Delaware Business Litigation Report

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

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.

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.

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.    

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.

Norman v. Elkin, 2007 WL 2822798 (D.Del. Sept. 26, 2007)

In this action the District Court evaluated the application of the statute of limitations to claims that a corporate fiduciary engaged in self-dealing at the corporation’s expense. Plaintiff was a 25% shareholder in a closely-held Delaware corporation with Pennsylvania headquarters, formed to participate in the wireless communications industry. Defendant #1 owned the remaining shares of the corporation, and also served as its President and sole director. Plaintiff alleged that Defendant #1 breached his duties to the corporation when he personally obtained newly-issued communications licenses from the FCC, then sold them along with the corporation’s pre-existing licenses to a third party, keeping the proceeds of the sale himself. Plaintiff further alleged that Defendant #1 took the action without notifying Plaintiff in his capacity as a shareholder, without holding an annual meeting, and without making any disclosure of the sale. Plaintiff sued Defendant #1, along with his wholly owned corporation and another corporate officer, in the Delaware Court of Chancery for breach of contract, unjust enrichment, declaratory relief, and breach of various fiduciary duties. Defendants removed the action to District Court based on diverse citizenship and moved for summary judgment, arguing that all claims were time-barred.

Conrad v. Blank, C.A. No. 2611-VCL (September 7, 2007).

In the latest of the Delaware option cases, the Court of Chancery permits the action to go forward when it appears that the Board considered the option backdating and did nothing about it. It is noteworthy from its decision that this apparent indifference to a wrong served to distinguish this case from others where the backdating appeared to be a simple mistake.  In the case of a simple mistake, the error would not be enough to expose the board to liability and that would excuse demand before the derivative suit was filed.

The Court also declined to apply the "continuing wrong" theory. Under that theory, a plaintiff who acquires her stock during the series of wrongful acts has the right to challenge all the actions including even those that occurred before she acquired her stock. Instead, here the court held that each backdated option was a separate wrong and the plaintiff could only sue for those that had occurred  after she bought her stock.

Feldman v. Cutaia, C.A. No. 1656-VCL (August 1, 2007).

Classifying a claim as derivative has big consequences. Among those is that the claim is then subject to the continuous ownership rule that requires the plaintiff to hold his shares throughout the litigation to maintain his standing. A merger that eliminates the plaintiff's ownership thus also eliminates his ability to proceed with a derivative suit.

In an effort to avoid this problem, plaintiffs that bring dilution claims asserting their interests have been wrongfully diminished need to fit into an exception to the general rule that dilution claims are derivative. This decision illustrates the limits on such claims. Basically, a dilution claim is derivative unless the claim is that a controlling stockholder has wrongly diluted the interests of the minority stockholders. For this purpose, "control" means having a greater than 50% interest or active domination of a board. Moreover, it is not possible to aggregate the stock holdings of a group of stockholders to get over the 50% threshold.

This opinion also discusses the exceptions to the general rule that a merger deprives a stockholder of standing, such as when the merger itself is an attempt to fraudulently end the derivative suit. It also notes that aiding and abetting claims based on derivative claims are themselves also derivative and subject to the same standing rules.

Rhodes v. Silkroad Equity LLC, C.A. No. 2133-VCN (July 7, 2007).

The line between what is a direct claim and a derivative claim is frequently critical. Derivative claims can only be brought by stockholders and have other procedural hurdles to jump to survive a motion to dismiss. In this decision, the Court permitted what appeared to be a derivative claim to go forward as a direct claim by a former stockholder. Thus, the Court has expanded the type of claim that may be brought as a direct claim. While the facts of this case may seem unusual, the claims made in this case have come up before and now will certainly take on new life.

Briefly, the plaintiff alleged that the majority stockholder had run down the business of the company to force out the plaintiffs as minority owners at a reduced price under a stockholders' agreement. The damage to the company from their actions would seem to be a classic derivative claim for it was the company that suffered the injury and to whom damages would seem to flow for such a claim. However, the Court held that this conduct also would support a direct claim because the conduct in effect permitted the majority to increase its interest in the company while diluting the interest of the minority stockholders. In that sense, the claim of the minority interest was also a direct claim suffered by them alone.

Sutherland v. Sutherland, C.A. No. 2399-VCL (July 2, 2007).

On several occasions, the Delaware courts have questioned why only a single member is appointed to a special committee. However, the practice continues.This decision illustrates the price to be paid by such a bad practice.

Normally, Zapata Corp. v. Maldonado, 430 A2d 779 (Del. 1981) limits discovery of a special committee to materials that reflect on the independence and diligence of the committee. Discovery into the merits of the committee's conclusions is limited. The theory behind this limitation is that to permit broad discovery into the allegations that lead to the committee's creation would effectively undermine the reasons the committee was appointed in the first place.

This decision permitted much broader discovery into the merits of the one person committee's conclusions because of the special circumstances involved in this battle between family members and the limited disclosures given about the reasons for selecting the single member of the committee. The rationale behind the decision still applies to increase discovery of other single member special committees.

Lemon Bay Partners LLP v. Hammonds, C.A. No. 05-327 (D.Del. June 26, 2007)

In this shareholder derivative action for breach of fiduciary duties against various corporate defendants, the Court held that the state law claims asserted so predominated the lone federal claim that exercise of supplemental jurisdiction was inappropriate. Plaintiffs, former shareholders of MBNA Corporation, asserted various claims against the defendants based on breach of fiduciary duties in connection with earnings reports and the merger of MBNA with Bank of America. Defendants moved to dismiss based on lack of subject matter jurisdiction, arguing that the Plaintiffs’ sole claim that rested on federal jurisdiction was so predominated by the state law claims as to make the exercise of the Court’s supplemental jurisdiction inappropriate. The Court concurred with the defendants, concluding that Plaintiffs’ federal law claim bore only a tangential relationship to the rest of the claims. The Court therefore granted Defendants’ motion to dismiss for lack of subject matter jurisdiction. 

Gatz v. Ponsoldt, C.A. No. 298 (Del. Supr., April 16, 2007).

The dividing line between what is a derivative suit and what claims may be filed directly on behalf of stockholders is undergoing a rapid development in Delaware. This decision is the latest in that recent line of decisions.

This decision makes it clear that under the recent Rossette decision, claims for dilution may be filed by a class of stockholders whose interest in the entity have been diluted by the issuance of stock to "a significant or controlling stockholder'" in a dilutive transaction.  Before Rossette, it was generally thought those claims belonged to the entity that did not get fair consideration for its stock and thus, were derivative claims only.

Levy v. Sterling Holding Co., LLC, 2007 WL 582555 (D.Del. Feb. 13, 2007).

In this shareholder derivative action, the plaintiff shareholder sued two defendants, both of whom occupied board positions with the corporation, for allegedly purchasing stock in the corporation and then selling it at a profit within six months, in violation of Section 16(b) of the Securities and Exchange Act of 1934. After each side filed cross-motions for summary judgment, the SEC adopted Amendments to SEC Rules 16b-3 and 16b-7, which exempt certain transactions from the prohibitions of Section 16(b). Defendants argued that the transaction that formed the basis of Plaintiff’s complaint, whereby Defendant’s preferred stock in the corporation was “automatically” converted to common stock upon completion of an IPO, was an exempt “reclassification” transaction under the SEC Rules. Conversely, Plaintiff argued that the exemption did not apply. The Court found that the SEC had acted within its power in exempting reclassification transactions from Section 16(b), and that as a result of that exemption, Defendants were entitled to judgment as a matter of law. 

Magten Asset Mgmt. Corp. v. Paul Hastings Janofsky & Walker LLP, No. 04-1256-JJF (D.Del. Jan. 12, 2007)

In this opinion, the District Court of Delaware found that both Montana’s substantive fraudulent transfer law and Plaintiff’s inability to establish standing warranted granting Defendant’s motion for judgment on the pleadings. Plaintiff, a creditor of a Montana limited liability company by virtue of an indenture agreement, sued Defendant, alleging that Defendant assisted the LLC in transferring assets to its parent corporation in order to defraud the LLC’s creditors. Defendant moved for judgment on the pleadings, arguing that as a non-transferee of the assets, it could not be held liable for any alleged fraudulent transfer under Montana’s fraudulent transfer act, and that as a creditor of the LLC, Plaintiff did not have standing to bring its derivative claims against Defendant on behalf of the LLC. The court agreed with Defendant, and granted the motion for judgment on the pleadings.

A few recent articles have questioned the willingness of the Court of Chancery to award adequate fees in class and derivative litigation. These articles focus on one or two instances where fee requests were not met with full approval. This anecdotal approach is misleading. After all, it would be a sign of a failing system if every fee request were given blanket approval regardless of its merits.

Two more recent decisions by the Court of Chancery show it is fully responsive to appropriate fee requests and is willing to award large fees when appropriate. In the McKesson/HBOC litigation, Chancellor Chandler  awarded the plaintiff's attorneys $10 Million for their years of hard work on behalf of McKesson in a derivative suit. More recently, Vice Chancellor Strine in the Hollinger case awarded plaintiff's counsel $2,500,000 in fees for his work in a case where the actual litigation work was fairly brief, but the results were outstanding.

Both of these cases were what are known as Caremark cases alleging that the Board had failed to perform its oversight duty to avoid accounting and other problems. That type of case is fairly characterized as among the most difficult to prove, given the high standard to establish liability.  Thus, when the plaintiffs won a good settlement, their attorneys were rewarded, fairly and even generously.

In short, bring a good case, fight hard, achieve a decent result and the Court of Chancery will reward your effort. That is all we should expect.

Weisler v. Barrows, C.A. No. 06-362 GMS, 2006 WL 3201882 (D. Del. Nov. 6, 2006).

Plaintiff, a shareholder of Sycamore Networks, Inc. (“Sycamore”), a Delaware corporation with its principal place of business in Massachusetts, brought this derivative action against several of its directors and officers, including its chairman, CEO and CFO. The complaint alleged six counts: (1) a count against each director for section 14(a) violations of the Securities and Exchange Act of 1934 (“Exchange Act”); (2) one count of disgorgement against four directors under section 304 of the Sarbanes-Oxley Act of 2002 (“Oxley Act”); (3) one count of breach of fiduciary duty against all directors; (4) one count of unjust enrichment against five directors; (5) one count of gross mismanagement against all defendants; and (6) one count of waste of corporate assets against all defendants.

The defendants moved to transfer the matter pursuant to 28 U.S.C. § 1404(a) and the Court granted the motion because it would convenience the parties and witnesses and serve the interests of justice.

The plaintiff alleged that the defendants had jointly and severally breached their fiduciary duties of care, loyalty, good faith, and candor by failing to: (1) discover or prevent the intentional manipulation of stock option grants between 1999 and 2004; (2) prevent the misreporting of earnings that was caused by the manipulation of the option grants; (3) oversee the administration of Sycamore’s stock-based compensation plans; (4) ensure Sycamore operated in compliance with applicable state and federal laws pertaining to dissemination of financial statements; (5) ensure the company did not engage in any improper or illegal practices; and (6) ensure that the company’s financial statements were compliant with GAAP. The conduct is alleged to have violated section 14(a) of the Exchange Act and section 304 of the Oxley Act.

The Court permitted the transfer of the matter on its individualized consideration of the motion under section 1404(a) and on whether it would convenience the parties and witnesses and serve the interests of justice. The Court also held that it was the defendants’ burden to establish the need for transfer. The Court observed that the standard for transfer did not demand a demonstration of compelling circumstances; rather, the defendants only needed to show that the case would be better off if transferred to the other jurisdiction. That inquiry required a “multi-factor balancing test” that consisted of not only the convenience of the parties and the witnesses but also the examination of certain public and private interests. The Court listed the private interests as: (1) a plaintiff’s choice of forum; (2) the defendant’s preference; (3) where the claim arose; (4) the convenience of the parties and witnesses; and (5) the location of the books and records. The Court listed the public interests as: (1) the judgment’s enforceability; (2) practical trial considerations making it easy, expeditious or inexpensive; (3) the administrative difficulty presented in the two fora; (4) local interest in deciding the controversy at home; and (5) the public policies of the fora under consideration. The Court found that the private and public factors weighed in favor of transfer and therefore permitted the defendants’ motion.

In Re Primedia Inc. Derivative Litigation, C.A. No. 1808-N (Del. Ch. November 15, 2006).

This case dealt with when directors would be considered interested in a deal so as to preclude the application of the business judgment rule and permit the suit to proceed.  Many of the directors were affiliated with the controlling stockholder who had purchased the corporation's preferred stock at a deep discount just before the board voted to redeem that stock at its face value. That decision was justified, it was argued, because the coupon rate on the stock was higher than market rate. The Court held that might well be so, but at the pleading stage it was too soon to accept that as a justification for the purchase that gave the controlling stockholder a big gain. The decision is particularly interesting for its discussion of when directors are considered sufficiently connected to a controlling stockholder so as to preclude application of the business judgment rule.

West Coast Management & Capital LLC v. Carrier Access Corporation, C.A. No. 2262-N (Del. Ch. November 14, 2006) is a classic example of what can go wrong in trying to plead a derivative suit. The Court of Chancery dismissed the complaint because the plaintiff had filed a prior complaint in federal court that had been dismissed for failure to establish that demand on the directors was excused. Here, the plaintiff tried to pursue a stockholder inspection claim to establish that demand was excused, but the Court held it was precluded from doing so by the dismissal of its prior complaint. This shows that a plaintiff better know what it is doing when it files a derivative suit because the chances to correct errors will be limited.

Stone v. Ritter,  C.A. No. 93, 2006 (Del. Supr. November 6, 2006).

The Supreme Court has issued the latest Delaware decision to interpret the duty to act in good faith. Indeed, it is possible to read Stone as holding there is no separate duty of directors to act in good faith. While that would be a mistake, the implications of this decision may be far reaching. At the very least, Stone upholds the conventional wisdom in Delaware that under Caremark the directors' duty to act is most easily triggered when there are red flags indicating something is wrong with the way the entity is being operated. A complaint that fails to plead those red flags has a good chance of being dismissed.

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.

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.

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).

Braddock v. Zimmerman, C.A. No. 489 (Del. Sup. September 12, 2006).

The Delaware Supreme Court has clarifed the rules as to when a plaintiff in a derivative suit must make a demand upon filing an amended complaint. The Court holds that if the derivative litigation has been properly instituted an amendment to the complaint does not need to be the subject of a demand on the board of directors as to those claims already "validly in litigation". Thus, even if the majority of the board has changed and is now independent under Rule 23.1 standards, no demand need be made in those circumstances.

North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, C.A. No. 1456-N (Del. Ch. September 1, 2006).

This is another in a series of Court of Chancery decisions that limit the claims that creditors may make based on the theory the directors owe the creditors a duty when their corporation is insolvent or in the vicinity of insolvency. Ever since the famous footnote in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch. Dec. 30, 1991), creditors have argued that directors should owe them a fiduciary duty to take their interests into account when the creditors are the residual interest holders in a corporation that is insolvent or nearly so. A series of recent decisions have limited those creditor arguments. See e.g. Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004) [holding most creditor claims must be brought as derivative claims]. This new decision further limits creditor claims by holding that creditors may not bring a direct claim for breach of fiduciary duty based on the theory the entity is in the vicinity of insolvency. Further, the decision holds that for clearly insolvent companies, only creditors whose claims are beyond fair dispute may claim the directors owe them a duty.

Gentile v. Rossette, C.A. No. 573, 2005 (Del. Supr. August 17, 2006).

This Delaware Supreme Court decision significantly clarifies the Court's Tooley decision that governs when a claim is a derivative claim. Because a derivative claim must meet significant pleading requirements under Court of Chancery Rule 23.1, this decision affects much of the corporate litigation in the Delaware Court of Chancery and merits careful reading.

Trenwick America Litigation Trust v. Ernst & Young LLP, C.A. No. 1571-N, 2006 WL 2333201 (Del. Ch. Aug. 10, 2006).

The Delaware courts have struggled for the last fifteen years over the scope of the duties of directors to creditors when their company is in the vicinity of insolvency. In two landmark decisions, the first in 2004, and just recently, the Court of Chancery sought to define the limits of that duty. Indeed, in this decision the Court rejected the very idea that there is a duty to avoid taking risks that may have the effect of deepening the insolvency of a Delaware corporation, at least in most circumstances.

Kosseff v. Ciocia, C.A. No. 188-N, 2006 WL 2337593 (Del. Ch. Aug. 3, 2006).

In this decision, the Court dealt with a complaint attacking the transaction implemented to settle a proxy contest. The proxy contest was settled by an agreement that put the dissidents on the board and had the CEO resign. However, the CEO was given the right to buy certain lucrative businesses of the company, a right he later exercised. The complaint alleged that this deal was improvident. After reviewing the complaint, the Master declined to grant a motion to dismiss.

AIG Retirement Services, Inc. v. Barbizet, C.A. No. 974-N, 2006 WL 1980337 (Del. Ch. July 11, 2006).

Business relationships between directors may sometimes make them unqualified to pass upon demands their company sue their fellow directors. This is such a case where the board members derived substantial benefits from their relationships with the potential target of litigation the plaintiff demanded be brought. Under those circumstances, the futility of making a demand under Rule 23.1 was easily established.

Gatz v. Ponsoldt, C.A. No. 174-N, 2006 WL 1510467 (Del. Ch. May 26, 2006).

Plaintiffs asserted direct claim arising from recapitalization. Defendants moved to dismiss, arguing that Plaintiffs' claim was actually derivative, not direct, and Plaintiffs had failed to make demand or establish demand was excused.

Khanna v. McMinn, C.A. No. 20545-NC, 2006 WL 1388749 (Del. Ch. May 9, 2006).

Defendants moved to dismiss class and derivative complaint under Court of Chancery Rules 23.1 and 12(b)(6). Defendants also moved to disqualify the plaintiffs, to strike portions of the complaint and for continued sealing of the complaint.

Feldman v. Cutaia, C.A. No. 1656-N, 2006 WL 920420 (Del. Ch. Apr. 5, 2006).

This action involved a series of transactions in which the Telx defendant directors allegedly granted themselves a significant equity stake in the company for little or no consideration. Plaintiff alleged that these transactions significantly diluted his equity position. This action also involved a self tender-offer by the company for $5 million worth of its securities. Defendant argued that plaintiff did not make a demand on the Telx board before proceeding with the derivative action and that the complaint did not plead with particularity facts that created a reasonable doubt as to the ability of the Telx board to independently consider such a demand. The Court of Chancery denied the defendants' motion to dismiss and permitted the plaintiff to proceed with his derivative suit.

Seinfeld v. Barrett, C.A. No. 05-298-JJF, 2006 WL 890909 (D. Del. Mar. 31, 2006).

Plaintiff filed a derivative action against defendants, alleging that they violated Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 14a-8 and breached their fiduciary duties under Delaware law by making false and misleading statements in connection with a proxy statement issued by the defendants in March 2005. Plaintiff moved for summary judgment, and defendants moved to dismiss for lack of subject matter jurisdiction and for failure to comply with Rule 23.1.

Big Lot Stores, Inc. v. Bain Capital Fund VII, LLC, C.A. No. 1081-N, 2006 WL 846121 (Del. Ch. Mar. 28, 2006).

In 2000, in a sponsored management buyout, a corporation sold a subsidiary business that operated a chain of toy stores (KB Toys) in exchange for $257.1 million in cash and a $45 million note due in 2010. In 2002, the new owners refinanced the business and distributed approximately $120 million to the buyout sponsor, affiliates, two officers and directors of the subsidiary that invested in the buyout, and others. In 2004, the KB Toys filed for Chapter 11 bankruptcy. Plaintiff Big Lots, Inc, an unsecured creditor and holder of the $45 million note, brought this action asserting direct claims of breach of fiduciary duties, fraud, and civil conspiracy. The plaintiff sought recovery for the amount due on the note and restitution for alleged unjust enrichment. The Court of Chancery dismissed the complaint namely because the claims were derivative in nature, not direct, and thus belong to the bankruptcy estate.

Carlson v. Hallinan, C.A. Nos. 19808, 19466, 2006 WL 771722 (Del. Ch. Mar. 21, 2006).

This case involved a direct and derivative action arising out of a dispute between two men engaged in the business of making short term, unsecured loans. Plaintiffs asserted direct claims for breach of contract and derivative claims for breach of fiduciary duties. Specifically, plaintiffs alleged that defendant Hallinan breached an oral contract with plaintiffs by paying himself and another defendant executive compensation. Plaintiffs also asserted that the defendants breached fiduciary duties they owed nominal defendant CR Services Corp. by paying themselves an excessive amount of executive compensation. The Court of Chancery found, among other things, that Hallinan breached the oral contract with plaintiffs and defendants committed multiple breaches of their fiduciary duties to CR because they failed to meet the entire fairness standard regarding their compensation.

Highland Legacy Ltd. v. Singer, C.A. No. 1566-N, 2006 WL 741939 (Del. Ch. Mar. 17, 2006).

A large shareholder brought a derivative action alleging that the directors committed corporate waste by approving exorbitant fees to unqualified financial advisers. The defendants moved to dismiss the complaint under Court of Chancery Rule 23.1 for failure to allege with particularity facts establishing demand futility. The court's review of the complaint revealed that plaintiff did not allege with particularity facts from which the court could reasonably conclude that the majority of the directors were disabled from impartially considering a demand. The court therefore granted defendants' motion to dismiss under Rule 23.1.

Canadian Commercial Workers Industry Pension Plan v. Eric Alden, et al., C.A. No. 1184-N, 2006 WL 456786 (Del. Ch. Feb. 22, 2006).

In this derivative action brought against four former directors and officers of Case Financial, Inc., the nominal defendant, the two remaining defendants moved to dismiss after two others settled. Plaintiff alleged breach of loyalty, breach of the Caremark duty of oversight, corporate waste and common law fraud. The Court of Chancery partly granted the motions.

Unisuper Ltd., et al. v. News Corporation, et al., C.A. No. 1699-N, 2006 WL 375433 (Del. Ch. Feb. 09, 2006).

Defendants filed cross-motions requiring depositions of thirteen named plaintiffs' under Ch. Ct. R. 30(b)(6) in either Delaware or New York. Plaintiffs filed motions for protective orders, to limit the numbers of deponents and contended depositions could occur outside the United States via videoconferencing.

The plaintiffs' Australian company had reincorporated in Delaware.

Plaintiff sought equitable relief requesting its shareholders to be permitted to vote on a poison pill's extension. The court treated this matter as a representative one, rather than an individual shareholder suit.

Stone, et al. v. Ritter, et al., C.A. No. 1570-N, 2006 WL 302558 (Del. Ch. Jan. 26, 2006).

This matter involved an attempt to institute a derivative proceeding against fifteen current and former director defendants of AmSouth Bancorporation for alleged failures of fiduciary duties through insufficient internal control systems to guard against statutory violations under the Bank Secrecy Act and the Anti-Money Laundering Regulations. The defendants filed a motion to dismiss and it was granted by the court for insufficiency of pleading under Chancery Court Rule 23.1.

On November 6, 2006, the Delaware Supreme Court affirmed this decision.

In re Tele-Communications Inc. Shareholders Litig., C.A. No. 16470, 2005 WL 3547674 (Del. Ch. Dec. 21, 2005), opinion revised and superceded by No. CIV. A. 16470, 2005 WL 3642727 (Del. Ch. Dec. 21, 2005), (revised Jan. 10, 2006)(Westlaw citation not available).

This summary judgment action originates from a Consolidated Amended Complaint that alleged nondisclosure of material information Continue Reading Posted By MorrisJames Delaware In Case Summaries , Class Actions , Derivative Claims , Directors , Fiduciary Duty , M&A , Special Committees | Permalink 0 Comments

Raider v. Sunderland, et al., C.A. No. 19357 NC, 2006 WL 75310 (Del. Ch. Jan. 04, 2006) (Revised Jan. 05, 2006).

This is a class action involving board actions and fee requests by the plaintiff representative.

Crescent/Mach I Partnership, L.P. v. Turner, C.A. No. 17455-NC, 2005 WL 3618279 (Del. Ch. Dec. 23, 2005).

Former stockholders who were cashed out in connection with merger sued the corporation's former controlling stockholder and the acquirer for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, respectively. Plaintiffs complained of numerous side deals, allegedly negotiated by the controlling stockholder. Plaintiffs also complained that the controlling stockholder breached his fiduciary duty by supplying growth projections that he knew to be unduly pessimistic and inconsistent with management's view. Defendants moved for summary judgment, which the court granted in part and denied in part.

Laties v. Wise, C.A. No. 1280-N, 2005 WL 3501709 (Del. Ch. Dec. 14, 2005).

In 2001, Defendant corporate executive received bonuses and other compensation near $9 million as CEO, due in some part to the corporation's reported profits that year. Several years later, after that executive's departure, the corporation restated its 2001 performance from a $93 million profit to a $447 million loss. Plaintiff brought a derivative claim against executive for unjust enrichment, and against the present directors of the corporation for breach of fiduciary duty and waste. Defendants moved to dismiss under Court of Chancery Rule 23.1.

Gentile v. Rossette, C.A. No. 20213-NC, 2005 WL 2810683 (Del. Ch. Oct. 20, 2005).

Plaintiffs, former shareholders of SinglePoint Financial, Inc. which merged into a subsidiary of Cofiniti, Inc., alleged that two former directors of SinglePoint breached their fiduciary duties in connection with the issuance of a large number of shares to one of the defendants and the merger. Defendants moved for summary judgment.

Ishimaru v. Fung, C.A. No. 929, 2005 WL 2899680 (Del. Ch. Oct. 26, 2005).

Plaintiff, a member of Paradigm Financial Products International LLC, sought to assert a cause of action on behalf of Paradigm against Defendant Ivy Asset Management Corp. for breach of contract. Ivy Asset moved to dismiss for lack of subject matter jurisdiction.

Zimmerman v. Braddock, C.A. No. 18473-NC, 2005 WL 2266566 (Del. Ch. Sept. 8, 2005).

Plaintiff, a shareholder of priceline.com, Inc., moved for leave to amend his derivative complaint against directors of Priceline based upon three defendants' alleged insider trading and misappropriation of confidential information. Defendants argued amendment would be futile.

Morrison v. Madison Dearborn Capital Partners III, LP, 389 F. Supp. 2d 596 (D.Del. 2005).

A shareholder brough a derivative action to recover profits from short-swing insider trading of stock. The defendants moved to dismiss under Federal Rule 12(b)(6).

Stone v. Ritter, C.A. No. 1570-N, 2005 WL 2416365 (Del. Ch. Sept. 26, 2005).

Defendants sought continued sealing of portions of derivative complaint.

In re J.P. Morgan Chase & Co. S'holder Litig., 2005 WL 1076069 (Del. Ch. April 29, 2005), aff'd, 2006 WL 585606 (Del. Mar. 8, 2006).

J.P. Morgan Chase & Co. ("JPMC") and Bank One agreed to a business combination that was expected to create the second largest financial institution in the country. JMPC paid a premium over the market share price for Bank One, effectively making JPMC the acquirer and the Bank One the target. After the merger was completed, the stockholders of the acquirer sued its directors, alleging breaches of fiduciary duty with regard to the acquisition. Their claims stemmed from the allegation that the directors paid too much for the acquired bank. The defendants moved to dismiss the complaint on the basis that the claims were derivative, not direct, and that demand was not excused. The court granted defendants motion to dismiss.

Benihana of Tokyo, Inc. v. Benihana, Inc., et al., C.A. No. 550-N (Del. Ch. Feb. 28, 2005).

This case deals with several motions to dismiss on several grounds, the upholding of personal jurisdiction under a conspiracy or aiding/abetting theory and plaintiff's request for a declaratory judgment.