Court Of Chancery Explains Shared Causation In Fee Award

Smith, Katzenstein & Jenkins LLP v. Fidelity Management & Research Company, C.A. 8066-VCL (April 16, 2014)

This decision explains how to calculate an attorney fee when there are 2 potential causes for a favorable settlement of a class action. The fee is divided based on the Court's views as to what is fair. A class member who hires its own attorney who is a cause of much of the recovery is not for that reason alone able to avoid a fee award to class counsel.

Court Of Chancery Again Explains Revlon-Bad Faith Analysis

Houseman v Sagerman, C.A. 8897-VCG (April 16, 2014)

This decision expands on the holdings of recent Court of Chancery decisions, one of which held directors not liable for breaches of their duty of care in a Revlon case and another that held an investment advisor liable for aiding and abetting the directors' breaches of duty.  Thus, the Court explained that a typical exculpatory charter provision eliminates breaches of duty claims absent a "knowingly and completely failed" observance of a board's duty to get the best price for the sale of the company.  Only such a complete failure is enough to state a breach of the duty of loyalty.   Second, this decision limits the impact of the Rural Metro decision that held an investment advisor liable on an aiding and abetting claim.  Rather, the degree of culpability must be much greater for such a claim to survive.

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Court Of Chancery Explains Standard of Review

Chen v. Howard-Anderson, C.A. 5878-VCL (March 8, 2014)

This is a critical decision to understanding the standard of review that the Court of Chancery will apply to a board's actions in selling its company. The decision makes 3 important points.  First, the Court explains how and when the enhanced scrutiny standard of review applies and what that standard's "reasonableness" test means.  The decision's explanation that the "rational basis" test of the business judgment rule standard differs from the "reasonableness" test of enhanced scrutiny is particularly helpful.  Second, the decision explains when conduct that is wrong under a reasonable basis test is not so bad as to avoid exculpation under the director exculpation statute.  This clarifies how far the prior law went in limiting exculpation when the conduct at issue showed an "utter failure" to follow one's duties.   Third, the decision points out that if the board is aware that disclosure materials are inaccurate, then it may not be exculpated because the failure to correct the errors goes beyond a simple duty of care violation.

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Court Of Chancery Upholds Clickwrap Non-Compete Agreement

Newell Rubbermaid Inc. v. Storm, C.A. 9398-VCN (March 27, 2014)

This decision holds that a clickwrap agreement is sufficient to bind an employee to a non-compete agreement.  This is an important innovation as it will permit employers to implement non-compete agreements quickly and without much fuss.

Court Of Chancery Issues Novel Injunction

Numoda Corporation v. Numoda Technologies Inc., C.A. 9163-VCN (March 27, 2014)

It is common in a Section 225 action seeking the determination of the composition of a company's board of directors for the court to issue a status quo order.  Those orders stop the company from taking any actions out-of-the-ordinary course of business until the Court decides who is really in control.  Here the Court issued a similar order pending a decision on whether the plaintiff was entitled to have stock issued to it to take control.  This extends the use of status quo orders to a new realm.

District Court Explains Pleading Rules For Securities Litigation

In re Wilmington Trust Securities Litigation, Master Civ. No. 10-990-SLR (March 20, 2014)

What must be pled to state a claim under the federal securities acts is often a difficult question.  For example, what facts sufficiently allege scienter to state a claim under the heightened rules governing such complaints? This decision explains the applicable pleading rules very clearly.

District Court Clarifies Who Is A Manager

Wakley Limited v. Ensotran LLC, C.A. 12-728-GMS (March 18, 2014)

Under the Delaware LLC Act, a manager or a person who acts like a manager is subject to jurisdiction in Delaware in a breach of duty case arising out of her management.  Because the LLC agreement usually sets out who is a "manager," that is usually not disputed.  However, it is often less clear who had exercised management duties sufficient to be subject to jurisdiction in Delaware. This decision helps decide that question. It points out that just being named an officer is not enough to submit to jurisdiction and that the nature of the defendant's' duties compared to what it is alleged she did improperly may also be determinative.  In other words, if you "managed" X project but are sued for what you did on the Y project, there is no jurisdiction over you..

Delaware Supreme Court Upholds The M&F W Case

Kahn v M&F Worldwide Corp., C.A. 334, 2013 (March 14, 2014)

The Delaware Supreme Court has upheld the important Court of Chancery decision in the M&F Worldwide case that applied the business judgment standard of review to a merger that has the following conditions: (1) the controlling stockholder conditions the merger on the approval of both a special committee and a majority of the minority stockholders, (2) the special committee is independent, (3) the special committee is empowered to freely select its own advisers and to say no indefinitely, (4) the special committee acts with care, (5) the minority vote is informed, and (6) there is no coercion on the minority.   Almost as importantly, the Court upheld the grant of summary judgment to the defendants.  As a result, the structure approved here will now be the gold standard for mergers involving a controlling stockholder.

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District Court Dismissed Derivative Suits Under Delaware Law

New Jersey Building laborers Pension Fund v. Ball, D. Del. No. 11-1153-LPS-SRF (March 13, 2014) and Freedman v Mulva,  D.Del., No. 11-686-LPS-SRF (March12, 2014)

In these 2 decisions, the U.S. Magistrate shows a sound understanding of Delaware corporate law. She recommends the dismissal of these 2 derivative suits under Rule 23.1 because the complaints do not show the directors were disqualified from considering a demand they sue.  The directors' interest in a compensation plan that was only currently applicable to employees did not make them interested under Delaware law.

Court Of Chancery Again Explains How To Do Sale Of A Company

Frank v. Elgamal, C.A. 6120-VCN (March 10, 2014)

Whether a stockholder or many stockholders acting as a group are in control of the process to sell a company has profound effects on the judicial review of what is done.  As this decision points out, "control" may be exercised over just part of the process as well.  Hence, this decision is a good explanation of when there is such control.

Court Of Chancery Explains Basis For Adviser Liability

In Re Rural Metro Corporation Stockholders Litigation, C.A. 6350-VCL (March 7, 2014)

This is an important decision explaining when advisers in a merger may be liable for aiding and abetting a breach of fiduciary duty.  Liability may attach even for just a breach of the duty of care if the adviser is aware that it is facilitating that breach.  The key here is that the advising investment banker was trying to make a fee from both the seller and the buyer in the same deal.  This then is just the latest such case criticizing double dealing and it is now time for lawyers to be sure the advisers are not engaged in such conduct.   The opinion is also a good road map for how a board ought to conduct the auction of a company.  While there are many opinions that say there is no fixed way to sell a company, those who just ignore these guidelines do so at their peril.

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Court Of Chancery Details Remedy For Unfaithful Employee

Wayman Fire Protection Inc. v. Premium Fire & Safety LLC, C.A. 7866-VCP (March 5, 2014)

When an employee departs and there is no agreement that restricts his post-employment actions, the law has been often unclear on the former employer's rights to protect itself from unfair competition. This decision pulls much of that prior scattered case law together in a coherent discussion of the former employer's rights.  It even deals with the misuse of computer systems statute that has seldom been discussed as a remedy for computer information theft.

Court Of Chancery Explains How To Do Cash Out Merger Fairly

In re Orchard Enterprises Inc. Stockholder Litigation, C.A. 7840-VCL (February 28, 2014)

This may be the definitive opinion on how to do a cash out merger fairly.  It contains a wealth of references to the case law dealing with all aspects of the dual duties to act fairly and provide a fair price and the potential remedies for the failure to meet those twin obligations.

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Court Of Chancery Requires Advancement Absent The Word "Advancement"

Fillip v. Centerstone Linen Services LLC,  C.A. 8712-ML (February 27, 2014)

Too often corporate documents refer to "indemnification" when they really mean "advancement."  Here the Court was required to interpret an agreement that really called for advancing attorney fees but did not use the word "advancement."  Hence, even if the right terminology is not used it still may be possible to win advancement.

Court Of Chancery Explains Acquiescence Defense

Lehman Brothers Holdings Inc. v. Spanish Broadcasting Systems Inc., C.A. 8321-VCG (February 25, 2014)

When may a large stockholder wait before asserting its voting rights arising out of the failure to pay dividends to preferred stock?  The short answer is that it all depends, particularly when the corporation is in the process of raising money by issuing debt that the preferred stock arguably had a right to prevent.  For if the stockholder waits until after significant corporate action is taken, it may have acquiesced in that action and lost the right to object to it.

Court Of Chancery Affirms Standing in Section 225 Case

 Flaa v. Montano, C.A. 9146-VCG (February 24, 2014)

This decision affirms the standing of someone not yet elected to the board to seek relief under Section 225.

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Court Of Chancery Affirms Power To Order Discovery Abroad

In re Activision Blizzard Inc. Stockholder Litigation, C.A. 8885-VCL (February 21, 2014)

Some countries, particularly in Europe, have laws that restrict the ability to get discovery of email and other materials.  This careful decision explains when the Court of Chancery will order that discovery anyway.  The opinion reviews the United States Supreme Court decisions and the laws of France on this subject.

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Court Of Chancery Explains Loss Causation

Vichi v. Koninklijke Philips Electronics N.V., C.A. 2578-VCP (February 18, 2014)

This may be the longest opinion ever written by the Court of Chancery.  In one sense, that is too bad because it has the best explanation of loss causation in any recent opinion.  Briefly, if A invests in company ABC because of false representations about its earnings and then the value of ABC declines because all its officers die, A has lost money because he invested in ABC.  However, his loss is not caused by the fraud but by the deaths of the officers.  In that situation, A has not proved loss causation. This is an important point that is too often overlooked.

Court Of Chancery Denies Advancement

White v. Kern, C.A. 7872-VCG (transcript, January 24, 2014)

This ruling illustrates an often overlooked point that the decision to advance attorneys' fees may constitute a self-dealing transaction when the party getting advancement is the party voting to do so. Hence, absent a proper basis, advancement is improper under those circumstances.  Of course, when advancement is required by the bylaws, then it is required and acceptable even if the decision is made by the same parties whose fees are to be paid.

Court Of Chancery Affirms Entitlement To Interest

Huff Fund Investment Partnership v CKx, Inc., C.A. 6844-VCG (February 12, 2014)

Appraisal actions are increasing for several reasons.  One reason is that the statutory rate of interest of 5% plus the federal discount rate paid to the stockholder is higher than that currently available elsewhere.  Here the defendant offered to pay into court what it said was the fair value and thereby stop the accrual of interest.  However, the Court held that the appraisal statute mandated interest be paid until the Court's judgment was paid.

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Court Of Chancery Awards Fees For Non-monetary Benefits

In re McMoRan Exploration Co. Shareholders Litigation, C.A. 8132-VCN (February 5, 2014)

This is an interesting decision because it awards fees for some complicated non-monetary benefits the plaintiffs' counsel claimed to have achieved.  How the Court analyzed the benefits is a guide to how it will do so in the future when the benefits go beyond mere additional disclosures.

Court Of Chancery Explains Nontransactional Damage Claims

OTK Associates LLC v. Friedman, C.A. 8447-VCL (February 5, 2014)

This interesting decision deals with 3 aspects of fiduciary litigation in Delaware. First, under the Supreme Court's CERBCO decision, even if a transaction is called off, a fiduciary who proposed the invalid deal may be held liable for the company's expenses. This happens so rarely that it is not clear how to apply CERBCO.  Well, this decision explains how it applies. The decision also explains when demand is not excused before filing an amended complaint when the composition of the board has changed since the original complaint was filed. Briefly, the Court looks to see if the new complaint is really a new claim and if it is, then the new board's independence is tested to see if demand is excused.   Finally, the decision explains when a forum selection clause is not enforceable to remove the court's power to decide a breach of fiduciary duty claim.  When the forum selection clause deals with the parties' contract claims, it does not preclude a Delaware court from dealing with fiduciary duty claims.

Court Of Chancery Shows How A Late Stage Summary Judgment Motion Works

In Re Answers Corporation Shareholders Litigation, C.A. 6170-VCN (February 3, 2014)

This is an excellent review of Delaware law on how to carry out the sale of a company.  Perhaps more novel, however, is how the Court deals with a summary judgment motion at a late stage of a case and where there are apparently conflicting factual claims. For after all discovery is done, the Court shows that it is more willing to weigh the evidence to some degree and rule that the plaintiff's' claims just do not get to trial.

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Court Of Chancery Explains Good Faith Dealing Applications

American Capital Acquisition Partners LLC v. LPL Holdings Inc., C.A. 8490-VCG (February 3, 2014)

Disappointed parties to merger or asset purchase agreements sometimes try to get a redo of their deal by arguing the other side has violated the duty to act fairly and in good faith in the course of implementing their transaction. This decision explains when that will not work and when it may succeed. If the parties contracted with respect to the subject the plaintiff is complaining about, it will do little good to try to cast its complaint as a matter of fair dealing. It instead should have done a better job of contracting. On the other hand, when the matter in dispute was not focused on by the parties in their deal, they have a better chance of having the Court fill the gap with a fair dealing and good faith analysis.

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Court Of Chancery Grants Specific Performance To Break Deadlock

Millien v. Popescu, C.A. 8670-VCN (January 31, 2014)

This is an interesting case because the Court grants specific performance of an somewhat vague contract and that breaks what would otherwise have been a stockholder deadlock.  It has a good outline of the law of specific performance.

Court Of Chancery Gets Tough On Delay

Sustainable Biofuels Solutions LLC v. Tekgar LLC, C.A. 8741-VCP (January 28, 2014)

Delays in discovery that affect the trial date will get a litigant in trouble with the Court.  The Delaware Supreme Court has made this clear and required that scheduling orders be followed.  This transcript makes this clear.

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Court Of Chancery Explains Stay Law On Appeals

In The Matter of the Rehabilitation Of Indemnity Insurance Corporation, C.A. 8601-VCL (January 16, 2014)

A party aggrieved by a trial court's decision may seek a stay while it appeals. To win a stay, it must satisfy the so-called "Kirpat" test, particularly its requirement of irreparable harm absent a stay.  This decision illustrates the analysis of the Kirpat factors.

Court Of Chancery Enforces Forum Selection Agreement

BE&K Engineering Company LLC v. Rocktenn CP LLC, C.A. 8837-VCL (January 15, 2014)

Anti-suit injunctions to enforce a choice of forum clause are not always easy to get.  Delaware courts do not like to interfere with other courts jurisdiction.  Instead, they prefer that a party aggrieved by the violation of a contract that selects Delaware as the forum to resolve disputes ask the non-Delaware court to stay its hand. However, as this decision illustrates, when pressed, a Delaware court will enjoin litigation elsewhere in the right circumstances. One such circumstance is when the party to be enjoined has tried to manipulate the system by taking inconsistent positions on what forum the contract requires. Trickery with the Courts is never a good idea.

Court Of Chancery Explains When A Lie Is Just A Lie

Touch Of Italy Salumeria & Pasticceria LLC v. Bascio, C.A. 8602-VCG (January 13, 2014)

In this case, the defendant quit his employment, lied to his co-owners about why and then set up a competing business.  However, the LLC agreement did not have any limitation on competing with it. As a result, while the court was quick to condemn the lie, it held that competing was permitted. This is an example of how people in business together often feel there are some unwritten ethical rules that a court will enforce even if they are not part of the parties' agreement.  At least in the area of competition, that is just not so. You need to get it in writing to enforce an obligation to not compete after some one leaves your employment. Of course, this does not mean that there are no fiduciary or other duties that may require a course of conduct not spelled out in writing.  Hence, this decision should not be read too broadly

Court Of Chancery Explains Scienter Requirement In Insider Trading Claim

Silverberg v. Gold, C.A. 7646-VCP (December 31, 2013)

Under Delaware law, a so-called Brophy claim seeks to recover the profits made by trading on insider information. Showing that material insider information was available is not too hard.  What is harder is showing the intent to use that information, the scienter requirement.  After all, an insider may trade for a variety of reasons, such as a favorable public announcement of good future prospects.  Here the Court explains, in the context of a motion to dismiss, how to interpret the circumstances surrounding insider trades to find that they were done with the intent to benefit from the insider information.  Among the key facts are the timing of the trades in reference to obtaining the information, the failure to disclose the insider information until after the trades are completed, and the size of the trades in comparison to any prior trading.

Court Of Chancery Denies Advancement For Predecessor Liability

Grace v. Ashbridge LLC, C.A. 8348-VCN (December 31, 2013)

In general, a successor entity is not liable for its predecessor's obligations when there has been a fundamental change in the identity of the entity.  Here, the Court held that the conversion of a corporation into an LLC did not make the LLC obligated to advance attorney fees for claims that arose out of actions taken while a director of the predecessor corporation.  The decision turned on the terms of the LLC's advancement provisions in its operating agreement.  Hence, if you want to include a right to advancement for actions taken for the predecessor entity, you had better say so.  Note also that the result may well have been different for a claim for indemnification after a merger because the merger statute provides that obligations of an entity in a corporate merger pass to a resulting entity after a merger.

Former Director Loses Right To Inspect

King v DAG SPE Managing Member Inc., C.A. 7770-VCP (December 23, 2012)

This decision holds that after a director ceases to be a director, he loses any statutory or other right as a director to inspect a corporation's books and records.

Court Of Chancery Explains Equitable Tolling

In re Primedia Inc. Shareholders Litigation, C.A. 6511-VCL (December 20, 2013)

This decision explains when the doctrine of equitable tolling will save a complaint from being dismissed because it was filed too late.  If the plaintiff would not have been able to discover the key facts supporting a claim by inspecting the company's books and records, equitable tolling of the applicable limitations period will apply until those facts come to light. That is particularly helpful in a Brophy claim alleging the use of insider information where the knowledge of the insider may not become apparent until that insider's records are disclosed.

Court Of Chancery Denies Anti-Suit Injunction

The North River Insurance Company v. Mine Safety Appliances Company, C.A. 8456-VCG (December 20, 2013)

The Court of Chancery has again denied a request for an anti-suit injunction. This time the Court noted that the litigation sought to be enjoined would actually continue by a party not before the Court. Hence, the injunction was not going to accomplish an end to duplicative litigation. 

Court Of Chancery Explains "Inadvertent" Disclosures

Jefferson v Dominion Holdings Inc., C.A. 8663-VCN (December 13, 2013)

The term "inadvertent" is frequently used in confidentiality and quick-peek agreements to permit the claw back of privileged documents that have been "inadvertently" produced. In a rare case, the Court of Chancery concluded that there was inadvertent production, even though the documents were used in questioning a witness.

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Superior Court Explains Forum Selection Rules

National Union Fire Insurance Co. of Pittsburgh, PA. v Crosstex Energy Services L.P., C.A. N13C-01-043 MMJ CCLD (December 13, 2013)

This opinion has a good summary of Delaware law on forum selection clauses, motions to dismiss for improper venue, and stays in favor of another forum.

Court Of Chancery Explains Privilege Rulings

MPEG LA L.L.C. v. Dell Global B.V., C.A. 7016-VCP (December 9, 2013)

This is a useful decision because it collects the relevant rules for deciding if there is a privilege for communications that include a mixture of business and legal advice. If the business advice can be segregated from the legal advice, the communication should be produced with the legal advice redacted. If the business advice predominates and segregating it from the legal advice is not possible, the communication should be produced. But if the business advice cannot be said to predominate and segregating the legal advice is not possible, the communication may be withheld.

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Court Of Chancery Suggests Equity May Aid When Dissolution Waived

Huatuco v Satellite Heathcare, C.A. 8465-VCG (December 9, 2013)

As this decision affirms, it is possible to waive the right to a judicial dissolution in an LLC agreement. However, the decision also notes that the Court may use its equitable powers to remedy an abuse of power.  This possible "escape valve" may be hard to invoke given the respect the Delaware Courts have for the right to contract away one's rights in an LLC agreement.

Court Of Chanery Explains Damages Calculation For Consent Breach

Fletcher International Ltd. v. ION Geophysical Corporation, C.A. 5109-CS (December 4, 2013)

What are the damages when a party's right to consent to a transaction is violated?  There is no easy answer to that question that involves predicting what might have been won in fair negotiations for that consent.  Nonetheless, here the Court explains how it determines what are the reasonable expectations of the non-breaching party.

Master in Chancery Summarizes Advancement Law

Fillip v. Centerstone Linen Services LLC, C.A. 8712-ML (December 3, 2013)

This is an excellent summary of the Delaware  law on advancement and why all the arguments against improvidently granted advancement rights are wrong.  For example, it explains why the right to be "defended' includes advancement, but the right just to be indemnified does not.  In short, it is a good case to read before drafting advancement contracts.

Federal Court Clarifies Duty To Negotiate

Osco Motors Company, LLC v. Marine Acquisition Corp., No. 13-868-RGA-MPT (D. Del. December 2, 2013)

The duty to negotiate in good faith is now well recognized in Delaware under SIGA Acquisition Inc. v. PharmAthene Inc., 67 A.3d 330 (Del. 2013).  However, what is less clear is when exactly does that duty arise. This decision explains when the duty is created and distinguishes Delaware from New York law in that respect.

Court Of Chancery Invalidates Stock Issuance

Boris v Schaheen, C.A. 8160-VCN (December 2, 2013)

This is an example of a corporate nightmare for failing to follow the requirements to validly issue stock.  Delaware law  requires that the stock issuance be reflected by a "written instrument," not just some oral agreement.  Moreover, the Court of Chancery will not use its equitable powers to cure a void stock issuance.  Hence, the stock will be held to not exist and all the corporate acts taken in reliance of that stock being issued will be called into question.

Court Of Chancery Upholds Survival Claim Limits

ENI Holdings LLC v. KBR Group Holdings LLC, C.A. 8075-VCG (November 27, 2013)

This is another decision holding that a contractual limit on when a claim "survives" is actually a limitation on when such a claim may be filed in court based on a breach of contract.  In short, survival clauses may shorten the statute of limitations.

The decision is also helpful in explaining that there is no requirement that the claim actually be known for it to expire and how to plead any of the several tolling doctrines that might apply to save such a claim.

Court Of Chancery Clarifies Jurisdiction

Darby Emerging Markets Fund L.P. v. Ryan,  C.A. 8381-VCP (November 27, 2013)

This decision clarifies the Court of Chancery's jurisdiction under the clean up doctrine and when a contract subject to specific performance has not yet been breached.

Court Of Chancery Examines Technical Requirements Of Stockholder Consents

The Ravenswood Investment Company L.P. v. Winmill, C.A. 3730-VCN (November 27, 2013)

Section 228 of the DGCL sets out the requirements to act by stockholder consent.  Here, the Court notes that each stockholder's signature should be separately dated.  While somewhat forgiving of a failure to observe all the technical requirements when there is no real factual dispute over what the stockholders did, this is a warning that a consent may be invalid if not done right.

Court Of Chancey Resolves Status Of Former GP

Policemen's Annuity and Benefit Fund of Chicago, Illinois v. DV Realty Advisors LLC, C.A. 7204-VCN (November 27, 2013)

What is the status of a general partner in a Delaware limited partnership after that GP is removed? As this decision points out, the answer is not clear and it may be just a holder of an economic interest, but not a limited partner. That question can be resolved by a provision in the partnership agreement and that is the better course as it will then help to determine the former GP's buy out rights.

Court Of Chancery Explains Conspiracy Jurisdiction

Lake Treasure Holdings Ltd. v. Foundry Hill GP LLC, C.A. 6546-VCL (November 21, 2013)

The so-called conspiracy theory of jurisdiction over a non-resident is often misunderstood. This decision is useful because: (1) it explains the relationship between jurisdictional discovery and the burden of alleging facts sufficient to establish jurisdiction and (2) it again explains what must be shown to warrant jurisdiction under the conspiracy theory.

Court Of Chancery Reviews Theories Of Liability Under Sale Agreement

Osram Sylvania Inc. v. Townsend Ventures LLC,  C.A. 8123-VCP (November 19, 2013)

A buyer of a business may not get what he was told to expect. This decision is a good review of the legal theories available to recover under those circumstances.

Supreme Court Explains Its "Business Combination" Ruling

Activision Blizzard Inc. v. Hayes, C.A. 497, 2013 (November 15, 2013)

What constitutes a "business combination" is an important question because that phrase is found in statutes and stockholder agreements that restrict certain corporate actions.  Here, the Supreme Court makes it clear that a divestiture is not a "combination" and that the phrase needs to be interpreted in the context it is used.

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Court Of Chancery Holds Privilege Passes With Merger

Great Hill Equity Partners IV, L.P. v. SIG Growth Equity Fund I, LLP,  C.A. 7906-CS (November 15, 2013)

In what seems to have created a real stir, the Court of Chancery held that control over the assertion of the attorney-client privilege passed to the acquiring corporation in a merger.  Hence, that entity could waive that privilege and obtain the legal advice the company received before the merger about certain aspects of its operations that the buyer now is arguing over.  Frankly, there is a lot of authority supporting this result and it should not have come as a surprise.

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Court Of Chancery Calculates Benefit Conferred

In re Quest Software Inc. Shareholders Litigation, C.A. 7357-VCG (November 12, 2013)

This is an interesting decision because it involves calculating how much litigation contributed to an increase in merger consideration when a competing bid drove the merger price up. There is no formula to apply to reach the result. Significantly, the attorneys were aided by the presumption that their efforts did have a positive affect.  It may be that the fee awarded was also influenced by calculations of a "fair" hourly  rate for the hours worked.

Court Of Chancery Explains Stock Option Complaint Rules

Pfeiffer v. Leedle, C.A. 7831-VCP (November 8, 2013)

It is sometime thought that it is enough to state a claim for a complaint to just allege that the directors violated the terms of a stock option plan. Not so.  As this opinion points out, the complaint must also contain factual allegations that the directors knowingly violated the terms of the plan. A simple negligent violation is not enough to state a claim. Thus, if the terms of the plan are sufficiently ambiguous that the directors may have believed their actions conformed to the plan's requirements, the directors are not liable for a breach.

Court Of Chancery Adopts Merger Price In Appraisal Case

Huff Fund Investment Partnership v. CKx Inc., C.A. 6844-VCG (November 1, 2013)

In this appraisal case, the Court rejected the usual DCF analysis as unreliable and instead adopted the merger price as the fair value. The facts are a bit unusual.  The merger was the result of a real marketing of the company.

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Court Of Chancery Again Explains Conspiracy Theory Of Jurisdiction

Microsoft Corporation v. Amphus, Inc., C.A. 8092-VCP (October 31, 2013)

The alter ego and conspiracy theories of jurisdiction are among the hardest to understand.  This decision carefully and clearly applies those theories to a complicated fact pattern.

Court Of Chancery Explains Limits Of Jurisdiction Over Foreign Entities

Baier De Adler v. Upper New York Investment Companies LLC, C.A. 6896-VCN (October 31, 2013)

This is an interesting decision dealing with jurisdiction over foreign entities. The Court will not take jurisdiction when the assets involved are located outside the US and not owned by a Delaware entity

Court of Chancery Explains "At Issue" Waiver of Privilege

JP Morgan Chase & Co. v. American Century Companies Inc., C.A. 6875-VCN (October 31, 2013)

As is well known, the attorney/client privilege may be waived by interjecting that communication into the matters "at issue" in the litigation.  Advice of counsel as a defense is one such instance.  This decision illustrates another -  when the advice apparently went to the valuation matters.

Also interesting is the Court's caution that just because one side interjects attorney communications into the issues, that does not mean that the opposing side's demand to see those communications also opens up its privileged matters to discovery as well.

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Court Of Chancery Explains Pleading Rules For Fiduciary Duty Claim

AM General Holdings LLC v. The Renco Group Inc., C.A. 7639-VCN (October 31, 2013)

This is another example of how the Court of Chancery treats breach of fiduciary duty claims that are duplicative of breach of contract claims. When the 2 claims overlap, the Court will dismiss the breach of fiduciary duty claim.  Of course, what constitutes such an overlap is not always easy to determine. This decision illustrates that process.

Superior Court Explains Insurance Policy Interpretation Rules

First Bank of Delaware Inc. v. Fidelity and Deposit Company of Maryland, C.A. N11C-08-221 (October 30, 2013)

This decision sets out in one place the standard rules for interpreting an insurance policy, particularly who has the burden of proving an exception to coverage exists and any exceptions to that exception. The decision is also noteworthy for adopting the rule that the exceptions to coverage should not be interpreted to swallow up all the coverage of the policy.

Court Of Chancery Upholds Complaint of Insider Abuse

TVI Corporation v. Gallagher, C.A. 7798-VCP (October 28, 2013)

If you are looking for a case that lists almost every abuse a controlling group of stockholders can make, this is it.  The decision also sets out the right scope of review and what are reasonable inferences sufficient to warrant upholding a variety of claims as well.

Court Of Chancery Upholds Election Results

Red Oak Fund L.P. v. Digirad Corporation, C.A. 8559-VCN (October 23, 2013)

In this unusual case, the Court of Chancery upheld the results of a proxy contest. The opinion is noteworthy for its explanation of the tests the Court will use in ruling on a challenge based on claims the election was unfairly conducted.

Court Of Chancery Dismisses Suit Over Merger

In re Bioclinica Inc. Shareholder Litigation, C.A. 8272-VCG (October 16, 2013)

This is an interesting decision because it dismissed an action against a merger when the complaint was similar to the standard form of complaint filed after most mergers are announced. Here, in contrast to what usually happens, the defendants chose to fight the allegations rather than settle with some additional disclosures and the payment of attorney fees. This does not mean we are in a new era of stand and fight. After all, one case does not make a trend. The opinion is a good collection of the Delaware law decisions on what must be pled to sustain such a complaint.

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Superior Court Adopts Chancery Anti-Reliance Law

TEK Stainless Piping Products Inc. v. Smith,  C.A. N13C-02-175 (October 14, 2013)

When does the parties' contract bar a claim for fraud? Here the Superior Court adopted the Court of Chancery's line of decisions that holds to bar such a claim the contract must specifically disclaim any "reliance" on representations outside the terms of the contract itself.

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Court Of Chancery Explains Their Corporate Benefit Rule

Zimmerman v. Crothall, C.A. 6001-VCP (October 14, 2013)

When litigation confers a benefit upon a corporate entity, it is only fair that entity pay the fees incurred. Yet what constitutes a benefit may be contested, particularly by the corporation that is the subject of the suit. Here the Court held that forcing the LLC to comply with its agreements constituted such a benefit that fees should be awarded.

Court Of Chancery Explains When Actions Are Void

Klaassen v. Allegro Development Corporation, C.A. 8676-VCL (October 11, 2013)

There is still an important distinction under Delaware law between actions that are void and those that are merely voidable. For only voidable actions may be ratified. This decision traces the history of that distinction with respect to calling of directors' meetings. Only meetings called in violation of the bylaws or certificate of incorporation are void. Others subject to some equitable attack are still able to be ratified.

Superior Court Explains Mutual Mistake Law

Newport Disc Inc. v. Newport Electronics Inc.,  C.A. N12C-10-228 MMJ CCLD (October 7, 2013)

This is an action where the defendant tried to avoid its contractual obligations by asserting a mutual mistake led to the wrong language in the contract. The Court rejected that argument for want of clear proof of a mutual mistake.  This illustrates the all-too-human tendency to feel that the wrong result must be a "mistake."  The Court just is not going to buy that cop out.

Supreme Court Upholds Its Pleading Standard

Winshall v.Viacom International Inc., No. 39, 2013 (October 7, 2013, corrected October 8, 2013)

This decision is particularly interesting for its affirmance in the face of questions from the Court of Chancery that the Delaware pleading standard is "reasonably conceivable" and not the federal "plausible" test of whether a pleading alleges facts sufficient to state a claim.

Court Of Chancery Explains Consent Vote Rules

Flaa v Montano, C.A. 8632-VCG (October 4, 2013)

When can you challenge the right to consent to corporate action?  This decision explains the rules that govern such challenges, particularly when it is claimed that the consent is valid on its face.

Court Of Chancery Permits Creeping Takeover

In re Sirius XM Shareholder Litigation, C.A. 7800-CS (September 27, 2013)

This is an interesting decision because it discusses the duties, or lack thereof, a large stockholder who is buying more stock on the open market to take control.  Here the stockholder had a contract that it entered into when it loaned a lot of money to the company that limited the company's ability to adopt a poison pill or otherwise prevent such stock purchases.  Yet even absent that contract, the court indicated that there is no fiduciary duty to offer a "fair" price when buying stock on the open market and no duty of a board to act to prevent those purchases.

Court Of Chancery Declines To Order Election

Canmore Consultants Ltd. v. L.O.M. Medical International Inc., C.A. 8645-VCG (September 19, 2013)

This is the first decision under  Section 223(c) of the DGCL to decide whether to order an election to fill the vacancies on a board that has less than a quorum of directors in office.  The Court held that the stockholders had the burden to show an election was appropriate and that due to the company's precarious finances, it was best not to hold the election but let the incumbent board members fill the vacancies.

Court Of Chancery Refuses Temporal Limit On Waiver Of Privilege

Mennen v. Wilmington Trust Company, C.A. 8432-ML (September 18, 2013)

If it is upheld upon review, this decision by a Master in Chancery needs to be studied by all practitioners.  Briefly, it holds that when a party waives the attorney-client privilege, it does so with respect to the entire subject matter of the communication involved in the waiver.  There is no temporal limit such that later communications on the same subject matter may be protected from discovery.

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Court Of Chancery Explains When To Award Fees For Litigation Misconduct

ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member LLC, C.A.5843-VCL (September 16, 2013)

When does a litigant"s conduct before or after the litigation is filed justify fee shifting? This careful decision answers that question.

To begin with, mere silence about a drafting error during contract negotiations is not the sort of fraud that warrants fee shifting.

As to post litigation fee shifting, needlessly increasing the costs as a leverage technique does warrant fee shifting. The decision also gives a litany of other examples that is a useful guide.

Court Of Chancery Orders New Arbitrator

Lynn v. Ullrich, C.A. 7098-ML-VCN (September 12, 2013)

This decision ordered the parties to pick a new arbitrator when the prior arbitrator concluded he was biased.  Why anyone would argue this seems odd.

Supreme Court Explains Merger Effect On Derivative Claims

Arkansas Teacher Retirement System v. Countrywide Financial Corp, No. 14, 2013 (September 10, 2013)

When does a derivative suit survive a merger?  This decision says "not very often."   There seems to be two rules at play here. First, when the merger's sole purpose is to eliminate the standing of the derivative plaintiff, then the derivative suit may continue.  Second, the merger may be attacked when it is an "inseparable" part of a fraud alleged as part of a direct pre-merger suit.  Note the word "direct."  A direct claim is not a derivative claim, but instead alleges wrongs for which the plaintiff may recover for herself.  Hence, even if the merger is cast as part of some fraud inseparable from pre-merger acts, a derivative suit will not survive the merger just for that reason.

Court Of Chancery Permits Employee Email Inspection

In re Information Management Services Inc. Derivative Litigation, C.A. 8168-VCL (September 5, 2013)

This decision holds that an employee's email communications with his attorneys are not privileged. The holding is limited to circumstances where the employer has at least told the employees not to expect that their email is private.  Furthermore, the Court notes that this decision may not be followed in the typical derivative case where an outsider is trying to gain access to those emails.  That decision will need to wait for another day.

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Court Of Chancery Enforces Indemnification Rights Under LLC Agreement

Costantini v. Swiss Farm Story Acquisition LLC, C.A. 8613-VCG (September 5, 2013)

This decision holds that language in an LLC agreement that mirrors the indemnification language of the Delaware Corporation law will be interpreted the same way to mandate indemnification to a prevailing manager.

Superior Court Explains Non-Reliance Law

Alltrista Plastics LLC. v. Rockline Industries, Inc., C.A. N 12C-09-094 JTV (September 4, 2013)

This is an excellent summary of what language is needed to prevent a claim based on reliance on representations outside the terms of the actual contract.  The language must clearly refer to the intention of the parties to bar such claims.

Court Of Chancery Limits Inspection From Third Party

Florida R&D Fund Investors LLC v. Florida BOCA, C.A. 8400-VCN (August 30, 2013)

This decision illustrates the danger in vesting practical control of the records an entity in a non-Delaware "agent."  Simply put, as the agent is not subject to the statutory duty to produce those records and may not even be subject to Delaware jurisdiction, the Delaware forum is not available to enforce inspection rights

Court Of Chancery Continues To Explain Bad Faith

Stewart v. BF Bolthouse Holdco LLC, C.A. 8119-VCP (August 30, 2013)

The interplay between fiduciary duties and contractual obligations is often hard to understand.  Add to that the task of explaining the duty to act in good faith and deal fairly and the law is even more confusing. This decision does a good job of cutting through that problem to explain: (1) when a complaint alleges enough facts to state a claim for acting in bad faith, (2) when contractual obligations take the place of fiduciary duties, and (3) when the obligation to act fairly is not superseded by contract.

Court Of Chancery Again Explains Demand Excused Rules

In Re China Automotive Systems Inc. Derivative Litigation, C.A. 7145-VCN (August 30, 2013)

The rules for determining when demand on the directors is excused apply even to Chinese-based companies despite their bad press.  This decision in a direct and clear way spells out when demand is not excused.  For example, merely being on the audit committee does not mean a director faces a serious risk of personal liability for auditing mistakes.  More "red flags" are required.

When A Request For An Injunction Does Not Preempt Arbitration

Shareholder Representative Services LLC v. ExlService Holdings Inc., C.A. 8367-VCG (August 27, 2013)

Arbitration clauses often have an exemption for suits for injunctive relief. Yet just asking for an injunction in the complaint may not avoid the need to arbitrate, as this decision holds. Apparently, when the injunction is just to enforce the terms of the contract and not to prevent irreparable harm, the claim must still go to arbitration.

Supreme Court Limits Laches Defense

Levey v. Brownstone Asset Management L.P., No. 551, 2012 (August 27, 2013)

When does laches apply to a claim filed in the Court of Chancery?  Generally that Court follows the statute of limitations that would have applied in the law court, the Delaware Superior Court.  However, the time to file suit may be extended in "unusual conditions or extraordinary circumstances," under IAC/InterActive Corp. v. O'Brien, 26 A.3d 174 (Del. 2011). This decision explains when those circumstances exist.

Court Of Chancery Resolves Common/Preferred Conflict

In re Trados Incorporated Shareholder Litigation,  C.A. 1512-VCL (August 16, 2013)

This is an important decision.  It resolves the long-standing confusion over how a board of directors is to act when the interests of preferred shareholders conflict with those of common shareholders. The common shareholders win is the short answer.

The decision also is very helpful in setting out how the directors should act or not act when faced with the all-too-common question of whether to sell when the common stock is under water due to the preferred stock's liquidation rights.

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District Court Follows Carsanaro

Fares v. Lankau, No. 12-1381-SLR (August 15, 2013)

This federal decision follows the recent Chancery explanation of the Gentile doctrine that permits a direct claim for equity dilution.  In short, the dilution can be by paying too little cash for the additional shares and the so-called "controlling" stockholder requirement for the buyer can be satisfied by a group of buyers operating though their elected directors that are a majority of the board.

Court Of Chancery Explains Injunction Out Clause In Arbitration Agreement

Medicis Pharmaceutical Corporation v. Anacor Pharmaceuticals Inc., C.A. 8095-VCP (August 12, 2013)

Agreements to arbitrate disputes often have an "out clause" that permits the parties to seek judicial relief by way of an injunction.  The scope of such a clause is the focus of this opinion that explains when a party may still file suit even after the other party has demanded arbitration.

Court Of Chancery Declines Award While Case On Appeal

Huff v. Longview Energy Company, C.A. 8453-CS (August 12, 2013)

This is an interesting decision because it involves some real nerve by directors who seek indemnification even after they lost big time in the underlying litigation. Their claim is that some of the counts against them were withdrawn, they were "successful" and hence entitled to be indemnified. The Court avoided deciding if this is correct by holding that so long as the underlying case is on appeal, it is better to wait to see how the appeal turns out and if the previously withdrawn claims are reinstated.

Court Of Chancery Provides Guidelines On Stantdstill Orders

IMO Dissolution Of Adir Managment Services, C. A. Nos. 8717 and 8718-VCN (August 9, 2013)

The Court of Chancery often enters standstill orders or status quo orders when the control of a Delaware entity is in dispute.  The orders are designed to prevent actions that may not be what the actual management would do in circumstances when the identity of that management is not in doubt. Disputes over the form of these orders are common and this decision seems to settle how one provision should be worded.  At least in the absence of special circumstances, the provision of the order that prevents extraordinary actions should be worded so as to permit action after 7 days notice to the other side, who is then free to seek court action if it objects.

Court Of Chancery Explains Equitable Fraud Claim

Grzybowski v. Tracy, C.A. 3888-VCG (August 9, 2013)

When is there a claim for "equitable fraud" in the absence of a fiduciary relationship?  This may be an important issue when it is difficult to prove the scienter requirement to establish a common law claim for fraud. This decision holds that there may be a claim for equitable fraud even when the parties do not have a fiduciary relationship. However, the holding is limited to when the proper remedy is to rescind the transaction.

Court Of Chancery Explains How To Determine Memerbership Interests

Grove v. Brown, C.A. 6793-VCG (August 8, 2013)

This is an interesting decision because it explains what is the effect when a member fails to pay the consideration contemplated by the LLC operating agreement to obtain his membership interest.  The answer is determined by what the operating agreement says is the consequence, loss of interest or just a debt owed to the LLC.

This is also an example of what a mess may be created when parties try to do their own legal work in setting up an entity and working their way through disputes.

District Court Upholds Option Complaint

Halpert v Zhang, C.A. 12-1339-SLR (August 1, 2013)

This federal decision illustrates when a complaint does state a proper derivative claim because it alleges that a majority of the Board violated a clear restriction on its right to award stock options. Such violations of an option plan are akin to violations of the law that are almost always beyond the business judgment of the directors to do.

Court Of Chancery Explains How To Calculate The Limitations Period When Class Is Not Certified

In Re Nine Systems Corporation Shareholders Litigation, C.A. 3940-VCN (July 31, 2013)

This decision explains how to determine if too much time has passed to permit a complaint to go forward, under a variety of circumstances.  It also discusses the various rules that may be applied when a class action is not certified but there is tolling while the class certification issue is pending.

Court Of Chancery Dismisses Merger Complaint

Miramar Firefighters Pension Fund v. Abovenet, Inc., C.A. 7376-VCN (July 31, 2013)

This decision is a good example of when a complaint about really nothing to complain about will be dismissed, even in the current environment where every merger is subject to litigation.  Here there was virtually no evidence any better deal was available, almost every director was disinterested, there was an extensive search for suitors, and the claims over the way the fairness opinion was done were just quibbles.

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Superior Court Explains Damage Limitation Clauses

RHA Construction Inc. v. Scott Engineering Inc., C.A. N11C-03-013 JRJ CCLD (July 24, 2013)

When is a limitation on a damages clause enforceable?  This decision explains Delaware law on that issue, particularly when the actual damages are too difficult to predict and the limitation is reasonable.

Court Of Chancery Limits Summary Judgment Filing

City Of Roseville Employees' Retirement System v. Ellison, C.A. 6900-CS (July 24, 2013)

This transcript ruling explains the Court of Chancery practice on hearing motions for summary judgment.  Briefly, it does not want to do so when there is less than 90 days after all briefing is done before the trial is to start.  Not only do such late-filed motions put a burden on the party preparing for trial but they require the court to decide those motions quickly when the circumstances do not warrant expedited treatment.

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Court Of Chancery Explains Limits Of Revlon

In re Morton's Restaurant Group Inc. Shareholder Litigation, C.A. 7122-CS (July 23, 2013)

This decision is another example of the increasing scrutiny of complaints attacking mergers without an adequate factual basis.  At the outset of the decision, the Court gives an extensive justification for going beyond the mere confines of the allegations of the complaint to review SEC filings and other materials touched on in the complaint.  From those documents, the court is able to conclude the Revlon claim has no merit.

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Court Of Chancery Again Affirms Use of Conflict Committee

Natural Energy Development Inc. v. Shakespeare-One Limited Partnership, C.A. 4836-CS (July 22, 2013)

The Court of Chancery once again has affirmed that the proper use of a conflicts committee may immunize a transaction from attack.  This is now a common feature of LLP and LLC agreements but each agreement's terms are critical to its impact and its implementation.

Federal Court Dismisses Novel Voting Rights Claim

Freedman v. Redstone, No. 12-1052-SLR (D. Del. July, 16, 2013)

Under the IRS Code, executive compensation over $1,000,000 a year is not deductible absent a stockholder vote to approve a compensation plan that meets certain objective criteria.  Here the Court dealt with a complaint that alleged that the approval vote had to include the vote of stock that under the corporation's certificate of incorporation did not normally have the right to vote.  The Court rejected that argument and held that only voting stock had the right to approve a compensation plan.  Hence, the DGCL was saved from the IRS.

Federal Court Upholds Option Timing Complaint

Ausikaritis v. Kiani, No. 12-1175-SLR (D. Del. July 16, 2013)

When stock options are awarded may be important to their actual value.  Get an option when the market price is in the toilet and you will do better when the market turns than with an option granted at the top of the market.  But is option grant timing itself actionable?  This decision says that it is and that a complaint that alleges such timing may withstand a motion to dismiss.

Supreme Court Decides Who Decides

Viacom International Inc. v. Winshall, C.A. 513, 2012 (Del.  July 16, 2013)

When there is an argument over whether part of a dispute is subject to the Court or the arbitrator's judgment, there has been considerable confusion.  The classic formulation of the test is:

Issues of substantive arbitrability are gateway questions relating to the scope of an arbitration provision and its applicability to a given dispute, and are presumptively decided by the court. Procedural arbitrability issues concern whether the parties have complied with the terms of an arbitration provision, and are presumptively handled by arbitrators.  These issues include whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met, as well as allegations of waiver, delay, or a like defense to arbitrability.

In this Supreme Court decision, the Court adopts this test at first and then seems to back away from it for a new test of its own.  The new test seems to be whether the dispute is simply part of the overall controversy.  If it is, then the arbitrator decides it.  Now that may be a misguided view of the holding, but it is the best that I can do.

Court Of Chancery Values Small Cap Company

Merion Capital LP v. 3M Cogent, Inc., C.A. 6247-VCP (July 8, 2013)

This is another in the series of recent appraisal cases.  As usual, the opinion reflects a careful analysis of the traditional methods used to value a company in an appraisal proceeding.

Particularly noteworthy is the Court's continued insistence that the expert's opinions be supported by a full explanation and that conclusions should be grounded in practices recognized by valuation literature.  This translates into the point that these appraisal cases are not for novices and demand familiarity with the financial literature and processes involved.

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Court Of Chancery Upholds Privilege To Say I Consulted

In re Quest Software Inc. Shareholders Litigation, C.A. 7357-VCG (July 3, 2013)

Almost every case seems to involve the issue of when asserting that the defendant board had legal advice constitutes a waiver of the attorney-client privilege. This decision explains how far you can go and yet preserve the privilege.  Basically, you can say that you consulted and still keep the privilege, but you cannot say 'he told me it was okay" without a waiver.

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Court Of Chancery Clarifies Damages For Breach

Universal Enterprise Group LP v Duncan Petroleum Corporation, C.A. 4948-VCL (July 1, 2013)

This careful decision explains how to calculate damages in a breach of contract case.  That is not as easy as it sounds. Plaintiffs frequently try to get tort-type damages in breach of contract cases, particularly under the loss of value theory.  This decision cuts off those types of damages.

Court Of Chancery Values Radio Company

Towerview LLC V. Cox Radio Inc., C.A. 4809-VCP (June 28, 2013)

This appraisal case is a good example of the Court's thinking processes in establishing value.  The close focus on the particular industry involved, the consideration of economic trends and the reliance on valuation theory are all typical in appraisal cases. Also interesting is the Court's willingness to really dig into the reasons for any expert's opinion. The experts had better fully explain why they reached any particular opinion or bear the risk that the Court will not accept it.

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Court Of Chancery Upholds Forum Selection Bylaw

Boilermakers Local 154 Retirement Fund v. Chevron Corporation, C.A. 7220-CS (June 25, 2013)

The Court of Chancery has upheld a bylaw that selects Delaware as the only forum for internal corporate disputes. The Court  did leave open the possibility that such a bylaw might be later challenged on narrow grounds that it was improper in limited circumstances.

Court Of Chancery Holds Privilege Waived

Lake Treasure Holdings Ltd. v. Foundry Hill GP LLC, C.A. 6546-VCL (June 14, 2013)

This transcript decision illustrates the danger in using a computer generated privilege log.  It will leave out document descriptions, addresses, etc.  As a result, the Court here held that any privilege claim was waived by using the "worst" log ever.  Hence, loggers beware!

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Court Of Chancery Appoints Receiver To Hold Meeting

Rich v Fuqi International Inc., C.A. 5653-VCG (June 12, 2013)

What happens when the Court orders the holding of an annual meeting and the company refuses to do so?  In this decision the Court of Chancery appointed a receiver with the authority to hold the meeting once the receiver determines how to do so without running afoul of the SEC rules requiring audited financial statements the company presently does not have.

Supreme Court Broadly Upholds Fair Dealing Claims

Gerber v. Enterprise Products Holdings LLC, No. 46, 2012 (June 10, 2013)

This decision has big implications. In a line of past decisions, the Court of Chancery has upheld arguments that  an LLC agreement may define what constitutes "good faith" in such a way as to severely limit claims based on the implied duty of good faith and fair dealing.  Of course, that duty under the Delaware LLC Act cannot be eliminated in an LLC agreement.  But, by permitting drafters to define what constituted good faith, the trial courts came close to eliminating that duty.  No more.

Exactly what will constitute a violation of the duty of good faith and fair dealing is also implicated by this decision.  Conduct that may seem permitted by the LLC agreement may now be prohibited if done to take an action that the investors never would have agreed to had they thought of it when the LLC agreement was drafted. Time will have to tell what all this means.

Supreme Court Upholds Cross-Jurisdictional Tolling

The Dow Chemical Corporation v. Blanco, No. 492, 2012 (June 10, 2013)

The Delaware Supreme Court has upheld cross-jurisdictional tolling. Thus, when a class action is filed, the statute of limitations is tolled at least until the class is not certified. That is true even if, as here, the class action was filed in another jurisdiction.

Court Of Chancery Upholds Concealment Claim

Transdigm Inc. v. Alcoa Global Fasteners Inc., C.A. 7135-VCP (May 29, 2013)

This is another in the continuing series of cases involving buyers of companies who claim to have been misled by the sellers and where the sellers rely on exculpation clauses to defeat the buyers' claims.  What is interesting about this decision is that it upholds the novel argument that a concealment claim is not barred by such exculpation language. The decision has an excellent review of prior Delaware law interpreting such clauses.

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Supreme Court Upholds Forum Selection Clause

National Industries Group v. Carlyle Investment Management LLC,  No. 586, 2012 (May 29, 2013)

This is an important decision because it upholds the power of the Delaware Court of Chancery to enforce by an injunction the forum selection clause in a contract.  Previously, there was some doubt under the existing case law whether such an injunction would issue, but, at least among sophisticated litigants, there is no doubt any more.  Note that the clause in question provided that a "court in Delaware" would hear any dispute.  A clause that attempted to vest jurisdiction only in the Court of Chancery is questionable because a contract alone cannot confer jurisdiction on that court with its limited equity jurisdiction.

Court Of Chancery Applies BJR To Controller Merger

In Re MFW Shareholders Litigation, C.A. 6566-CS (May 29, 2013)

In this important decision the Court of Chancery for the first time has applied a business judgment rule analysis to a review of a merger where a controller is on both sides of the deal. This result limits the old Lynch doctrine that mergers involving a controller on both sides is subject to the intrinsic fairness standard that almost always requires a trial to resolve.  While this short blog cannot do justice to the Court's analysis, it held that the BJR will apply when: (1) the deal is subject to the approval of a SNC and the majority of the minority stockholders, (2) the SNC is independent, (3) the SNC has its own advisors and can say "no", (4) the SNC meets its duty of care, (5) the stockholder vote in fully informed and (6) the  vote is not subject to coercion.

 

 

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Delaware Supreme Court Affirms Contractual Exculpation

Norton v. K-Sea Transportation Partners L.P., No. 338, 2012 (May 28, 2013)

This decision affirms the consensus that a limited partnership agreement may set the standards for resolving a conflicted transaction and thereby absolve the controllers from any liability.

Court Of Chancery Upholds Caremark Complaint

In re China Agritech Inc. Shareholder Derivative Litigation, C.A. 7163-VCL (May 21, 2013)

One of the harder aspects of practicing Delaware corporate law is dealing with all the decisions. This is an excellent summary of current Delaware law on Rule 23.1, Caremark and a lot of other aspects of Delaware law that are implicated by derivative complaints.  It is also yet another example of a Chinese-based entity whose controllers seem to have no concern about compliance with our law.

Court Of Chancery Explains Exculpation Clause

Anvil Holding Corporation v. Iron Acquisition Corporation, C.A. 7975-VCP (May 17, 2013)

Many acquisition agreements contain provisions that are intended to limit the buyer's remedies. This decision explains what language to use to cut off claims based on extra-contractual representations.  The contract must specifically say that there is no reliance on anything outside the  terms of the contract.

Court Of Chancery Limits Third Party Discovery

In re: El Paso Partners LP Derivative Litigation, C.A. 7141-CS (Transcript, April 15, 2013)

This decision discusses when discovery from a third party not involved in the transaction under attack in the litigation is justified.  In part, the Court denied the discovery because it was not convinced the information to be obtained would be all that helpful in the litigation.

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Court Of Chancery Explains Limits Of Review Of Appraiser Decision

Senior Housing Capital LLC v. SHP Senior Housing Fund LLC, C.A. 4586-CS (May 13, 2013)

This decision explains the limits on any substantive review of an appraisal determination the Court will undertake when the parties' agreement limits that review.  it is an excellent overview of the way in which parties may decide how much judicial review they want in such cases.

Court Of Chancery Explains When A Derivative Suit Survives A Merger

In Re Primedia Inc. Shareholders Litigation, C.A. No. 6511-VCL (May 10, 2013)

This is a major decision.  Generally, a merger ends the standing of a plaintiff to pursue derivative litigation.  To get around this problem, derivative plaintiffs have alleged that the merger itself was invalid because the consideration paid to the stockholders eliminated in the merger did not include anything for the value of a pending derivative claim.  Until this decision, that claim did not go very far because the courts found that the derivative claim was worth very little.  But what if the claim is worth a lot?

This decision explains how to deal with that situation to effectively assert what is known as a "Parnes" claim.  As a result, we may see more such claims at least when the derivative litigation asserts big damages.

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Court Of Chancery Upholds Acceptance Of One Offer Without Market Check

In re Plains Exploration & Production Company Stockholder Litigation, C.A. 8090-VCN (May 9, 2013)

 As this decision points out again, when a board of directors is disinterested in the transaction, its decision to accept the first offer for its company does not run afoul of the Revlon doctrine just because there was no pre-agreement market check.  Instead, their decision is subject to the business judgment rule.

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Supreme Court Sets Reformation Rules

Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, C.A. 437, 2012 (May 9, 2013)

This is an important decision because it sets the rules for when a contract may be reformed for a unilateral mistake.  First, it is not a defense to a reformation claim that the other party failed to read the contract.   That may be a defense to a rescission claim, but not reformation.  Second, a unilateral mistake, known to the other party who remains silent, may justify reformation.  Third, the defense of ratification of such a mistake must be based on knowledge of the mistake.

Court Of Chancery Agrees To Consider Post Merger Evidence

In re Rural Metro Corporation Shareholders Litigation, C.A. No. 6350-VCL (April 16, 2013)

The Delaware appraisal statute is generally interpreted to preclude consideration of post-merger events in determining the fair value of the company.  However, in this transcript ruling, the Court indicated that it would consider such evidence when: (1) it sheds light on what the parties were thinking at the time of the merger (such as on revenue projections) and (2) it helps prevent a true outlier (such as wildly wrong revenue projections).  The Court cautioned that it might not give much weight to this evidence and it remains to be seen how far this transcript will go to permit other post-merger evidence.

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Court Of Chancery Explains A Fiduciary's Duty To Selling Stockholders

In Re Wayport Inc. Litigation, C.A. 4167-VCL (May 1, 2013)

When does a corporate fiduciary owe a special disclosure duty to a minority stockholder whose stock he purchases?  There are several approaches to this question and this decision fully reviews them all.  Ultimately the Court adopted the so-called "special circumstances" rule that requires disclosure when the buying fiduciary knows of material facts not known to the seller.  Note that in this context what is "material" is a higher bar to pass than in a more common disclosure case.

The decision is also useful for its review of the equitable fraud and common law fraud rules,  particularly after a duty to disclose arises because of a past disclosure.

Court Of Chancery Rejects Special Rights For Minority Stockholders

Blaustein v. Lord Baltimore Capital Corporation, C.A. 6685-VCN  (April 30, 2013)

This decision affirms the long held law that Delaware does not recognize the "abuse of minority stockholders" theory whereby there is a duty to treat minority stockholders in such a way as to give them benefits that are not provided by contract or the law, such as dividends.

Court Of Chancery Explains When Board Must Respond To Demand

Rich v. Chong, C.A. 7616-VCG  (April 25, 2013)

The rules governing when a demand on a board to file suit is excused are well known.  Less well known is what happens when a demand is made and nothing happens.  This decision explains that the failure to even respond is itself evidence that the board cannot be trusted to fairly evaluate the need to sue.  While each such case turns on its own facts, this decision is an excellent summary of Delaware law on when a Caremark claim is well pled to excuse demand.

Court Of Chancery Permits Access To Litigation Reserves

JP Morgan Chase & Co. v. American Century Companies Inc., C.A. 6875-VCN (April 18, 2013)

This decision explains the rare case when a litigant may gain access to the opposing party's litigation reserves. That information is usually subject to attorney-client privilege.

Court Of Chancery Explains When Directors May Shield Other Directors

Kalisman v. Friedman, C.A. 8447-VCL (April 17, 2013)

When may most of a Board of Directors deny another director access to the advice of counsel the majority received?  This decision answers that interesting question and concludes "not very often."  There are exceptions to that general rule, such as when there is a board committee involved whose counsel has not also been counsel to the excluded director, when the excluded director wants the information for a proven improper purpose, etc.

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Court Of Chancery Explains Privilege Waiver Law

In Re Comverge, Inc. Shareholders Litigation, C.A. 7368-VCP (April 10, 2013)

When does the mere assertion that your client had "advice of counsel" waive the attorney-client privilege?  This question comes up more often than you might think.  This decision makes clear that in some instances, merely asserting that you sought an attorney's advice is not a waiver of the privilege.  The 2 keys to retaining the privilege are not injecting the advice of counsel issue into the litigation yourself and not actually saying what the attorney told you.  But, if you follow the guidance in this decision, the privilege will be preserved.

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Supreme Court Reverses Important Decision Giving Delaware Primacy

Pyott v. Louisiana Municipal Police Employees' Retirement System, No. 380, 2012 (April 4, 2013)

In a major decision, the Delaware Supreme Court dismissed a derivative suit on the basis that a prior dismissal of essentially the same suit by a different stockholder barred the Delaware litigation.  This reverses the Court of Chancery that held the suit might proceed despite the dismissal of the other litigation by a Federal Court in California.

Pyott may have major implications for derivative litigation, at least when multi-state cases are filed. Defendants may be expected to race to file motions to dismiss in what they see as the most favorable jurisdiction or in those cases where they see less formidable opponents.

It is also noteworthy that the Supreme Court rejected any presumption that a "fast filer" is an inadequate plaintiff.

Court Of Chancery Limits Advancement

Emerging Europe Growth Fund L.P. v. Figlus, C.A. 7936-VCP (March 28, 2013)

When may a partnership demand advancement of its litigation expenses from a limited partner who has arguably breached the partnership agreement?  Only when the partnership agreement is very clear in granting that right, according to this decision.

Court of Chancery Explains Willie Gary

Li v. Standard Fiber LLC, C.A. 8191-VCN (March 28, 2013)

Who decides if a dispute is subject to arbitration? The Delaware Supreme Court decision in the Willie Gary case sets the way to resolve this question.  However, those rules are often hard to interpret. This decision explains Willie Gary in a useful way.

Court Of Chancery Explains Fee Award In Disclosure Case

In re PAETEC Holding Corp. Shareholders Litigation, C.A. 6761-VCG (March 19, 2013)

This decision gives a good explanation of how to calculate fees in a supplemental disclosure case.  It is particularly noteworthy in comparing the fees awarded to those won in other cases.

Court Of Chancery Permits Suit For Trustee To Proceed

Zutrau v. Jansing, C.A. 7457-VCP (March 18, 2013)

This decision permits a suit to proceed that seeks the appointment of a trustee for a solvent corporation based on allegations of breach of fiduciary duty.  That may be particularly unusual for prior decisions have required that there be a prior adjudication of a serious breach of duty before an action seeking a trustee might be filed. Perhaps here the gross breaches of duty alleged were enough to convince the Court to let the action go to trial.

Court Of Chancery Explains The Gentile Case

Carsanaro v. Bloodhound Technologies, Inc., C.A. 7301-VCL (March 15, 2013)

This is a major decision.  For some time lawyers have struggled to understand when a claim is derivative or direct. The distinction is important if for no other reason than derivative claims may be mooted by a merger that eliminates the plaintiff as a stockholder with standing to sue.  Under the Delaware Supreme Court's Gentile decision, some claims alleging a wrongful stockholder dilution may be direct, derivative or both.  Which ones qualify?  This decision answers that question with a thoughtful analysis that is useful in dealing with other factual patterns besides the controlling stockholder that was involved in Gentile.

This decision is also important for its holding that when a stockholder consents to any corporate action by a written consent form that refers to other documents that define the transaction consented to, the other documents must be given to the consenting stockholder for her consent to be effective.

Court Of Chancery Sets Guidelines For Trades By Class Representatives

In re NYSE Euronext Shareholders Litigation, C.A. 8136-CS (Transcript March 8, 2013)

This transcript sets 2 guidelines that a class representative should follow with respect to trading in the securities held by the class it represents.  First, any trading should be first reviewed by class counsel to avoid problems with using insider information gained in the course of the litigation. Second, the class representative should retain at least 75% of the securities it held when the class was certified to be sure it continues to have the same economic interests that warranted its appointment to represent others.

Court Of Chancery Enjoins Solicitation

Kallick v. Sandridge Energy Inc., C.A. 8182-CS (March 8, 2013)

This is an important decision dealing with a so-called "Proxy Put."  Briefly, a Proxy Put permits creditors to call corporate debt when a new board of directors is elected without the consent of the current board.  This decision applies the reasonableness standard of Unocal rather than the stricter standard of review of Blasius to decide if the Board has properly refused to approve a competing slate of directors for purposes of preventing a Proxy Put.

The Court carefully distinguished other circumstances where such a Put might be upheld, such as when a competing slate's election might cause immediate harm to the corporation.

Court Of Chancery Explains What Is Commercially Reasonable

Edgewater Growth Capital Partners LP v. H.I.G. Capital Inc., C.A. 3601-CS (February 28, 2013, revised April 18, 2013)

When a secured creditor forecloses on its line, the resulting sale must be "commercially reasonable."   What does that mean exactly?  This decision provides guidance to answer that question.  For example, just because the lender works with the company to get the best price does not mean the resulting sale to the lender is tainted.

Court Of Chancery Explains The Gentile Doctrine

In re Nine Systems Corporation Shareholders Litigation, C.A. 3940-VCN (February 28, 2013)

When is a claim that stockholders were wrongly diluted by the issuance of stock a derivative claim and not a direct claim?  Under the Gentile rule, such a claim is derivative unless the dilution was done to benefit a controlling stockholder of a control group.  Determining when several stockholders constitute a "group" for this purpose is not easy.  Just acting together is not enough. This decision explains what else is required, such as acting to carry out a preconceived goal.

Court Of Chancery Applies McWane Doctrine

In re Diamond Foods Inc. Derivative Litigation, C.A. 7657-CS (February 28, 2013)

Under the McWane doctrine, a Delaware court will dismiss  a case if another proceeding filed elsewhere is more advanced and will provide complete relief for any valid claim.  As this decision illustrates, while Delaware does not too often apply McWane, it will do so when it is the plaintiff in the Delaware litigation who has chosen to first seek relief in another state's court. The lesson is to not treat the Delaware court as your second choice.

Court Of Chancery Explains Deal Protection Limits

In re Bioclinica Inc. Shareholder Litigation, C.A. 8272-VCG (February 25, 2013)

This is yet another example of the Court of Chancery explaining that the deal protection rules set by Omnicare have long since been modified by the Court.  The correct analysis is not to just adopt some rigid formula but to instead carefully test the actual impact of the deal protection measures on the possibility some other bidder may appear. This decision tells you how to do just that test.

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Court Of Chancery Explains Limits On Inspection

Doerler v. American Cash Exchange Inc., C.A. 7640-VCG (February 19, 2013)

This books and records case provides a good summary of the law limiting inspection to what the petitioner really needs to fulfill her proper purpose in seeking inspection.  The decision covers both inspection to value shares and to investigate alleged wrongdoing.

Court Of Chancery Permits Interlocutory Appeal In 220 Case

In Re Freeport-McMoRan Copper & Gold Inc. Derivative Litigation,  C.A. 8145-VCN (February 14, 2013)

In recent years, the Delaware Supreme Court has stressed that it is desirable to file a books and records case before starting derivative litigation.  But do you need to do that every time?  In the unusual situation presented by this case, the Court of Chancery declined to hold up a derivative case to permit a books and records case to go first.  In granting an immediate appeal, the Court recognized that the Supreme Court may want to clarify the law in this area.

Court Of Chancery Outlines Custodian Immunity

Jepsco Ltd. v. B.F. Rich Co. Inc,. C.A. 7343-VCP (February 14, 2013)

The liability of a custodian or receiver for a dissolving corporation is not clear.  Judicial immunity does protect him from many claims, but as this decision points out, not from all claims.  The discussion of what claims are or are not barred by immunity is particularly helpful for anyone assuming the role of a custodian or receiver.

Court Of Chancery Explains Class Representative Qualifications

New Jersey Carpenters Pension Fund v. infoGROUP, Inc., C.A. 5334-VCN (February 13, 2013)

This decision is a good review of the qualifications needed to serve as a class representative. Particularly noteworthy is its holding that merely voting in favor of the merger under attack is not an automatic disqualification.  So too, the sale of the stock prior to the merger is not grounds for disqualifying a proposed class representative.

District Court Awards Damages Despite Unenforceable Contract Term

Vici Racing LLC v. T-Mobile USA Inc., Case No. 10-835-SLR (D. Del. February 8, 2013)

This case involves a classic mistake. The contract contained a severability clause that required a court to enforce the contract even if one of its provisions was unenforceable. The Court held that the marketing commitment of key importance to the defendant was not enforceable.  But, as a result of the severability clause, the Court enforced the contract in favor of the plaintiff and awarded it damages.  Hence, using form contract terms is not a good idea.

Court Of Chancery Denies Expedition Of Money Claim

Intrepid Investments LLC v. Selling Source LLC,  C.A. 8261-VCN (February 8, 2013)

It is not always easy to have the Court of Chancey expedite your case just because you ask for an injunction.  Here, the Court denied expedition because the plaintiff had waited 5 months to ask for it and because the plaintiff's claim was really just for damages.

Master In Chancery Upholds Arbitration Award

Garda USA Inc. v. SPX Corporation, C.A. 7115-ML (February 7, 2013)

When may an arbitrator's award be vacated?  Of course, that is determined by the applicable  arbitration statute.  However, that begs the question as the statutes are not easy to apply in this area. This decision explains when the arbitrator award may be vacated for a manifest violation of the law.

Court Of Chancery Explains Contract Damages

Henkel Corporation v. Innovative Brands Holdings LLC,  C.A. 3663-VCN (January 31, 2013)

When a buyer breaches a contract to buy a business, how are the seller's damages to be calculated?  This is not as easy as it sounds.  For if the seller finds a new buyer and demands damages equal to any dimunition in the sale price, the defaulting buyer will claim the duty to mitigate requires the loss be offset by any income earned prior to the later successful sale.  How do you decide what that is?  This decision carefully analyzes this issue.  The short answer is it depends on the conduct of the parties after the breach.

Court Of Chancery Explains Promissory Fraud

Boulden v. Albiorix Inc., C.A. 7051-VCN (January 31, 2013, rev. Feb. 7, 2013)

Plaintiffs often try to allege fraud by claiming that the defendant made a promise that he did not intend to keep.  As this decision points out, that mere allegation is not good enough to state a claim. Rather, the complaint must allege facts that support the allegation the promise was made all the while with the intent to not keep it.  For example, if the promisor lacked the means to keep his promise or had no reasonable expectation of getting the means to do so, then it might be said he lied when he said what he could not deliver.

This decision also has an excellent analysis of the conspiracy theory of jurisdiction.

Court Of Chancery Explains Effect Of Disinterested Director Approval

In re BJ's Wholesale Club Shareholders Litigation, C.A. 6623-VCN (January 31, 2013)

When a majority of a board of directors is not personally benefiting from a transaction they approve, the business judgment rule applies.  How do you overcome that BJR?  A plaintiff may do so by showing an "extreme set of facts" sufficient to support the inference the board acted in bad faith.  In trying to do so, however, it is not enough to allege the board "should have known" the deal stunk. Instead the plaintiff needs to allege facts that show the board actually knew that the deal was not in their company's best interests.

Court Of Chancery Limits Fees For Unsuccessful Claims

Dawson v. Pittco Capital Partnership,  C.A. 3148-VCN (January 31, 2013)

This decision affirms the rule that attorney fees should be apportioned between those claims that succeeded and those that did not.

Court Of Chancery Limits Claims In Section 220 Cases

The Ravenswood Investment Company LP v. Winmill & Co. Incorporated, C.A. 7048-VCN (January 31, 2013)

In a books and records action, may the plaintiff also add a count for breach of duty?  This decision holds that he cannot do so.  After all, a books and records action is meant to be summarily litigated.  That fast track cannot be achieved if other claims must also be decided at the same time.

Court Of Chancery Explains Perils Of LLC Agreements

Zimmerman v. Crothall, C.A. 6001-VCP (January 31, 2013)

The Delaware Supreme Court has made it clear that investors in LLCs get what they bargained for in their LLC agreement, but not much more.  That seems attractive to those who manage LLCs because they feel they can limit their liabilities to investors by the terms of the LLC agreement.  Yet, management may be overstating the benefits of the LLC form, as this decision points out.

In this case, very sophisticated counsel advised on how to issue additional interests in the LLC to raise more capital. Unfortunately, and despite being the drafter of the LLC agreement, he got it wrong and failed to follow the terms of the agreement.  This points out that LLC agreements are often so complicated that compliance with their terms is tricky. Each agreement is individually crafted, unlike in a corporation where the statute generally spells out in well understood terms what are the rights and obligations of the investors and managers.  These errors have happened time after time.  Hence, use of the LLC or LLP form needs to be with great caution.

Court Of Chancery Explains Corporate Opportunity Doctrine

In Re MobilActive Media LLC, C.A. 5725-VCP (January 25, 2013)

This is an essential decision for anyone dealing with the corporate opportunity doctrine.  Under that doctrine, a fiduciary who takes an opportunity that might have been instead given to his corporation (or LLC or LLP) is liable for any gain made by him as a result.  One prime defense to such a claim is that the entity lacked the means to develop  the opportunity itself and thus suffered no real harm when it lost that opportunity.  This decision significantly undercuts that defense.

Court of Chancery Discusses Expedited Proceedings

The Renco Group Inc. v. MacAndrews AMG Holdings LLC, C.A. 7668-VCN (January 18, 2013)

This decision provides a good review of when the Court will expedite a proceeding.

Court Of Chancery Explains Special Committee Standard Of Care

Gerber v. EPE Holdings LLC, C.A. 3543-VCN (January 18, 2013)

It is now common for LLC and LLP agreements to have provisions permitting a "special committee" to approve  transactions with a controller.  What the limits are of that form of protection is the subject of this interesting opinion.  As the Court points out, surely not every committee approval, no matter how onerous, can immunize the transaction from judicial review.  Here, even when the transaction did not get an independent adviser's review and was at a price reflecting a startling run up in value for the underlying assets, the complaint failed to allege facts sufficient to state a claim that the approval was in bad faith.  More was required.

Agreement to Indemnify Does Not Include Fees

Bear Stearns Mortgage Funding Trust 2007-AR2 v. EMC Mortgage LLC,  C.A. 6861-CS (January 15, 2013, revised January 17, 2013)

As this decision points out, an agreement to indemnify against loss does not necessarily mean that the indemnitee also recovers its attorney fees.

Court Of Chancery Awards Fees Separately For Disclosure And Settlement

In re MoneyGram International Inc. Shareholder Litigation, C.A. 6387-VCL (January 7, 2013)

This is a somewhat unusual fee award because of the way the Court did the calculation of the amount. The court divided the award into two parts, one for the additional disclosures and the second part for the settlement fund created by the plaintiff's efforts. The disclosure award is also larger than typical awards for added disclosures.

Court Of Chancery Explains Bad Faith Claim

In re Novell Inc. Shareholder Litigation, C.A. 6032-VCN (January 3, 2013)

This decision well explains what may constitute a claim that a merger was entered into in bad faith. Such a claim is necessary to sustain a complaint when the majority of the directors are independent and disinterested.  Deal protection devices such as termination fees are not enough to show bad faith, at least when their terms are typical of such provisions.

Here the complaint adequately pled bad faith by alleging that the board favored 1 of 2 bidders for no good reason. For example, if the losing bidder made the highest offer, there must be some reason to not take its bid.  If not, the the board may be said to have acted in bad faith because that would knowingly violate its duty to get the best deal.

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Supreme Court Refines Rule On Failure To Follow Scheduling Order

The Delaware Supreme Court has issued 4 opinions that significantly refine the rules set out only 2 years ago in the Drejka decision on when a case may be dismissed for failing to meet the timetable in a scheduling order.  See Christian v. Counseling Resource Associates Inc., No. 460, 2011 (January 2, 2013);    Hill v. DuShuttle, No. 381, 2011 (January 2, 2013);   Adams v Aidoo, No. 177, 2012 (January 2, 2013) and Keener v. Isken, No. 609, 2011 (January 2, 2013).

The Christian decsion is perhaps the most significant.  From now on, if a party fails to meet a deadline for discovery, the opposing party will be precluded from objecting unless the opposing counsel alerts the Court to the failure and asks for formal relief.  Note that the Supreme Court's wording is very broad because it says that the first failure to object to a delay means the opposing party has "waived the right to contest any late filings by opposing counsel from that time forward." Literally then, all future delays are waived.  This seems too broad to be taken literally. For example, a failure to object to a 2 day delay on a minor matter should not preclude a failure later to provide an expert report.  Nonetheless, the current, somewhat lax, informal extensions are now a thing of the past.

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Court Of Chancery Permits Limits On Advancement

Miller v Palladium Industries Inc., C.A. 7475-VCN (December 31, 2012)

This decision illustrates the need for careful drafting of bylaws regarding advancement rights.  The plaintiff claimed entitlement to mandatory advancement under the Company's bylaws.  However, the bylaws also provided that advancement was required "unless" the Board decided otherwise. The Court held that the word "unless" made advancement discretionary.  In contrast, a different bylaw that made advancement subject to board approval has been held to be mandatory so long as the request met the board's technical requirements as to the form of the requested advancement.  A word can make a lot of difference.

Supreme Court Requires Opt Out Class Action

In re Celera Corporation Shareholder Litigation, No. 212, 2012 (December 27, 2012)

The Delaware Supreme Court has required opt out rights in a class action settlement.  The objector that wanted to opt out was a major stockholder, the claims being settled were only damage claims and the class representative had acted in a way that called into question if it had adequately represented the class. Thus, this decision may be an abnormality and opt out rights will still continue to be rarely granted.  But, we shall see.

Court Of Chancery Expands Entitlement To Injunction

AM General Holdings LLC v. The Renco Group Inc., C.A. 7639-VCN (December 21, 2012)

This is an interesting decision because it may extend the circumstances where the Court of Chancery will issue a preliminary mandatory injunction requiring the payment of money.  It is often said, perhaps wrongly, that there is an adequate remedy by the award of damages that precludes issuing an injunction requiring such a payment.  Here, however, the parties' contract contained a provision recognizing that irreparable harm would occur if the payment was not made and the failure to make the payment also frustrated a key provision in the parties' contract governing how their entity would be operated.  That was enough to get the injunction.

Court Of Chancery Explains LLP Law

Metropolitan Life Insurance Company v. Tremont Group Holdings Inc., C.A. 7092-VCP (December 20, 2012)

While not having anything new, this decision is an excellent summary of the law on LLP agreements, such as their exculpation provisions.

Court Of Chancery Explains Reach Of Post Sale Indemnification

Winshall v. Viacom International Inc., C.A. 6074-CS (December 12, 2012)

What claims does an indemnification clause in a sale of a company actually cover?   This decision is useful in interpreting a typical indemnification clause to point out that it does not cover future events absent  clear language.

Affirmed, Del Supr. 39, 2013 ( October 7, 2013).

Court Of Chancery Again Upholds Fiduciary Duties In An LLC

Feeley v.  NHAOCG LLC, C.A. 7304-VCL (November 28, 2012)

For years the Court of Chancery has repeatedly held that the controllers of an LLC owe fiduciary duties to the members -  at least absent an express disclaimer of those duties in the LLC Operating Agreement.  Then on November 7, 2012 in the Gatz Properties decision, the Delaware Supreme Court said "not so fast" and indicated in no uncertain terms that the fiduciary duties of an LLC controller were not yet decided under Delaware law.  Well in this decision, the Court of Chancery decided that so long as the Supreme Court continued to not rule on the question,  the Court of Chancery would continue to hold those duties exist.  Maybe this will force the Supreme Court to decide that issue.

This decision is also interesting for its ruling on when a claim must go to arbitration.  If the claim might have been brought even without the contract having the arbitration clause in existence, then it need not be arbitrated.

Court Of Chancery Examines "Don't Ask, Don't Waive" Clause

In re Complete Genomics Inc. Shareholder Litigation,  C.A. 7888-VCL (November 27, 2012)

This transcript has an excellent review of the case law on deal protection clauses that limit what a Board can do upon receiving a possible better offer.  The Court enjoined compliance with a "don't ask, don't waive" clause in such circumstances.

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Supreme Court Reinvigorates Istituto Bancario

Matthew v. Flakt Woods Group SA, No. 150, 2012 ( November 20, 2012)

For some time the conspiracy theory of jurisdiction, first set out in the famous Istituto Bancario decision, has had little success in conferring jurisdiction over foreign entities.  With this new decision by the Delaware Supreme Court, that trend may be reversed.  The key holding is that the defendant should have known that it was involved with a Delaware corporation and  the dissolution of that company as part of the alleged conspiracy was enough to give jurisdiction over the non-US defendant.  While the parameters of this possible extension of jurisdiction are to be determined later, it may be very broad.

Court Of Chancery Dismisses Improperly Notarized Complaint

Bessenyei v. Vermillion, Inc., C.A. 7572-VCN (November 16, 2012)

This is a troubling decision.  One plaintiff, through the efforts of the other plaintiff who is a lawyer, used a false verification when the complaint was filed. The Court of Chancery requires all complaints be verified.  As a result, the Court dismissed the complaint under the rule of Parfi where the dismissal is on the merits.

Seems right so what is troubling?  Delaware lawyers typically believe their clients when they are sent a verification that the client did what the verification says, appeared before a notary to sign it. This is an odd case because there was some indication that was not being done. Still, how far should we  go?  The short answer is that we need to ask the client: "Did you get this signed in front of a notary like it says"?

Court of Chancery Dismisses Limited Liability Partership Act Suit

New Media Holding Company LLC v. Brown,  C.A. 7516-CS (November 14, 2012)

This decision deals with a hole in Delaware jurisprudence.  Generally, the statutes authorizing each form of Delaware entity contain a provision whereby the managers of that entity submit themselves to the jurisdiction of the Delaware courts for acts in their managerial capacity.  But, as this decision points out in dismissing the complaint for want of personal jurisdiction over the defendants, that is not the case under the Delaware limited liability partnership statute.  This seldom used act may need to be amended as a result.

Court Of Chancery Explains Scope Of Section 225 Case

T.R. Investors, LLC v. Genger, C.A. 3994-CS (November 9, 2012)

 A Section 225 action is supposed to be limited to the narrow question of the composition of a corporation's board of directors.  Subsidiary questions, such as who owns what stock, may be resolved as well but are generally not binding on persons who are not parties to the litigation.  However, as this decision points out, if you are a party and consent to the Court deciding stock ownership in a Section 225 action, you are stuck with the judgment.

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Supreme Court Cautions Whether LLC Managers Have Fiduciary Duties

Gatz Properties LLC v. Auriga Capital Corporation, C. A. 148, 2012 (November 7, 2012)

In the absence of a provision that excludes fiduciary duties, do the managers of a Delaware LLC have those duties?  The Court of Chancery has long said "yes" but this decision of the Delaware Supreme Court says "not so fast."  Instead, the Supreme Court held that the terms of the LLC agreement in this case imposed fiduciary duties on the manager in a self-dealing transaction. Thus, the Court held, it was premature to also hold, as the Court of Chancery did, that under the LLC statute such fiduciary duties existed absent a renunciation of those duties in the agreement.

Will the Supreme Court ever decide that issue and if it does, how will it come out?  Is it time for the Delaware General Assembly to resolve this issue?  If LLCs are ever to be used for more publicly traded entities, their managers will need to have a fiduciary duty.  Trusting to the LLC agreement to protect investors is to ask too much of drafters of such agreements who cannot anticipate every circumstance that may occur.  That calls for the legislature to act.

Court Of Chancery Discusses Special Conflict Committees

Allen v El Paso Pipeline GP Company LLC , C.A. 7520-CS (November 5, 2012)

This transcript is noteworthy for 2 reasons.  First, it reflects the Court's view that a conflict committee in an LLC must examine all the important aspects of a proposed transaction before a motion to dismiss will be granted based on the committee's approval of the deal under attack.  Second, the transcript shows the Court's respect for the NYSE definition of when a director is "independent."

Court Of Chancery Clarifies Discovery Obligations

Senior Housing Capital LLC v. SHP Senior Housing Fund LLC, C.A. 4586-CS (November 2, 2012)

This decision in a bench ruling has some interesting issues on what should be disclosed in discovery.  First, it is important to not fail to list the witnesses that you will call at trial when answering interrogatories.  Hanging back to the last minute may mean the witness will be barred from testifying.  There was more to this than just delay but that is still a point worth remembering.

Second, the scope of expert discovery may well include notes and work papers of everyone who is on the team assisting the expert witness and will certainly include prior studies the expert has done on the same subject matter for other clients. This points out the need to be careful in setting up the expert's team and in selecting the expert.

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Court Of Chancery Imposes Attorney Fees For Bad Faith

Soterion Corporation v. Soteria Mezzanine Corporation, C.A. 6158-VCN (October 31, 2012)

Too often a plaintiff will file suit just to put pressure on the other side to get a settlement of a business dispute.  In this decision, after finding that the complaint included knowingly false factual allegations, the Court imposed attorneys' fees on the plaintiff for suing when it had decided "not to bring his claim to definitive adjudication."  This illustrates the Court of Chancery's understandable lack of tolerance for litigants who waste its time and the other side's money.

Court Of Chancery Permits Interested Manager Vote

Feeley v. NHAOCG LLC, C.A. 7304-VCL (October 12, 2012)

At common law, a director who was interested in the outcome of a board of directors vote simply could not vote on the issue before the board.  Her vote was literally void.  That old law was changed by statute in Delaware, under Section 144 of the DGCL.  This decision holds that even absent a similar statute in the LLC Act, a manager may vote on a transaction that he is interested in, absent some restriction in the LLC Operating Agreement.  Of course, merely having the power to vote does not make any vote the right thing to do.

Court Of Chancery Explains Scope Of Inspecton

Rock Solid Gelt, Ltd. v. The SmartPill Corporation,  C.A. 7100-VCN (October 10, 2012)

This decision addresses one of the more perplexing problems of book and records litigation - what exactly is the plaintiff entitled to review? The Court of Chancery expects plaintiffs to limit their demands to what is really necessary and to explain to the Court, sometimes with witnesses, exactly what should be inspected to meet the proper purpose established at trial.  A blunderbuss approach is likely to irritate the Court and get you less than you really want.  This decision spells out the sort of evidence that should be presented to inspect specific records.

Court Of Chancery Upholds Waiver Of Fiduciary Duties

Hite Hedge LP v. El Paso Corporation, C.A. 7117-VCG (October 9, 2012)

This simple decision is still important because it contains the contract language that effectively waives any fiduciary duty to the limited partners in a Delaware LLP.  This has been a source of confusion in the past where the language was less clear and complete.  For example, there are Delaware decisions that find that efforts to waive fiduciary duties did not extend to the duties owed to minority owners.

Court Of Chancery Explains Non-Profit Corporate Law

Hockessin Community Center Inc. v. Swift , C.A. 7789-VCL (October 5, 2012)

Delaware does not have a separate corporate statute dealing with non-profit corporations. Hence, the non-stock sections of the DGCL usually apply to such entities.  It is sometimes hard to decide what parts of the DGCL do apply, however, as the integration of stock with non-stock provisions is less than clear.  This decision helpfully explains how to decide what parts of the DGCL to apply to non-stock entities

Court Of Chancery Explains Sufficient Basis For Inspection

Louisiana Municipal Police Employees' Retirement System v. Lennar Corporation, C.A. 7314-VCG (October 5, 2012)

To inspect corporate records to see if there has been "wrongdoing,"  a stockholder has to have a basis to suspect that wrongdoing has occurred. The evidence needed has been described as the lowest level possible if there is to be any standard at all.  This decision illustrates that a standard does exist.  Past lawsuits that have been settled are not sufficient to show present wrongdoing. General news articles about an industry-wide investigation are not sufficient.  Both together do not get there either and the suit was dismissed.

Court Of Chancery Explains Evidence Needed For Reformation

CC Financial LLC v. Wireless Properties LLC,  C.A. 5927-VCN (October 1, 2012)

This decision establishes that "clear and convincing" evidence is needed to warrant reformation of a contract for mutual mistake or unilateral mistake coupled with knowing silence.

Court Of Chancery Explains A Director's Duty Of Loyalty While Objecting To Policy

Shocking Technologies Inc v. Michael,  C.A. 7164-VCP (September 28, 2012, revised October 1, 2012)

Everyone agrees that a director should speak up even if he disagrees with the rest of the board of directors.  But when does a director go too far in his opposition to policies he wants to change?  In this decision, the Court wrestled with this question and decided that leaking confidential corporate information to pressure the company went too far.  Significantly, the information was not about any wrongdoing.  Hence, the finding of a breach of the duty of loyalty only goes so far as a precedent.

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Court Of Chancery Explains How To Calculate Award In Non-Monetary CAse

Dias v. Purches, C.A. 7199-VCG (October 1, 2012)

This is a classic example of what not to say in an argument unless you want to get the Court mad. In addition, this decision again explains how to calculate a fee award when the corporate benefit achieved is non-monetary.

Court Of Chancery Interprets Preferred Stock Rights

Greenmont Capital Partners I LP v. Mary's Gone Crackers Inc., C.A. 7265-VCP (September 28, 2012)

This is a useful, if not surprising, example of how the Court will interpret a corporate charter regarding the rights of preferred stock.  It is also an example of the principle that if you want a veto power in the charter,  you had better be clear and complete or the charter will be changed to your detriment.

Court Of Chancery Declines To Restrict Access To Documents

Czarninski Baier de Adler v. Upper New York Investment Company LLC,  C.A. 6896-VCN (September 28, 2012)

This decision illustrates the Court's reluctance to permit protective orders to limit access to documents. The Court permitted the plaintiff's husband and non-US attorneys access to the documents that would otherwise have been confidential under a protective  order.

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Court Of Chancery Upholds Duty To Arbitrate Of Alter Ego

Legend National Gas II Holdings LP v. Hargis, C.A. 7213-VCP (September 28, 2012)

When a non-party to a contract is still bound by its arbitration provision is surprisingly often litigated. This decision reviews the past law and reiterates that a non-party may need to arbitrate when it is the alter ego of the a party that agreed to the arbitration clause, such as a successor partnership.

Court Of Chancery Requires Effective Pre-Suit Investigation

South v. Baker, C.A. 7294-VCL (September 25, 2012)

Many lawyers believe that it may be okay to file suit and do an investigation of the facts later through discovery. Not so in some derivative litigation. This decision explains what pre-suit investigation is required to sustain a derivative suit alleging a Caremark claim.  It is required reading for its detailed review of the current law.

Briefly, at least when a Caremark claim is asserted, it is almost mandatory that a Section 220 action to inspect the corporation's records be done before filing suit.  Absent that inspection, a plaintiff better have a very good factual basis to allege that the directors violated their duty to oversee their company's compliance with the law.

Court Of Chancery Nails Down "Good Faith" By A Conflicts Committee

In re: Encore Energy Partners LP Unitholder Litigation, C.A. 6347-VCP (August 31, 2012)

Delaware limited partnership agreements frequently have provisions governing how to deal with conflict of interests between the GP, the limited partners and the owners of the GP.  This decision sets out the language needed to protect the GP and its owners from attacks in conflict transactions when the deal is approved by a conflicts committee.  If the committee acts in the subjective good faith belief the transaction is in the best interests of its constituency, an attack alleging objective unfairness will be dismissed.

This then may be the definitive guide to drafting limited partnership agreements.  And while the Court recognizes that the decision offers little protection for limited partners, it points out that is part of the risk they bear when they invest in such LPs.

This decision was affirmed on July 22, 2013.

Court Of Chancery Explains Post-Closing Notice Requirements

Impact Investments Colorado II LLC v. Impact Holding Inc., C.A. 4323-VCP (August 31, 2012)

Acquisition agreements often have provisions for post-closing adjustments to the purchase price. How to invoke the right to such an adjustment is set out in the agreement.  This decision deals with such a notice provision requiring "reasonable particularity" for the claimed adjustment.  While the Court reserved for trial the decision on whether that standard was met, the discussion of the notice provision is an excellent guideline on how to draft and interpret notice provisions.

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Court Of Chancery Clarifies Ultra Vires Statute

Southeastern Pennsylvania Transportation Authority v. Volgenau,  C.A. 6354-VCN (August 31, 2012)

Section 124 of the Delaware General Corporation Code sets out the Delaware limits on the common law doctrine of ultra vires.  This decision holds that Section 124 does not limit suits for breach of fiduciary duty, but does protect corporate transactions that have closed from some attacks alleging a lack of power to do the transaction.

Court Of Chancery Limits Revisions To An Expert's report

IQ Holdings Inc. v. American Commercial Lines Inc.,  C.A. 6369-VCL (August 30, 2012)

When may an expert change his mind after he has provided his report under a court-ordered deadline?  This decision answers that question.  Briefly, absent agreement between all the parties, once the report is served, it may not be materially changed.  Of course, this just makes common sense if scheduling orders are to have any force.

What the expert is then to do when he realizes he has erred is a tough question.  Confession is said to be good for the soul and that probably applies here as well.  But the opposing party needs to be cautious as well, for nothing in this ruling bars a surprise during cross examination of its expert, who absent a correction by the opposing expert, may not be as prepared as he might have been with that disclosure.

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Court Of Chancery Explains Conspiracy Jurisdiction

Hospitalists of Delaware, LLC. v. Lutz, C.A. 6221-VCP (August 28, 2012)

This is an important decision because it explains the theory of jurisdiction over alleged conspirators. While that basis for jurisdiction has been around since the Istituto Bancario decision, it is still hard to understand.  The guidance this decision provides to that law and the conspiracy theory in general is very helpful.

Supreme Court Upholds Southern Peru Case

Americas Mining Corporation v. Theriault, No.  29, 2012 (August 27, 2012)

The Delaware Supreme Court has upheld the largest attorney fee award in Delaware history.  In doing so, the Court has squarely upheld the use of percentages to award fees out of the common fund created by the litigation and disclaimed the so-called "lodestar" approach.

The decision is also noteworthy for its upholding of the Court of Chancery's damages award, also probably the largest in Delaware history.

On September 27, 2012, the Supreme Court aslo denied a motion for reargument. The reargument opinin is noteworty bcaue it rejected te "look through" theory that the benefit confererd by a derivative suit should be limited to the interest in the corporation held by its the non-defendant stockholders.

Court Of Chancery: When Termination Is In Good Faith

Policemen's Annuity and Benefit Fund of Chicago v. DV Realty Advisors LLC,  C.A. 7204-VCN (August 16, 2012)

While this issue continues to come up, it is still not clear when limited partners may terminate a manager when their limited partnership agreement only says they must act in "good faith."  Absent some more definitive standard, this decision holds the termination must be done honestly in fact and observe reasonable commercial standards.  Now is that clear enough?  In any case, if the manager fails to meet the deadline for submitting an annual financial statement, you may  "in good faith" fire her.

Affirmed, Del Supr. August 26, 2013

Court Of Chancery Clarifies Controller Duty

In re Synthes Inc. Shareholder Litigation,  C.A. 6452-CS (August 17, 2012)

This decision clarifies the extent of a controlling shareholder's duties when selling her company. The controller is not required to sacrifice her own interests to benefit the minority, such as by accepting less for herself than others receive. Of course, the safe harbor is still equal treatment.

Court Of Chancery Explains Work Product Standard

New Jersey Carpenters Pension Fund v. infoGROUP, Inc.,  C.A. 5334-VCN (August 16, 2012)

This decision clarifies that to have discovery of work product a party needs only show a "substantial need" and that it would be an "undue hardship" to get the information some other way.  Despite some contrary language in the famous Garner case, there is no requirement that you also show the information is sought in "good faith."

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Court Of Chancery Upholds Standing To Object To Subpoenas

Feeley v. NHAOCG LLC, C.A. 7304-VCL (August 16, 2012)

It has long been thought that Cede & Co. v Joule Inc., 2005 WL 736689 (Del. Ch. Feb. 7, 2005) denied standing to a party to object to a third party subpoena except on privilege grounds.  Well no more.  In this recent decision, the Court declared that Joule is wrong and that it will protect a party from excessive discovery.

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Court Of Chancery Limits Subpoena

Huff Fund Inv. Partnership v. CKx Inc.,  C.A. 6844-VCG (August 15, 2012)

This is another in a series of recent discovery decisions limiting the use of subpoenas.  Here the Court balanced the limited relevance of the information sought with the potential prejudice to the party asked to produce its trade secrets and denied some of the discovery.

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Court Of Chancery Applies Relation Back Rule

Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, C.A. 5140-CS (August 7, 2012)

When a complaint is amended, the issue sometimes arises whether any new claims relate back to the original filing date so as to avoid the expiration of the statute of limitations.  In this decision, the Court explains that when the breach of contract alleged in the amended complaint arises out of different facts and is a different breach than in the original contract, then it does not relate back. Hence, it is a bad idea to wait to amend a complaint.

Court Of Chancery Explains Accounting Damages

Gila Dweck v. Nasser,  C.A. 1353-VCL (August 2, 2012)

This decision explains how to calculate damages in an accounting action for breach of fiduciary duty.

Court Of Chancery Clarifies Blasius

Keyser v. Curtis, C.A. 7109-VCN  (July 31, 2012)

This decision clarifies that the rule of the Blasius decision is really just an application of the intermediate Unocal standard in reviewing director conduct. 

 

Court Of Chancery Explains Laches Defense In Contract Suit

Petroplast Petrofisa Plasticoes S.A. v. Ameron International Group, C.A. 4304-VCP (July 31, 2012)

When is a laches defense available in the Court of Chancery? This decision explains how to figure that out in a breach of contract case.

Court Of Chancery Explains Disclosure Rules For Management Contracts

In re Micronetics Inc. Shareholder Litigation, C.A. 7626-VCP (July 24, 2012)

While each disclosure case will turn on its own facts, this decision gives an excellent overview of when employment contracts with management must be disclosed when notifying stockholders of a proposed merger with an acquiring company.  When management has been involved in the merger negotiations, any employment agreements and the surrounding circumstances must be disclosed.

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Court Of Chancery Explains Requirements For Expedition

APC Workforce Solutions LLC v. Gary D. Nelson Associates Inc., C.A. 7672-VCP (July 23, 2012)

When a plaintiff is able to show a "colorable claim" and that absent prompt relief it will suffer "irreparable harm," the Court of Chancery will expedite a hearing on its claims. However, exactly what that all means varies from case to case.  This is a good example of such a showing to obtain expedition in a breach of contract case.

Supreme Court Determines What Constitutes Wrongful Interference With Contract

WaveDivision Holdings LLC v. Highland Capital Management L..P. , No. 649, 2011 (July 19, 2012)

This decision establishes Delaware law on what constitutes a wrongful interference with another's contract.  Thus, it resolves several unsettled questions, such as concluding that a proper motive trumps an improper motive to interfere with a contract's performance.

Court Of Chancery Orders Discovery On Notarization

Bessenyei v. Vermillion Inc., C.A. 7572-VCN (July 19, 2012)

All Court of Chancery complaints must be verified by each plaintiff.  Most of us take it for granted when the client returns a notarized verification.  But should we?  In this case the transcript includes an order granting discovery of a notary to see if the plaintiff actually appeared before that notary to sign his verification.  The Court suggests that if he did not do so then he has committed a fraud on the Court.  That is perhaps not the best way to start litigation.

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Court Of Chancery Allocates Value For Preferred Stcok

In Re: Appraisal Of The Orchard Enterprises Inc., C.A. 5713-CS (July 18, 2012)

One of the more difficult issues in appraisal litigation is how to allocate value between common and preferred stock.  Here the preferred stock was entitled to dividends on an as-converted basis and the Court used that forrmula to allocate the enterprise's value between the preferred and common stock.

The decision is also a primer on how to do a discounted cash flow valuation.

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Court Of Chancery Holds Individual Buyers Liable For "Corporate" Debt

Envo Inc v. Walters,  C.A. 4156-VCP (July 18, 2012)

In this unusual case, the Court of Chancery held individuals liable on a contract that was signed by a corporation.  Why?  The corporation did not exist.  Apparently, the buyers intended to form the entity, but had a fight with their lawyer and never got around to doing the incorporation.  While they argued that they had expressly refused to guarantee the contract, the Court held they could not both take the benefits of the deal themselves and then not pay for it.  Big surprise!

Court Of Chancery Explains Limits Of Jurisdictional Discovery

Picard v. Wood, C.A. 6526-VCG (July 12, 2012)

A plaintiff must offer some basis to believe the defendant is subject to the Court's jurisdiction before he will be permitted to take jurisdictional discovery.  Owning an interest in a Delaware LLC is not enough.

Court Of Chancery Upholds Power To Enjoin Employment

NuVasive Inc. v. Lanx, Inc.,  C. A. 7266-VCG (July 11, 2012)

Litigation to restrain the employment of former employees is often complicated by jurisdictional issues. This decision resolves some of those issues by holding that a Delaware court may restrain a Delaware corporation from employing a former employee of the plaintiff even when that employee is not himself subject to the jurisdiction of the Delaware courts.

This decision, coupled with the enforcement of the choice of Delaware law clauses in other employment decisions, means that Delaware is a preferred forum for such litigation.

Court Of Chancery Resolves Allocation Issue

ASB Allegiance Real Estate Fund v. Scion Breckenidge Managing Member LLC,  C.A. 5843-VCL (July 9, 2012)

Allocating a fee claim between various losing parties in the case that you won is difficult most of the time.  This decision shows that when all the claims are sufficiently related, you may not need to do so.  The defendants are then jointly and severally liable.

Court Of Chancery Awards Fees For Defending Fee Request

Coughlin v. South Canaan Cellular Investments, C.A. 7202-VCL (July 6, 2012)

In a "man bites dog" case, the Court of Chancery awards attorney fees for opposing a Rule 11 claim for fees.  This illustrates that the Court really does not like Rule 11 motions and those need to be made only after careful thought.

Court Of Chancery Upholds Compensation Claim In Derivative Suit

Seinfeld v. Slager, C.A. 6462-VCG (June 29, 2012)

Derivative suits alleging excess compensation are hard to plead.  To avoid dismissal, the plaintiffs must show the directors were interested in the compensation awarded and their customary director fees do not count.  Indeed, even bonus awards to themselves are not enough when the bonuses are approved by a stockholder vote.  But this decisions shows why there is an exception to this general rule.

Here the bonus plan did not contain any limit on the board's discretion, except for a cap on the total awarded.  Finding that this made the awards free from any real stockholder control, the Court held the complaint stated a valid derivative claim.  The lesson then is to put some guidance on the awards into the plan when it is submitted for the stockholders' approval.

Court Of Chancery Rejects Compensation Claim

Zucker v. Andreessen, C.A. 6014-VCP (June 21, 2012)

This is a run -of -the mill dismissal of a derivative suit for failure to justify the lack of demand on the board, but with a twist.  For the decision highlights just how hard it is to show that a board is liable for paying an executive too much.  Hence, curbs on compensation are left to the stockholders' vote to control.

Court Of Chancery Stays Section 273 Case

McElroy v Schornstein, C.A. 7233-CS (June 6, 2012)

It is often said that the Court of Chancery will not stay or dismiss an action filed under one of the statutory provisions for summary adjudication of a claim, such as to decide a proxy contest,  because there is prior litigation filed elsewhere.  That is generally true, but not always and this decision involves 1 of the rare exceptions.  Here the plaintiff sought a decree of dissolution by his complaint filed several months after a similar claim was filed by the other side in New Jersey. Noting that any decision by it would impact a preliminary ruling by the New Jersey court, the Court of Chancery dismissed its case to avoid such a conflict.

Court Of Chancery Upholds Derivative Claim Despite Prior Dismissal

Louisiana Municipal Police Employees' Retirement System v. Pyott, C.A. 5795-VCL  (June 11, 2012)

This is one of the most important decisions on derivative litigation in many years. There are 3 key holdings, at least one of which may reverse prior law.  First, the Court held that a derivative suit dismissed for failure to plead sufficient grounds to proceed under the demand rules may be refiled by a different plaintiff who has a better complaint.  This may modify prior law  that had held that once dismissed with prejudice, the suit could not be revived by a better complaint from a new plaintiff.

Second, this decision effectively kills off the old first-filed rule that held that the plaintiff who files the first complaint will control the litigation even if other complaints are filed later by different plaintiffs.  From now on, the better plaintiff will be the lead plaintiff.

Third, the decision again stresses the value of inspecting a company's records before filing a derivative suit.  Indeed, the failure to do so may cause the Court to view the complaint as presumptively meritless, at least with respect to whether the demand rules have been meet.

The opinion is worth reading for many other reasons as well.  Its discussion of the Caremark case alone is a good reason to study the decision.

Court of Chancery Discusses The Role of a Stockholder Representative In Arbitration Proceedings

Pryor v. IAC/Interactivecorp, C.A. 6884-CS (June 7, 2012)

What is the role of a "stockholder representative" in an arbitration proceeding?  When there are many parties to an agreement, it is common for the parties on one side (such as the selling stockholders entitled to an earn out payment) to chose one of their bretheren to act for them all.  While most assume that the representative chosen has the right to call the shots in the arbitration, her role may be much more.  This decision explains why that may be important.  It holds that notice to the representative that begins the period in which an appeal may be filed also counts as notice to all the parties the chosen one represented.  Hence, if she does not file a timely appeal,  the others may not do so later.  Moreover, the decision suggests that only the representative may argue the merits of an appeal.

Superior Court Explains When a Contract Claim Is Not A Tort

Cornell Glasgow LLC v. La Grange Properties LLC,  C.A. N11C-05-016 JRS CCLD (June 6, 2012)

Parties often try to plead as many different legal theories as possible.  Pleading tort claims is particularly popular because there is a sense that  it may lead to bigger damages and sounds aggressive.  After all, who wants to be a "tortfeasor?"  This careful decision explains when there is a tort claim and when there is not when the dispute arises out of a contractual relationship.

Briefly, after the contract has been at least partially performed, it is not a tort to promise to continue performance even if you do not mean to do so.  Instead, that is just a breach of the contract. Therefore, there is no claim in such circumstances for fraudulent inducement. Also, when the damages arising out of the breach are not different than the damages recoverable in tort, there is no tort claim either.

Court Of Chancery Implements The Pharmathene Decision

PharmAthene Inc. v. SIGA Technologies Inc., C.A. 2627-VCP (May 31, 2012)

The original PharmAthene decision is a landmark in the law of remedies for breach of contract because it imposed a form of profit sharing. This latest decision in that case, together with the attached Order, explains in detail how that remedy is to work.

This decision, including its award of expectation damages, was largely affirmed on May 24, 2013. See Del Supr C.A, 314, 2012

Court Of Chancery Upholds Contract As Bar To Estoppel Claim

Blaustein v. Lord Baltimore Capital Corporation,  C.A. 6685-VCN (May 31, 2012)

This decision reiterates the settled Delaware law that when a contract deals with the parties' rights on a particular subject, one of the parties can not claim that it entered into the contract based on an oral promise that differs from what the contract provides.  After all, if you could do that, then why have the contract in the first place?

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Court Of Chancery Interprets LLC Consent Rights

Paul v. Delaware Coastal Anesthesia, C.A. 7084-VCG (May 29, 2012)

The LLC statute, like the DGCL, permits the operating agreement to bar member action by written consent.  Here the plaintiff argued that such an agreement's fairly common provisions dealing with how members were entitled to vote at a meeting also precluded member action by written consent. The Court held that any such prohibition must be clearly set out in the operating agreement and not merely implied.  Hence, the written consents were upheld.

Court Of Chancery Interprets Release

Travelers Casualty And Surety Company v. Sequa Corporation,  C.A. 7055-VCG (May 29, 2012)

This decision involved an interesting argument over the scope of a release.  As is common, the release was signed on behalf of a parent company and all its subsidiaries. To escape the scope of the release, a subsidiary argued that it was only bound to release the same claims that its parent had, but not any claims that were unique to the subsidiary.  The Court sidestepped that argument because in any case the release did not cover the claims asserted by the subsidiary.  However, this stands as a warning to better draft releases that cover all entities in a control group.

Supreme Court Upholds Section 220 Jurisdictional Rules

Central Laborers Pension Fund v. News Corporation,  No. 682, 2012 (May 29, 2012)

The right of a stockholder to inspect a company's books and records is govenned by Section 220 of the DGCL.  A beneficial owner must first show proof of beneficial ownership, however, and Section 220 tells how to do so.  Here the plaintiff for some reason just ignored Section 220's requirements to show beneficial ownership.  When then faced with a motion to dismiss, he argued that he could supply that proof later because it was just a clerical mistake to not do so when his complaint was filed. The Delaware Supreme Court forcefully rejected  that argument and upheld the dismissal of his complaint.

Note that the Supreme Court sidestepped the holding of the Court of Chancery that once it filed a derivative suit, this plaintiff lost its rights under Section 220.

Court Of Chancery Explains Burden Of Proof In Accounting Case

Whittington v. Dragon Group LLC, C.A. 2291-VCP (May 25, 2012)

This decision explains how to apply the burden of proof in an accounting case.  Merely producing a cancelled check is not enough.

Court Of Chancery Permits Jurisdictional Depositions

Reid v. Siniscalchi, C.A. 2874-VCN (May 25, 2012)

Discovery in aid of proving jurisdiction is usually available.  But is there a limit?  This decision explores that question and permits depositions to prove jurisdiction.

Court Of Chancery Applies Hirt Test

Coyne v. Catalyst Heath Solutions Inc., C.A. 7448-VCN (May 25, 2012)

This decision applies the familiar Hirt factors to decide who should be lead class counsel.  Note the slight preference for who has the most support among the various plaintiffs' firms.

Court Of Chancery Explains Reformation Remedy

Brinckerhoff v. Enbridge Energy Company Inc., C.A. 5526-VCN (May 25, 2012)

This is an interesting decision because it suggests a remedy other than damages in an unfair price case.  Once a deal has closed, the plaintiff may find that his remedies in a pure unfair price claim are limited.  Frequently, damages against directors are foreclosed by an exculpation clause. Here the Court suggests that, at least when the merger consideration is not just cash, reformation may be an available remedy.  Given that has happened just once, it may be a long shot at best.

This decsiion was upheld by the Supreme Court on MAy 28, 2013. 67 A3d 369.

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Court Of Chancery Again Decides What is A Security

Fletcher International Ltd. v. ION Geophysical Corporation, C.A. 5109-VS (May 23, 2012)

When a preferred stockholder has the right to approve the issuance of any new securities by its company, the question arises whether that right extends to the issuance of notes.  In the second decision in this case, the Court again determines whether such notes should be considered securities subject to approval by a preferred stockholder.  In keeping with the brevity expected of a blog, the short answer is that the longer the term of the note, the closer it is to being classified as a security.  Of course, that is too short an answer, but you will need to read this detailed opinion to really understand the test.

Court Of Chancery Awards Fees For Fraud

Paron Capital Management LLC v. Crombie,  C.A. 6380-VCP (May 22, 2012)

Recovering attorney fees is rare in Delaware litigation.  However, this decision enforces another of the few exceptions to the American rule that usually denies a fee award.  The exception is for when a fraud requires a plaintiff to spend the fees in defense or prosecution of a claim involving a third party.  In that case, the fees are really just damages caused by the fraud and may be recovered.

Supreme Court Clarifies Fraud Disclaimers

RAA Management LLC v. Savage Sports Holdings Inc., C.A. 577, 2011 (May 18, 2012)

It is common in sales of a company to have a non disclosure agreement containing a waiver of any claim, including a fraud claim, by the buyer that is based on any representation not specifically included in the final agreement of sale.  In other words, there may be no reliance on any oral representation or even any written materials unless the final agreement says the buyer is entitled to rely on that representation.  This Delaware Supreme Court decision squarely upholds such provisions.

After all, the result could hardly have been otherwise in this case.  For here, the would be buyer never actually agreed to buy, but only to take a look.  When it found out the facts, it walked away except to demand payment for its expenses.  To let a possible buyer recover expenses based on claims it had disclaimed going into the due diligence room seems unwise.

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Court Of Chancery Explains Right To Reformation

ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member LLC, C.A. No. 5843-VCL  (May 16, 2012)

This is an excellent review of when a contract may be reformed by a court to correct a drafting mistake known by just 1 of the parties who remains silent in the face of the other party's obvious mistake about what the contract says.  Reformation is particularly appropriate when there is strong evidence from past dealings over what the parties intended to be in the contract and when the error makes no economic sense.

Court Of Chancery Crafts Settlement Options

Forsythe v. ESC Fund Management Co. (U.S.) Inc., C.A. 1091-VCL (May 9, 2012)

When the Court tasked with reviewing a settlement proposal in a derivative action is faced with apparently well-intentioned objectors who want to go to trial and not settle, deciding what to do is not easy.  This decision comes up with an ingenious solution - let the objectors "buy the settlement."   This is accomplished by giving the objectors time to put up a bond to effectively guarantee the recovery of the settlement amount and then permit the objectors to take over the litigation and go to trial.

It will be interesting to see if the objectors take the Court up on its proposal.  After all, the recovery in any derivative suit goes first to the entity involved.  Any one who funds such litigation needs to be aware of the risk that sharing in the recovery is its only reward.

Court Of Chancery Applies Corporate Law To Statutory Trust Case

Protas v. Cavanagh, C.A. 6555-VCG (May 4, 2012)

This decision answers the question of what law will apply to decide if a beneficiary of a Delaware statutory trust may bring a derivative suit.  The court held that the established law under the DGCL and Rule 23.1 applies.  Hence, the beneficiary must show that either the director defendants are conflicted or that there is a substantial basis to believe that they will be liable because their actions are so outlandish that they are not protected by the business judgment rule.

Court Of Chancery Enjoins Proxy Contest For Violation Of NDA

Martin Marietta Materials Inc. v. Vulcan Materials Company, C.A. 7102-CS (May 4, 2012)

Non-disclosure agreements are often used and frequently ignored.  Well not any more.  This decision enjoins a proxy contest for 4 months because the bidder violated a NDA in its proxy materials.  This unique remedy will make it much more important to carefully draft and to honor NDAs.

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Court Of Chancery Values Smaller Company

Gearreald v. Just Care Inc., C.A. 5233-VCP (April 30, 2012)

This is an interesting appraisal case because it explains the issues dealing with valuing a smaller company.  As they are riskier, for example, a small company risk premium is proper in determining what its cost of capital should be.

 

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Court Of Chancery Explains Drag Along Rights

Dawson v. Pittco Capital Partners L.P., C.A. 3148-VCN (April 30, 2012)

This is an interesting decision because it explains the limits of drag along rights.  While some old case law and some new contract language try to spell out when a stockholder, creditor or other interested party may have their rights affected by a corporate transaction taken without their consent, this makes it clear that there needs to be very explicit authority to do so, particularly when we are talking about drag along rights that are contractually based.

Court Of Chancery Examines Advance Notice Bylaw

Icahn Partners LP v. Amylin Pharmaceuticals Inc., C.A. 7404-VCN (April 18, 2012)

An advance notice bylaw requires stockholders to tell their company substantially in advance of a stockholders' meeting if they want to nominate someone to to be elected as a director at that upcoming meeting.  But, under the Hubbard decision, sometimes the Court of Chancery will set aside such a bylaw when it is used in a way the Court finds is inequitable.  Here Carl Icahn is claiming that the Board changed its basic business strategy after the advance notice bylaw deadline has passed and it would be inequitable under those circumstances to bar him from nominating a slate of directors to bring the company back on course.  The Court has agreed to hear his claim.  The outcome will be interesting.

Superior Court Limits Savings Clause

Huffington v. T.C. Group LLC, C.A. N11C-01-030-JRJ-CCLD  (April 18, 2012)

Delaware has a savings statute that generally prevents the statute of limitations from expiring when a case is dismissed for technical reasons and then refiled in the right court.  But, as this decision points out, the savings statute has a much narrower scope than some might believe.  Thus, when as here, a case is filed in a jurisdiction other than that chosen by the parties in their contract and then dismissed for having violated the forum selection clause, the savings statute does not apply.

Supreme Court Confirms Fee Award Principles

EMAK Worldwide Inc. v. Kurz,  No512, 2011 (April 17, 2012)

The Delaware Supreme Court has once again confirmed that substantial attorney fee awards may be appropriate even when the plaintiff has not won a large monetary recovery.  That is particularly so when the plaintiff has protected stockholder voting rights, as in this litigation.

Court Of Chancery Explains When Director May Be "Interested"

In re Answers Corporation Shareholders Litigation, C.A. 6170-VCN (April 11, 2012)

Directors who are also officers have an interest in a merger when they are to retain their jobs in the merged company.  Delaware has recognized that this interest is inevitable in many cases and is usually not enough to make that director's vote for the merger considered an interested transaction. Of course, if future employment is negotiated improperly, the director may well be "interested," particularly if he both negotiates the merger and his future employment at the same time.

But what happens if he does not do so? Here the director/officer was deemed to be an interested director who had to prove the entire fairness of the deal because he knew he was about to be fired unless the deal was done soon.  This illustrates the importance of context.

Finally, the opinion is also interesting for its review of when circumstantial evidence is enough to show the acquiror had knowledge of possible fiduciary duty breaches so as to be an aider and abettor.

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Court Of Chancery Discusses Director Removal Statute

Shocking Technologies Inc. v. Michael, C.A. 7164-VCN (April 10, 2012)

A year or so ago, the DGCL was amended to permit the removal of a director by the Court of Chancery.  While the grounds to do are broadly stated (including "breach of the duty of loyalty"), the statute requires that the director first have been convicted of a felony or been found in a prior case to have breached his duty of loyalty.  There thus remains the question of whether director removal may be done without a prior action that establishes the grounds to do so.

This decision suggests that such a direct action for removal will be very hard to win, for the Court expressed serious concerns over whether it has that authority absent the statutory prerequisites. The question is still open to be squarely decided in another case.

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Court Of Chancery Upholds Limited Review Permitted By LP Agreement

In Re K-Sea Transportation Partners LP Unitholders Litigation, C.A. 6301-VCP (April 4, 20120)

This is another example of how an LP agreement may limit the review of a transaction by a court at the request of a dissatisfied partner.  The partnership agreement provided that the GP only needed to act in good faith in approving a sale and defined good faith, in part, as established by reliance on an expert's advice.  Since that was present, the court dismissed the complaint.

Court Of Chancery Explains Special Benefit Rule

Frank v Elgamal, C.A. 6120-VCN (March 30, 2012)

It is well understood that when a controlling stockholder stands on both sides of a transaction with his controlled entity that he will need to show the transaction is entirely fair to the other owners.  But when he receives such a special benefit so as to be on both sides of the deal is not always so easy to decide.  After all, it is common such acquirors to want to retain management.  If the insiders get an employment contract, do they stand on both sides of the negotiations?  This decision helps to answer that question.  In general, if the controllers get an equity interest in the surviving entity to a merger that is not shared with the other owners, then they are on both sides of the transaction and must show it is entirely fair.

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Delaware Superior Court Instructs How To Raise Choice Of Law

Anguilla Re LLC v. Lubert-Adler Real Estate Fund IV LP,  Del. Super., C.A. N11C-10-061-MMJ-CCLD (March 28, 2012)

When must a litigant raise any issue over the choice of the law that governs a dispute?  Right away is the answer.  As this decision correctly holds, if the parties brief their issue under Delaware law, trying to argue later that some other jurisdiction's law applies is too late.

Supreme Court Interprets Post Closing Payment Clause

BLGH Holdings LLC v. EXXCO LFG Holding LLC, Del., C.A. 531, 2011 (March 27, 2012)

When a post-closing adjustment is due after a merger is sometimes disputed, particularly when it depends on the closing of another deal.  Here the Supreme Court concludes that when the payment is due on the closing of another "deal" that new deal needs only to close, not to be exactly what the parties might have contemplated when they signed the merger agreement.  Thus, this is another example of "you-get-what-you bargained-for" in Delaware.

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Court Of Chancery Explains "Acquiescence"

In re Celera Corporation Shareholder Litigation, C.A. 6304-VCP (March 23, 2012)

This is an important decision because it clarifies when a stockholder will be deemed to have acquiesced to a merger, thereby losing her right to continue to litigate.  In short, voting for the merger or accepting a tender offer is acquiescence.  Accepting the merger consideration when the merger is inevitable is not acquiescence.

This decision is also useful for its explanation of how the Court will calculate the fees to be awarded.

Court Of Chancery Explains When Continuing Wrong Theory Applies

Buerger v. Appel, C.A. 6539-VCL (March 15, 2012)

After a board makes a decision that has consequences that last for years, the question arises of when the time to litigate over that decision expires.  Some decisions hold that when the decision is not reviewable later, such as when a long term contract is awarded, the time to attack that contract starts to run out the day the contract is approved.  Here, however, the Court noted that the company had the right to cancel the contract every year.  Thus, the Court held that each time the board decided not to cancel the contract, it made a new business decision that was subject to court attack from the date the contract was not cancelled.

Court Of Chancery Appoints Receiver To Resolve Strategic Issues

Badii v. Metropolitan Hospice Inc., C.A. 6190-VCP (March 12,  2012)

In this case the Court appointed a receiver for an insolvent corporation under Section 291 of the DGCL.  The Court reasoned that the appointment was needed to break a deadlock over whether to implement a proposed tax strategy when there was little time left to deal with the IRS.  This illustrates when a receiver may be appointed to make business decisions.

Court Of Chancery Limits Fraudulent Inducement Claims

Schonfeld Group Holdings LLC v. Trillium Holdings LLC, C.A. 6759-VCL (March 6, 2012)

It occurs more than you might think that a party to a release later claims that the release is not binding because she was fraudulently induced to sign it.  Applying recent New York law, here the Court holds that if the release covers "unknown claims," then it cannot be set aside by an claim that it was fraudulently induced.

Court Of Chancery Again Denies Injunction Despite Breach Of Duty

In re Delphi Financial Group Shareholder Litigation,  C.A. 7144-VCG (March 6, 2012)

For the second time in a month, the Court of Chancery has denied an injunction against a merger despite serious breaches of duty by the lead merger negotiator.  Here the controlling stockholder refused to vote for the transaction unless he received a "bonus" in the form of more for his stock than the other stockholders were to receive on a per share basis.  This odd demand arose out of some equally odd provisions in the certificate of incorporation where the controller had agreed to equal treatment in any merger but now sought to take back that provision.  That was wrong, the Court held.  However, the deal was too good to enjoin when there was no other deal on the table and none likely to arise later if an injunction stopped the show.  Hence, out of concern for the minority stockholders, the Court let the deal go through and left the stockholders with a damage claim.

While some commentators have argued that such a result is wimpy, they do not seem to worry about the impact on stockholders of killing a deal that represents the golden goose.  The threat of a damage remedy should be enough to deter such conduct in the future,  just as it does in other contexts.

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Court Of Chancery Applies Corporate Law Principles To LLC Dispute

Zimmerman v Crothall, C.A. 6001-VCP (March 5, 2012)

This is an interesting application of corporate law principles to an LLC dispute where the LLC operating agreement defined the managers' duties by language closely following common law duties for directors. Thus, the analysis included determining if they acted with gross negligence, were interested in 2 transactions to invoke the entire fairness test, etc.

Court Of Chancery Adopts New Fee Setting Procedures

Danenberg v. Fitracks, Inc., C.A. 6454-VCL ( March 5, 20120)

Among the more vexing tasks of a Court is setting the fees to be awarded in an advancement case. If left to itself, this can become a monthly job as the parties endlessly quarrel over how much is to be paid. The Court of Chancery has tried several approaches to  avoid getting stuck in this endless quagmire.  Here is a new one.  The Court is charging the senior Delaware lawyers for each party with the duty to resolve any difference through a detailed process including monthly meet and confer sessions.  That may be enough to interject some sanity into these disputes.

Court Of Chancery Explains Priority Rule In Merger Litigation

Dias v. Purches, C.A. 7199-VCG (March 5, 2012)

It is often thought that the jurisdiction where suit is first-filed will obtain priority over later filed actions.  As this decision makes clear, that is not true when the litigation involves a representative action and Delaware corporate law applies.  For in that case, the Delaware courts will apply the doctrine of forum non conveniens that gives only slight weight to where the first suit was filed.  More important in class or derivative actions is Delaware's interest in applying its corporate law to Delaware entities.

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Court Of Chancery Instructs What Deal Protection Provisions Are Acceptable

In re Micromet Inc. Shareholders Litigation, C.A. 7197-VCP (February 29, 2012)

This is an excellent primer on what deal protection provisions are acceptable, particularly when the board must have the right to change its recommendation to stockholders when a superior proposal surfaces.  It is permissible to require a board to wait a short time before changing its recommendation to allow the first acquiror to match a new proposal.  However, once that matching right period passes, the board must be free to act promptly.

This opinion also provides a good analysis of the scope of any pre-deal market check and the board's role in limiting the scope of any effort to shop a deal.

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Court Of Chancery Declines Injunction Despite Probabililty Of Success

In re El Paso Corp. Shareholder Litigation,  C.A. 6949-CS (February 29, 2012)

This is the now-famous decision finding several breaches of fiduciary duties by the negotiators of a merger, but declining to kill the deal that would have given stockholders a large premium.  The opinion is, as usual for its author, entertaining to read.  More importantly, however, it is once again proof that money may deaden any sense of fiduciary duty, particularly any sense of when there is a conflict of interest.

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Court Of Chancery Resolves Who May Bring Derivative Claims After Dissolution

Matthew v. Laudamiel, C.A. 5957-VCN (February 21, 2012)

This decision resolves who may bring a derivative claim after an LLC has been dissolved.  The argument made by 1 of the parties was that after dissolution, any member may bring a derivative claim directly.  The Court rejected that argument and concluded that the claim still must be brought in the name of the LLC and that a petition might also be filed to have the entity restored to bring such a claim or for a trustee to be apponted to do so.

This decision also dealt with an important jurisdictional issue under the so-called conspiracy theory.  It holds that the alleged conspirator must be aware that the conspiracy involves an action in Delaware in furtherance of the conspiracy, before the conspiracy is completed and the harm done.

Court Of Chancery Restricts Transfer Of LLP Interest

In re Estate of Everett T. Conaway, C.A. 6056-VCG (February 15, 2012)

This decision upholds transfer restrictions in a limited partnership agreement.

Court Of Chancery Appoints Books And Records Receiver

Jagodzinski v. Silicon Valley Innovation Company LLC, C.A. 6203-VCP  (February 14, 2012)

This is an interesting decision because the Court appointed a receiver to enforce its orders granting a right to inspect an LLC's records when the LLC management did not comply with those past orders.  How far that receiver might go in his inspection is not clear but given that the receiver is the plaintiff's own agent, pretty far seems likely.

Court Of Chancery Explains How To Establish "Good Faith" In Indemnification Case

Marc S. Hermelin v. K-V Pharmaceutical Company,  C.A. 6936-VCG (February 7, 2012)

This is the leading decision on how to establish the "good faith" requirement for permissive indemnification after the indemnitee has lost his case.  As the opinion notes, that may require a mini-trial when the good faith of the indemnitee has not been settled in the underlying action.

The opinion is also helpful in setting out what constitutes and how to prove "successful on the merits or otherwise,"  the usual test both under the statute and most bylaws for mandatory indemnification.

Court Of Chancery Explains How To Apply Hirt

In re Delhi Financial Group Shareholder Litigation,  C.A. 7144-VCG (February 7, 2012)

This decision teaches how to appy the so-called Hirt facts to select lead counsel in a class action. Most notably, it holds that filing first is not as important as filing the best complaint and that co-lead counsel may work in some cases.

Court Of Chancery Limits Inspection When Prior Case Filed

Amalgamated Bank v. NetApp Inc., C.A. 6772-VCG (February 6, 2012)

The interaction between two cases in two jurisdictions is again examined in this decision. The court held that a Section 220 books and records case may not be pursued to provide discovery to support the amendment of a complaint in a case pending elsewhere when the time to amend that complaint has passed.  The mere possibility that the time to amend may be extended is not enough to get under the rule in the King decision that permitted a books and records action to proceed when the right to amend a complaint was still present.

Court Of Chancery Repeats What Interrogatory Answer Must State

Grunstein v. Silva, C.A. 3932-VCN (January 26, 2012)

When answering an interrogatory asking about the documents a litigant relies upon, it is not enough to just refer to the documents produced.  Instead, the specific documents must be identified, such as by bates numbers.

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Court Of Chancery Explains Role Of Fiduciary Duties

Auriga Capital Corporation v. Gatz Properties LLC, C.A. 4390-CS (January 27, 2012)

It is often the case that a controlling owner wants to eliminate the minority interests.  How to do so and abide by his fiduciary duties is the stuff that makes for litigation.  This is an example.  This decision is particularly important for 2 reasons.  First, it makes clear that even a controlling owner who does not really want to be a seller must consider going through a validly conducted sale process to show that he has been entirely fair with the minority.

Second, it explains the role of fiduciary duties in LLCs, including those LLC agreements that try to modify or eliminate those duties. That is possible to do but needs to be done very explicitly.

Court Of Chancery Explains Email Evidence Rule

Paron Capital Management LLC v. Crombie, C.A. 6380-VCP (January 24, 2012)

When is email sufficiently authenticated to be admissable into evidence?  This decision explains that when there are "distinctive characteristics" such as an email address the party admits is his, then that email is admissable.

Court Of Chancery Awards Damages In Corporate Opportunity Decision

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

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

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

Court Of Chancery Enjoins Loan Restructuring

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

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

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

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

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

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

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

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

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

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Delaware Federal District Court Adopts ESI Discovery Guidelines

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

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

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

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

Court Of Chancery Upholds No Trading Rule

Steinhardt v. Howard-Anderson,  C.A. 58787-VCL (January 6, 2012)

A class representative may not trade in the stock held by his class members based on information he learns in the litigation.  That is the usual rule reflected in the typical confidentiality order entered in such cases in Delaware.  This decision collects several other unreported decisions following that rule and shows how to calculate the trading profits that must be returned to the class when the rule is violated.

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

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

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

Supreme Court Explains Contract Analysis

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

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

Court Of Chancery Extends Stockholder Meeting Date

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

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

Court Of Chancery Provides More Guidance On Fee Awards

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

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

Court Of Chancery Clarifies Pleading Rules For Bad Faith Claims

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

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

Supreme Court Determines Interest Award

Brandywine Smyrna Inc. v. Millennium Builders Inc., No. 53, 201 (December 9, 2011)

 When a prevailing party is entitled to interest on its judgment has sometimes been confusing.  This decision affirming the general right to interest clarifies Delaware law.

Supreme Court Clarifies Inspection Rights

Espinoza v. Hewlett-Packard Company, C.A. 208, 2011 (November 21, 2011)

This decision clarifies the scope of the right to inspect a company's records to investigate allegations of wrongdoing.  The decision is somewhat unique becasue it also raised issues of attorney-client privilege and work product protection that the Supreme Court did not need to decide. Briefly, a document may be subject to inspection when it is "essential" to accomplish the purpose of the inspection.  That in turn means the document must address the issue involved, such as the alleged wrongdoing, and not just be information otherwise made available to the inspector.

Obviously, this is a fact intensive test.  In this case, for example, the information sought was contained in other documents provided and the document sought did not really add much to the mix of information addressing the key question the stockholder wanted to investigate.

Court Of Chancery Explains Good Faith And Fair Dealing

Winshall v. Viacom International Inc.,  C.A. 6074-CS (November 10, 2011)

This is another case where a party tried to re-do a contract by claiming that the failure to give it more than it bargained for constituted a violation of the covenant of good faith and fair dealing.  In rejecting that claim, the Court again explains the tight limits of that covenant.  It just can not be used to make a new deal.

Affirmer, del Sup. 39, 2013 (October 7, 2013).

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Court Of Chancery Analyizes Class Conflicts

Garrett v. Zon Capital Partners LP,  C.A. 5607-CS (November 10, 2011)

This is a rare Court of Chancery decision discussing when a class should be certified. The Court reviewed and dismissed the claim that there was a conflict of interest among class members, based on a funds flow analysis.

Court Of Chancery May Appoint A Receiver To Collect Insurance

In The Matter of Krafft-Murphy Company Inc., C.A. 6049-VCP (November 9, 2011)

This decision upholds the power of the Court of Chancery to appoint a receiver for a dissolved Delaware corporation to collect on the corporation's insurance polices covering asbestos claims. This may be done even more than 10 years after formal dissolution and provides a way to pursue insurance coverage despite the general law that prohibits direct claims against an insurer.

See also the Supreme Court's reversal of part of the Court's ruling at Anderson v. krafft-Murphy Company, Inc. Del Sup. C.A. 85, 2013 ( November 26, 2013).

Court Of Chancery Again Interprets The Step Transaction Doctrine

Coughlan v. NXPB, C.A. 5110-VCG (November 4, 2011)

It is sometimes important to decide if a series of transactions are to be coupled together to be treated as one.  The so-called step transaction doctrine does that when applied.  Here the Court used the step transaction to interpret an agreement that gave the selling stockholders the right to a bump up in the merger consideration and certain protections if company assets were sold before all the additional consideration was paid.  This somewhat lenient application of the doctrine may signal its greater acceptance by the Court.

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Superior Court Explains Physical Evidence Requirement

Elegant Slummimg Inc. v. NGM,  C.A. 810C-11-013-RFS (November 30, 2011)

This scholarly review of Delaware law explains the "physical evidence requirement" in some insurance policies. 

Court Of Chancery Explains What Is A Control Group

Dubroff v. Wren Holdings LLC, C.A. 3940-VCN (October 28, 2011)

What is a derivative claim is sometimes hard to decide but may be central to a plaintiff's right to bring suit.  Under the Supreme Court's Gentile decision, a claim that the controlling stockholder has improperly diluted the minority shareholders' stock may be filed as a direct claim on behalf of those stockholders and does not have to pass the tough rules governing the filing of derivative litigation.  Who then constiutes a "controlling stockholder?"  This decision holds that a group may be in "control" for the purposes of the Gentile rule and explains how to decide if that control group exists.

The decision also further explains what sort of dilution qualifies to invoke Gentile, when disclosures after action by stockholder consent must be complete and that a pending class action tolls the statue of limitations until the class certification process is complete.

 

Court Of Chancery Explains The Incorporation Basis For Personal Jurisdiction

Connecticut General Life Insurance Company v. Pinkas, C.A. 5724-VCN (October 28, 2011)

It is sometime claimed that the act of incorporating a Delaware corporation is enough to subject the incorporator to jurisdiction in Delaware.  After all, an old case does do just that.  But as this decision points out, the act of incorporating has to be an integral part of the actions that give rise to the claims asserted.  That is not so easy to show and did not work in this case.

Superior Court Explains How To Calculate Fee Award

Relax Limited v. ANIP Acquisition Company, C.A. 10C-06-032 JRS CCLD (October 17, 2011)

A frequent issue is how to calculate a fee award when the prevailing party has only been partially successful.  This decision turns on the unique provisions of English law, but is still an interesting exercise in awarding some but not all the fees to a party who only partially prevailed.

Court Of Chancery Awards $1.263 Billion In Damages

In re Southern Peru Copper Corporation Shareholder Derivative Litigation,  C.A. 961-CS (October 14, 2011)

This is the largest monetary award in the history of the Court of Chancery, $1.263 Billion plus interest.  Indeed, except for 1 other case decided outside of Delaware, it may be the largest breach of fiduciary duty case anywhere else.  It certainly should end the claim that the Delaware courts always favor management.

The decision is particularly instructive about how a special negotiating committee should conduct or not conduct itself.  For that reason alone it is required reading for anyone who cares about such things.

Court Of Chancery Rejects Appraisal Claim

Krieger v. Wesco Financial Corp., C.A.6176-VCP (October 13, 2011)

Some corporate mergers give stockholders of the acquired company an option to take cash or the stock of the acquiror.  If the stockholder fails to chose, then she typically gets the cash.  The appraisal statute only provides for an appraisal claim when the stockholder is required to take cash and not publicly traded stock.  Here the plaintiff who had not made the election to take stock and so got cash argued she was forced to take cash and hence was entitled to appraisal of her shares.

The Court said "no," reasoning that so long as she had a choice she was not forced to take the cash.  Risking the wrath of some members of Congress, the Court cited to a famous French philosopher on why you still have a choice even when you do not decide to act.  That too is your choice.

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Court Of Chancery Explains What Is A Duty Of Loyalty Claim

In re Alloy Inc. Shareholder Litigation, C.A. 5626-VCP (October 13, 2011)

Delaware corporate law permits a Delaware corporation to exonerate directors from claims that they acted negligently.  Those claims are known as "duty of care" claims.  However, the same statute also states that claims for acting in bad faith [known as "duty of loyalty" claims] may not be so easily precluded.  Hence, plaintiffs often seek to cast their complaints as duty of loyalty claims. Often, this takes the form of alleging that no loyal director could have been so stupid as to do what those directors are alleged to have done and so they must have been disloyal, not just negligent.

Well as this decision shows, it is just not that easy to plead a duty of loyalty claim.  You need really strong facts, not just conclusions.  This decision is a good example of how the Court analyzes those sorts of allegations and will dismiss a complaint that lacks the facts to sustain a duty of loyalty claim.

Court Of Chancery Upholds The Business Judgment Rule Again

In re The Goldman Sachs Group Inc. Shareholders Litigation,  C.A. 5215-VCG (October 12, 2011)

Every so often, a corporation acts so badly that a plaintiff decides to take a run at attacking the business judgment rule and sues the corporation's directors alleging their decisions have been too stupid to be protected by that rule of Delaware law.  That was true in the famous Disney case and this is another example of such a suit.  After all, who could stand up for Goldman Sachs these days?

Well, showing that the business judgment rule is alive and well, the newest member of the Court of Chancery in this decision reaffirms that hindsight alone does not support a good claim.  The decision is noteworthy because Vice Chancellor Glasscock exhibits the same care and scholarship as his predecessors in his opinion dismissing the complaint.

Court Of Chancery Suggests The Disclosure Of Free Cash Flows

Gaines v. Narachi, C.A. 6784-VCN (October 6, 2011)

What should be disclosed in a proxy is not always clear. This decision notes the reasons and the precedent to disclose free cash flows used to do a discounted cash flow analysis by an investment bank giving the fairness opinion.

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Court Of Chancery Refuses Any "Pass" For Small Companies

In Re Openlane Inc. Shareholders Litigation, C.A. 6849-VCN (September 30, 2011)

Some believe that the board of directors of a small company does not have as strict fiduciary duties to the minority stockholders as do boards of publicly traded companies.  This decision reiterates that under Delaware law those duties apply to the small and the large equally.

The opinion is also noteworthy as another example of the Court of Chancery's inclination to limit the Omnicare decision to its facts.

Court Of Chancery Upholds Reliance On Banker To Show Good Faith

Brinckerhoff v. Enbridge Energy Company Inc.,  C.A. 5526-VCN (September 30, 2011)

This is a significant decision for 2 reasons.  First, it confirms the widely-held belief that the Tooley test to determine if a complaint is direct or derivative applies to limited partnerships.

Second, it interprets language in the LLP agreement permitting the general partner to rely on the advice of an investment banker as constituting proof of "good faith" in deciding to do a deal with an affiliate of that general partner.  This is important because while Delaware law permits LLP agreements to waive many duties owed by a GP, the duty to act in "good faith" cannot be waived. Hence, the ability to effectively define in the LLP agreement what will constitute good faith is another way to limit claims against the GP even for self-dealing.

This decision was affirmed on MAy 28, 2013.

Court Of Chancery Explains Domination Law

New Jersey Carpenters Pension Fund v. Infogroup, Inc., C.A. 5344-VCN (September 30, 2011)

To decide whether a derivative suit may proceed without first asking the Board of Directors to bring the suit, one test that is applied is whether the Board is "dominated or controlled" by an alleged wrongdoer.  For if the Board is so dominated, then it cannot be expected to independently decide if the suit should proceed.  Some cases under this rule are easy to decide, such as when there is a parent-child relationship involved.  [Those of us who have had teenagers might wonder why this is so.]

There are harder cases and this is one. Here the Court decided that the threats of a dominant stockholder and board member had so affected the rest of the Board that the other directors could not be expected to independently decide if the dominating board member should be sued. Hence, it permitted the suit to proceed without a demand on the rest of the Board.

The obvious lesson here is not to be a bully.

Court of Chancery Arbitration Likely to Become More Prevalent

 Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | September 28, 2011

In 2009, Delaware's General Assembly passed and Gov. Jack Markell signed legislation enabling arbitration in the Court of Chancery.  In 2010, the Court of Chancery adopted rules governing arbitration. As the statutes — 10 Del. C. §§ 349 and 351 — and rules — Court of Chancery Rules 96-98 (Arbitration Rules) — are new and arbitration requires mutual agreement, arbitration may become a more prevalent means of resolving disputes as deal lawyers increasingly require Court of Chancery arbitration for disputes arising out of merger and other agreements.

Reportedly, the current dispute between Skyworks Solutions and Advanced Analogic Technologies contains a dispute resolution clause mandating arbitration in the Court of Chancery. It is thus appropriate to review why Chancery Court arbitration is likely to become an increasingly preferred method of dispute resolution.

First, the arbitration rules permit resolution of disputes by decision-makers with the knowledge and experience of the chancellor and vice-chancellors. To be eligible for Court of Chancery arbitration, the dispute must involve at least one party that is a Delaware entity; both parties must agree to arbitration; and if the dispute is solely about monetary damages, the amount in controversy must exceed $1 million. The procedure is not available for consumer disputes. Previously, disputes solely for monetary damages were not amenable to subject matter jurisdiction in the Court of Chancery.

Second, the members of the Court of Chancery are used to resolving matters on an expedited basis. The arbitration rules contemplate that generally an arbitration hearing will be scheduled within 90 days of the filing of the petition. However, they also allow for modification of the schedule with the consent of the parties and approval of the arbitrator. The arbitration rules thus permit flexibility for the parties and arbitrator to structure the dispute resolution on a schedule that makes sense.

Third, Chancery Court arbitration proceedings are confidential. The filing of a petition for arbitration is not included on the court's docket system. The petition and all supporting documents are by rule considered confidential and not of the public record, unless there is an appeal.

Fourth, Section 351 of Title 10 expressly authorizes parties to stipulate that an arbitration award shall be final, binding and non-appealable. As the synopsis to the legislation explains, "In many matters parties desire an answer and their dispute is narrow enough that even if they cannot settle, they are willing to agree in advance to live with the outcome rendered ... ." The new statutes permit that voluntary option.

Fifth, any appeals go to the Delaware Supreme Court, a decision-making body equally acclaimed for its knowledge and experience in the prompt resolution of significant business disputes.

Sixth, for parties in disputes with foreign entities, the new statutes and arbitration rules may provide greater comfort that the arbitration award will be enforceable against a foreign entity on its home turf under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Finally, the price is right compared to private arbitration. The filing fee is $12,000, to be equally divided by the parties. For each day or partial day that the vice chancellor or master engages in arbitration after the first day of arbitration, there is a $6,000 fee, also to be equally divided by the parties.

Efficiency, confidentiality, first-rate decision-makers experienced in resolving complex business disputes — for these reasons deal lawyers should consider the benefits of Chancery Court arbitration. And as they counsel their clients to specify Chancery Court arbitration in their agreements, we can expect that it will be an increasingly utilized tool for dispute resolution.

Court Of Chancery Invalidates Vote Blocking Device

Johnston v. Pedersen, C.A. 6567-VCL (September 23, 2011)

This is a good discussion of the "enhanced scrutiny" that the Court of Chancery applies to board action that affects the right to vote.  Such action must have a "compelling justification" and the simple desire to avoid being thrown out of office, even by scalawags, is not enough.  Hence, here the Court invalidated the provisions of a specially issued series of preferred stock that had the right to block the removal of the board of directors.

Morris James Launches "Delaware Courts Online" - A Guide To Litigation in Delaware's Business Courts

Morris James LLP is pleased to announce the launch of Delaware Courts Online, a second online presence for the firm that will serve as a guide to litigation in the U.S. District Court of Delaware, the Delaware Court of Chancery and the Delaware Superior Court Complex Commercial Litigation Division. 

Delaware Courts Online (www.delawarecourtsonline.com) is intended to assist clients and counsel whose Delaware law issues or corporate or commercial litigation are resolved in Delaware courts. The website features experienced Delaware litigators providing insight on topics such as the courts, judges, procedures, rules, forms and electronic filings and much more.

Unique features of the website include its courtroom galleries showing views of the courtrooms from all angles and the highlights of the court rules and practice pointers. Clients and out-of-town counsel will find a guide on how to litigate in Delaware’s business courts.

“Delaware Courts Online will serve as an extension of what we do every day for our clients – deliver information about the Delaware business court system, says Edward M. McNally, Chair of Morris James’ Litigation Group.

Court Of Chancery Fashions Remedy For Failure To Negotiate

PharmAthene Inc. v. SIGA Technologies Inc.,  C.A. 2627-VCP (September 22, 2011)

This is an important decision for 2 reasons.  First, it clarifies the extent of a duty to negotiate in good faith.  Second, it crafts a remedy for a breach of that duty.  This is important because deal term sheets often provide for further "good faith" negotiations and what that means has been unclear in the past.  Further, it is also common for the mediation of commercial disputes to end with the basic terms set out in a memorandum of understanding with the details to be "negotiated in good faith."

First, it is important to understand when there is a binding obligation to negotiate in good faith.  In this case, 2 formal contracts between the parties required they have such further negotiations. Without a binding contract to do so, it remains doubtful  that just a simple agreement to continue discussions binds anyone.

Second, when the duty to negotiate does arise, what constitutes good faith is hard to define in the abstract.  This decision points out, however, that a refusal to continue to honor past agreements is "bad faith."  In short, you cannot go back on terms already agreed to as a way to get other concessions.

Third, when the duty to negotiate is violated, the remedy is critical.  As this decision points out, specific performance and a damage award of what one side says were its expectation damages may not be available for a variety of reasons.  Here, the Court provided a remedy that gave the non-breaching party what the Court felt were the benefits that the parties had agreed on generally, even if the details were not finalized.  This highlights the importance of reviewing the history of their negotiations to determine what is likely to have been the outcome had they fairly negotiated.

Court Of Chancery Uses Computer Records To Unravel Facts

Phillips v. Hove, C.A. 3644-VCL (September 22, 2011)

This is an interesting decision for its very entertaining explanation of the facts and how the Court decided what was true in the face of false testimony.  Using the computer records to verify when documents were generated, the Court determined which story was most believable.

There are also some key legal determinations, although nothing really new.  For example, even though the LLC Agreement had provisions for dissolution,  the Court,  having concluded those would not work, ordered dissolution.

 

Court Of Chancery Enjoins Suit In Another Jurisdiction

ASDC Holdings LLC v. The Richard J. Malouf 2008 All Smiles Grantor Retained Annuity Trust,  C.A. 6562-VCP (September 14, 2011)

Frequently a contract will have a provision selecting Delaware as the forum to litigate any dispute.  What happens then when a case is filed elsewhere and one party seeks to enforce the forum selection clause by an injunction in Delaware against the prosecution of the other litigation?   Well, this decision tells us the result and resolves possible conflicting holdings in other courts including the Delaware Supreme Court.  Briefly:

1. The Court of Chancery will grant the injunction if the forum selection clause properly confers jurisdiction in Delaware courts.  Note that this means that selecting the Court of Chancery may not work if the dispute is not subject to equitable jurisdiction in that court.  Better to select  "any" court with jurisdiction in Delaware over the subject matter of the dispute.

2. The forum selection clause must be broad enough to include any dispute "arising out of" or "related" to the dispute.  A narrower clause may not work.

Seizing Control of a Dispute by Seeking Declaratory Judgment

 by Katherine J. Neikirk

Originally published in the Delaware Business Court Insider | September 14, 2011


For companies in disputes with third parties or insiders, filing a declaratory judgment action offers a way to seize control of a dispute and frame the contours of the litigation. Filing a declaratory judgment also provides a way to resolve uncertainty, such as when potential claims affect a business's ability to obtain financing. There can be a number of advantages to this approach, assuming the parties can satisfy the requirements for a declaratory judgment, versus waiting to see if the other side sues.

The advantages include "setting the table" for the litigation. The initiating party can tell the court its side of the story first, define the framework of the parties' dispute and introduce the key issues and players to its advantage. If there are bad facts for the initiating party, it can attempt to neutralize those bad facts by explaining why they are not actually bad or do not really matter. Such an approach can be preferable to defending bad facts after the other side initiates litigation and distorts the facts to its advantage. A defendant moving to dismiss a complaint for failure to state a claim cannot challenge the well-pleaded facts in the complaint. The court must accept the allegations as true in resolving the motion to dismiss.

Another potential advantage to initiating a declaratory judgment action is forum selection. Perhaps there are multiple jurisdictions that could hear the dispute and the parties did not select a forum. Or maybe there is some question as to the appropriate jurisdiction. Even if the parties have selected a forum, perhaps the other side is likely to file somewhere else.

Delaware courts move promptly and a party that initiates a declaratory judgment action in Delaware will at least have the opportunity to argue that Delaware is the appropriate forum. Like all courts, however, Delaware courts are critical of forum shopping, so filing a declaratory judgment action with a weak basis for jurisdiction in Delaware compared to a more convenient forum is unlikely to succeed.

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Poison Pill Limbo: How Low Can It Go?

by Peter B. Ladig
Published in the Delaware Business Court Insider | September 07, 2011

A few months ago the pop culture writer Chuck Klosterman published a short article addressing a question I have pondered myself, although far less articulately than Klosterman discussed it: Is there a speed at which the human body cannot run any faster?

Put another way: Is there a point at which the record for the 100 meter dash is so low that it cannot be broken because the human body simply cannot exceed it, or could the record always be lowered? The general consensus was that there probably is a limit, but no one knows what the limit is, and a sprinter's belief in his ability to continually break the record generated better performances.

The limits of the human body are, of course, a long way from the poison pill jurisprudence of the Delaware courts, but a question with a similar genesis can be asked: Is there a lower limit for poison pill triggers? In 2010, the Delaware Supreme Court in Versata Enterprises Inc. v. Selectica Inc. affirmed the decision of the Court of Chancery upholding the adoption of a poison pill with a 5 percent holding trigger.

Indeed, the Supreme Court upheld the adoption of the poison pill, the dilution below 5 percent of the stockholder that intentionally triggered the pill, and the adoption of a second poison pill, again with a 5 percent holding trigger. In reaching this conclusion, the Supreme Court found that despite the low trigger point for the poison pill, the pill was not preclusive because it was not "realistically unattainable" for an insurgent to wage a successful proxy contest with a 5 percent trigger. The Supreme Court added that the shareholder advisory firm RiskMetrics Group supports rights plans with a trigger below 5 percent on a case by case basis if adopted for the purpose of preserving net operating losses, as was the case in Selectica.

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Superior Court Emphasizes Need for Speed in Litigation

by Edward M. McNally
Originally published in the Delaware Law Weekly  l  08-31-2011

In years gone by, Delaware’s courts had much of the same flavor as a small town. The local bar was small. Few firms from outside Delaware had Delaware outposts. The lawyers were part of a community where everyone at least knew someone who knew who they were and how they practiced law. As a result, it was often true that lawyers got away with not complying with scheduling orders and continuances were freely granted. Even today, some of that atmosphere remains, with Delaware lawyers maintaining civility.

To view the full article, login to Delaware Law Weekly.

Two Vice Chancellors, Two Preferences for Interim Fee Applications

by Lewis Lazarus
Originally published in the Delaware Business Court Insider | August 31, 2011

Stockholder litigation challenging a merger transaction before it is consummated often has two phases. First, plaintiffs seek to enjoin the transaction. Second, if that fails, plaintiffs proceed with claims that the transaction was unfair because of a flawed process and an inadequate price.

When plaintiffs succeed in causing the corporation to issue corrective disclosure prior to a stockholder vote, they generally will be found to have conferred a benefit upon the corporation and its stockholders. Having done so, they are then entitled to an award of attorney fees. But can they get fees before the case is finally resolved?

Two recent decisions, Frank v. Elgamal and In re Del Monte Foods Company Shareholders Litigation, illustrate that the question is one for the discretion of the court and that that discretion may be exercised differently depending upon the chancellor or vice chancellor deciding the case and the underlying facts and circumstances.

Although the Frank court declined to entertain an application for interim fees while the Del Monte court did and awarded $2.75 million in interim fees, the court in each opinion agreed that "interim fee awards may be appropriate where a plaintiff has achieved the benefit sought by the claim that has been mooted or settled and that benefit is not subject to reversal or alteration as the remaining portion of the litigation proceeds," quoted from the 2001 decision in Louisiana State Employees Retirement System v. Citrix Systems Inc.

The court in each opinion also recognized that a trial court is never required to consider an interim fee application and that a trial court may well prefer to have applications determined at the end, when a single fee can be awarded. Vice Chancellor John W. Noble in Frank noted that "judicial economy and the orderly conduct of litigation are usually better served if interim awards of attorneys' fees are avoided."

 

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Intersection Between Fiduciary Duties and Contract Rights May Be Headed For a Showdown

by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider l 08.17.2011

In recent years, the tension between fiduciary duty principles and contract rights, particularly with respect to fiduciary duties in unincorporated entities, has received a great deal of attention from the members of the Delaware judiciary in their written opinions and in extrajudicial commentary.

On the one hand, many decisions of the Court of Chancery have held that fiduciary duties apply in unincorporated entities unless specific language eliminates those duties. On the other, Chief Justice Myron T. Steele wrote an article in the 2009 American Business Law Journal that stated, "Delaware courts should not apply default fiduciary duties even if the parties have not specifically provided for the elimination of fiduciary duties."

Although the Delaware Supreme Court has not yet directly addressed whether fiduciary duties apply to unincorporated entities by default, it has held — in the 2010 case Nemec v. Shrader — that the exercise of contractual rights is not subject to fiduciary duties.

The tension between fiduciary duties and contract principles in unincorporated entities was visited again in the Court of Chancery's recent opinion in Paige Capital Management LLC v. Lerner Master Fund LLC. Although the court's opinion addressed many factual and legal issues, the facts of Paige as they relate to fiduciary duty issues are straightforward.

Michele and Christopher Paige, wife and husband, sought to enter the world of hedge fund management. They recruited Lerner Master Fund LLC, the investment arm of the Lerner family, founders of MBNA and current owners of the NFL's Cleveland Browns and English Premier League's Aston Villa Football Club, to provide the hedge fund with $40 million in "seed money" so that the Paiges could use the Lerners' investment to attract other qualified investors. The Lerner group became a limited partner of the hedge fund, but also signed a separate agreement with additional terms and conditions that were applicable to the Lerners' investment. Pursuant to this side agreement, the Lerners were not permitted to remove their investment from the hedge fund for three years, unless, among other things, the Paige entities breached the contract or a fiduciary duty. In exchange, the Lerners received reduced management fees, incentive payments and other benefits.

 

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Supreme Court Affirms Creditors May Not Sue Derivatively In LLC

CML V LLC v. Bax,  C.A. 735, 2010 (September 2, 2011, corrected September 6, 2011)

This decision upholds the prior decision of the Court of Chancery that creditors of an insolvent LLC may not bring a derivative claim against its managers.  This follows because the Delaware LLC Act limits such claims to members.  This result is another example of the differences between LLCs and corporations.  For in the corporate context, a creditor may file a derivative claim when the entity is insolvent.

17 Morris James Attorneys Named In Best Lawyers in America® 2012 in 20 Practice Areas

Seventeen Morris James attorneys are listed as being among the most elite lawyers in their practices in The Best Lawyers in America® 2012.

The Best Lawyers in America® has become universally regarded as the definitive guide to legal excellence. Their rigorous research is based on an exhaustive peer-review where leading attorneys cast votes on the legal abilities of other lawyers in their practice areas.

The Morris James attorneys listed in the 18th edition of the guide and the areas of law in which they are recognized include:

Richard P. Beck
Litigation – Real Estate (1983)
Real Estate Law (1983)

John M. Bloxom IV
Real Estate Law (2010)

P. Clarkson Collins, Jr.
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)

Mary M. Culley
Elder Law (2008)

Keith E. Donovan
Personal Injury Litigation (2009)

Dennis D. Ferri
Medical Malpractice Law (2007)
Personal Injury Litigation – Defendants (2007)

Richard Galperin
Personal Injury Litigation – Defendants (2005)

Richard K. Herrmann
Information Technology Law (2003)
Technology Law (2003)

Francis J. Jones, Jr.
Personal Injury Litigation – Defendants (2008)
Personal Injury Litigation – Plaintiffs (2008)

Gretchen S. Knight
Family Law (2007)

Lewis H. Lazarus
Commercial Litigation (2006)
Corporate Law (2006)
Litigation – Mergers and Acquisitions (2006)

Mary B. Matterer
Litigation – Intellectual Property (2009)

Edward M. McNally
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)

Mark D. Olson
Tax Law (2011)

James W. Semple
Commercial Litigation (2009)

Bruce W. Tigani
Tax Law (2011)

David H. Williams
Education Law (2007)
Employment Law – Management (2007)
Labor Law – Management (2007)
Litigation – Labor and Employment (2007)

(Year indicates first year listed in practice area)

Court Of Chancery Explains Books And Records Rights In An LLC

DFG Wire Company LLC v. Eight Estates Wine Holdings LLC, C.A. 6110-VCN (August 31, 2011)

Inspection rights in LLCs are different from those in corporations.  The statute is different and the relationship between the owners is different.  This decision does a good job of explaining inspection rights in an LLC, including when those rights may reach the records of a subsidiary.

Court Of Chancery Denies Interim Fee Application

In re Novell Inc. Shareholder Litigation, C.A. 6032-VCN (August 30, 2011)

Once again, the Court of Chancery has denied an application for interim fees in a shareholder litigation.  The application was based on so-called curative disclosures made as a result of the plantiff's efforts.  While such applications are certainly disfavored as premature, that is perhaps all the more so when they are based on just additional disclosures.  Several other recent decisions have reached the same conclusion.

Court Of Chancery Upholds Attorney Lien

Judy v. Preferred Communications Systems, Inc., C.A. 4662-VCL (August 19, 2011)

This is the first decision in Delaware to uphold an attorney's lien for unpaid legal fees.  Hence it is welcome news to us all.  The Court conditioned the release of the documents subject to the lien on the client posting security to cover the disputed fees pending an arbitration.

The opinion is particularly noteworthy for its exhaustive scholarship and its modification of the old rule that such a lien might only be justified to prevent a client fraud.

Supreme Court Clarifies Test Of Pleadings

Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, No. 595, 2010 (August 18, 2011)

This important decision clarifies that Delaware courts should apply the "conceivability" test to determine if a complaint states adequate facts to state a claim.  Previously, Delaware's trial courts had applied the "plausibility" test from the United States Supreme Court's Twombly decision.  As the Delaware Supreme Court makes clear, the "conceivability" test is the more liberal test and will result in sustaining more complaints in response to motions to dismiss.

For years, the Chief Justice has cautioned in public statements that Twombly was not Delaware law.  While his opinion in this case may leave that open for a later review,  for now he has the last word.

The decision also significantly liberalizes the scope of a "good faith and fair dealing" claim.  So long as such a claim does not depend on an actual breach of the contract involved, it may survive a motion to dismiss as well.

Court Of Chancery Permits Full Transfer Of Membership

Achaian Inc. v. Leemon Family LLC, C.A. 6261-CS (August 9, 2011)

It is often unclear when a member of an LLC may transfer not just her financial interests but her voting rights as well.  The LLC Act leaves that issue to be determined by the LLC operating agreement.  Here the Court closely examines this issue and an LLC agreement and decides that a member's full interest may be transferred by her without the other members' consent.

Court Of Chancery Permits Innovative Use Of Declaratory Judgment

K&K Screw Products LLC v. Emerick Capital Investments Inc., C.A. 5633-VCP (August 9, 2011)

Sometimes a lingering contract dispute causes problems in obtaining financing or just getting on with a company's business.  Here the Court upheld the use of a declaratory judgment action to establish the parties rights in such a dispute.

Court Of Chancery Upholds Fiduciary Duty In An Alternative entity

Paige Capital Management LLC. v. Lerner Master Fund LLC, C.A. 5502-CS (August 8, 2011)

This is an important decision and a lot of fun to read to boot.  The fun is in the all-too-human story it tells of personal ambition frustrated and what happens then.

There are 3 key points in its holding.  First, those who control an LLC owe fiduciary duties to the members unless the LLC Agreement clearly cancels those duties. This may be contrary to the views of at least 1 Supreme Court Justice who favors requiring those duties be spelled out in the agreement.

Second, vesting in a manager the "sole discretion" to decide a matter only means she is the only one who gets to vote on it.  It does not mean she can vote anyway she likes even if that is unfair. Here better drafting is needed.

Third, the Court will decide cases on their legal merits even if the winning party is a jerk.  Of course, here there was a bit of a contest to see who could be the biggest jerk.  Nonetheless, it is reassuring that the Court saw though all that to get to the real merits.

CCLD Explains Pleading Rules For Fraud

Brevet Capital Special Opportunities Funds L.P. v. Fourth Third LLC, C.A. N10C-12-071 JRS (CCLD)

The Superior Court's Complex Commercial Civil Division is issuing more and more opinions in the various matters that are now becoming ripe for decision.  Here the Court explains when both fraud and breach of contract claims may be filed in the same case and how to adequately plead the fraud count under the particularity standard required.