute continuing wrongs that subject the defendant to Delaware jurisdiction after January 1, 2004.

Of course, the decision also holds that there are