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

Collins & Aikman Corp. v. Stockman, C.A. No. 07-265-SLR/LPS (D. Del. Sept. 30, 2009).

Upon review of the Report and Recommendation issued by Magistrate Judge Leonard P. Stark, and the objections thereto, the district court rejected Judge Stark's recommendation that the complaint did not contain adequately specific allegations that the defendants knew or should have known that the company's financial statements were false in connection with a Rule 10b-5 claim. The complaint is a rare example of a pleading that sufficiently raised red flags which should have alerted the defendants to accounting irregularities from the fraudulent schemes asserted against the director and officer defendants.

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City of Roseville Employees’ Ret. Sys., v. Horizon Lines Inc., C.A. No. 08-969 (D. Del. June 18, 2009)

In this putative class action, the plaintiffs allege that Horizon, a container shipping and logistics company, fraudulently inflated the value of its securities by entering into illegal price-fixing agreements with its competitors in order to manipulate prices in certain markets. In an unopposed motion for appointment of lead plaintiff and counsel, the district court applied In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001) and the terms of the PSLRA to appoint the Police and Fire Retirement System of the City of Detroit as lead plaintiff and their choice for lead and liaison counsel.
 

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In re Adams Golf, Inc., Secs. Litig., C.A. No. 99-371-GMS (D. Del. May 26, 2009)

Chief District Judge Gregory M. Sleet rejected the defendants' motion for summary judgment, finding remaining issues of material fact concerning disclosures of gray marketing (marketing that legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer).  The Court found factual disputes as to: (1) whether the defendants had a duty to disclose the risk of gray marketing and (2) whether the gray marketing risk was material.  The defendants argued that gray marketing was not a “known trend or uncertainty” that must be disclosed under Item 303(a)(3)(ii) of Regulation S-K.  The court concluded, however, that a jury could reasonably conclude that the risk of gray marketing was a known trend or uncertainty likely to have a material impact on future revenue or that such knowledge rendered the statements false and misleading.  The Court also could not find as a matter of law that gray marketing risks were obviously unimportant to an investor.

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County of York Employees Retirement Plan v. Merrill Lynch & Co., Inc., C.A. 4066-VCN (Del. Ch. Oct. 28, 2008)

In this decision, the Court of Chancery again affirms it disinclination to stay proceedings in Delaware just because a federal securities case was filed first elsewhere. Some doubt about that issue may have existed after the Court did stay a Delaware case involving Bear Sterns in favor of federal litigation in New York. But as this opinion notes, the Bear Sterns case was unique.

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

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

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

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Baker v. MBNA Corp., 2007 WL 2009673 (D. Del. July 6, 2007)

This case is a consolidated class action against MBNA and certain officers for violations of §§ 10(b) and 20(a) of the Exchange Act, as wells as regulations promulgated thereunder. Plaintiffs alleged that the Defendants violated the Act in connection with allegedly false statements made in announcements and public filings regarding restructuring charges incurred and anticipated growth. Plaintiffs further alleged that the Defendants engaged in insider trading. Defendants moved to dismiss the complaint under F.R.C.P. Rules 9(b) and 12(b)(6). The District Court granted the motion with respect to the 10(b) claims again two of the officers, but denied it in all other respects.

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Baker v. MBNA Corp., 2007 WL 2009673 (D. Del. July 6, 2007)

This case is a consolidated class action against MBNA and certain officers for violations of §§ 10(b) and 20(a) of the Exchange Act, as wells as regulations promulgated thereunder. Plaintiffs alleged that the Defendants violated the Act in connection with allegedly false statements made in announcements and public filings regarding restructuring charges incurred and anticipated growth. Plaintiffs further alleged that the Defendants engaged in insider trading. Defendants moved to dismiss the complaint under F.R.C.P. Rules 9(b) and 12(b)(6). The District Court granted the motion with respect to the 10(b) claims again two of the officers, but denied it in all other respects.

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Cannon v. MBNA Corp., 2007 WL 2009672 (D. Del. July 6, 2007)

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.

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MBKS Company Limited v. Reddy, C.A. 1853-VCL (May 1, 2007).

It is occasionally important to distinguish between stock that is voidable and stock that is void. One reason is that voidable stock may be voted while it is still outstanding. In this decision, the Court of Chancery did an exhaustive review of the case law, applied the new statutory standard for consideration of  "any benefit to the corporation" and concluded the stock in question was void.

On MArch 3, 2008, the Delaware Supreme Court affirmed this decision in an opinion that is worth reading as well.

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

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

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Esopus Creek Value LP v. Hauf, C.A. No. 2487-N (Del. Ch. November 29, 2006).

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.

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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.

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

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

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

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Golub v. Hilb, Rogal & Hobbs Co., 379 F.Supp.2d 639 (D.Del. 2005).

Ninety-Nine shareholders represented by members of Hobb Group, L.L.C., and Hobbs IRA Corporation ("Sellers") entered into an agreement with defendant to sell its outstanding membership interest units for $270,000,000. Sellers alleged that the defendant company had not disclosed information that it knew before the closing. The defendant company moved to dismiss the Complaint. The Court granted the motion because the Complaint did not fall into the Delaware carve-out and therefore required dismissal.

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Shockley v. Adams Golf, Inc., No. Civ.A. 99-371-KAJ, 2005 WL 3654346 (D.Del. June 27, 2005).

This is a securities class action. The background to this case is provided in In re Adams Golf, Inc. Securities Litigation, 176 F.Supp.2d 216, 219-22 (D.Del. 2001), aff'd in part, rev 'd in part, 381 F.3d 267, 270-72 (3d Cir. 2004). In the present opinion, the Court resolved two remaining issues related to class certification. Pursuant to oral arguments on plaintiff's motion for class certification on May 17, 2005, the Court granted the motion but reserved its decision as to both: the appropriate time period applicable for defining the class of securities holders bringing an action under Section 11 of the Securities Act of 1933, 15 U.S.C. § 77l(a)(2); and the "nature of a subclass with respect to any liability under section 12(a)(2)" of the Securities Act of 1933, "including the appropriate time period for defining the subclass."

The Court held that July 10, 1998, the date when the Registration Statement became effective was the start date of the class. Similarly, October 22, 1998, signifying the last date when the class had typical claims was the end-date for the class.

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Segen v. Comvest Venture Partners, LP., C.A. No. 04-822 JJF, 2005 WL 1320875 (D.Del. June 2, 2005).

This opinion decided two motions to dismiss the Complaint. The motions were filed by two sub-groups of defendants, referred to as the "ComVest Defendants" and the "Priddy Defendants" for convenience. The Court denied both motions because they relied upon the same grounds and arguments.

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Tracinda Corp. v. DaimlerChrysler AG, 364 F.Supp.2d 362 (D.Del. 2005).

Tracinda Corporation ("Tracinda"), a Nevada entity with its principal place of business in California and engaged in investing in companies and then Chrysler's largest shareholder, brought this action against defendants comprising DaimlerChrysler AG, Daimler-Benz AG ("Daimler"), Jurgen Schrempp and Manfred Gentz (collectively "Defendants") and citizens of Germany alleging: (1) violations of securities laws; (2) common law fraud; and (3) conspiracy in connection with the 1998 merger between Chrysler Corporation ("Chrysler") and Daimler-Benz AG ("Daimler-Benz"). After a thirteen day bench trial, the Court held that: (1) personal jurisdiction did not exist over the German corporation; (2) the German company and its CEO were subject to the proxy solicitation statute although the American manufacturer solicited proxies; (3) pre-merger oral statements of the CEO did not attract liability; and (4) the documents memorializing the merger did not misrepresent that it was a merger between equals.

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