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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
This decision explains how to calculate damages in an accounting action for breach of fiduciary duty.
This decision clarifies that the rule of the Blasius decision is really just an application of the intermediate Unocal standard in reviewing director conduct.
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.
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.
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.
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.
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.
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.
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.
Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 15, 2011
A plaintiff who pleads successfully that a transaction under attack is governed by the entire fairness standard of review instead of business judgment generally stands a good chance of defeating the defendant's motion to dismiss. That is because when a transaction is reviewed for entire fairness, defendants bear the burden in the first instance of proving at trial the fairness of the process and price.
In two recent cases - Ravenswood Investment Co. v. Winmill and Monroe County Employees' Retirement System v. Carlson - the Court of Chancery clarifies that a plaintiff must still make well-pleaded allegations that a transaction is unfair as to process and price if its complaint is to survive dismissal at the pleadings stage.
Ravenswood involved claims that defendant directors' adoption of a performance equity plan violated fiduciary duties by seeking to dilute the minority stockholders' percentage interest in non-voting Class A shares (only Class B shares had voting rights). The court noted that the entire fairness standard applied because "where the individuals comprising the board and the company's management are the same, the board bears the burden of proving that the salary and bonuses they pay themselves as officers are entirely fair to the company unless the board employs an independent compensation committee or submits the compensation plan to shareholders for approval."
Because the directors employed no such protective measures, the court held that the entire fairness standard of review applied. Still, citing Monroe County, the court held that the plaintiff "bears the burden of alleging facts that suggest the absence of fairness."
The court dismissed the plaintiff's complaint because it found he had failed to make well-pleaded allegations that the defendant directors' adoption of the performance equity plan was unfair. Critical to the court's reasoning was that dilution occurs upon the adoption of any options plan; the question is whether the manner in which the options were issued unfairly diluted the stockholders.
As the defendants in their motion to dismiss did not challenge the plaintiff's claim for unfair issuance of the options, the court found that the plaintiff's allegation of dilution did not suffice to state a claim for unfairness in the adoption of the performance equity plan.
This was so because the plaintiff alleged that "(1) the Performance Equity Plan only authorizes the Board to grant stock options with an exercise price not lower than the market value as of that event, (2) the Defendants already control all of the Company's voting rights through their ownership of its Class B shares, and (3) even if all options authorized under the plan were to be granted to the Defendants they would not obtain a majority interest in the Class A shares... ."
The court noted that although it was true that the Class A shares could vote to approve a merger, the plaintiff made no allegation in his complaint that the adoption of the performance equity plan impaired those voting rights. The court declined to comment on whether such an allegation may have sufficed to sustain this claim.
The Ravenswood court relied upon the court's holding in Monroe County. That case involved a challenge to an intercompany agreement that required the plaintiff's company to purchase services and equipment from its controlling shareholder on terms in conformity with (for services) or the same as (for equipment) what the controlling shareholder charged its other affiliates. The parties agreed that the arrangement the plaintiff attacked was governed by the entire fairness standard of review.
They disagreed as to whether the plaintiff's pleading sufficed to survive a motion to dismiss.
As summarized by the court: "Delaware law is clear that even where a transaction between the controlling shareholder and the company is involved such that entire fairness review is in play, plaintiff must make factual allegations about the transaction in the complaint that demonstrate the absence of fairness. (citations omitted). Simply put, a plaintiff who fails to do this has not stated a claim. Transactions between a controlling shareholder and the company are not per se invalid under Delaware law. (citation omitted). Such transactions are perfectly acceptable if they are entirely fair, and so plaintiff must allege facts that demonstrate a lack of fairness."
In reviewing the complaint, the court found no allegations that the price at which the controlling stockholder provided the services and equipment was unfair. Instead, the court found that plaintiff's allegations addressed only alleged unfair dealing.
In the absence of an allegation that the company could have obtained the services or equipment on better terms from a third party or any specific allegation of the worth of the services or equipment relative to what the company paid, the court found that the complaint did not make sufficient factual allegations that the intercompany agreement transactions were unfair. Because the plaintiff chose to stand on its complaint in response to the defendants' motions to dismiss rather than to amend, the court dismissed plaintiff's complaint with prejudice under Court of Chancery Rule 15(aaa).
Together, these two cases clarify that a plaintiff cannot survive a motion to dismiss simply by alleging that a transaction involving a controlling stockholder is unfair. A plaintiff instead must make particular factual allegations suggesting why the transaction was unfair. A plaintiff who cannot make such allegations and who stands on a conclusory complaint, as in Ravenswood, may find that its claims are dismissed with prejudice.
Lewis H. Lazarus (email@example.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. His practice is primarily in the Delaware Court of Chancery in disputes, often expedited, involving managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and do not necessarily reflect the firm or any of the firm's clients.
One of the more important fiduciary duties in Delaware corporate law is not to trade on insider information. A complaint alleging that you did is known as a Brophy claim for the decision that announced it over 60 years ago. Recently, Brophy was thought to have been watered down by a requirement that the company actually suffer harm from the trading involved. That would occur, for example, if the company is in the market to buy back its own stock in competition with the insider.
Well, the Supreme Court announced in this decision that it will not permit any chipping away at the Brophy rule. It is not necessary to show harm to bring such a claim. Rather, preserving the sanctity of fiduciary duties under Delaware law warrants permitting recovery of any profits made by the disloyal fiduciary, even if not at the company's expense.
Some may think that all you need to state a claim for breach of fiduciary duty is to allege the action under attack involved a conflicted board. Not so. At the very least, a plaintiff also needs to allege facts that show the deal was unfair to the company. Once that is pled, then the burden does shift to the conflicted board to justify the transaction.
In this unusual decision the Supreme Court upheld an award of attorneys fees and costs to plaintiffs who proved a breach of fiduciary duties owed to them but where there were no apparent damages from the breach. In that way the plaintiffs were compensated for the breach. It is not clear if this means that in every breach of fiduciary duty case that attorney fees may be won by the plaintiffs as well. I doubt it for the Court does not announce any such major change in Delaware law and the decision seems limited to its peculiar facts. But, you can not know for sure.
When a controlling shareholder has the power to veto any proposed transaction, it is sometimes claimed that his support for a particular deal has forced the other shareholders to accept that deal or get nothing. This decision rejects such a claim and holds that the controlling shareholder's veto power in itself is not coercion that the other shareholders may complain about later.
This opinion is also an excellent summary of the exceptions to the entire fairness rule of the Kahn case and is worth reading for that reason as well.
It is becoming increasingly clear that Court of Chancery judges believe the Delaware Uniform Contribution Among Tortfeasors Act ("DUCATA") applies to breach of fiduciary duty claims. E.g., Hampshire Group Ltd. v. Kuttner, 2010 WL 2739995, at *54 (Del. Ch. July 12, 2010); J. Travis Laster & Michelle D. Morris, Breaches of Fiduciary Duty and the Delaware Uniform Contribution Act, 11 Del. L. Rev. 71 (2010). In light of this development, attorneys representing directors alleged to have breached their fiduciary duties should make sure to address the effects of DUCATA when drafting settlement agreements. Attorneys should include language providing that settling defendants are not liable for contribution to defendants who do not settle.
An example of language addressing Section 6304 of DUCATA might include language like the following: "In accordance with 10 Del. C. 6304(b), this settlement agreement reduces the damages that the plaintiff may recover against tortfeasors other than the settling defendants by the pro rata share of the settling defendants' liability. This language is intended to comply with 10 Del. C. 6304(b) so as to preclude any liability of the settling defendants to any other alleged tortfeasors, for contribution or otherwise."
This decision is well worth reading for its careful explanation of what standard of review the Court will apply when director action adversely affects minority stockholders. In short, it depends on the facts of each case. For example, when the majority already controls who is elected to the board, the adoption of a staggered board does not really affect the rights of minority stockholders and the business judgment rule applies.
The decision is also noteworthy for its rejection of the idea that preservation of a unique corporate "culture" justifies defensive action under the Unocal test. The lesson here is that if you want to run your company as a hobby, then do not take money from investors who do not support that hobby.
Because "self dealing" sounds so bad, sometimes a plaintiff thinks that all she needs to do is say those words in a complaint to state a claim. Not so. As this decision points out, self dealing may still be fair if the price is right. Hence, to state a claim a complaint must state facts that show the deal was not fair.
Preferred stockholders like to claim, in addition to the rights they have to be "preferred" under the certificate of incorporation, that they also have the right to enforce fiduciary duties to them by the board. Not so as this decision explains. When the preferred stock's "contract" touches on a topic, such as the right to share in merger consideration, then that defines their rights and they cannot resort to fiduciary duty law to expand those rights.
The Court of Chancery Reaffirms the Vitality of Claims Asserting Insider Trading as a Breach of the Fiduciary Duty of Loyalty
Vice Chancellor Laster recently affirmed the continuing vitality of state law “Brophy” claims for Delaware corporations injured by their fiduciaries’ insider trading. In so ruling, the Court clarified the elements of a Brophy claim, explained why the claim is firmly grounded in the duty of loyalty applicable to Delaware fiduciaries and discussed why such claims complement and do not conflict with the federal securities law regime. Less clear and undecided by the decision are the elements of damage the corporation might recover.
The Toll Brothers decision arose in the context of a motion to dismiss a shareholder derivative complaint brought for the benefit of Toll Brothers Inc. against eight of the eleven directors of the corporation. The complaint alleged they sold significant amounts of their Toll Brothers stock during the period from December 2004 through September 2005. The complaint further alleged that they did so while in possession of material nonpublic information about Toll Brothers’ future prospects that contradicted the Company’s upbeat disclosures about its business prospects and expected growth and earnings. When the Company in December 2005 suddenly revised its public growth forecast for 2006 net income downward from 20% to 0.5%, its stock price precipitously dropped.
A federal securities lawsuit followed joining the individual defendants and alleging they made material misrepresentations and omissions of material fact in connection with projections for 2006 and 2007 that were “knowingly unreasonable” when made. The federal action also alleged insider trading in violations of Section 10(b)(5). The federal court upheld the securities claims against a motion to dismiss under the rigorous standards for pleading securities fraud and the case moved to merits discovery.
The Delaware derivative action followed in November 2008. The Delaware complaint had two counts. The first alleged breach of fiduciary duty under Brophy v. Cities Service, 70 A.2d 5 (Del. Ch. 1949) for harm caused by insider trading. The second count was a generalized claim for indemnification and contribution for harm to the Company resulting from the federal securities fraud action. The director defendants moved to dismiss both counts on various grounds including that Brophy is an outdated precedent that should be rejected.
The Court rejected all of the defendants’ arguments challenging the Brophy claim. The Court first stated the elements of claim: “1) the corporate fiduciary possessed material, nonpublic company information; and 2) the corporate fiduciary used that information improperly by making trades because he was motivated, in whole or in part, by the substance of that information.”
The Court found that the complaint sufficiently pled a reasonable basis from which the fiduciaries’ knowledge could be inferred. The inference was based on specific allegations of the defendants’ knowledge and reliance on core metrics the Company used to measure and forecast growth and earnings, the contrast between the defendants’ public statements and the underlying trends indicated by the Company’s metrics, and the defendants’ contemporaneous massive sale of securities. The Court ruled the allegations supported a pleading stage inference that the Sellers took advantage of confidential corporate information not yet available to the public to unload significant blocks of shares before the market’s views of Toll Brother’s prospects dramatically changed. The Court contrasted this case from those cases dismissed at the pleading stage where evidence of accounting improprieties were disclosed in a subsequent restatement and senior officers and directors sold stock during the period covered by the restatement. Those cases the Court noted lacked allegations supporting an inference that the fiduciaries would have known of the particular accounting problems, in contrast to the core operational information involved in the Toll Brothers case.
The Court also addressed and rejected the assertion that Brophy was an anachronism that predated the current federal insider trading regime and should no longer be followed. Brophy involved a corporate secretary who knew of Cities Service’s planned open market purchases that would likely boost its stock price. The fiduciary bought for his personal account in advance of the corporate purchase and later sold the shares at a profit after the market price rose. Rejecting the argument that the corporation suffered no harm, the Brophy Court said “Public policy will not permit an employee occupying a position of trust and confidence toward his employer to abuse that relation to his own profit, regardless of whether his employer suffers a loss.”
Vice Chancellor Laster in the Toll case explains why the Brophy claim does not duplicate the federal securities laws and does provide a meaningful remedy for corporate harm. First, a Brophy claim does not exist to recover losses by contemporaneous traders, nor does it automatically require disgorgement of reciprocal insider trading gains; rather it is to remedy harm to the corporation. Pointing to Delaware Supreme Court precedent rejecting claims of breach of fiduciary duty or fraud as a basis for the class-wide recovery of trading losses, the Court agreed with Vice Chancellor Strine in his recent AIG opinion upholding a Brophy claim that it is harm to the corporation that is of primary concern. Vice Chancellor Laster wrote that harm in the case of insider trading might include the costs and expense the corporation incurred for regulatory proceedings involving the insider trading, internal investigations, fees paid to counsel and other professionals, fines paid to regulators and judgments in litigation. In this case and the recent AIG case, both of which involved companion securities law litigation naming the corporation a defendant, the Court noted that the defendants’ breaches of the duty of loyalty, involving trading on confidential information and material misrepresentations and omissions, may subject the corporation to a substantial judgment or settlement in the federal securities action.
The Court left to another day the precise type of damages or remedy that would be available if plaintiff proved its case. It noted, however, that Delaware remedies to protect the corporation and non-duplicative of the federal remedies that might be granted, were necessary and available to remedy breaches of the fiduciary duty of loyalty based on insider trading. Avoiding damages duplicative of the federal securities laws and satisfying public policy concerns regarding indemnification for securities fraud violations remain significant issues in fashioning a damage award for successful derivative plaintiffs. See e.g., Richard A. Booth, The Missing Link Between Insider Trading and Securities Fraud, 2 J. Bus. & Tech. L. 185-206 (2007).
The Court’s opinion also dealt quickly with defendants’ arguments that the derivative complaint failed to plead demand futility adequately under Rule 23.1 and was barred by the statute of limitations. Using the Rales standard, the Court concluded that demand was excused because a majority of the Board could not consider the merits of a demand without being influenced by improper considerations. Because of the potential personal liability a majority of the directors faced in the federal securities action, they faced a sufficiently substantial threat of personal liability to compromise their ability to act impartially on a demand.
As to the statute of limitations, the Court acknowledged that the complaint was filed more than 3 years after the alleged insider trading, but it found the pleading supported a basis for equitable tolling. Because the complaint alleged wrongful self-dealing and shareholders’ reasonable reliance on the competence and good faith of the director fiduciaries until December 2005 when management officially abandoned its previous growth projections, the Court ruled the running of the limitations period was equitably tolled until then.
Finally, the Court acknowledged the tension between allowing the concurrent prosecution of the shareholder derivative action for the benefit of the corporation at the same time the corporation seeks to defend itself from liability in the federal securities action. Not wanting to have the derivative action burden the corporation’s ability to defend itself in the securities action, the Court urged the parties to coordinate the actions and acknowledged the possibility of a stay of the derivative action pending the outcome of the securities action as was done in the AIG case.
Lately, there seems to be a lot of interest in the rights of preferred stock compared to the rights of common stock and how the board of directors should act when caught in the middle of their conflicting claims. This decision summarizes the past decisions and explains what to do.
Here are some "rules" to go by:
1. When the certificate of incorporation speaks to the preferred stock's rights on an issue, that controls and the board does not need to consider granting greater rights to the preferred. The charter ends the discussion.
2. When the certificate of incorporation is silent on an issue and leaves the preferred in the same position as the common [such as on the right to get the highest price for the company in a merger] then the board needs to consider the preferred and common as having the same rights and owed the same fiduciary duty.
3. When the issue somehow falls in a gap between the preferreds rights under the certificate of incorporation and the rights of the common stock, get a good lawyer. Seriously, the board needs to do its best to strike a fair balance under the circumstances.
In an era when "too big to fail" seems to be an accepted reason to do the extraordinary, in this case the plainitffs tried to argue that a 'bet-the-company" deal requires a board to be right or be held for the consequences. The Court soundly rejects that argument and held the business judgment rule protects the board from second guessing in even the biggest deals.
This decision is also an excellent summary of the law dealing with when demand must be made on a board before filing a derivative suit. The Chancellor was once a law professor and his teaching skills are on full display in this case.
Directors sometimes face a conflict between what is best for the common stockholders compared to what is best for the preferred stockholders. While it is generally recognized that preferred stockholder rights are largely contractual and not based on fiduciary duties, that does not resolve all conflicts with common stockholders. The certificate of incorporation just cannot deal with every possible conflict. Here the Court held that common stock is to be favored in any conflict with the preferred that is not resolved by the terms of the certificate of incorporation. That will not solve all the problems, of course, and in this case, the Court held that a full trial might be needed to reach a final decision on how the preferred/common conflict should be resolved.
Where then does that leave a board of directors faced with such a conflict in the interests of the common and preferred stockholders? The answer probably lies in the case law dealing with what to do when a company is insolvent and the creditors are the residual risk holders. In that instance, the stockholders want the board to use every last dollar to reverse the company's fortunes, while the creditors want asset preservation and liquidation to get what they can. The Delaware Courts have held in that circumstance, the board is charged with making a business judgment over what is the best course for the entity to follow. That is easier said than done but may boil down to a risk/benefit analysis somewhat like a card player makes when deciding if it is time to fold his hand. So long as the board acts in good faith, its decision should be upheld.
The question sometimes arises over what are the disclosure duties of the buyer under a stockholder agreement that compels a stockholder to sell her stock upon some triggering event, such as retirement. This decision clarifies the rules that apply.
In general, when the sale is strictly pursuant to the stockholder agreement, then that agreement determines if any disclosure is required. However, it is not always clear whether the sale is "strictly" pursuant to the agreement as sometime other terms are discussed, extra stock added [as was the case here] and the agreement for some reason not followed. When that happens, the rules change.
While the corporation itself may not have any disclosure duties, the directors as fiduciaries do have those duties. Thus, if they are the buyers, then they need to disclose material facts when they purchase a stockholder's shares outside the provisions of a stockholder's agreement.
Magistrate Judge Leonard P. Stark considered the plaintiffs’ state law claims of breach of fiduciary duty and denied the defendants’ motion to dismiss these claims against certain individual defendants. The complaint alleged that the individual defendants, each of whom were directors or officers of Collins & Aikman, owed “fiduciary duties of loyalty, good faith and care to the Company” and breached those duties “by orchestrating, encouraging or utilizing various accounting schemes . . . which materially misstated the financial condition of the Company.” The Court rejected the defendants’ argument that, with regard to the duty of care claims, C&A’s § 102(b)(7) exculpatory provision eliminated or limited personal liability. The Court took judicial notice of the exculpatory provision and found it inapplicable as the complaint alleged facts implicating breaches beyond that of due care.
Norman v. Elkin, C.A. No. 06-005-JJF (D. Del. Apr. 28, 2009)
The district court denied motions for summary judgment for claims of breach of contract, usurpation of corporate opportunities, breaches of fiduciary duty, breach of the duty of disclosure, conversion and misappropriation, and fraudulent representation. In their motion, the defendants responded to the plaintiff’s usurpation of corporate opportunity and misappropriation claim by arguing that the claim failed as matter of law, because the defendant corporation did not have the financial capability to participate in an auction for certain licenses. The district court cited the Court of Chancery’s standard for establishing that a corporation is financially unable to take advantage of a corporate opportunity. “[S]uch financial inability must amount to insolvency to the point where the corporation is practically defunct.” The district court agreed with the plaintiff that a reasonable jury could find that the defendant was not practically defunct and could have raised funds necessary to participate in the auction.
After the recent decision in the AIG case denying a motion to dismiss a complaint, there was some concern that perhaps the Court of Chancery was loosening the pleading requirements to state a claim under the Caremark line of case law. Caremark, of course, suggested that directors might be liable for failing to properly supervise management even when the directors did not receive any personal benefit as a result.
In this latest decision, the Chancellor has put those fears to rest. He distinguished the AIG decision and strongly affirmed that the business judgment rule protects directors when they make business decisions, even those that involve risk to the entity.
Thus, it is important to read the AIG decision and this decision together to get a full picture of how the Court is reacting to the calls to assign blame in the current financial crisis.
This is an important decision because it limits when stockholder approval of a transaction has the effect of ratifying director action. Moreover, it limits the effect of stockholder ratification by holding that the business judgment level of review still applies to the directors' action, rather than holding that ratification extinguishes any claim.
The ratification holding is that stockholder ratification only occurs when the stockholders approve a transaction that the directors are empowered to take without the approval of the stockholders. For example, because directors are able to issue stock without stockholder approval, the added approval of the stockholders would ratify their decision to sell stock. In contrast, because a merger already requires stockholder approval, the approval of the stockholders does not constitute "ratification" of the directors' decision to recommend the merger. They approve it but do not "ratify" it. How is that for a distinction?
The rationale for this tightly reasoned result lies in the difference under Delaware law between complying with a controlling statute's requirements to carry out a transaction and having a good reason for doing the transaction in the first place. In other words, in Delaware just because you have the power to act (the stockholders voted for it) does not mean you should act (a decision that is measured by Delaware's law of fiduciary duty).
In this major opinion, the Court of Chancery held that a manager of a Delaware Statutory Trust has a fiduciary duty to the Trust absent a clear exclusion of that duty in the trust instrument. This conclusion has broad implications including that the owners of the manager may also have such duties in connection with transactions that arguably benefit the owner. That is consistent with a long line of Delaware case law in other contexts, such as for corporations and limited partnerships.
This once again illustrates the need for very careful drafting in these alternative entities where the governing instrument may set the rules of the game. Failure to do so means that principles of corporate law, or in this case, trust law, will control by default. That will defeat the whole purpose of using an alternative to the traditional corporate form to gain the right to draft rules for that particular transaction.
This decision is a textbook explanation and summary of the Delaware case law on the duties of a board of directors when considering a takeover proposal. The Court first sets out the Revlon duties in detail including the effect on those duties when the Barkin "exception" may apply. Next, the Court explains how to comply with the principles of both Omnicare and Unocal concerning defensive measures that protect the proposed transaction. Finally, the Court explains why in the context of a summary judgment motion that the otherwise disinterested board may have its good faith questioned.
This last part of the decision is surely its most controversial. While the Delaware statute protects directors from attacks on their decisions based on their lack of care, the loophole has always been that the statute does not protect from act not taken in good faith. When does a lack of care turn into a lack of good faith is the question.
In a series of decisions such as the Disney case, the Delaware Supreme Court has tried to set out some guidance on this issue. However, the test to be applied is still vague and in the context of a summary judgment motion when all inferences must be drawn in favor of the plaintiff, the test becomes even more difficult in application. This decision illustrates that problem and is worth reading for that issue alone.
The plan of allocation approved in Ginsburg v. Philadelphia Stock Exchange et. al., C.A. No. 2202-CC is a landmark decision for those in the business of litigation arbitrage, buying shares of a company that is involved in a class action that may lead to substantial settlement proceeds.Continue Reading...
The law of Delaware on when damages may be awarded for failing to make proper disclosures to stockholders in a proxy statement has been unsettled. This major decision resolves much of that uncertainty. The Court has now held:
“. . . this Court cannot grant monetary or injunctive relief for disclosure violations in connection with a proxy solicitation in favor of a merger three years after that merger has been consummated and where there is no evidence of a breach of the duty of loyalty or good faith by the directors who authorized the disclosures.”
The opinion carefully reviews and harmonizes precedent to reach this final conclusion. The net effect then is that the remedy for negligent disclosure violations is an injunction. Of course, as the opinion makes clear, damages may still be available in circumstances where there was a conflict of interest by the directors or they acted in bad faith. The latter would occur, for example, if the directors omitted substantial materials from the proxy statement deliberately to mislead.
For a director of a Delaware corporation to be guilty of gross negligence, her conduct must be so unreasonable that no one could have made the same decision. Unless the decision under review is this bad, it will be protected by the business judgment rule. This gross negligence rarely happens and it is thus difficult to find decisions that illustrate the type of conduct that meets this test. In fact, in this decision the defendant had a conflict of interest and thus the business judgment rule did not apply for that reason.
However, the Court went to great length to point out that the investment decisions under review did also exceed the gross negligence standard. This explanation provides an insight into what sort of decision-making is a breach of fiduciary duty. For example, in this case the investment was in a company that did not have a business plan, was continuously losing money, and was generally in such poor shape that no one but the hapless defendant would have lent it money. In short, it was gross negligence to make the loans and the defendant was liable for them as a result.
The District Court recently allowed claims for breach of the duties of care and loyalty against former directors and officers of Tectonic Network, Inc. (the “Company”) to go forward, rejecting Defendants’ jurisdiction, standing and insufficient claim arguments. Plaintiff, an Ad Hoc Committee of Equity Holders in the Company, sued Defendants for purportedly improper conduct in connection with the acquisition of three businesses and the resulting sale of one of the Company’s subsidiaries. Plaintiff alleged that Defendant Officers (Officer #1 and Officer #2) committed fraud related to the Company’s actions, and all Defendants breached their fiduciary duties. Specifically, Plaintiff alleged that the Defendants breached their fiduciary duties in recommending and/or approving the acquisition of the three businesses, all of which Officer #1 had a majority interest in. Plaintiff also alleged that the Defendant Officers committed fraud in making material misrepresentations to the board regarding the profitability of the acquired businesses and the prospective profitability of a future business plan that resulted in the sale of the Company’s subsidiary. Subsequent to acquisitions and sales, the Company’s financial picture worsened, and it filed for voluntary Chapter 11 bankruptcy. The Bankruptcy Court lifted the stay to allow Plaintiff to press its claims outside of the bankruptcy proceedings.Continue Reading...
A Delaware LLC is a creature of the members' contract. Here the LLC agreement gave voting rights to a class of members that effectively gave them veto rights over certain actions. When those members exercised those veto rights, the other members sued claiming that constituted a breach of duty. The Chancellor flatly rejected that argument as an attack on the veto rights that were given in the LLC Agreement.
The opinion also holds that a member's consultation with his designated managers on the LLC Board does not give Delaware jurisdiction over that member under the long arm statute's provisions that subject managers to jurisdiction in Delaware.
Ebay Brings Stockholder Action In Court of Chancery Against Craigslist And Its Directors For Diluting Its Minority Stake
Yesterday eBay Domestic Holdings Inc. brought an action in the Court of Chancery, C.A. 3705-CC, against Craigslist and certain of its directors, challenging recent transactions implemented by the Craigslist board. According to this statement on its website, eBay acquired a minority ownership interest in Craigslist (28.4%) back in 2004. It now alleges that Craigslist's directors have taken unilateral action in violation of their fiduciary duties and have disadvantaged eBay and its investment.
The complaint was filed under seal. The matter has been retained by Chancellor Chandler.
In this case of first impression, the Court of Chancery held that a corporation had a duty to a warrant holder to truthfully answer its inquiries about corporate plans. This is significant because normally there is no fiduciary duty running to warrant holders and no duty to keep them informed. Here, however, finding that when asked about a matter that implicated the warrant holders' financial interest, there was a duty to answer a question truthfully.
Miller v. McDonald, C.A. 07-51350 (Bankr. Del. April 9, 2008)
In a case of apparent fist impression, a bankruptcy court in Delaware has held that Caremark duties apply to corporate officers as well as directors. Thus, corporate officers also have the duty to exercise reasonable care in oversight of corporate operations in their area of responsibility. This is hardly a surprise. However, given that the officer involved in this case was considered the company's general counsel, this decision has some far-reaching implications.
In this widely reported decision, the Court of Chancery applied well established principles of contract construction to determine when a proxy would be upheld. Once again, the Court rejected an attempt to modify the contract language to imply a duty of good faith and fair dealing, or a fiduciary duty that would override the rights given in the contract.
See latest developments on 03/31/08 above: Last Thursday, a class action complaint was filed against Bear Stearns and its directors in the Court of Chancery. The complaint alleges that the company has failed to maximize shareholder value by agreeing to be purchased by JPMorgan Chase for $2 per share. The complaint further alleges that, by agreeing to the deal, the company has favored numerous constituencies over the shareholders. You can access the complaint here.
Further Update: An additional class action was filed against Bear Stearns on Monday by the Wayne County Employees' Retirement System (access the complaint here). And, yesterday a TRO was filed on behalf of the plaintiffs in both actions, seeking to enjoin the sale, which is set to close on April 8 (access the TRO here). Both actions, and the accompanying TRO, have been assigned to Vice Chancellor Parsons.
In the latest of the Chancery decisions on complaints challenging the grant of options, the Court has explained what it takes to state a derivative complaint that excuses demand on the Board. Briefly, the Court here focused on what was disclosed to the stockholders when they were asked to approve option plans or elect directors who had received option grants. First, full disclosure is required, particularly of practices that are likely to lead to increasing the value of the options, such as the bullet-dodging alleged in this case.
Second, the fact that a majority of the board received the options also made them interested enough to excuse demand.
Pfeffer v. Redstone, C.A. No. 2317-VCL (February 1, 2008).
At first this seems like a common disclosure case. It is more than that, however. The court here shows that it expects claims to be based on more than mere conjecture to survive a motion to dismiss. The Complaint alleged that the key corporate officers knew of a bad cash flow analysis but failed to disclose it in connection with an exchange offer. When the plaintiff''s counsel could not even say he had seen the alleged report or explain how it was disclosed to the defendant directors, the complaint was dismissed.
To support allegations of knowledge of a red flag, the allegation must be based on common sense or specific facts. It is common sense to infer the directors saw a report if it was common knowledge in the corporation and is a type of report that one would expect the board to have seen. It is not common sense to believe that an obscure memo generated by a lower level employee was shown to the board of a publicly traded corporation.
In re Coca-Cola Enterprises Inc. Shareholders Litigation, C.A. No. 1927-CC (October 17, 2007).
In breach of fiduciary duty cases, a frequent question is when to apply the three-year statute of limitations that applies to actions at law. Here, the Court again holds that the statute of limitations begins to run in a breach of fiduciary duty case when the parties enter into their contract and not when the harm resulting from that contract occurs.
Thus, when the complaint alleged that Coca-Cola was abusing its bottling company under the terms of a 1986 contract, the breach ran from 1986, not from when Coca-Cola took certain actions under that contract in 2004. Time and again, the Court has used this approach to reject late claims or claims asserting a so-called continuing wrong theory where the limitations period never expires.
District Court Applies Delaware Statute of Limitations Carve Out For Fiduciary Claims, Denies Summary Judgment
In this action the District Court evaluated the application of the statute of limitations to claims that a corporate fiduciary engaged in self-dealing at the corporation’s expense. Plaintiff was a 25% shareholder in a closely-held Delaware corporation with Pennsylvania headquarters, formed to participate in the wireless communications industry. Defendant #1 owned the remaining shares of the corporation, and also served as its President and sole director. Plaintiff alleged that Defendant #1 breached his duties to the corporation when he personally obtained newly-issued communications licenses from the FCC, then sold them along with the corporation’s pre-existing licenses to a third party, keeping the proceeds of the sale himself. Plaintiff further alleged that Defendant #1 took the action without notifying Plaintiff in his capacity as a shareholder, without holding an annual meeting, and without making any disclosure of the sale. Plaintiff sued Defendant #1, along with his wholly owned corporation and another corporate officer, in the Delaware Court of Chancery for breach of contract, unjust enrichment, declaratory relief, and breach of various fiduciary duties. Defendants removed the action to District Court based on diverse citizenship and moved for summary judgment, arguing that all claims were time-barred.Continue Reading...
Conrad v. Blank, C.A. No. 2611-VCL (September 7, 2007).
In the latest of the Delaware option cases, the Court of Chancery permits the action to go forward when it appears that the Board considered the option backdating and did nothing about it. It is noteworthy from its decision that this apparent indifference to a wrong served to distinguish this case from others where the backdating appeared to be a simple mistake. In the case of a simple mistake, the error would not be enough to expose the board to liability and that would excuse demand before the derivative suit was filed.
The Court also declined to apply the "continuing wrong" theory. Under that theory, a plaintiff who acquires her stock during the series of wrongful acts has the right to challenge all the actions including even those that occurred before she acquired her stock. Instead, here the court held that each backdated option was a separate wrong and the plaintiff could only sue for those that had occurred after she bought her stock.
In this action alleging violations of ERISA and state contract law, Defendants moved to dismiss two of the claims under F.R.C.P. Rule 12(b)(6). Plaintiff’s husband was employed by one of the defendants. Plaintiff brought the action against the employer and its insurance company, alleging that Defendants wrongfully denied her claim under an employee welfare benefit plan after her husband was killed while on a business trip. She alleged that defendants wrongfully denied benefits under ERISA, breached fiduciary duties owed under ERISA, and violated state contract law. Defendants moved to dismiss the fiduciary breach and state contract claims. The Court allowed the breach of fiduciary duties claim, but dismissed the state contract claim.
In this class action lawsuit brought by former MBNA employees, Plaintiffs asserted various breaches of fiduciary duty arising under ERISA in connection with administration of their 401(k) plan. Plaintiffs’ claims arose out of MBNA’s 2005 announcement of expected 10% annual growth for several years. Plaintiffs’ 401(k) plan contained MBNA stock. Several months later MBNA announced lower-than-expected earnings and MBNA stock fell nearly 35%. Plaintiffs alleged that the Defendants breached various fiduciary duties that resulted in this loss. Defendants were MBNA, the former CEO of MBNA, the committee responsible for the administration of the 401(k), and the individual committee members. Defendants moved to dismiss the various claims under F.R.C.P. 12(b)(6). The District Court found that dismissal as to all counts in the complaint was inappropriate at the pleading stage, and denied the motion.Continue Reading...
Gradient OC Master Ltd. v. NBC Universal Inc., C.A. No. 3021-VCP (July 12, 2007).
A line of Delaware decisions recognizes that it is improper to coerce stockholders into accepting a transaction. What exactly is coercive, however, is not well defined. After all, almost any transaction that offers a choice has incentives built into it to induce taking the deal, but that cannot be improperly coercive. Here the Court of Chancery summarizes the prior decisions and articulates helpful standards to determine when there is actionable coercion.
While the decision is complex, the bottom line appears to be whether the Court is convinced the terms offered make economic sense. Thus, in this case it made sense to ask stockholders to give up some of the restrictive covenants that went with their preferred stock to achieve a successful restructuring. In contrast, when in another case a self-tender was seen as an unjustified attempt to fight off a competing offer, the Court held the too high tender price was an unlawful attempt to coerce stockholders to take the offer or be left with an over-leveraged company in the hands of the same directors.
District Court Declines to Exercise Supplemental Jurisdiction Over Fiduciary Duty Claims, Grants Motion to Dismiss
In this shareholder derivative action for breach of fiduciary duties against various corporate defendants, the Court held that the state law claims asserted so predominated the lone federal claim that exercise of supplemental jurisdiction was inappropriate. Plaintiffs, former shareholders of MBNA Corporation, asserted various claims against the defendants based on breach of fiduciary duties in connection with earnings reports and the merger of MBNA with Bank of America. Defendants moved to dismiss based on lack of subject matter jurisdiction, arguing that the Plaintiffs’ sole claim that rested on federal jurisdiction was so predominated by the state law claims as to make the exercise of the Court’s supplemental jurisdiction inappropriate. The Court concurred with the defendants, concluding that Plaintiffs’ federal law claim bore only a tangential relationship to the rest of the claims. The Court therefore granted Defendants’ motion to dismiss for lack of subject matter jurisdiction.Continue Reading...
Since the Tyson decision, some have predicted that the Court of Chancery will be hard on option granting abuses. That has proved to be so, but not always. Here the Court discussed a suit that alleged improper option granting because the plaintiff really could not plead a case that the board of directors was knowingly breaking the rules.
Many of the options involved were granted to lower level employees when the board itself was not directly involved. In that case, the plaintiff could not show that the members of the board had enough culpability to fear personal liability. Under those circumstances, the plaintiff could not meet the rules for showing a demand on the board to bring suit would be fatal.
In the case of other options, while they may have been granted at favorable times before good news caused the market to rise or after bad news caused it to fall, the options were part of a prearranged plan with set grant dates. Hence, timing of the grants was not at issue. Again, under these circumstances board liability was too remote to excuse demand under Rule 22.1.
North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, C.A. No. 521, 2006 (May 18, 2007).
For many years, the rights of corporate creditors to bring breach of fiduciary duty claims against directors has been the subject of much debate. For the most part, commentators have felt there was little need to protect creditors who it was said should protect themselves through their loan agreements. Nonetheless, substantial case law existed that upheld the right of creditors to sue directors.
In this decision, the Delaware Supreme Court has effectively ended the debate. It holds that creditors may not bring a direct claim against directors for breach of their fiduciary duties. This is true whether the corporation is insolvent or is close to insolvent. Creditors may, however, bring derivative claims when the corporation is insolvent because then they are the residuary risk takers for whom the directors should act. While the opinion does not answer this question, it seems likely that creditors may not bring derivative claims when their corporation is close to but not actually insolvent.Continue Reading...
Crescent/Mach I Partnership LLP v. Turner, C.A. 17455-VCN (May 2, 2007).
Predicting how the Court of Chancery will determine value in an appraisal proceeding is a difficult task. To some extent, each appraisal case will involve a battle of experts. Which side will ultimately prevail can be hard to predict, at least before cross examination. Further, the discounted cash flow approach frequently used by the Court of Chancery can be complicated. This decision offers a primer on that process and is well worth the trip for those willing to put in the time.
Valeant Pharmaceuticals International v. Jerney, C.A. No. 19947 (Del. Ch. March 1, 2007).
Payment of bonuses to officers and directors often seems so routine that extra care is not required to be sure they are fair. This case shows what can go wrong when fair process and fair amounts are not properly considered.
Because each member of the board was to receive a bonus under the plan in issue, the bonuses were subject to the rigorous entire fairness review by the Court. That involves testing to see if the process used to approve the bonuses was fair in the sense of using appropriate safeguards to protect the corporation's interests and fair in the sense that the amounts involved were within a range of reasonableness. These bonuses failed on both counts.
To begin with, the committee to whom the bonus plan was referred consisted of persons who would receive a bonus and a majority of the committee were closely allied with the CEO who was targeted for a $30 Million bonus under the plan. The consultant they hired came in after the plan was set up and was really only asked to justify the amounts involved.
Second, the amounts were extremely high compared to other bonuses and were for work that had not just been done already before the plan was announced but that had in a sense already been the subject of prior bonuses. All in all, this was just too much and the Court voided the bonuses.Continue Reading...
In Re Tyson Foods, Inc., C.A. No. 1106-N (Del. Ch. February 6, 2007).
The Court of Chancery applies a three year statute of limitations to claims asserting breach of fiduciary duty. However, there are several theories that extend that time, such as for fraudulent concealment of the facts that would provide notice of the claim. This decision explains those theories in a comprehensive way. Moreover, the decision applies this law to the detailed facts presented in this case. That is useful as it is not always easy to understand when the Court will extend the time to sue.Continue Reading...
Ryan v. Gifford C.A. No. 2213-N (Del. Ch. February 6, 2007).
Backdating of stock options has long been under fire. This decision spells out the legal theories under Delaware law that support a breach of fiduciary duty claim for backdating. In addition, the opinion also seems critical of similar practices such as "springloading" option grants. Moreover, by characterizing the backdating of options as constituting "bad faith", under the facts presented in this case, the opinion removes the protection of the director exculpation provisions provided in many charters.Continue Reading...
Sample v. Morgan, C.A. No. 1214-N (Del. Ch. January 23, 2007).
It is a rare case where the Court of Chancery finds grounds for a claim of waste. The standard to be met is very strict. This is such a case. Here the Inside Directors caused their corporation to issue them rights for 200,000 shares for the grand total of $200, all while knowing that the shares had a value of over $5 per share if not more. To make matters worse, the Inside Directors tried to implement this scheme by asking the stockholders to approve it through seriously misleading disclosures and then used a conflicted process to have the actual issuance of the shares approved at the board level. It is hard to see how they could have done a worse job in trying to secure their option rights.
The decision notes that even informed stockholder approval of an option plan does not give management a blank check to issue options under any circumstances. There still must be an informed process that takes due care in the decision to actually issue the options.Continue Reading...
Cantor v. Perelman, Civil Action No. 97-586-KAJ, 2006 WL 3462596 (D. Del. Nov. 30, 2006).
Plaintiff and defendants filed motions to exclude the testimony and reports of several experts. The Court granted the motions to exclude the entire proposed testimony of one expert from both parties. The motions were denied with respect to all other experts in all other respects.
This action originates from a plan of reorganization in bankruptcy litigation involving Marvel Entertainment Group, Inc. (“Marvel”) and the Trustees of the MAFCO Litigation Trust (“Trust”) created as part of the Reorganization Plan. The Trust was created to pursue breach of fiduciary duty and unjust enrichment claims against defendants comprising Perelman, a controlling stockholder and chairman of Marvel, and other directors of the Marvel companies. The instant opinion is connected to the issue of three tranches of notes (“Notes”) issued in 1993 and 1994 by Marvel, raising $553.5 million by using Marvel stock as collateral. Plaintiffs alleged that the defendants breached their fiduciary duties by using Marvel resources to sell the Notes and including restrictions on the issue of debt or dilution of Perelman’s shareholding in those Notes.
Delaware law requires an annual stockholder meeting. The SEC rules prohibit calling a stockholder meeting when the company is delinquent in its SEC filings. In this case and in its decision in Newcastle Partners LP v. Vesta Insurance Group, Inc., 887 A.2d 975 (Del. Ch. 2005), aff'd., 906 A.2d 807 (Del. Ch. 2005) the Delaware Court of Chancery has resolved this apparent conflict. Here, the Court held that a stockholder meeting should go forward with adequate disclosures to the stockholders entitled to vote on the proposed sale of substantially all of the company's assets. The Court ordered the company to apply to the SEC for an exemption from the rules prohibiting the calling of a meeting.Continue Reading...
This is the first decision that applies the law of civil conspiracy in the context of a parent and its subsidiaries. While there is authority that entities under common control cannot be held to have conspired together, that is not now the law of Delaware. This holding is particularly important in the way it may be applied to deal with coordinated conduct by related entities. The implications include that civil conspiracy may take the place of other legal theories, such as veil piercing, that previously were used to hold parent entities responsible for the wrongful conduct of their subsidiaries.Continue Reading...
Weisler v. Barrows, C.A. No. 06-362 GMS, 2006 WL 3201882 (D. Del. Nov. 6, 2006).
Plaintiff, a shareholder of Sycamore Networks, Inc. (“Sycamore”), a Delaware corporation with its principal place of business in Massachusetts, brought this derivative action against several of its directors and officers, including its chairman, CEO and CFO. The complaint alleged six counts: (1) a count against each director for section 14(a) violations of the Securities and Exchange Act of 1934 (“Exchange Act”); (2) one count of disgorgement against four directors under section 304 of the Sarbanes-Oxley Act of 2002 (“Oxley Act”); (3) one count of breach of fiduciary duty against all directors; (4) one count of unjust enrichment against five directors; (5) one count of gross mismanagement against all defendants; and (6) one count of waste of corporate assets against all defendants.
The defendants moved to transfer the matter pursuant to 28 U.S.C. § 1404(a) and the Court granted the motion because it would convenience the parties and witnesses and serve the interests of justice.
The plaintiff alleged that the defendants had jointly and severally breached their fiduciary duties of care, loyalty, good faith, and candor by failing to: (1) discover or prevent the intentional manipulation of stock option grants between 1999 and 2004; (2) prevent the misreporting of earnings that was caused by the manipulation of the option grants; (3) oversee the administration of Sycamore’s stock-based compensation plans; (4) ensure Sycamore operated in compliance with applicable state and federal laws pertaining to dissemination of financial statements; (5) ensure the company did not engage in any improper or illegal practices; and (6) ensure that the company’s financial statements were compliant with GAAP. The conduct is alleged to have violated section 14(a) of the Exchange Act and section 304 of the Oxley Act.
The Court permitted the transfer of the matter on its individualized consideration of the motion under section 1404(a) and on whether it would convenience the parties and witnesses and serve the interests of justice. The Court also held that it was the defendants’ burden to establish the need for transfer. The Court observed that the standard for transfer did not demand a demonstration of compelling circumstances; rather, the defendants only needed to show that the case would be better off if transferred to the other jurisdiction. That inquiry required a “multi-factor balancing test” that consisted of not only the convenience of the parties and the witnesses but also the examination of certain public and private interests. The Court listed the private interests as: (1) a plaintiff’s choice of forum; (2) the defendant’s preference; (3) where the claim arose; (4) the convenience of the parties and witnesses; and (5) the location of the books and records. The Court listed the public interests as: (1) the judgment’s enforceability; (2) practical trial considerations making it easy, expeditious or inexpensive; (3) the administrative difficulty presented in the two fora; (4) local interest in deciding the controversy at home; and (5) the public policies of the fora under consideration. The Court found that the private and public factors weighed in favor of transfer and therefore permitted the defendants’ motion.
This case dealt with when directors would be considered interested in a deal so as to preclude the application of the business judgment rule and permit the suit to proceed. Many of the directors were affiliated with the controlling stockholder who had purchased the corporation's preferred stock at a deep discount just before the board voted to redeem that stock at its face value. That decision was justified, it was argued, because the coupon rate on the stock was higher than market rate. The Court held that might well be so, but at the pleading stage it was too soon to accept that as a justification for the purchase that gave the controlling stockholder a big gain. The decision is particularly interesting for its discussion of when directors are considered sufficiently connected to a controlling stockholder so as to preclude application of the business judgment rule.Continue Reading...
Stone v. Ritter, C.A. No. 93, 2006 (Del. Supr. November 6, 2006).
The Supreme Court has issued the latest Delaware decision to interpret the duty to act in good faith. Indeed, it is possible to read Stone as holding there is no separate duty of directors to act in good faith. While that would be a mistake, the implications of this decision may be far reaching. At the very least, Stone upholds the conventional wisdom in Delaware that under Caremark the directors' duty to act is most easily triggered when there are red flags indicating something is wrong with the way the entity is being operated. A complaint that fails to plead those red flags has a good chance of being dismissed.Continue Reading...
In this decision, the Court of Chancery discusses the application of Delaware's three year statute of limitations to claims for breach of fiduciary duty. The Court applied the statute to bar claims that arose three years before the suit was filed and declined to apply the potential saving rules such as when a claim is hidden from the plaintiff.
Under Delaware law, when a stockholder files suit over a merger she may be limited to appraisal rights when her concern is only over the price to be paid. It is often difficult to decide when a complaint is limited to the price and does not also deal with unfair dealing claims that are appropriate for class litigation. Here, the Court held that a complaint that alleged only 5 days notice of a merger and the right to seek appraisal did properly allege unfair dealing and could proceed as a class claim.
Delaware corporations frequently ask the Court of Chancery to decide if a proposed course of action is appropriate, particularly when the board of directors' fiduciary duties are implicated. In this decision the Court focused primarily on when the Court may provide that guidance and when the matter is not ripe for judicial action. The Court has rejected becoming involved in hypothetical issues not framed by a real world transaction, but more of a "what if" set of questions. Here, the Court accepted one question for its review and rejected others, thereby illustrating how it will deal with those situations.Continue Reading...
The Court of Chancery may be called upon to decide the scope of a board of director's duties in appropriate cases. Here, the Court interpreted a common merger agreement provision that limited the board's options in considering third party bids while the merger was pending. The Court held the provision permitted contact with the new bidder.Continue Reading...
This is another in a series of Court of Chancery decisions that limit the claims that creditors may make based on the theory the directors owe the creditors a duty when their corporation is insolvent or in the vicinity of insolvency. Ever since the famous footnote in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch. Dec. 30, 1991), creditors have argued that directors should owe them a fiduciary duty to take their interests into account when the creditors are the residual interest holders in a corporation that is insolvent or nearly so. A series of recent decisions have limited those creditor arguments. See e.g. Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004) [holding most creditor claims must be brought as derivative claims]. This new decision further limits creditor claims by holding that creditors may not bring a direct claim for breach of fiduciary duty based on the theory the entity is in the vicinity of insolvency. Further, the decision holds that for clearly insolvent companies, only creditors whose claims are beyond fair dispute may claim the directors owe them a duty.Continue Reading...
The Delaware Supreme Court affirmed post-trial ruling by Court of Chancery that $20 million issuance of preferred stock to a third-party holding company was authorized by the corporate charter and that the directors acted properly in approving that transaction.Continue Reading...
The Court of Chancery frequently is called upon to interpret a corporate certificate of incorporation. In this decision, the Court held that a certificate provision permitting a corporation to withhold a reserve for contingent liabilities in connection with calculating the liquidation preference for preferred shareholders did not automatically authorize the board to hold back the highest possible amount, even if doing so was unreasonable based on objective factors. The Court also held that the authority granted by 8 Del C. §281 to hold back a reserve for continent liabilities did not authorize the board to do so under the charter. Instead, the terms of the certificate need be interpreted on its own terms.Continue Reading...
As it has several times in recent years, the Court of Chancery has decided a case combining appraisal rights and a class claim for inequitable treatment in a merger. The Court held that when directors get together to freeze out the other stockholders the entire fairness test applies even when they do not own a majority of the stock. This follows because the interests of those directors in remaining shareholders differs from the other shareholders who will be frozen out. Absent some insulating procedure such a majority of the minority vote, the directors then have the burden of proving the merger was entirely fair.Continue Reading...
The Delaware courts have struggled for the last fifteen years over the scope of the duties of directors to creditors when their company is in the vicinity of insolvency. In two landmark decisions, the first in 2004, and just recently, the Court of Chancery sought to define the limits of that duty. Indeed, in this decision the Court rejected the very idea that there is a duty to avoid taking risks that may have the effect of deepening the insolvency of a Delaware corporation, at least in most circumstances.Continue Reading...
In this decision, the Court dealt with a complaint attacking the transaction implemented to settle a proxy contest. The proxy contest was settled by an agreement that put the dissidents on the board and had the CEO resign. However, the CEO was given the right to buy certain lucrative businesses of the company, a right he later exercised. The complaint alleged that this deal was improvident. After reviewing the complaint, the Master declined to grant a motion to dismiss.Continue Reading...
The Court of Chancery has upheld the use of a press release to announce a stockholder meeting date and to trigger the provisions of a ten day advance notice bylaw. The plaintiff's employees read the press release, which mostly focused on financial results, but they neglected to notice it also announced the annual meeting date. Thus, the plaintiff failed to get the names of its nominees to the company in the time required by a bylaw provision triggered by the notice of meeting.Continue Reading...
This decision makes it clear that a controlling stockholder may sell control without fear of liability for the actions of the buyer after the transaction closes, with few exceptions. While it has long been the rule that a stockholder may deal with its shares as it sees fit, case law recognized that a controlling stockholder has a fiduciary duty to its company and the minority owners by virtue of the controller's ability to control what the company does. How that duty applied in the sale of control context is the question addressed in this case.Continue Reading...
In this decision the Court of Chancery extensively discusses the legal theories under which the plainitff may seek a recovery from two of the entities alleged to have helped the AIG Chairman profit at the expense of AIG. In effect, the Court held that if as alleged these entities were set up to profit by doing what AIG might have done for itself, then their profits are subject to recovery under several theories such as the imposition of a constructive trust. The opinion is a good source of legal theory for recovery in such cases.
In this action to recover for the diversion of partnership property, the Court of Chancery fashioned a unique remedy by ordering that the partnership be sold by a receiver so as to realize the special value of its technology.Continue Reading...
News Corporation shareholder objected to settlement, arguing the release was overly broad.Continue Reading...
Court of Chancery Grants Summary Judgment for Defendants in Case Arising From Interpretation of Limited Partnership Agreement
Plaintiffs and defendants brought cross-motions for summary judgment on claims arising from disputes over interpretation of limited partnership agreement ("LPA").Continue Reading...
Plaintiff filed a class action, claiming a merger was the subject of unfair dealing and produced an unfair price. Another plaintiff filed a statutory appraisal claim based on the same merger.Continue Reading...
Court of Chancery Finds Majority Stakeholder, Chief Executive Officer and General Partner of Limited Partnership Breached His Fiduciary and Contractual Duties to Limited Partnership
Plaintiffs brought action individually and on behalf of limited partnership against 90% owner of limited partnership for, among other things, breach of fiduciary duty and breach of limited partnership agreement.Continue Reading...
Defendants moved to dismiss class and derivative complaint under Court of Chancery Rules 23.1 and 12(b)(6). Defendants also moved to disqualify the plaintiffs, to strike portions of the complaint and for continued sealing of the complaint.Continue Reading...
Plaintiff, a minority shareholder in a Florida corporation, filed a breach of fiduciary duty action in connection with a freeze-out merger. The sole defendants were a Nevada limited partnership, which was the ultimate controlling entity of the Florida corporation, and a Delaware corporation formed to serve as an intermediate holding company in connection with the merger. Defendants moved to dismiss based on forum non conveniens, arguing that forcing them to litigate in Delaware would impose an overwhelming hardship. The Court of Chancery granted that motion, finding that the dispute would be more appropriately litigated in Florida and that Defendants had met the exacting standard applied in assessing forum non conveniens motions.Continue Reading...
This case was described by Vice Chancellor Strine as "another progeny of one of our law's hybrid varietals: the combined appraisal and entire fairness action." The court was tasked with determining whether the share price in a squeeze-out merger was fair, and, if not, what the extent of the underpayment to the minority shareholders was. The court found that the merger price was unfair, and finding no difference between the award the petitioners/plaintiffs would receive in appraisal or in equity, the court awarded an amount equivalent to petitioners' pro rata share of the company's appraisal value on the date of the merger.Continue Reading...
Court of Chancery Awards $4.8 Million, Plus Interest, to Minority Shareholders for Damages Suffered from Director Defendants' Breach of the Fiduciary Duty of Loyalty
Defendant Boston University ("BU") was the controlling shareholder of Seragen, a financially troubled biotechnology company. Plaintiffs, a group of former minority stockholders of Seragen's common stock, challenged certain transactions before Seragen was merged and the process by which the merger proceeds were divvied up. The plaintiffs contended that the BU defendants breached their fiduciary duties to Seragen's common shareholders by approving various financial transactions, which were not fair to the common shareholder as a matter of price and process. The Court of Chancery awarded damages in excess of $4.8 million plus interest for breaches of the fiduciary duty of loyalty.Continue Reading...
Court of Chancery Permits Derivative Action to Proceed Because Alleged Facts Created Reasonable Doubt that Directors were Disinterested and Independent
This action involved a series of transactions in which the Telx defendant directors allegedly granted themselves a significant equity stake in the company for little or no consideration. Plaintiff alleged that these transactions significantly diluted his equity position. This action also involved a self tender-offer by the company for $5 million worth of its securities. Defendant argued that plaintiff did not make a demand on the Telx board before proceeding with the derivative action and that the complaint did not plead with particularity facts that created a reasonable doubt as to the ability of the Telx board to independently consider such a demand. The Court of Chancery denied the defendants' motion to dismiss and permitted the plaintiff to proceed with his derivative suit.Continue Reading...
This case involved a dispute between two businessmen who hoped to work together on a project to open a swim and fitness center, but who failed to achieve this despite months of efforts and negotiations. Plaintiff and defendant intended to formalize their relationship in a written LLC agreement. Ultimately, defendant closed on the property for himself, frustrated by his inability to reach a final agreement with plaintiff. Plaintiff sued for breach of contract, breach of fiduciary duty, and promissory estoppel. The Court of Chancery found that there was no contract between the parties and that the parties were not partners, therefore defendant did not owe any fiduciary duties. The court did, however, find that plaintiff had a claim for promissory estoppel and awarded reliance damages.Continue Reading...
District Court Denies Defendants' Motions to Dismiss Derivative Action for Failure to Comply with Demand Requirement and Lack of Subject Matter Jurisdiction and Denies Plaintiff's Motion for Summary Judgment.
Seinfeld v. Barrett, C.A. No. 05-298-JJF, 2006 WL 890909 (D. Del. Mar. 31, 2006).
Plaintiff filed a derivative action against defendants, alleging that they violated Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 14a-8 and breached their fiduciary duties under Delaware law by making false and misleading statements in connection with a proxy statement issued by the defendants in March 2005. Plaintiff moved for summary judgment, and defendants moved to dismiss for lack of subject matter jurisdiction and for failure to comply with Rule 23.1.Continue Reading...
Court of Chancery Dismisses Complaint Because a Creditor Erroneously Asserted Derivative Claims as Direct in the Hope of Escaping Bankruptcy Court Jurisdiction
In 2000, in a sponsored management buyout, a corporation sold a subsidiary business that operated a chain of toy stores (KB Toys) in exchange for $257.1 million in cash and a $45 million note due in 2010. In 2002, the new owners refinanced the business and distributed approximately $120 million to the buyout sponsor, affiliates, two officers and directors of the subsidiary that invested in the buyout, and others. In 2004, the KB Toys filed for Chapter 11 bankruptcy. Plaintiff Big Lots, Inc, an unsecured creditor and holder of the $45 million note, brought this action asserting direct claims of breach of fiduciary duties, fraud, and civil conspiracy. The plaintiff sought recovery for the amount due on the note and restitution for alleged unjust enrichment. The Court of Chancery dismissed the complaint namely because the claims were derivative in nature, not direct, and thus belong to the bankruptcy estate.Continue Reading...
Court of Chancery Finds Breach of Oral Contract Regarding Executive Compensation and Breach of Fiduciary Duty for Failure of Such Compensation to Satisfy Entire Fairness Test
This case involved a direct and derivative action arising out of a dispute between two men engaged in the business of making short term, unsecured loans. Plaintiffs asserted direct claims for breach of contract and derivative claims for breach of fiduciary duties. Specifically, plaintiffs alleged that defendant Hallinan breached an oral contract with plaintiffs by paying himself and another defendant executive compensation. Plaintiffs also asserted that the defendants breached fiduciary duties they owed nominal defendant CR Services Corp. by paying themselves an excessive amount of executive compensation. The Court of Chancery found, among other things, that Hallinan breached the oral contract with plaintiffs and defendants committed multiple breaches of their fiduciary duties to CR because they failed to meet the entire fairness standard regarding their compensation.Continue Reading...
A large shareholder brought a derivative action alleging that the directors committed corporate waste by approving exorbitant fees to unqualified financial advisers. The defendants moved to dismiss the complaint under Court of Chancery Rule 23.1 for failure to allege with particularity facts establishing demand futility. The court's review of the complaint revealed that plaintiff did not allege with particularity facts from which the court could reasonably conclude that the majority of the directors were disabled from impartially considering a demand. The court therefore granted defendants' motion to dismiss under Rule 23.1.Continue Reading...
District Court Denies Motion to Dismiss Declaratory Judgment Action for Lack of Jurisdiction and Failure to Allege a Controversy of Sufficient Immediacy
Plaintiff Shamrock Holdings of Ca., Inc. ("Shamrock") was a Class A member of ALH Holdings, Inc. ("ALH"), a Delaware limited liability company, and the other plaintiffs were employees and/or members of ALH's Supervisory Board (the "Board"). In connection with the failure of ALH's business, and its investors' subsequent loss of their investments, plaintiffs filed an action in the Court of Chancery seeking a declaration that (i) they did not breach ALH's operating agreement; (ii) they did not breach their fiduciary duties as ALH employees, members or Board members; (iii) they had relied in good faith on the advice of experts and professionals in making their decisions; (iv) they were not liable to the defendants under the terms of a consulting agreement; and (v) they were entitled to advanContinue Reading...
Court of Chancery Dismisses De Facto Dividend Claim Because Disguised as Improperly Pled Claim of Self-Dealing
Plaintiffs, founders of a Health Management Organization, alleged that their co-investors abused their positions by siphoning off tens of millions of dollars from the HMO in the form of disguised salaries and corporate perquisites; plaintiffs call these "de facto dividends." The Court of Chancery granted defendants' motion to dismiss because plaintiffs did not adequately allege self-dealing, the center of a de facto dividend claim.Continue Reading...
District Court Dismisses Class Action Alleging Federal Securities Laws Violations and State Breach of Fiduciary Duty Claim
Plaintiff filed a class action complaint against defendants, alleging violations of Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and breach of the fiduciary duty of loyalty by the directors of Pathmark Stores, Inc. ("Pathmark") in connection with a transaction between Pathmark and The Yucaipa Companies, LLC ("Yucaipa"). Plaintiff also moved for appointment as lead plaintiff, with his counsel as lead counsel. Defendants moved to dismiss the complaint.Continue Reading...
This is a motion to amend the Complaint under Court of Chancery Rules 15(a) and 15(aaa) for the third time before the Court of Chancery, involving a foreign judgment enforcement action. Plaintiff sought to withdraw his petition for receivership and add factual predicates to various claims he made. In an earlier hearing, the Court of Chancery permitted plaintiff's motion for discovery and converted the defendants' motion for dismissal upon plaintiff's motion to one of summary judgment.Continue Reading...
In this derivative action brought against four former directors and officers of Case Financial, Inc., the nominal defendant, the two remaining defendants moved to dismiss after two others settled. Plaintiff alleged breach of loyalty, breach of the Caremark duty of oversight, corporate waste and common law fraud. The Court of Chancery partly granted the motions.Continue Reading...
Court of Chancery Denies Motion For Expedited Preliminary Injunction Hearing For Lack of "Colorable Claim" Demonstrating Imminent Irreparable Harm
Madison Real Estate Immobbilien-Anlagegesellschaft Beschrankt Haftende KG v. GENO One Financial Place L.P. and GENO Auslandsimmobilien GmbH, No. Civ.A. No. 1928-N, 2006 WL 456779 (Del. Ch. Feb. 22, 2006).
The plaintiff is a German entity organized under that country's laws, as is the second named German limited liability defendant. The latter party is also a general partner in the first defendant entity. The plaintiff was one of two bidders that made an unregulated tender offer for a part of the first-named defendant's Delaware limited partnership interest. Plaintiff filed a motion in the Court of Chancery for expedited injunction proceedings, seeking to enjoin the defendant's general partner from approving any transfer agreements related to the tender offers.Continue Reading...
In re Cencom Cable Income Partners, L.P., C.A. No. 14634-NC, 2006 WL 452775 (Del. Ch. Feb. 16, 2006).
This Court of Chancery action arose out of a breach of fiduciary duty claim filed on Oct. 20, 1995. Defendants unsuccessfully moved to dismiss for failure to prosecute under Court of Chancery Rule 41.Continue Reading...
Court of Chancery Accepts Fiduciary Status Through Partnership Interest-Assignment And Appraises Interest's Value
Ramunno v. Capano, et al., C.A. No. 18798-NC, 2006 WL 375541 (Del. Ch. Feb. 10, 2006).
This is a fiduciary claim based action to appraise the fair value of real property brought by the trustee of four trusts that held a 12.1% interest in that property held by the defendant entity and its two majority interest holders, after that entity's merger into a new Delaware limited partnership.Continue Reading...
Cantor v. Perelman, C.A. No. 97-586-KAJ, 2006 WL 318666 (D. Del. Feb. 10, 2006).
Plaintiffs alleged that defendants Perelman, Bevins and Drapkin, all of whom were directors of Marvel Entertainment Company ("Marvel") and were the only directors of each of Marvel's five holding companies, breached their fiduciary duties by causing Marvel and its holding companies to issue three tranches of notes, for which they received $553.3 million in proceeds and pledged all of their stock in Marvel as collateral. Plaintiffs alleged that none of the proceeds of the loan went to Marvel or were used for its benefit. Marvel was unable to repay the notes and subsequently filed for bankruptcy protection. Plaintiffs named Marvel's remaining directors as defendants and claimed that they aided and abetted Perelman, Bevins and Drapkin in breaching their fiduciary duties. Plaintiffs also alleged that the defendants artificially inflated Marvel's earnings by booking the fees resulting from various licensing agreements as income at the time the licensing agreements were executed, but never collecting the fees and writing them off. Plaintiffs sought a jury trial, which defendants opposed.Continue Reading...
This is a motion for expedited proceedings for a preliminary injunction pertaining to certain disclosure claims not made public in SEC-filed proxy statements soliciting shareholder vote for an agreement for sale of the corporation at $24 per share. Class actions were earlier filed in the Delaware Court of Chancery and California's Superior Court challenging the sale transaction as a director-interested one.Continue Reading...
Court of Chancery Denies Defendants' Demand For Intercontinental Depositions Approving Videoconferencing Under R.30(b) And Limits Number Of Deponents
Defendants filed cross-motions requiring depositions of thirteen named plaintiffs' under Ch. Ct. R. 30(b)(6) in either Delaware or New York. Plaintiffs filed motions for protective orders, to limit the numbers of deponents and contended depositions could occur outside the United States via videoconferencing.
The plaintiffs' Australian company had reincorporated in Delaware.
Plaintiff sought equitable relief requesting its shareholders to be permitted to vote on a poison pill's extension. The court treated this matter as a representative one, rather than an individual shareholder suit.Continue Reading...
Court Of Chancery Dismisses Complaint For R. 23.1 Failure Despite Corporation's Inadequate "Internal Controls" Attracting $50 million Fine
This matter involved an attempt to institute a derivative proceeding against fifteen current and former director defendants of AmSouth Bancorporation for alleged failures of fiduciary duties through insufficient internal control systems to guard against statutory violations under the Bank Secrecy Act and the Anti-Money Laundering Regulations. The defendants filed a motion to dismiss and it was granted by the court for insufficiency of pleading under Chancery Court Rule 23.1.
On November 6, 2006, the Delaware Supreme Court affirmed this decision.Continue Reading...
Court Of Chancery Holds That Unlike Corporations, LLC Agreements Can Mandate Arbitration For Fiduciary Breach Claims
Minority shareholders brought a breach of fiduciary duty action against the managing member of the LLC. Additionally, they plead aiding and abetting conspiracy and unjust enrichment claims against defendants' affiliate entities. Relying on Delaware Supreme Court precedent, the defendants insist all claims require mandatory arbitration under the LLC agreement. The court agreed.Continue Reading...
Court Of Chancery Awards Litigation Fees Advancement Under LLC Agreement And Fees On Fees For Present Suit
This case was decided on a motion for judgment on the pleadings. Plaintiff sought to obtain advancement of attorney fees allegedly contractually agreed, to defend a New York action and fees on fees for initiating and prosecuting this action. The plaintiff was sued in the New York action by affiliates-entities of her then employer.Continue Reading...
This is a summary judgment motion for advancement of legal fees made by defendant-officers. Their corporation alleged fraud, fiduciary violations and usurpation of corporate opportunity against defendants as a bar to advancement. Defendants replied with counterclaims under their respective employment contracts. The motion was granted and denied in part.Continue Reading...
Opinion and order granting interlocutory appeal on two contract issues, after court dismissed corporate allegations of fraud, negligent misrepresentation and fiduciary duty breach.Continue Reading...
In re Tele-Communications Inc. Shareholders Litig., C.A. No. 16470, 2005 WL 3547674 (Del. Ch. Dec. 21, 2005), opinion revised and superceded by No. CIV. A. 16470, 2005 WL 3642727 (Del. Ch. Dec. 21, 2005), (revised Jan. 10, 2006)(Westlaw citation not available).
This summary judgment action originates from a Consolidated Amended Complaint that alleged nondisclosure of material information
Court of Chancery Grants Partial Summary Judgment with Respect to Claims that Former Controlling Stockholder Extracted Excess Compensation from Acquirer in Exchange for Supporting Merger
Former stockholders who were cashed out in connection with merger sued the corporation's former controlling stockholder and the acquirer for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, respectively. Plaintiffs complained of numerous side deals, allegedly negotiated by the controlling stockholder. Plaintiffs also complained that the controlling stockholder breached his fiduciary duty by supplying growth projections that he knew to be unduly pessimistic and inconsistent with management's view. Defendants moved for summary judgment, which the court granted in part and denied in part.Continue Reading...
In the context of converting from an Australian corporation to a Delaware corporation, News Corp.'s board adopted a policy that if a shareholder rights plan was adopted following reincorporation, the plan would have a one-year sunset clause unless shareholder approval was obtained for an extension. The policy also provided that if shareholder approval was not obtained, the company would not adopt a successor shareholder rights plan having substantially the same terms and conditions. Several weeks later, News Corp.'s board adopted a poison pill in response to a specific third-party takeover threat. One year later, the board extended the poison pill without a shareholder vote, in contravention of its prior policy.Continue Reading...
Court Dismisses Claim That Board Breached Fiduciary Duty by Failing to Seek Recovery of Bonus that Turned Out to Be Unjustified After Accounting Restatement
In 2001, Defendant corporate executive received bonuses and other compensation near $9 million as CEO, due in some part to the corporation's reported profits that year. Several years later, after that executive's departure, the corporation restated its 2001 performance from a $93 million profit to a $447 million loss. Plaintiff brought a derivative claim against executive for unjust enrichment, and against the present directors of the corporation for breach of fiduciary duty and waste. Defendants moved to dismiss under Court of Chancery Rule 23.1.Continue Reading...
Court of Chancery Denies Motion to Stay Books and Records Action in Favor of Separate Derivative Action Involving Substantially Similar Matters
A beneficial stockholder filed a books-and-records action pursuant to 8 Del.C. §220 seeking documents relating to the corporation's decision to settle certain derivative and federal class action litigation in a manner that allegedly benefited the individual wrongdoers at the corporation's expense. A special litigation committee acting on behalf of the corporation moved to stay this action until it completed its investigation on this issue, which had become the subject of new derivative litigation in New York brought by different plaintiffs.Continue Reading...
Stockholder sought rescission of an agreement to issue $20 million of preferred stock to a third-party holding company. Plaintiff alleged that the transaction violated 8 Del. C. - 151 and corporation's certificate of incorporation by granting the holding company shares with preemptive rights and was therefore void as ultra vires. Plaintiff also alleged that a majority of the corporation's directors breached their fiduciary duties in approving the transaction and that the transaction had an improper primary purpose to dilute Plaintiff's interest in the corporation and entrench certain director defendants. Plaintiff further alleged that the acquirer aided and abetted the director defendants in their actions.Continue Reading...
Portions of Lawsuit Alleging Breach of Fiduciary Duty and Waste Dismissed Based Res Judicata, Laches, and Failure to State a Claim
Dissident shareholder group filed individual and derivative complaint alleging that director defendants violated their fiduciary duties and committed waste by mismanaging and misappropriating corporate assets and by disseminating misleading information to the corporation's minority shareholders. Complaint further alleged that Defendants self-interestedly adopted an advancement bylaw and exculpatory charter provision. Defendants moved to dismiss based on res judicata, laches, lack of standing, forum non conveniens, failure to state a claim, and failure to plead facts excusing demand under Court of Chancery Rule 23.1.Continue Reading...
Actions Filed Four Months Apart Treated as Contemporaneous Filings for Purposes of Forum Non Conveniens Analysis
Former directors moved to dismiss breach of fiduciary duty action brought against them by bankruptcy liquidation trust in Delaware District Court for lack of subject-matter jurisdiction. That same day, the former directors filed a parallel action in the Court of Chancery seeking a declaration that they did not breach their fiduciary duties in connection with the conduct challenged in the District Court action. Four months later, the directors' motion to dismiss was granted. The following day, the trust re-filed its breach of fiduciary duty action in Ohio state court. The directors moved to enjoin the trust from prosecuting the Ohio action. The trust cross-moved to stay or dismiss the Chancery action. The court denied both parties' motions.Continue Reading...
Plaintiff alleged that she and Defendant orally agreed as co-founders that corporation would have a four-member board of directors and that each party would appoint two directors. Plaintiff alleged that this agreement was later reduced to written drafts but never finalized or signed. Plaintiff further alleged that Defendant, who owned 52.5% of the corporation's outstanding stock, breached this agreement and his fiduciary duties when he terminated Plaintiff as CEO and President, installed his unqualified nephew in her stead, and added a fifth member to the board. Plaintiff also sought appointment of custodian under 8 Del.C. -226, suggesting that the company's board, when properly constituted with two directors per side, would be deadlocked. Defendant moved for partial judgment on the pleadings.Continue Reading...
Court of Chancery Partially Grants Motion For Summary Judgment Based Upon Plaintiffs' Lack Of Standing To Bring Derivative Claims As Result Of Merger
Plaintiffs, former shareholders of SinglePoint Financial, Inc. which merged into a subsidiary of Cofiniti, Inc., alleged that two former directors of SinglePoint breached their fiduciary duties in connection with the issuance of a large number of shares to one of the defendants and the merger. Defendants moved for summary judgment.Continue Reading...
Entire Fairness Applied to Third-party Merger Transaction Where Controlling Shareholder Acquired Minority Stake in Resulting Company
Former shareholders filed fiduciary class action in connection with a cash-out merger, naming corporation and former directors as defendants. The complaint alleged that the corporation's controlling shareholder negotiated to sell the company to a third-party investment firm in all-cash deal. The complaint further alleged that, as part of the transaction, the controlling shareholder and other members of company management agreed to invest approximately $184 million to acquire a 25% equity stake in the surviving entity. Defendants moved to dismiss for failure to state a claim.Continue Reading...
Court of Chancery Grants Summary Judgment In Favor Of Defendants Alleged To Have Breached Their Fiduciary Duties By Approving Asset Sale Likely To Result In Zero Value To Equity Owners
Plaintiff Blackmore Partners L.P. instituted cause of action against Defendant Link Energy LLC and its directors, alleging breaches of fiduciary duty in connection with the sale of Link's assets for a price likely to leave zero value to Link's equity investors. Defendants moved for summary judgment.Continue Reading...
Court of Chancery Grants Plaintiff's Motion To Amend Derivative Complaint Against Director-Defendants For Insider Trading
Plaintiff, a shareholder of priceline.com, Inc., moved for leave to amend his derivative complaint against directors of Priceline based upon three defendants' alleged insider trading and misappropriation of confidential information. Defendants argued amendment would be futile.Continue Reading...
Court of Chancery Holds Plaintiff's Breach Of Fiduciary Duty Claims Fail And Defendant's Loan and Veil Piercing Claims Fail
Plaintiff, who was limited partner of partnership and sole stockholder of corporation controlled by Defendants, alleged that Defendants failed to report or account to him regarding his ownership interest in the entities, breached their fiduciary duties and commingled assets. Defendants counterclaimed for money loaned by limited partnership to corporation.Continue Reading...
Plaintiff sought preliminary injunction against consummation of Purchase Agreement pending arbitration of its substantive disputes with Defendant.Continue Reading...
Court of Chancery Dismisses Consumer's Fiduciary Duty Claim Against Online Brokerage, Stating that the Scope and Existence of any Duty is Governed by Their Contract
Plaintiff consumer brought an action on behalf of himself and others similarly situated alleging that defendant Morgan Stanley breached its fiduciary duties and that HarrisDirect, the buyer of its online brokerage business, aided and abetted in the breach. The two defendants moved to dismiss under Rule 12(b)(6) for failure to state a claim.Continue Reading...
Court of Chancery Grants Preliminary Injunction Against Majority Stockholder Seeking to Purchase Additional Shares for a Penny Each in an Attempt to Convert Some of its Debt to Equity
Plaintiff Flight Options International, Inc. ("FOI") sought a preliminary injunction against defendant Flight Options LLC ("the Company"), a Delaware limited liability company.Continue Reading...
Court of Chancery Finds Genuine Issue of Material Fact Regarding Disinterestedness of Board of Acquisition Target
In a shareholder class action, the plaintiffs sought relief alleging an unfair exchange ratio in a stock-for-stock merger of two public companies. The defendants moved for summary judgment. The Court of Chancery denied Defendant's Motion.Continue Reading...
Court of Chancery Denies Motion for Temporary Injunction Where Breakup Fee Is Alleged To Be Too High
The Court of Chancery considered a motion to enjoin a vote of the stockholders of Toys "R" Us, Inc. to consider approving a merger with an acquisition vehicle formed by a group led by Kohlberg Kravis Roberts & Co. Pursuant to the terms of the merger agreement, the Toys "R" Us stockholders would receive $26.75 per share for their shares. The $26.75 per share merger consideration constituted a 123% premium over the price of TRU stock when merger negotiations began in January 2004. Plaintiffs charged the board did not act reasonably in pursuit of the highest attainable value. The Court of Chancery denied the motion to enjoin a stockholder vote on the proposed merger, saying stockholders could stop the merger by voting if they thought it was unfairContinue Reading...
Court of Chancery Denies Motion to Dismiss Complaint Where Board Materially Misled Shareholders About Search For New CEO
Plaintiff dissident shareholders seek to void the result of a corporate election of directors, to compel the company to make full and fair disclosure of the CEO selection process, and (following such disclosure) compel another election of directors. Defendants filed a motion to dismiss Plaintiffs' complaint. The Court of Chancery denied the Motion.Continue Reading...
Defendants filed a motion for summary judgment where Plaintiff alleged proposed internal recapitalization favored director shareholders. Plaintiff challenged the adequacy of the fairness opinion, the disclosures to shareholders and the sufficiency of the Proxy Statement because it failed to disclose separate valuations of New Valley's various assets and lines of business
The Court of Chancery granted the Defendants' motion for summary
Court of Chancery Dismisses Stockholders' Claims Because Claims were Derivative and Demand was Not Excused
J.P. Morgan Chase & Co. ("JPMC") and Bank One agreed to a business combination that was expected to create the second largest financial institution in the country. JMPC paid a premium over the market share price for Bank One, effectively making JPMC the acquirer and the Bank One the target. After the merger was completed, the stockholders of the acquirer sued its directors, alleging breaches of fiduciary duty with regard to the acquisition. Their claims stemmed from the allegation that the directors paid too much for the acquired bank. The defendants moved to dismiss the complaint on the basis that the claims were derivative, not direct, and that demand was not excused. The court granted defendants motion to dismiss.Continue Reading...
Wal-Mart brought suit against all the parties involved in its purchase of corporate-owned life insurance ("COLI") policies. Its complaint alleged a broad range of legal and equitable claims against the insurance brokers and providers, all seeking to recover from them the losses it incurred in connection with this risky tax avoidance scheme. On consolidated motions to dismiss brought by the insurers and brokers, the court concluded that the retailer failed to state a claim upon which relief could be granted. The court, therefore, granted the defendants' motions to dismiss.Continue Reading...
This case deals with several motions to dismiss on several grounds, the upholding of personal jurisdiction under a conspiracy or aiding/abetting theory and plaintiff's request for a declaratory judgment.Continue Reading...
This is an action for breach of fiduciary duties, commingling of assets and a failure to account involving two Delaware limited partnerships. Defendants brought an unsuccessful motion to dismiss. The court however granted their summary judgment motion for claims predating June 18, 1998 but denied judgment as to all other claims.Continue Reading...
This is an action for plaintiff's attorney fees following settlement of fiduciary duty-based shareholder class actions.Continue Reading...
Minority shareholders of LLC brought a derivative suit for corporate waste and breach of fiduciary duties. Defendants filed a motion to stay discovery pending the resolution of a motion to dismiss. The court granted it.Continue Reading...
Plaintiff filed a motion to amend its answer to limit its liability exposure to its shareholders in a publicly traded corporation, by asserting an affirmative defense under the law of Massachusetts.Continue Reading...
Court of Chancery Permits Privileged Documents For "Good Cause" Under "Mutuality of Interest" Exception
This discovery-related action involves a claim of access to defendant-corporation's documents listed in its privilege log through a motion to compel. The court granted the motion in part, but denied production of the shareholder repurchase document.Continue Reading...
In this motion to dismiss opinion, the court examines whether the claims were tolled or untimely and held against the plaintiff. The plaintiff had instituted contract claims, fiduciary duty violation claims and a breach of the limited partnership agreement claim against the defendant-partners.Continue Reading...
The plaintiff brought an action against a former officer for fraud, unjust enrichment, and breach of fiduciary duty. The defendant moved to dismiss based on doctrine of res judicata because a similar case had been brought and dismissed for failure to prosecute in the Court of Chancery. The Superior Court granted the motion to dismiss.Continue Reading...