Morris James Elects Brett M. McCartney, Eric J. Monzo & David J. Soldo as Partners

 Morris James LLP is pleased to announce that Brett M. McCartney, Eric J. Monzo and David J. Soldo, have been elected partners effective January 1, 2014.  The new partners are part of the Business Representation group in the areas of corporate litigation, bankruptcy and creditors’ rights and commercial litigation.

“The addition of this new group of partners strengthens our ability to offer exceptional service and value to our clients,” said David H. Williams, Managing Partner.  Mr. Williams also congratulated the new partners for the manner in which they have distinguished themselves in the legal community.

 

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New ANDA Litigation Book

Kenneth L. Dorsney Is Editor-In-Chief and a Co-Author of a New ANDA Litigation Book Published by the American Bar Association

The recently released book, ANDA Litigation, provides both a ready roadmap for novice litigators in the field as well as more detailed material and strategy to assist the more experienced ANDA litigator. The first part details the Hatch-Waxman Act and how it was implemented. Practical tools in these chapters include: an overview of the drug approval process, including required notice and pre-litigation considerations, and issues related to the timeline of litigation.

Following this, the authors explore even deeper into the actual litigation under the act, with topics covering: responses to the complaint, discovery, the work of experts, and patent claim construction and summary judgment. Further chapters are practice-focused, covering issues including preparing the case for trial, the work of trial, managing the litigation process, and post-trial issues, including appeals to the U.S. Court for the Federal Circuit. Finally, the authors discuss remedies, settlement, and antitrust implications, and the book also includes chapters on regulation and litigation of pharmaceuticals outside the U.S.

Please visit the American Bar Association’s bookstore to learn more or to order a copy of this new book, ANDA Litigation: Strategies and Tactics for Pharmaceutical Patent Litigators.

 


Representing a compromise in the pharmaceutical industry in balancing patent exclusivity against market competition, the effect of the Drug Price Competition and Patent Term Restoration Act (commonly known as the Hatch-Waxman Act) on controlling the pharmaceutical market remains unsettled. Amendments to the original act included provisions for an abbreviated process for FDA approval of generic versions of patented pharmaceuticals through the filing of an Abbreviated New Drug Application (ANDA) and the right to initiate patent litigation against an applicant. This law has resulted in ANDA litigation cases and a constant struggle to shape the landscape of the patent and regulatory regime governing FDA approved patented and generic drugs.

The Hatch-Waxman Act with it amendments is a hybrid of two already complex areas of the law -- U. S. patent law and FDA regulatory law -- which makes patent litigation in this area especially complicated and hotly contested. ANDA Litigation: Strategies and Tactics for Pharmaceutical Patent Litigators is a single-source guide examining the intersection between the statutory and regulatory scheme governing approval of generic pharmaceuticals and U.S. patent law in the context of Paragraph IV ANDA litigation. In 19 detailed chapters, this single-source reference focuses both on the current and developing law as well as the strategies and tactics employed by the litigants.

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2012 Federal Trial Practice Seminar: An Introduction to Federal Practice in the District of Delaware

The Delaware Chapter of the Federal Bar Association, in conjunction with the United States District Court for the District of Delaware, is pleased to announce another exciting new initiative.  On the evenings of Thursday, May 17 and Thursday, May 31, 2012, from 5:00 to 7:30 p.m., the District Court and FBA will sponsor a two-night seminar program entitled “The Federal Trial Practice Seminar Presents:  An Introduction to Federal Practice in the District of Delaware.”  The sessions will take place in Courtroom 2B at the J. Caleb Boggs Federal Building.

Attorneys who have been practicing in the District for three years or less are eligible to participate in this seminar.  One of the two seminar sessions will relate to an attorney’s interaction with opposing counsel and participation in the litigation process, while the other session will focus on an attorney’s interaction with the Court.  Each session will include a presentation from a speaker and a panel discussion.  The speakers and panel members will be current and/or former judges of the District Court.

Participation is limited to FBA members.  Current FBA members may register for the seminar by contacting Steve Brauerman via e-mail at sbrauerman@bayardlaw.com, by no later than May 14, 2012.  Those interested in participating in the seminar who are not currently FBA members may contact Mr. Brauerman at the e-mail address listed above to obtain additional information about FBA membership.

Space for the seminar is limited and applicants will be accepted on a first-come, first-served basis.  Applicants should be available to attend both sessions.  Admission to the seminar is free and the FBA expects to apply for Continuing Legal Education credit in Delaware for both sessions.

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

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

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

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

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

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

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

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

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

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

John M. Bloxom IV
Real Estate Law (2010)

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

Mary M. Culley
Elder Law (2008)

Keith E. Donovan
Personal Injury Litigation (2009)

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

Richard Galperin
Personal Injury Litigation – Defendants (2005)

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

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

Gretchen S. Knight
Family Law (2007)

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

Mary B. Matterer
Litigation – Intellectual Property (2009)

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

Mark D. Olson
Tax Law (2011)

James W. Semple
Commercial Litigation (2009)

Bruce W. Tigani
Tax Law (2011)

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

(Year indicates first year listed in practice area)

Unliquidated Derivative Claims Continue to Have Little Value

This article was original published in The Delaware Business Court Insider | 2011-07-06

On May 31, Vice Chancellor Leo E. Strine Jr. issued an opinion denying a motion for preliminary injunction to halt a merger between Massey Energy Company and an affiliate of Alpha Natural Resources Inc. One of the critical issues in the opinion was the value of the derivative claims Massey had against certain current and former directors and officers arising out of Massey's compliance with federal mining safety regulations.

Massey's attitude toward federal mining safety regulations arguably manifested itself in the Upper Big Branch mine disaster, which resulted in the loss of 29 lives. In his opinion, Strine found that the plaintiffs had probably stated a Caremark claim against the directors of Massey and criticized the board of Massey for failing to assess the value of the derivative claims but ultimately refused to enjoin the merger, concluding that the derivative claims did not have the value plaintiffs believed.

While this result has received some negative commentary, is it really a surprise? In fact, the court's analysis is consistent with prior analyses addressing the value of derivative claims in the context of a merger. The fact that the party here is more infamous than many others did not change the analysis under Delaware law.

The plaintiffs valued the derivative claims based on the "aggregate negative financial effect on Massey that the Upper Big Branch Disaster and its Fall-Out has caused." According to the plaintiffs' expert, these damages range from at least $900 million to $1.4 billion. The court, however, rejected this theory, in large part because the computation of the value of the derivative claims was far more complicated than the plaintiffs' theory.

First, even though the plaintiffs had stated a viable Caremark claim against the directors, because of the business judgment rule and the exculpatory provisions in Massey's certificate of incorporation, in order to obtain a monetary judgment against the directors, they would have to prove that the directors acted with scienter — a difficult standard to meet, particularly with independent directors.

Second, the court also found that even as to the autocratic former leader of Massey, Don Blankenship, who was arguably responsible for Massey's approach to mining safety, meeting this standard would be difficult. The court noted that there is a large gap between pushing the limits of federal regulations while accepting minimal loss of life and knowingly endangering the mine itself by putting its very operations at risk. Moreover, Blankenship was not directly in charge of any specific mine, and tying his policies directly to any disaster would be challenging.

Third, proving that the directors acted with scienter may entitle the corporation to a monetary judgment from the directors, but it would simultaneously expose the company to third-party civil liability and potential criminal liability, and potentially deprive the directors of the ability to rely on insurance coverage, all of which would harm the company.

Fourth, after the merger, Alpha will continue to have to address direct claims against Massey from its lost and injured miners, regulatory consequences of the company's mining safety approach, and other elements of the "Disaster Fall-Out." To the extent possible, Alpha will have every incentive to shift that liability to the former directors.

Fifth, it is impossible to determine the potential derivative liability of the directors until Massey's direct liability is determined. Indeed, it is not even in the interest of Massey's stockholders to press their claims of derivative liability now, before third-party civil and criminal adjudication, lest the plaintiffs expose the company to additional liability.

Sixth, the plaintiffs' expert put no value on the ability of the company or its stockholders to collect on a potential $1 billion judgment. The company's insurance policy, even assuming it is available to cover claims against the former directors, is only $95 million. While this is no small amount, it is, as the court put it, "not material in the context of an $8.5 billion merger."

While the vice chancellor was quick to note that the Massey board's approach to valuation of the derivative claims was less than ideal, because of the factors noted above, he found that the plaintiffs had not persuaded him that the merger was unfairly priced because of the failure to value separately the derivative claims. Was this conclusion so unprecedented, however, to justify criticism of the valuation?

Delaware courts previously have been asked to consider the value of unliquidated, contingent claims belonging to the company in the valuation context. These courts have never valued derivative claims at the full value of all potential damages, but instead have considered many of the factors Strine addressed in Massey.

For instance, in Onti Inc. v. Integra Bank Inc., petitioners in an appraisal action argued that their derivative claims should have been valued as an asset of the company in the appraisal proceeding. The stockholders' expert valued the claims at more than $19 million, while the company's expert valued the claims at negative $2.5 million. The court determined that the claims had no value. In reaching that conclusion, the court adopted the theory advanced by the company's expert, that all litigation factors should be considered, including the likelihood of success on the merits, the attorney fees necessary to obtain that result and any indemnification that the company would owe to its directors. Citing to prior precedent, the court noted that "there would be strong logic in including the net settlement value of such claims as an asset of the corporation for appraisal purposes."

Later that same year, the court took a similar approach in Bomarko Inc. v. International Telecharge Inc. The court valued the claim in that case by multiplying the probability of success by the likely amount of recovery while subtracting costs incurred to obtain that result.

More recently, in Arkansas Teacher Retirement System v. Caiafa, the Court of Chancery overruled an objection to a settlement that released claims that the board failed to ascribe any value to federal derivative claims in a merger. After noting that there is no case law supporting the proposition that the board was required to undertake a separate and discrete valuation of the derivative claims pending at the time of the challenged merger, the court reached the same result as Strine did in Massey, albeit with less analysis. That is, the court noted that the claims asserted in the federal action were difficult to win, and even those that had a higher probability of success could not have the $2 billion value the objectors claimed they did. On appeal, the Delaware Supreme Court affirmed the Court of Chancery's decision to overrule the objection for the reasons set forth in the Court of Chancery's opinion.

Given these precedents, is the result in Massey all that surprising? While some contingent claims have been given value, it is the exception, and not the rule, to assign material value to contingent derivative claims. Moreover, in the context of a merger worth billions of dollars, the likelihood is low that derivative claims have material value, particularly when reasonable defenses can be interposed.

But does this decision mean that boards can just eschew any analysis of the value of a derivative claim in the context of a merger? Probably not. The Court of Chancery certainly did not condone the practice, and had the court not been persuaded that the board otherwise acted properly, the failure to do so could have had more importance.

Further, because the exception to the derivative standing rule that entering into a merger for the purpose of extinguishing derivative claims remains viable, particularly in light of the Supreme Court's opinion in Caiafa, failure to value the claims could support the conclusion that a merger was negotiated simply to avoid liability. Finally, not all derivative claims are equal in this context. As Strine noted in Massey, if Massey had a liquidated claim against a former fiduciary reduced to a judgment but failed to get any value for this claim, he could see the substantial unfairness in failing to obtain value for that claim in a merger. Alternatively, if recovery on any derivative claim after a cash-out merger would inure solely to the benefit of the acquirer, then perhaps there would be value to the buyer in obtaining that claim.

Put simply, as with many issues of fiduciary law, the context of the situation is important. What is fairly clear, however, is that unliquidated contingent derivative claims are not ascribed much value, if any, in a merger context, unless a party can demonstrate a reasonable likelihood that the net value of the claim to the company is material.

Peter B. Ladig (pladig@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He represents both stockholders and directors in corporate litigation. The majority of his practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions. The views expressed herein are his alone and do not necessarily reflect the firm or any of the firm's clients.
 

Will Delaware Survive Without A William In Charge?

This article was originally published in the Delaware Business Court Insider | June 29, 2011

There is trouble in Delaware.  For over 40 years the esteemed Delaware Court of Chancery has been almost always headed by a Chancellor named “William.”  From William Duffy, to William Marvel to William Quillen to William Allen and last in the line, William Chandler, the Court has been well served by its Williams.  Now that Leo Strine is about to become the rare Chancellor not named William, concern abounds over his name.  Of course, a past great Chancellor was named Grover, as in Grover Brown, but that was the exception that proves the rule.  Apart from their common name, what made all these Williams special?  That answer can be seen in looking at the characteristics of the last William, Chancellor Chandler who has just retired.

First of all, William Chandler was an honest man in an age when intellectual honesty is not common.  By honesty, of course, I do not refer to financial integrity.  All Delaware judges have had that in recent memory.  Instead, honesty means following binding precedent even when you think it is wrong.  Here, Chancellor Chandler always said what he thought and never hid his reasoning, but followed precedent even if he disagreed with the Delaware Supreme Court.

A great judge has intelligence.  The scholarship of so many Chandler opinions is astonishing for a busy judge.  Just look at the hundreds of footnotes in his recent Air Products decision issued soon after the last hearing and you must wonder how did he find the time.  Intellectual ability made the difference.  Past Chancellors such as William Allen have lasting reputations for their scholarship.  So too will this Chancellor Chandler.

A great judge has energy.  Being a judge requires paying attention to witnesses and lawyers droning on and on and then writing an opinion that decides a complicated case.  That takes stamina.  Chancellor Chandler’s frequent jogging kept him in shape and that was reflected in the energy he brought to the job.

A great judge is a good administrator.  The Court of Chancery under this Chancellor was free from internal squabbling, had a hard working staff of reporters and administrators and consistently provided great service.  While that is a tribute to that staff, it also reflects well on the person in charge – the Chancellor.  This aspect of the job is often overlooked because it is not done in public or with great fanfare.  Yet, it is vital to an effective court.  Moreover, Chancellor Chandler has a great interest in technology.  That has led the Court to be up-to-date not just with electronic fillings but with other innovations such as easy rapid transcription of hearings. 

A great judge has patience.  Chancellor Chandler is among the most patient of human beings.  He was patient with wandering lawyers, pro se litigants, impossible deadlines and constant demands on his time with rarely a complaint.  This characteristic is much more appreciated than some judges might think.  Chancellor Duffy was a small man in stature, but had total command of the Courtroom through his calm, patient demeanor.  Not for him was the sarcastic remark to put down the wrongheaded lawyer.  Chancellor Duffy instead would gently show the errors of that lawyer’s position by his patient explanations.  That is not easy and is often not acknowledged, but is important.  Chancellor Chandler had a similar quiet but effective command of his courtroom.

A great judge is a good listener.  This is more than just being patient.  It is the knack of making the person talking to you feel that you are hearing and considering every word they say.  Chancellor Chandler was the best listener I have ever seen.  He made you feel that you were the only one in the room.  On occasion at some Bar or judicial event, the Chancellor would need to participate in a conference call.  When he did, the telephone literally seemed to be part of his anatomy and even if a streaker ran by he would not blink so intent was his concentration.

A great judge is a faithful public servant.  The Court of Chancery did not need to volunteer to hold mediations and now arbitrations of business disputes in addition to its regular, full docket.  But to keep Delaware as a leader in resolving business disputes, this Chancellor was an early advocate of these additional services to business litigants.  That is a burden that he and the Court took on and that is all done in private without any public appreciation for that extra effort.  That is real public service.

Finally, a great judge enjoys his job.  The constant clamor of litigants and the demands of always being “fair” can make any judge irritable.  That never happened with Chancellor Chandler.  Sure he always ruled his courtroom and could be stern when that was needed.  But day in and day out he was good to be with even in the toughest trial.  Just the joy he took in the new courthouse in Georgetown was a pleasure to see, including giving tours of that courthouse when it first opened.

So what about the nominee to be Chancellor?  Even though he is named “Leo” he is well-suited for this job as Chancellor.  While not as patient as Chancellor Chandler (who is anyway?), Chancellor Strine has the intellectual honesty, intelligence, energy, administrative skills, and commitment to public service of the Williams who preceded him.  The Delaware Bar expects that he will fulfill his promise.
 

Lewis Lazarus Authors Article on Plaintiffs' Pleading Burden in the Court of Chancery

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 (llazarus@morrisjames.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.
 

Why Do We Care About 'Poison Pills'?

This article was originally published in the Delaware Business Court Insider | June 08, 2011
 
Why do so many people care about whether the Delaware courts will continue to uphold the "poison pill" defense to a hostile takeover?  After all, comparatively few lawyers practice merger and acquisition law. Few companies are subject to hostile takeover threats, especially in recent years.  And who really stays up at night worrying about the fight between the two largely unknown companies that were the participants in Delaware's latest hostile takeover battle and the weapon of choice among defenders in such battles, the poison pill?

Yet, since the Feb.15 Court of Chancery decision in the Air Products case, there have been almost too-many-to-count blog postings, journal articles and symposia about that decision and its upholding of a poison pill. Who cares?
 

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Chancery Decisions Highlight Importance of Independent and Disinterested Directors in Company Sale Transactions

Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | May 25, 2011
 
Two recent decisions from the Court of Chancery — In re Orchid Cellmark Inc. Shareholders Litigation and In re Answers Corp. Shareholders Litigation — illustrate how parties may reduce deal risk by ensuring that the directors responsible for managing a sale process are disinterested and independent.  At the same time, while the court in both cases rejected challenges to the transactions based on allegedly excessive deal protection terms, the court also signaled that providing much more than the parties did in Orchid may break the court’s proverbial back.

Independence and Disinterest

The court decided each of these cases following an expedited preliminary injunction hearing at which the plaintiffs sought to enjoin the transactions based in part on an allegedly inadequate sales process.  In this Revlon Inc. v. MacAndrews & Forbes Holdings Inc. context, the court is called upon "to assess carefully the adequacy of the sales process employed by a board of directors."  A primary inquiry in assessing a transaction is whether the directors responsible for the negotiations are independent and disinterested.

In Orchid, the court noted that five out of the six directors were independent. Its board formed a special committee to negotiate the transaction.  That committee included two independent directors and a third newly elected director who had been nominated by the company’s largest shareholder.  In addition to the independence of the special committee, the court also found no reason to doubt the independence or credentials of the special committee’s financial adviser.

Likewise, in Answers, although the plaintiffs raised questions about the independence of two of the directors, the court found that those directors did not lead the negotiations.  Moreover, four out of the seven directors who approved the transaction were disinterested and independent.  Finally, the court held that the company’s financial adviser’s independence and qualifications were not seriously challenged.  The independence of the directors and their advisers were significant factors in the court’s decision in both cases to uphold the reasonableness of the boards’ decision making.

Deal Protection Terms

The court noted that deal protection terms such as termination fees, expense reimbursements, and no-talk and no solicitation clauses are standard.  The issue is whether cumulatively they are impermissibly coercive or preclusive of alternative transactions.  In Answers, the court observed that the break-up fee of 4.4 percent of equity value was at the upper end of the "conventionally accepted" range.

However, the court stated that this is not atypical in a smaller transaction.  The court also rejected the plaintiffs’ challenge that the court should measure the break-up fee in reference to enterprise value on the ground that "Our law has evolved by relating the break-up fee to equity value."

In Orchid, the parties' deal protection included not only standard no-shop and termination provisions, but also a top-up option, matching rights and an agreement to pull the company’s poison pill, but only as to the buyer.  The court held that top-up options are standard in two-step tender offer deals.  As to the termination fee, the court found it appropriate in reference to the equity value of the target and again rejected the plaintiffs' effort to measure the termination fee in reference to enterprise value.  The court also recognized that the matching and informational rights might have a deterrent effect on a hypothetical bidder, but it found those provided in the merger documents would not preclude a serious bidder from stepping forward.

The court also found that the selective pulling of the pill was not impermissibly preclusive of alternative bids.  The court reasoned that the merger agreement enables the board to redeem the pill if it terminates the merger agreement.  Termination is permitted if the board receives a superior offer and withdraws its recommendation that the stockholders tender their shares.  The court observed that the termination fee that would be owed if the board terminates the merger agreement for a bidder who makes a superior offer and then pulls the pill would be no greater than if the company accepts a superior offer or terminates the merger agreement for some other reason.

Finally, because "a sophisticated and serious bidder would understand that the board would likely eventually be required by Delaware law to pull the pill in response to a Superior Offer," the court ruled that the deterrent effect of these provisions likely was minimal.

In so holding, the court stated that deal protection measures evolve and cautioned that at some point incremental protection may prove too much:

"Deal protection measures evolve.  Not surprisingly, we do not have a bright line test to help us all understand when too much is recognized as too much.  Moreover, it is not merely a matter of measuring one deal protection device; one must address the sum of all devices.  Because of that, one of these days some judge is going to say 'no more' and when the drafting lawyer looks back, she will be challenged to figure out how or why the incremental change mattered.  It will be yet another instance of the straw and the poor camel's back.  At some point, aggressive deal protection devices — amalgamated as they are — run the risk of being deemed so burdensome and costly as to render the 'fiduciary out' illusory."

Together, these two cases demonstrate the value of a disinterested and independent decision-making body running a sale process.  Also, while the court rejected claims that the deal protection at issue was preclusive or coercive, the court also cautioned that counsel must be careful not to make an alternative transaction too burdensome or costly, lest any fiduciary out be deemed illusory.  Counsel should carefully evaluate the context of each transaction in determining appropriate deal protection, lest an added straw of protection is found to be the one that breaks the court’s proverbial back.

Lewis H. Lazarus (llazarus@morrisjames.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 not those of his firm or any of the firm's clients.
 

Delaware's Complex Civil Litigation Court: One Year Later

Edward M. McNally
This article was originally published in the Delaware Business Court Insider | May 18, 2011

On May 1, 2010, the Delaware Superior Court established a specialized "division" within that court to handle business disputes, known as the "Complex Civil Litigation Division" (or "CCLD"). The CCLD complements the Court of Chancery by offering a specialized business court to handle cases for monetary damages where jurisdiction would not exist in the Court of Chancery. Three specially assigned judges handle the cases assigned to the CCLD. Now that a year has passed, it is time to review the work of the CCLD and to assess its future. The CCLD is off to a good start, but remains an underutilized resource for businesses faced with civil litigation.

For a number of years, civil litigation involving business disputes has been plagued by inefficiency, escalating costs and delay. Three areas in particular caused much of the trouble with business litigation. First, discovery of electronically stored information caused litigation costs to escalate even beyond the amounts in dispute. Second, delays from crowded court dockets frustrated businesses with a problem to resolve. Third, discovery disputes over privileged communications and the testimony of expert witnesses that are often involved in business disputes also increased litigation costs and delays.

The CCLD addresses each of these areas of concern. It utilizes judges experienced in business disputes who, by a Case Management Order ("CMO") entered at the outset of litigation, keep the litigation on track to a fixed trial date. The CMO also controls the discovery process and the collateral disputes that otherwise often derail a case. Discovery of electronically stored information ("e-discovery") is subject to a set of guidelines that require litigants to cooperate in e-discovery and to reduce its costs. Other protocols are imposed to limit disputes over the discovery of privileged communications and expert witnesses, with the goal of further reducing litigation costs.

None of these special aspects of the CCLD are groundbreaking innovations. The Federal Rules of Civil Procedure, for example, require case management conferences and court orders establishing pretrial and trial schedules. Those rules also were recently amended to better control e-discovery and expert witness discovery. Federal Rule of Evidence 502 also was added to better control attorney-client privilege disputes. The CCLD has freely borrowed from these innovations of the federal courts.

Moreover, the CCLD for the most part has chosen to characterize its special procedures as guidelines for litigants to adopt or modify as they choose by their own agreements. Thus, the parties may opt out of the expert witness, e-discovery and privileged communication guidelines of the CCLD if they wish. The court has made it clear that it will accept any reasonable proposal the parties choose.

Now that the CCLD has been in place for one year, it makes sense to see if its new procedures for Delaware’s Superior Court have succeeded in resolving the problems confronting business litigation.

As the awareness of the CCLD has grown, business for the CCLD has picked up speed. To date, 49 substantial business disputes have been assigned to the CCLD and its three judges. Our review of the dockets of those 49 cases (together with our direct participation in 25 percent of these cases) leads us to conclude the CCLD is making progress, but is still an underutilized resource.

The 49 cases fall into four categories: (1) those matters diverted from the CCLD by voluntary settlement, bankruptcy stays or removal to federal court; (2) those matters just recently filed whose history is too short to be analyzed; (3) those matters subject to motions to dismiss; and (4) those matters being actually litigated. In our experience this breakdown is typical of business litigation. For example, the CCLD attracts many insurance coverage disputes that are usually resolved by determinations of the scope of an insurance policy, often in the context of a motion to dismiss. Full litigation including discovery is not common in those cases.

Of the cases actually going forward in the full litigation process, the large majority are subject to some form of CMO, including protocols on expert and privileged document discovery. Delays caused by discovery disputes seem to have been avoided, with savings in time and expense. Thus, as to those cases, the CCLD is working out as planned. Of course, a more complete review of how CCLD is working must await a significant number of CCLD cases going to trial or at least going through the full litigation process.

The mere existence of the CCLD protocols as guidelines also may be having a positive effect even if the parties to the litigation do not choose to explicitly adopt them. E-discovery is an example. The CCLD has a detailed set of "E-Discovery Plan Guidelines." Those guidelines require that the parties submit an "e-discovery" plan to the court, unless "the parties otherwise agree." The parties are reaching agreements on e-discovery and thus the guidelines are having their intended effect of reducing e-discovery costs.

Of course, as with anything new, there are some problems that the CCLD is working to address. Motions to dismiss a complaint sometimes delay assignment of a matter to the CCLD. If it was a defendant who requested assignment to the CCLD, that assignment was planned to occur after an answer to a complaint was filed. If there was no answer but instead a motion to dismiss, assignment was delayed in these cases. Motions to dismiss have also delayed entry of a CMO. That is understandable given that granting such a motion will save the court from entering a useless CMO. Such a delay in ultimate case disposition when a motion to dismiss is eventually denied is a problem in all civil litigation. The CCLD is expected to address these issues shortly.

Finally, the CCLD appears to be an underutilized resource as it passes its first-year anniversary. We are told that the CCLD judges are able to go to trial on almost any schedule the parties choose. While that capacity may not last forever, it is a big advantage to litigants. Given Delaware’s predominance as a corporate domicile where jurisdiction over Delaware entities is established, companies interested in efficient resolution of business disputes before specially-focused judges should more frequently file their claims in the CCLD. If businesses are serious about improving the efficiency and predictability of business litigation, they will choose the Delaware Superior Court’s CCLD more frequently. We are confident that as the CCLD’s reputation grows, its docket will grow as well.

Edward M. McNally (emcnally@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He practices primarily in the Delaware Superior Court and Court of Chancery handling disputes involving contracts, business torts and managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and not those of his firm or any of the firm’s clients.
 

Chief Justice Steele Discusses CCLD, Federal Legislation and Airgas

The May 2011 issue of Metropolitan Corporate Counsel contains an interview with Chief Justice Myron T. Steele.  In this interview, Chief Justice Steele discusses, among other things, the Superior Court's Complex Commercial Litigation Division, the detrimental effects of federal legislation on state corporate law, the decisions in Airgas Inc. v.  Air Products and Chemicals, Inc.  and the primacy of contracts in alternative entity disputes.

http://metrocorpcounsel.com/current.php?artType=view&artMonth=May&artYear=2011&EntryNo=12237

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The Viability of the Disclosure Only Settlement

This article was originally published in the Delaware Business Court Insider | May 11, 2011
 
For corporations facing stockholder litigation challenging a proposed business combination, negotiating a settlement in which the corporation agrees to provide additional disclosures without any increased consideration can be an efficient means of avoiding the risk of litigation.  The benefit created by the additional disclosures means the plaintiff’s lawyer can apply for a fee while the corporation and its directors get a release of all claims.

Some recent decisions of the Court of Chancery, however, have cast some doubt on the ability of a "disclosure only" settlement to serve as the sole consideration for a settlement or a substantial fee.  Practitioners on both sides should be aware of these developments when negotiating a settlement of litigation challenging transactions.

Although the Court of Chancery has not recently issued a written opinion refusing to approve a "disclosure only" settlement, there is precedent for doing so — e.g., the Delaware Court of Chancery's 2006 opinion in In re SS & C Technologies Inc.  The issue most recently came to light in Scully v. Nighthawk Radiology Holdings Inc., a much discussed case in which the court appointed special counsel to report on whether the settlement in that case was collusive and improper.

There, the plaintiffs sought expedited proceedings to enjoin a merger between Nighthawk Radiology Holdings Inc. and another party based solely on claims of inadequate disclosures.  The court denied the motion, in part, because the court felt the disclosure claims were not meritorious and, indeed, would not support a "disclosure only" settlement.  The corporation then reached a "disclosure only" settlement with the plaintiffs in a parallel proceeding in Arizona and agreed to present the settlement for approval to that court.  The Court of Chancery viewed this as an attempt to avoid its earlier admonition that a disclosure only settlement would not be adequate consideration to support a release for defendants, and appointed special counsel to investigate the matter.

While the special counsel in Nighthawk ultimately concluded that no collusion was present, the healthy skepticism of "disclosure only" settlements expressed by the Court of Chancery should be noted. Courts appear to be scrutinizing closely "disclosure only" settlements as part of a Delaware court’s independent duty to ensure that a settlement is fair and reasonable — e.g., the Chancery Court's 2005 opinion In re Cox Communications Inc. Shareholders Litigation.  That skepticism is most clearly manifested in recent decisions analyzing fee requests in which disclosures were part of the benefit created.

For instance, on April 30's In re Sauer-Danfoss Inc. Shareholder Litigation, Consol, the Court of Chancery considered a request for $750,000 by plaintiffs’ attorneys who claimed they caused the corporation to issue corrective disclosures before the transaction was ultimately abandoned.  After first determining that the plaintiffs were entitled to credit for only one of the purported 11 additional disclosures, the court began its discussion of the fee to which the plaintiffs were entitled by noting that "all supplemental disclosures are not equal."  When quantifying the fee award for additional disclosures, the court "evaluates the qualitative importance of the disclosures obtained."  While one or two meaningful additional disclosures might merit an award of $500,000, prior precedent in contested fee cases reveals that less meaningful disclosures yield much lower awards.  With that in mind, the court awarded $80,000, in large part because the disclosures were not particularly meaningful and the plaintiffs had not actively litigated the case after filing, instead seeking to negotiate a settlement.

The court used three recent opinions to support its conclusion that an award of only $80,000 was sufficient under the circumstance. In the 2006 case In re Triarc Companies Shareholders Litigation, the court awarded $75,000 in fees and expenses for the additional disclosure that the chairman of the special committee thought the deal price was inadequate where the plaintiffs had done nothing after the disclosure mooted the claims in the amended complaint to create any benefit.

In the 2009 Chancery Court case In re BEA Systems Inc. Shareholders Litigation, the court awarded fees and expenses of $81,297 where supplemental disclosures were made before discovery, preliminary injunction briefing and hearing, but the injunction was denied.

Finally, in 2010's Brinckerhoff v. Texas Eastern Products Pipeline Co., the Chancery Court awarded fees and expenses of $80,000 to an objector to a settlement who settled his objection in exchange for additional disclosure from the corporation as Form 8-K.

The consistent thread throughout these opinions, including the recent Sauer-Danfoss decision, is that non-meaningful disclosures that were agreed to after little work by plaintiffs will not merit substantial fee awards.

What effect, then, does the court’s reluctance to award large fees for additional disclosures combined with the court’s criticism of "disclosure only" settlements have on class action and derivative litigation going forward?

First, it may provide a disincentive for plaintiffs firms to continue to file litigation in Delaware challenging transactions.  The data showing a decrease in the number of lawsuits filed in the Court of Chancery has been readily available for some time now.  While smaller fee awards and higher criticism of "disclosure only" settlements cannot be the sole basis for the decrease in filings in the Court of Chancery, it likely plays some role.

Second, the use of the "disclosure only" settlement may become a thing of the past due to the risk for both sides.  Plaintiffs may not be willing to enter into a "disclosure only" settlement because they know they are at risk they will not be awarded a substantial fee.  Defendants may not be willing to enter into a "disclosure only" settlement because they do not want to put at risk their global release if the settlement is rejected as unfair.

To be clear, there is nothing in the Court of Chancery’s current jurisprudence to suggest that a "disclosure only" settlement is per se impermissible.  What is clear, however, is that to the extent that the parties to stockholder litigation challenging a business combination believed they could settle a case for the relatively inexpensive cost of making additional information available to the stockholders, that path must be followed carefully while keeping in mind the authorities cited above.

Peter B. Ladig (pladig@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group.  He represents both stockholders and directors in corporate litigation.  The majority of his practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions.  The views expressed herein are his alone and not those of his firm or any of the firm's clients.
 

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'Material Adverse Change' Clauses Protect Against Loss of Customers and Suppliers

Lewis H. Lazarus and Jason C. Jowers
This article was originally published in the Westlaw Journal Delaware-Corporate | May 4, 2011

In the article, Lewis H. Lazarus and Jason C. Jowers discuss the need for transactional and litigation attorneys who negotiate or litigate material adverse change clauses to focus on the particular language at issue as differences in phrasing could affect whether a seller is protected from a buyer's claim of breach.  To view the article, click here

Ignoring Chancery Court's Guidance on How to Act in Merger Transactions Could Jeopardize Deals

Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | May 04, 2011

The Delaware Court of Chancery, mindful of its role as a pre-eminent business court, works hard to communicate its expectations of officers and directors and their advisers.  That facilitates predictability.  Companies can be bought or sold with reduced risk that proposed transactions will be enjoined.  The corollary is that when advisers and their boards do not follow the rules, they put their clients’ transactions at risk.  Two recent cases illustrate that the Delaware Court of Chancery will not hesitate to enjoin a transaction where parties ignore clear guidance from prior opinions.

In its Feb. 14 decision in In re Del Monte Foods Co. Shareholders Litigation, the Court of Chancery enjoined a merger transaction from closing for 20 days and voided the deal protection terms that would have made a competing bid more expensive during that time period.  It did so because of conflicts of interest by the seller’s investment adviser.  The conflict arose because the seller’s investment adviser worked with the buyer to develop its merger proposal without telling the board, in apparent violation of a confidentiality agreement arising out of a previous failed effort to sell the company.  It then sought a role in providing buy-side financing.  All this while acting as financial adviser to the seller.

In enjoining the transaction the court relied on In re Toys "R" Us Inc. Shareholder Litigation, a 2005 case in which the court held that generally "it is advisable that investment banks representing sellers not create the appearance that they desire buy-side work, especially when it might be that they are more likely to be selected by some buyers for that lucrative role than by others."

Here the court found the investment adviser failed to disclose its conversations with prospective buyers or that it sought from the beginning to provide financing to the buyers.  This prevented the board from taking steps to protect the integrity of the process.  It also caused the seller to incur greater fees because once it was disclosed that the investment adviser sought to provide buy-side financing, the conflict required the board to obtain a new investment banker to opine on the fairness of the transaction.  Thus, while "the blame for what took place appears at this preliminary stage to lie with Barclays, the buck stops with the Board," the court said in Del Monte.

The remedy the court fashioned was unique — voiding the deal protection terms while enjoining the closing to permit a 20-day go-shop — but reflects the traditional equity power of the court to fashion a remedy tailored to the breach.  The court had no problem voiding the contractually bargained-for deal protection terms where the buyer knowingly participated in the board’s breach of fiduciary duty.  In so doing, the Del Monte court emphasized, "After Vice Chancellor [Leo] Strine’s comments about buy-side participation in Toys 'R' Us, investment banks were on notice."

Three weeks later, in its March 4 decision in In re Atheros Communications Inc. Shareholders Litigation, the Court of Chancery enjoined another transaction where the board failed to disclose the nature and amount of the investment adviser’s fee.  In Atheros the court found that stockholders voting on a proposed merger transaction would find it important to know that the investment adviser who rendered the fairness opinion upon which the board relied would receive 98 percent of its fixed fee only if a transaction closed.  The court was not troubled by the contingent fee per se, but rather by the fact that more than 50 times the portion that was otherwise due would be received only if a transaction closed.  As the court held, "the differential between compensation scenarios may fairly raise questions about the financial adviser’s objectivity and self-interest."

An additional factor justifying the court’s entry of injunctive relief was that the board did not disclose how soon in the process the seller’s CEO, who actively participated in negotiating the transaction price, knew that he would be staying on and receiving compensation from the buyer.  The court thus required additional disclosure on this point, finding that information that the CEO knew he would receive an offer of employment from the buyer at the same time he was negotiating the offer price would be important to a reasonable stockholder in deciding how to vote.

Both of these cases demonstrate the vitality of the court’s observation in Del Monte, cited in Atheros, that "because of the central role played by investment banks in the evaluation, exploration, selection, and implementation of strategic alternatives, this court has required full disclosure of investment banker compensation and potential conflicts."

That guidance means that practitioners and advisers would be well-served to avoid conflicts, to counsel their clients to avoid them, and to disclose such conflicts promptly.  Boards must also ensure that possible conflicts on the part of management who participate in the sale negotiations are properly managed by the board and fully disclosed.  As these cases demonstrate, it is the board’s responsibility to manage the sale process and failure to follow clear guidance from the case law imperils prompt closing of potential transactions.

Lewis H. Lazarus (llazarus@morrisjames.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 not those of his firm or any of the firm's clients.
 

The Song of Preferred Stockholders: 'You Get What You Asked for, Not What You Need'

Edward M. McNally
This article was originally published in the Delaware Business Court Insider | April 27, 2011.

For a number of years, private equity investors bought preferred stock as their investment vehicle. That this stock was considered equity rather than debt made it particularly desirable for startup companies that need to conserve their borrowing capacity. For the investors, preferred stock also might have a favorable tax treatment on the inevitable day when it was redeemed by the issuing company. All the investor had to do was provide sufficient protection for itself by the rights given to its preferred stock by the issuer’s certificate of incorporation. Seems simple enough.

Yet even the most sophisticated equity investors have failed to get what they actually need to protect their investment. They have asked for literally dozens of different rights as preferred stockholders, only to find out later that they failed to get what they really needed to secure the return of their investment. While it is true that in some cases preferred stockholders are also owed the fiduciary duties owed to common stockholders, that is not good enough. After all, they are "preferred." Why have they failed to protect themselves?

There are two basic legal principles that affect the ability of preferred stockholders to protect their investment. First, it is settled Delaware law that preferred stockholder rights are based on their "contract," what the company’s certificate of incorporation provides for the preferred stock. The courts will not grant them rights they did not get in the certificate.

Two recent Delaware decisions illustrate this principle. On March 29. in Fletcher International Ltd. v. ION Geophysical Corporation, the Chancery Court said the preferred stockholder sought to protect its investment by bargaining for the right to consent to the sale of any stock by a company’s subsidiary. In that way the parent company’s most valuable assets, its subsidiaries, could not be diluted without the preferred stockholder’s approval. But when the parent company wanted to do a deal that the preferred stockholder did not approve, the parent company just formed a new subsidiary and sold that subsidiary’s stock itself. Because the certificate of incorporation only prohibited a stock sale by a subsidiary and not by the parent company, the court permitted the sale to go forward over the preferred stockholder’s objection. No amount of complaining about form over substance did the preferred stockholder any good. It still lost.

SV Investment Partners v. Thoughtworks Inc., a Nov. 10, 2010, Chancery Court decision, reached a similar disappointing result for the preferred investor. There, the preferred stock had the right to be redeemed out of "funds legally available" on the redemption date. On that date the company had a "surplus" — its assets were worth more than its debts. However, the court ruled that the preferred was not entitled to be redeemed. It reasoned that because the company had legitimate needs for its cash, those funds were not "legally available" for redemption. In short, the precise wording the preferred stockholders asked for in the certificate of incorporation did not get them what they needed to be redeemed.

Getting around this first legal principle of strictly limiting the preferred’s right is not as easy as just giving it the power to elect directors upon default. For then the second legal principle that affects preferred stockholder rights comes into play. Directors have a fiduciary duty to all stockholders, even if those directors have been appointed just by the preferred stockholders. Hence, in the Thoughtworks situation, even if the majority of the directors had been elected by the preferred stockholders, they well may have had a duty to not use its funds for redemption when other uses of cash were better for Thoughtworks.

Indeed, recent Delaware decisions have criticized directors elected by preferred stockholders who wrongly favor the preferred stock. Because of those decisions, I suspect that it is the desire to avoid assuming any fiduciary duty to other stockholders that causes some private equity investors to not seek board control even if they are not timely redeemed.

What then are the remedies of the poor preferred stockholder left to only the terms of his or her preferred stock "contract" in the face of ingenuous schemes to work around his or her rights?

To begin with, the reality is that most of the time preferred stock ends up with the preferences it asked for at the bargaining table. Even if redemption may be postponed beyond the redemption date, steeply accruing post-redemption date carrying charges cannot be ignored forever. The price to be paid is just too steep, particularly if the company is to be sold to a third party or go public. Moreover, private equity investors learn quickly. The loopholes validated by past decisions will close in the next deal. The information exchange is just too fast to permit a clever avoidance tactic to be used for very long.

Finally, as the Thoughtworks decision points out, there are multiple existing ways a preferred stockholder may protect his or her investment. Requiring that redemption be paid by a short-term note, drag-along rights or even a forced sale of the company may all protect preferred stockholders. The vigilant preferred investor will remain as "preferred" as he wants, so long as he knows what to ask for in advance. Careful drafting is the key to the desired result.

Edward M. McNally (emcnally@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He practices primarily in the Delaware Superior Court and Court of Chancery handling disputes involving contracts, business torts and managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and not those of his firm or any of the firm’s clients.
 

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Multi-Jurisdictional Litigation a Rich Vein of Issues for Chancery Court

Peter B. Ladig
This article was originally published in the Delaware Business Court Insider | April 20, 2011.

Settlements of multi-jurisdictional stockholder litigation challenging corporate transactions raise logistical and other issues for reviewing courts including the proper allocation of fees between and among competing plaintiffs.   Chancellor William B. Chandler III in In re Allion Healthcare Inc.  Shareholders Litigation recently addressed this problem and his opinion provides important guidance to practitioners.  Here, the problem was not the specter of a collusive settlement, as it was in the litigation arising out of the merger of Nighthawk Radiology Holdings Inc. (Nighthawk), previously reviewed in this space.

This time, the settlement was approved, but the counsel for plaintiffs in two different jurisdictions could not agree how to allocate the award of attorney fees between them, and required the intervention of the chancellor to resolve the dispute.  Not only is the chancellor’s analysis illuminating, he also used the opinion as an opportunity to suggest his preferred mechanism to address certain of the problems caused by multi-jurisdictional litigation.

On Oct. 18, 2009, Allion Healthcare Inc. (Allion) announced it had entered into an agreement contemplating a going-private merger transaction whereby Allion would merge with affiliates of private investment firm H.I.G. Capital LLC (HIG) and a group of Allion stockholders who together owned about 41 percent of Allion’s common stock. As a result of the merger, Allion’s unaffiliated stockholders would be cashed out for $6.60 per share.   In response to this announcement, lawsuits were filed in Delaware and other jurisdictions, including New York, alleging that the price to be paid in the merger was unfair and asserting claims of breach of fiduciary duty against Allion, its directors and HIG in connection with the merger.  The first lawsuit was filed in New York on Oct. 20, 2009. A week later, a lawsuit was filed in Delaware, followed by another lawsuit in Delaware filed by Steamfitters Local Union 449.

Defendants moved to stay the New York action in favor of the Delaware proceeding.  That motion was ultimately denied, but not before counsel for the plaintiffs in the Delaware action notified the Court of Chancery that the Delaware plaintiffs, New York plaintiffs and the defendants had reached an agreement for the defendants to supplement their proxy statement in exchange for the withdrawal of the motion for a preliminary injunction.

After the merger closed, the plaintiffs in New York and Delaware filed amended complaints.  Defendants filed motions to dismiss in both jurisdictions.  The motion to dismiss in New York was largely denied on Aug. 13, 2010, by which time the motion to dismiss in Delaware was fully briefed but not decided.

The parties to the Delaware proceeding began discussing settlement in August 2010, and informed the Court of Chancery in September that they had reached an agreement in principle to resolve the Delaware action.  The New York plaintiffs learned of the settlement of the Delaware action on the same day.  On Nov. 12, 2010, the parties to the Delaware action filed a stipulation of settlement providing for an additional $4 million to be paid to the unaffiliated stockholders of Allion.  The New York plaintiffs filed an emergency motion to intervene in the Delaware proceeding to either: (1) stay the action, (2) reject the proposed settlement, or (3) allow the New York plaintiffs to take discovery on the merits of the action and the proposed settlement.  The court denied that motion, finding that the New York plaintiffs were well aware of the settlement, and permitted the New York plaintiffs to object to the settlement at the hearing to approve the settlement.

At the hearing, the court approved the settlement and awarded attorney fees and expenses of $1 million: $250,000 for the improved disclosures and $750,000 for the improved merger consideration.  The court allowed counsel for the plaintiffs the opportunity to create a fee-splitting solution.  They were unable to do so, and the court was required to resolve the issue.

Suggesting an Approach

Before addressing the merits of the issue before it, the court noted that the issue of fee-splitting is another practical problem caused by multi-jurisdictional litigation.  While discussing generally the other issues created by multi-forum litigation, in footnote 12 to the March 29 opinion in In re Allion Healthcare Inc. Shareholders Litigation, the chancellor suggested his solution:

"My personal preference, for what it’s worth," the chancellor wrote, "is for defense counsel to file motions in both (or however many) jurisdictions where plaintiffs have filed suit, explicitly asking the judges in each jurisdiction to confer with one another and agree upon where the case should go forward. In other words … my preference would be for defendants to ‘go into all the courts in which the matters are pending and file a common motion that would be in front of all of the judges that are implicated, asking those judges to please confer and agree upon, in the interest of comity and judicial efficiency, if nothing else, what jurisdiction is going to proceed and go forward and which jurisdictions are going to stand down and allow on jurisdiction to handle the matter….’ Judges in different jurisdictions might not always find common ground on how to move the litigation forward. Nevertheless, this would be, I think, one (if not the most) efficient and pragmatic method to deal with this increasing problem.  It is a method that has worked for me in every instance when it was tried."

This pragmatic solution is typical of the Court of Chancery’s approach to many issues, both procedural and substantive.  Indeed, the notion that the judges hearing related matters should collectively determine where the matter should go forward is similar in concept to the suggestion by the special counsel in Nighthawk that all courts hearing a related matter should be made aware of events in the other proceedings.  While some momentum appears to be building toward this type of disclosure, counsel representing defendants in a similar position would be wise to heed the suggestions in Allion and Nighthawk even before more definitive guidance emerges.

Counsel Fees

Turning to the merits of the fee dispute, the court found the analysis straightforward.  The court found that the disclosure portion of the fee was appropriately split equally between the New York and Delaware plaintiffs.  Although the New York plaintiffs may have argued later that the disclosures were inadequate to support a settlement, they still contributed to the benefit achieved by the disclosures by independently negotiating for them.

Unlike the disclosure portion of the fee, the court found that the efforts of the New York plaintiffs did not contribute to the benefit achieved by the increased merger consideration, and awarded all of the $750,000 increased consideration fee to the Delaware plaintiffs.

In Delaware, the filing of a meritorious action followed by a benefit conferred to a class creates a rebuttable presumption that the benefit was caused by the litigation.   When similar lawsuits are litigated in multiple fora, the presumption of a causal relationship between the litigation and the benefit achieved applies only to the Delaware litigation.   Affording the presumption to all actions would encourage placeholder filings in other jurisdictions, wasting judicial resources and making it more difficult to reach a settlement.

Here, the New York plaintiffs did not sign on to the settlement or otherwise support it.   Thus, the only way the New York plaintiffs could merit a fee is if the New York litigation somehow caused the Delaware settlement.  Here, counsel for the New York plaintiffs argued that even though it played no direct role in negotiation of the increase of the merger consideration, it created an "atmosphere" where the Delaware plaintiffs were able to negotiate a resolution.  The court rejected that argument for many of the same reasons it has been rejected before — the impact on the Delaware litigation was purely conjecture and in the absence of sufficient evidence to the contrary, a settlement achieved by counsel for Delaware plaintiffs should be attributed to them.  The court also rejected the New York plaintiff’s argument that the denial of the motion to dismiss in the New York action "moved" the case along to encourage settlement, finding that the evidence presented at the settlement hearing refuted this argument.

The chancellor’s decision in Allion, along with the report of the special counsel in Nighthawk, provide invaluable guidance to attorneys counseling directors and corporations involved in multi-jurisdictional litigation with a Delaware component.  Those who counsel these groups would be wise to review these issues carefully when advising them.

Peter B. Ladig (pladig@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group.   He represents both stockholders and directors in corporate litigation.  The majority of his practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions.  The views expressed herein are his alone and not those of his firm or any of the firm's clients.
 

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Are Directors Vulnerable for Lack of Oversight When a Natural Disaster Strikes?

Edward M. McNally
This article was originally published in the Delaware Business Court Insider | April 06, 2011
 
The recent events in Japan prompt the question of whether the members of a corporation’s board of directors have any exposure to liability when a natural disaster strikes their company. The potential claim would be that as part of their duty to oversee the company’s risk management, they should have better protected their company from the losses resulting from a natural disaster.

Of course, most people view such national disasters as "black swans," or events no one anticipates will happen.

Surely directors are not responsible for future events no one anticipates.

Or are they?

The analysis of this issue begins with a review of the directors’ duty to oversee their corporation’s activities to proactively prevent losses. In Delaware, this duty is often referred to as a "Caremark" duty, after the decision that proposed such a duty exists. Delaware courts have repeatedly described a Caremark claim as possibly the most difficult claim to win under Delaware corporate law. Yet, Caremark claims continue to be filed, albeit less frequently than other types of claims against directors.

A Caremark claim is particularly dangerous to directors. The Delaware Supreme Court has characterized some Caremark claims as breaches of the duty of loyalty that all directors and officers owe to their corporations. While that may not seem too different from a claim based on lack of care, the difference is significant.

The Delaware statute permitting a corporation to immunize directors from damages does not apply to breach of loyalty claims. Thus, director liability under a Caremark claim may have serious consequences if D&O coverage is not sufficient.

Regardless of whether the plaintiff characterizes the claims as a breach of the duty of loyalty or care, the claims will have one common characteristic. Typically, Caremark plaintiffs allege that the directors failed to take affirmative steps in some way that would have prevented damage to the corporation. That failure cannot be just simple negligence because under Delaware law, simple negligence is insufficient to constitute a breach of a director’s duty. Rather, at least gross negligence must be alleged to state a claim.

Thus, to state a Caremark claim the complaint usually alleges that the directors were aware of their duty to take action and that their failure to do so was grossly negligent. That awareness usually depends on "red flags" -- warnings the directors received before they failed to act. If the directors receive enough red flags and ignore them, then it may be said they were grossly negligent, and a Caremark claim exists.

However, the courts have also permitted a Caremark claim even without any red flags. When directors have utterly failed to do any monitoring of corporate affairs or put in place some system of supervision over corporate activities, a Caremark claim may be brought when damages occur because of bad conduct by employees. Directors just cannot simply sit back and do nothing, even in the absence of a warning that things are amiss.

Does it not follow that almost by definition a natural disaster is not anticipated because it is out of the ordinary and no red flags went up? That does not necessarily follow when you think about it. For example, it is reported that Japan had at least one prior earthquake that seriously affected a nuclear power plant. Japan has building codes that require earthquake protection. Does it follow that the past damage to a nuclear plant and the building codes generally together constituted red flags that directors of Japanese companies in the nuclear power business could not safely ignore? What do directors need to do to avoid liability for natural disasters?

In the final analysis, the answer to this question will depend upon what was reasonable under the circumstances. A large corporation may receive literally thousands of complaints each year from customers, employees or regulators. It is not reasonable to ask a board of directors to consider each of those complaints as red flags requiring their inquiry. The board would do nothing else if it had to look into a thousand complaints. Instead, what the board should do is have in place some process that is designed to catch wrongdoing, filter complaints and send to the board only those few that warrant further action by the board of directors.

That same analysis applies to the board’s duties concerning potential natural disasters. It is to be expected that some level of natural events may occur and lead to damages to a corporation’s infrastructure. Storms are even classified by how often they are expected to occur, with a "10 years storm" expected at least once a decade. The board should have in place insurance and other measures that it has been advised by experts are sufficient to protect their corporation from natural disasters that are reasonably likely to occur.

The board should periodically review the company’s insurance and disaster avoidance plans, at least to be satisfied that appropriate steps have been taken by management to address that threat to the company.

Not every potential disaster needs to be planned for, just those that are actual threats. If these basic steps are taken, directors should not be held liable if a natural disaster causes an anticipated harm to their company. We have not yet reached the point where the courts will expect directors to foresee black swans. Some risk is necessary for success. A properly functioning board is entitled -- and indeed expected -- by its investors to take such risks.

Edward M. McNally (emcnally@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He practices primarily in the Delaware Superior Court and Court of Chancery handling disputes involving contracts, business torts and managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and not those of his firm or any of the firm’s clients.


 

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Ed McNally to Serve as Panelist for Webinar on LLC Operating Agreements on December 15, 2010

Ed McNally will be a panel member for a live 90-minute webinar program entitled LLC Operating Agreements - Crafting Provisions on Fiduciary Duties, Indemnification and Exculpation to Minimize Business  Disputes  on  Wednesday,  December 15, 2010 at 1:00 p.m. Eastern Time.  Sponsored by the Legal Publishing Group of Strafford Publications, the webinar will include an interactive Q&A session. 

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Morris James LLP is Named a "Go-To Law Firm" for the Nation's Fortune 500 Companies

Recognizing the firm's strength in intellectual property litigation, Corporate Counsel magazine has named Morris James a “Go-To Law Firm for the Top 500 Companies.”  Go-To Law Firms are chosen from an American Lawyer Media national survey of general counsel from the top Fortune 500 companies and through research in various key databases.  The firm’s recognition will be published in the 8th Annual Edition of In-House Law Departments at the Top 500 Companies.

The Morris James Intellectual Property Litigation Group provides out-of-state firms and their clients help in navigating the Delaware court system. The Group combines its on-the-ground, technical and trial experience to address the complex intellectual property protection issues moving global markets today. They represent clients in complex disputes involving patents, trade secrets, trademarks, copyrights, unfair competition, and antitrust issues and have successfully litigated cases in all areas of technology in the Delaware District Court, the Delaware Court of Chancery and Superior Court, and federal courts throughout the country, including the Court of Appeals for the Federal Circuit.
 

 

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Four Morris James Attorneys Selected By Their Peers As "Top Lawyers" In Delaware Today Magazine

Morris James is pleased to congratulate the lawyers listed below who were the most recommended by their professional peers, as determined by a Delaware Today survey of Delaware attorneys.

Gretchen S. Knight
Divorce
Family Law

Mary M. Culley
Elder Law

Keith E. Donovan
Personal Injury
(Dover Office)

Jill S. Di Sciullo
Family Law


To view the entire list of "Top Lawyers", please click here.

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Morris James LLP Receives "Award of Excellence" From The Marvin S. Gilman Superstars in Business Awards Sponsored by the DSCC

We are very pleased to receive this honor from the Delaware State Chamber of Commerce," said David H. Williams, Managing Partner of Morris James LLP, "Our firm is deeply rooted in Delaware and we are committed to providing our community with top-tier legal services.”

The Marvin S. Gilman Superstars in Business Award, named for one of Delaware’s leading small business entrepreneurs, honors businesses and non-profit corporations for their outstanding achievements and model approaches to business and management. The awards are presented to companies that have been in business for at least three years, are small businesses based on number of employees, and are members of the Delaware State Chamber of Commerce. Awards of Excellence are also granted to deserving companies.

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18 Morris James Attorneys Selected by their Peers for Inclusion in The Best Lawyers in America® 2011

18 Morris James attorneys in 13 practice areas were recently selected by their peers for inclusion in The Best Lawyers in America® 2011.  New to the list are Mark D. Olson and Bruce W. Tigani from the firm’s Tax, Estates and Business practice.  The firm’s Real Estate Practice Group Chair, Richard Beck, has been named in this highly regarded publication since its inception in 1983. 

The Best Lawyers in America® 2011 has become universally regarded as the definitive guide to legal excellence.   Their rigorous research is based on an exhaustive peer-review survey in which more than 39,000 leading attorneys cast almost 3.1 million votes on the legal abilities of other lawyers in their practice areas.  The Morris James attorneys listed in the 2011 edition and the areas of law in which they are recognized include:

COMMERCIAL LITIGATION
 P. Clarkson Collins, Jr. (2005)
• Lewis H. Lazarus (2006)
• Edward M. McNally (2005)
• James W. Semple (2009)

CORPORATE LAW
• P. Clarkson Collins, Jr. (2005)
• Lewis H. Lazarus (2006)
• Edward M. McNally (2005)

ELDER LAW
• Mary M. Culley (2008)

EDUCATION LAW
• David H. Williams (2007)

FAMILY LAW
• Gretchen S. Knight (2007)

INFORMATION TECHNOLOGY LAW
• Richard K. Herrmann (2003)

INSURANCE LAW
• Mary B. Matterer (2009)

LABOR AND EMPLOYMENT LAW
• David H. Williams (2007)

PERSONAL INJURY LITIGATION
• Keith E. Donovan (2009)
• Dennis D. Ferri (2007)
• Richard Galperin (2005)
• Francis J. Jones, Jr. (2008)

REAL ESTATE LAW
• Richard P. Beck (1983)
• John Bloxom IV (2010)

TAX LAW
• Daniel P. McCollom (2007)
• Mark D. Olson (2011) *
• Bruce W. Tigani (2011) *

TECHNOLOGY LAW
• Richard K. Herrmann (2003)

TRUSTS AND ESTATES
• Mary M. Culley (2008)

* Indicates First Year on List
 

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Benchmark Litigation 2011 Names 5 Morris James Partners Among Top "Local Litigation Stars"

Morris James LLP is pleased to announce that five of its partners have been recognized among the top Delaware litigation attorneys in Benchmark Litigation 2011 - The Guide to America's Leading Litigation Firms and Attorneys.

Morris James’ Litigation Stars

Rich Galperin 
Clark Collins
Richard Herrmann
Lewis Lazarus
Edward McNally 

Benchmark Litigation focuses exclusively on litigation lawyers and firms in the United States.  Recommendations are based on extensive face-to-face and telephone interviews with the nation’s leading private practice lawyers and in-house counsel.

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Chambers USA Names 10 Morris James Partners In Their 2010 Guide to Leading Business Lawyers

Morris James LLP is pleased to announce that ten of its partners have been ranked among the leading Delaware lawyers in the 2010 edition of Chambers USA:  America’s Leading Lawyers for Business - an increase of two rankings from last year.    In addition, four practice areas including Bankruptcy/Restructuring, Chancery, Intellectual Property and Employment Law were identified among the leading practices in Delaware.   The Morris James partners selected for inclusion in the 2010 edition are:

Bankruptcy/Restructuring

  • Brett Fallon
  • Carl N. Kunz
  • Stephen M. Miller

 Chancery

  • Edward M. McNally
  • Lewis H. Lazarus
  • P. Clarkson Collins, Jr.

Intellectual Property

  • Mary M. Matterer
  • Richard K. Herrmann

Labor and Employment

  • David H. Williams

Real Estate: Zoning/Land Use

  • A. Kimberly Hoffman

Chambers & Partners is a highly respected and influential London-based research and publishing company that provides rankings of leading business lawyers and law firms throughout the world.  Rankings are based on technical legal ability, professional conduct, client service, commercial astuteness, diligence, commitment, and other qualities most valued by clients. 

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Peter B. Ladig Joins Morris James LLP as a Partner in the Corporate and Fiduciary Litigation Group

Morris James LLP is pleased to announce Peter B. Ladig has joined the firm as of June 1, 2010.  The majority of Mr. Ladig’s practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions. 

David Williams, the firm’s managing partner stated “We are delighted Peter Ladig has joined the Firm as a partner in our Corporate/Commercial Litigation Group. Peter adds his considerable skill and experience to a talented Group. We continue to look for opportunities to grow our Firm by adding accomplished laterals, particularly in the IP practice.”   

Mr. Ladig has represented both stockholders and directors in litigation in the Court of Chancery in cases involving, among other things, advancement of legal fees and expenses, contested elections of directors, requests to inspect books and records and claims for breaches of fiduciary duties.  He has also represented corporations and other entities in commercial disputes involving breach of contract claims and claims arising under the General Corporation Law of the State of Delaware. 

Mr. Ladig has authored several articles pertaining to corporate and commercial litigation in Delaware and he is a frequent speaker before groups of professionals regarding Delaware laws affecting LLCs and other business entities.  Mr. Ladig graduated with distinction from Emory University School of Law and has been a member of the Delaware Bar since 1996.

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Super Lawyers® Names 7 Morris James Partners As Top Legal Counsel in Delaware

Super Lawyers® magazine has named 7 Morris James partners as top legal counsel in Delaware.  The multiphase selection process is handled by Law & Politics who evaluates each candidate on 12 indicators of peer recognition and professional achievement. Selections are made on an annual, state-by-state basis and include only 5 percent of the licensed attorneys in a state.

Morris James’ 2010 nominations include:

• David H. Williams - Employment & Labor, Government/Cities/Municipalities
• P. Clarkson Collins, Jr. - Business Litigation, Business/Corporate, Mergers & Acquisitions
• Richard Galperin - Personal Injury Defense: Medical Malpractice
• Lewis H. Lazarus - Business Litigation
• Edward M. McNally - Business Litigation, Business/Corporate
• James W. Semple - Business Litigation, General Litigation, Insurance Coverage
• Richard Herrmann – Intellectual Property Litigation
 

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Vice Chancellor Strine Discusses Stockholders' Role in Corporate Troubles

In this New York Times piece, http://dealbook.blogs.nytimes.com/2009/10/05/dealbook-dialogue-leo-strine/, Vice Chancellor Strine discusses the role of stockholders, particularly institutional investors, in recent corporate woes.

 

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Conference Board Issues Report on Executive Compensation

On September 21, 2009, the Conference Board Task Force on Executive Compensation issued its recommendations on executive compensation.  Recommendations include the use of clawback policies and the avoidance of controversial pay practices such as excessive golden parachutes and gross-ups.  The full report can be found at http://www.conference-board.org/ectf

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Court of Chancery Approves Settlement in Countrywide Financial Case

Vice Chancellor Noble has approved a settlement in the class action arising from the merger of Countrywide Financial Corporation and Bank of America.  The opinion approving the settlement can be viewed here.

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Laster Nominated for Vice Chancellor

J. Travis Laster, a highly-regarded Delaware corporate litigator and founding partner of the firm Abrams & Laster, has been nominated by Governor Jack Markell to fill Vice Chancellor Lamb's seat on the Court of Chancery.  An article from the Delaware News Journal announcing the nomination can be viewed here.

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Three Nominated for Vice Chancellor

Delaware's Judicial Nominating Commission, a panel tasked with screening candidates for judgeships in Delaware, has forwarded three candidates to Governor Jack Markell for his consideration as potential replacements for Vice Chancellor Lamb on the Court of Chancery.  The three are:

  • Mary Johnston, a former partner at Morris James and a Superior Court Judge since 2003;
  • Richard Forsten, a partner at Saul Ewing;
  • Travis Laster, a partner at Abrams & Laster.

Governor Markell is expected to forward one of these three names to the Delaware Senate for a confirmation vote that is expected to occur in September.

 

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Delaware State Bar Association Submits Comments on SEC Proxy Access Proposal

In what may be the first time that the Delaware State Bar Association (DSBA) has ever submitted comments upon a proposed SEC rule, the DSBA has recently submitted comments upon proposed Rule 14a-11, the SEC's proposed proxy access rule.  The DSBA comment letter can be viewed here, and the SEC's proposed proxy access rule can be viewed here.  The DSBA argues that SEC should decline to implement the proposed rule: 

It should instead allow proxy access systems to develop under the framework of private ordering and shareholder choice created by state law.  The one-sided inflexibility of proposed Rule 14a-11 impairs that scope of choice, and with it, significant substantive rights under state corporate law.

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Summary of Amendments to Delaware Alternative Entity Statutes

The Harvard Law School Forum on Corporate Governance and Financial Regulation has posted a useful summary of the recent amendments to Delaware's alternative entity statutes, drafted by Delaware practitioner Louis G. Hering.  The post can be viewed here.

ABA Corporate Governance Committee Issues Report on Corporate Roles and Responsibilities

In response to the ongoing financial crisis, the Corporate Governance Committee of the ABA Section of Business Law formed a Task Force on the Delineation of Governance Roles and Responsibilities in the summer of 2008.  The Task Force included Lawrence Hammermesh, the Ruby Vale Professor of Corporate and Business Law at Widener University here in Delaware.  The Task Force has issued its report, which aims to "provide a context for policymakers, participants in the corporate governance process and the public in considering responses to the current crisis."  The report can be viewed here.

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The 21st Tulane Corporate Law Institute Begins Tomorrow

Here is the brochure for the program, which takes place April 2-3.  The panelists are among the most respected and knowledgeable legal minds and financial experts involved in corporate law and M&A, including Chief Justice Myron T. Steele and Justice Jack B. Jacobs of the Delaware Supreme Court and Vice Chancellors Leo E. Strine, Jr., Stephen P. Lamb, and Donald F. Parsons, Jr., of the Delaware Court of Chancery.      

Special Committee Releases Report on Delaware Superior Court Toxic Tort Litigation

A Special Committee appointed by the Delaware Superior Court has released its report and recommendations on Superior Court toxic tort litigation. The report (copy available here) followed the Special Committee’s investigation into concerns expressed by the Delaware State Chamber of Commerce that an increasingly large number of asbestos cases was adversely impacting the ability of the Delaware Superior Court to effectively and fairly adjudicate civil cases.

The Special Committee

  • solicited input from all the parties involved in toxic tort litigation in Delaware
  • held a public hearing where numerous persons spoke (including practicing attorneys, law professors and Chamber representatives) and
  • met separately with representative groups of defendants’ and plaintiffs’ counsel. 

Almost entirely, the focus of all these groups was on asbestos litigation.  After studying all this information for over five months, the Committee concluded “that the Delaware asbestos litigation is fairly conducted for both defendants and plaintiffs and is effectively resolving claims ... very well.”

The Special Committee particularly noted the willingness of the Superior Court judges to meet with the litigants’ counsel to structure unique procedures that fit their needs in this high-volume litigation. Recently, those procedures were amended to address concerns over plaintiffs’ disclosures and other matters. Hence, the Special Committee recommended that the parties to Delaware's asbestos litigation continue to address amongst themselves how to solve any remaining concerns over how that litigation is conducted.

While it is too early to know if the Special Committee’s report will be fully accepted by all concerned, initial reactions have been positive. In particular, the willingness of the Delaware courts to address litigants’ concerns in a positive manner has served to further support Delaware’s reputation for a fair court system. 

Edward M. McNally, a Partner and Chair of the Litigation Practice of Morris James LLP, was a member of the Special Committee.  If you have specific questions about the report, he can be contacted here.

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Superior Court Alters ADR Rules, Substitutes Mediation as Default Format

Effective March 1, 2008, the Superior Court amended Civil Rule 16 and repealed Civil Rule 16.1 to alter the compulsory alternative dispute resolution ("ADR") process mandated under Court rules.  The amendments, found here, substitute mediation for arbitration as the Court's default format for ADR in the event the parties cannot agree.  The amendments also require parties to make a good faith effort to agree on an ADR Practitioner, or face possible Court-imposed sanctions.
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Delaware Retains Top Ranking for Fairness of Litigation Climate

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

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.   

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

 

 

Preeminence of Delaware Courts for Business Litigation Highlighted

In the most recent edition of the ABA's Business Law Today publication, Vice Chancellor Donald F. Parsons, Jr., of the Delaware Court of Chancery, and Judge Joseph R. Slights, III, of the Delaware Superior Court review the history and development of the Delaware courts as the leading business courts in the country. The article titled, "The History of Delaware's Business Courts - Their Rise to Preeminence,"(available here) details some of the many features of both the Court of Chancery and the Superior Court that have made Delaware the forum of choice for complex corporate and commercial litigation. 

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Day Two At The Tulane Corporate Law Institute Conference

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

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

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

The DealScape is reporting here.

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The Tulane Corporate Law Institute Gets Underway Today

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

The full program is available here.

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

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

Pileggi is reporting here and here

 

    

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Update To Bear Stearns/Morgan Chase Litigation In Delaware

Vice Chancellor Parsons of the Delaware Court of Chancery heard arguments this afternoon in connection with Defendants motion to dismiss or alternatively to stay the Delaware TRO action in favor of the first-filed New York action. The core of Defendants argument was centered on the McWane and forum non conveniens doctrines.

The arguments raise several interesting questions: (1) to what extent would Delaware courts defer to New York courts when matters involve Delaware corporate law; and (2) how would the Delaware court handle, among several other issues, the issue of comity urged by the defendants. 

Several collateral arguments were also raised with respect to obtainment of compulsory process with respect to witnesses located in New York, particularly federal witnesses and the intersection of New York Stock Exchange Rules with Delaware law. 

Plaintiffs argued that unique and novel issues of Delaware law are involved and that the McWane and forum non conveniens doctrines do not require deference to New York courts under relevant Delaware precedent. 

Plaintiffs requested an expedited preliminary injunction hearing before May 8, 2008. The New York court has scheduled arguments related to the first-filed New York preliminary injunction application on that date.

Vice Chancellor Parsons noted the urgency in the matter and took it under advisement. He concluded that a ruling will issue in a few days.

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SEC General Counsel Brian G. Cartwright Addresses the Role of Foreign and Domestic States in Securities Regulation and General Corporation Law

SEC General Counsel Brian Cartwright discussed the emergence of transnational businesses and the global securities market in a speech at Widener University School of Law on March 28, 2008. The speech, titled "The Role of the States (Foreign and Domestic)" (available here), focused on the implications the global securities market and the spread of free market economies around the world creates for federal securities regulation and states' regulation of internal corporate affairs. Mr. Cartwright noted that as transnational businesses with global stockholder bases continue to flourish, both the SEC and Delaware may need to evaluate and adjust to the impact this will have on the regulation of these businesses.

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Class Action Filed Against Bear Stearns in Delaware Seeking to Enjoin Acquisition by JPMorgan

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

 

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

 

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

 

 

 

Additional Complaints Filed Against Yahoo! in Delaware

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

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

Class Actions Filed in Delaware Challenge the Yahoo! Board's Rejection of Microsoft's Offer

On Monday, February 11th, and Thursday, February 21st, two related class actions were filed in the Court of Chancery against the directors of Yahoo! for breach of fiduciary duties in connection with the offer by Microsoft, made on February 1st, to acquire Yahoo! for $31 per share, a price which reflected a 62 percent premium above the Yahoo! share value at the close of the day prior to the offer.  The first complaint, Wayne County Employees’ Retirement Sys. et al. v. Yahoo!, Inc., Court of Chancery C.A. No. 3538, can be accessed here.  The second complaint, Police and Fire Retirement System of the City of Detroit et al. v. Yahoo!, Inc., Court of Chancery C.A. No. 3561, can be accessed here.

The second complaint alleges that the Yahoo! board members have breached their fiduciary duties by rejecting Microsoft’s value-maximizing offer by refusing to consider and respond to the offer in good faith.  The plaintiffs also seek an injunction preventing Yahoo! from initiating any defensive measures and an order compelling Yahoo! to redeem its poison pill and invalidate certain severance plans.   

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"It's Not a Crime Against Nature"--But It's Wrong!

In back-to-back hearings last month, Vice Chancellor Leo E. Strine, Jr., had occasion to stress his—and presumably the entire judiciary’s—intolerance for speaking objections at Delaware depositions. Both cases involved out-of-state attorneys and should thus serve as a reminder to Delaware counsel to inform co-counsel of the judiciary’s strict adherence to this policy. 

In Benton v. Guitar Center, C.A. No. 3075-VCS, Vice Chancellor Strine was so troubled by the defending attorney’s repeated speaking objections, which “unduly lengthened the deposition” and “obstructed the legitimate inquiries of counsel,” that he instructed Delaware counsel and the out-of-state attorney who defended the deposition to draft a letter to disciplinary counsel, enclosing the transcript. And in case that was not enough, he further instructed Delaware counsel to see to it that the out-of-state attorney come to town to chat with disciplinary counsel about the appropriate rules of conduct for a deposition in Delaware. See pages 4-5. 

Court: It's not a crime against nature. But it was -- I can only imagine how patience testing it was for the person taking the deposition, because I read it, and every single question, there were inappropriate speaking objections. It's just ridiculous. And people want to practice that way, they can practice in jurisdictions where inappropriate, ridiculous obstruction of questioning is tolerated. But this ain't one of them.

The attorneys in Benton faced particularly poor timing, though, as Vice Chancellor Strine had encountered a very similar issue the day before in a hearing for SinoMab Bioscience Ltd., et al. v. Immunomedics, Inc., C.A. No. 2471-VCS. There, Vice Chancellor Strine made clear, at pages 62-63 of the transcript, that there was no debate about the impropriety of speaking objections in Delaware:

Court: There’s no wiggle room about whether what your partner did was an inappropriate way to object at a Delaware deposition. Not gray. Clearly wrong.

. . .

It's not a crime against nature. It happens. . . . The best of us do it. But it doesn’t help to come and argue with the basic proposition that it was wrong.

At the hearing, Vice Chancellor Strine awarded costs to the moving party. After the hearing, when he granted the proposed order, Vice Chancellor Strine made clear that the award of costs, which included attorneys’ fees, was partially a remedy for the improper speaking objection. (See the comments section of the order.)

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Delaware's Court System Does It Again!

For the sixth consecutive year in a row, Delaware has received the #1 Ranking from the Harris Poll State Liability Systems Ranking Study which is compiled by the United States Chamber of Commerce Institute for Legal Reform.  The Study attempts to quantify the perceptions corporate attorneys have about each state's legal system.  Respondents to the study are asked to grade states in each of the following areas:

  • having and enforcing meaningful venue requirements;
  • overall treatment of tort and contract litigation;
  • treatment of class action suits and mass consolidation suits;
  • punitive damages;
  • timeliness of summary judgment or dismissal;
  • discovery;
  • scientific and technical evidence;
  • non-economic damages;
  • judges' impartiality and competence; and
  • juries' predictability and fairness.

To read a copy of the study, click here.

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Rule Changes For The Court of Chancery

Effective January 1, 2007, there will be some significant rule changes in the Delaware Court of Chancery. Some of these changes will affect pending actions and are required reading. The most extensive changes are directed at preventing the kick-back abuses that have occurred in other jurisdictions where lawyers have allegedly paid professional plaintiffs to bring class and derivative suits. These changes may be briefly summarized as follows.

First, all complaints must now be "verified". In other words, the plaintiff must swear or affirm that the facts alleged are true or at least that there is a basis to believe they are true.

Second, in class and derivative suits, the plaintiff must file an affidavit stating he will not receive any payment for acting as a representative party, except for damages or fees and costs awarded by the Court. In effect, this means that the plaintiff may not receive any compensation for acting as a plaintiff unless the Court approves that payment. A similar affidavit must be filed when any settlement is presented for approval by the Court.

Third, in pending actions, the "no-kick-back" affidavit must be filed when any person asks to intervene as a representative party or asks to be appointed as a representative party.

There are some other more minor changes to the rules as well.

 

 

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Is Good Faith Still Alive After Disney?

On October 5, 2006, the Delaware State Bar Association sponsored a symposium entitled "Good Faith After Disney: The Role of Good Faith in Organizational Relations in Delaware Business Entities." The speakers included Chief Justice Steele and Justice Jacobs of the Delaware Supreme Court, and Chancellor Chandler and Vice Chancellor Strine of the Delaware Court of Chancery.

The participants discussed whether a separate fiduciary duty of good faith exists under Delaware law. This debate stemmed from footnote 112 of the Delaware Supreme Court's opinion affirming Disney in which the Court explained it would "not reach or otherwise address the issue of whether the fiduciary duty to act in good faith is a duty that, like the duties of care and loyalty, can serve as an independent basis for imposing liability upon corporate officers and directors."

The speakers explained that the Court of Chancery could not ignore the Delaware Supreme Court's opinion in Caremark, in which a separate duty of good faith was addressed. Attempting to reconcile the Caremark decision, the Court of Chancery explained in footnote 463 of Disney that "[i]n the end, so long as the role of good faith is understood, it makes no difference whether the words 'fiduciary duty of' are placed in front of 'good faith,' because acts not in good faith (regardless of whether they might fall under the loyalty or care aspects of good faith) are in any event non-exculpable because they are disloyal to the corporation."

The lesson? There is no clear majority as to whether there is a separate fiduciary duty of good faith under which directors may be held liable. It is, however, more likely that good faith is merely an extension of the fiduciary duty of loyalty. Because of this uncertainty, it is probably a mistake to seek liability soley based on an independent fiduciary duty of good faith. For now, stick with the basic fiduciary duties of care and loyalty and allege good faith as part of the duty of loyalty.

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Delaware Recognizes New Defense to Contract Claims

In what the Court itself noted is an unprecedented decision for Delaware, the Delaware Superior Court has ruled that a defendant in a contract case may plead as a defense that the plaintiff violated the implied covenant of good faith and fair dealing. This decision in Daystar Construction Management Inc. v. Mitchell has particularly broad implications because of the wide-spread adoption of Delaware law as the choice of law in contracts. The Court noted that it is rare for the covenant to be used as a defense to a breach of contract claim. However, the Court's decision cited to an impressive list of sources in its detailed and thoughtful analysis. Given that the Court also held that the breach of covenant is an affirmative defense that must be specifically plead to be asserted, a review of the decision is now mandatory for any defense of a contract case governed by Delaware law.

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Good Faith After Disney: Fiduciary, Contract, Agency, Statutory and Trust Law in Delaware Business Entities

Save the Date!

On Thursday, October 5, 2006, the Delaware State Bar Association will be presenting a program entitled "Good Faith After Disney: Fiduciary, Contract, Agency, Statutory and Trust Law in Delaware Business Entities". The program will be held at the Chase Center on the Riverfront, 800 S. Madison St., Wilmington, DE.

Attendees will receive 6.0 hours CLE credit.

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President Nominates Former Morris James Partner to United States Court of Appeals for the Third Circuit

The partners and staff of Morris James congratulate our former partner, The Honorable Kent A. Jordan, who is currently serving on the U.S. District Court, District of Delaware, on his recent nomination by President George W. Bush to the United States Court of Appeals for the Third Circuit.

For additional details, click here, to read a copy of the article which first appeared in The News Journal on Thursday, June 29, 2006.

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Disney Ruling Affirmed

In Re The Walt Disney Company Derivative Litigation, William Brehm and Geraldine Brehm, et. al. v. Michael D. Eisner, et. al., No. 411, 2005 (Del. June 8, 2006).

On June 8, 2006, the Delaware Supreme Court affirmed the Delaware Court of Chancery's decision issued by Chancellor William B. Chandler, III in August 2005 which stated that the directors of The Walt Disney Co. had not acted in bad faith when they awarded Michael S. Ovitz a $130 million severance package.

According to the Supreme Court, the decisions made by the directors were "protected business judgments, made without any violations of fiduciary duty."

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Delaware Docket - The Newsletter of the Delaware Judiciary

Delaware Docket is published by the Administrative Office of the Courts. Several highlights from the Summer 2006 issue include:

--Delaware's #1 Ranking for the Fifth Consecutive Year in a Row by the Harris Poll State Liability Systems Ranking Study by the United States Chamber of Commerce Institute for Legal Reform

--Three Delaware Judges Were Among the 500 Leading Lawyers in America Chosen by Lawdragon

--Delaware is Developing a New Case Management System for its Judicial Branch

To read these and other articles concerning Delaware's Judiciary, click here.

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2006 Bench and Bar Conference

Wednesday, June 7, 2006

Chase Center on the Riverfront
800 South Madison Street
Wilmington, DE

The 2006 Bench and Bar Conference begins at 10:30 a.m. with a seminar entitled "Professionalism and Ethics: Past, Present and Future". The seminar will end at 3:45 p.m. so that participants may join members of the Delaware State Bar Association at the DSBA Annual Meeting from 4:00 p.m. until 5:00 p.m. A cocktail reception and dinner will be held for all DSBA members immediately following the annual meeting.

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United States District Court, District of Delaware Issues Order Regarding Deletion of Hard Drive

On August 19, 2004, two corporals and a sergeant, all members of the Delaware State Police Department (the "Plaintiffs"), filed an action alleging violations of the First Amendment Free Speech Clause. After several amendments to their complaint, the Plaintiffs filed a Motion for Sanctions and Other Relief (D.I. 87) which asserts that defendants intentially destroyed relevant evidence, namely the hard drive of one of the defendants' computers. On February 8, 2006 the defendants filed an opposition (D.I. 93) asserting that, while the hard drive was no longer available, it was duplicative in light of the process by which the Delaware State Police stores its data.

The Court concluded that the defendants had a duty to preserve the hard drive since a user had the ability to manually designate a different file path and save a document outside of the system. Appropriate sanctions will be determined by the Court after independent experts are consulted to determine whether the hard drive can be recovered.

A copy of the April 12, 2006 order is available here.

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Emerging Trends in Fiduciary Duty Litigation: Lessons Learned from Emerging Communications and Disney

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Partner, Lewis H. Lazarus and Associate, Joseph S. Naylor of Morris James' Corporate and Fiduciary Litigation Group were recently featured in BNA Inc.'s Corporate Accountability Report. "Emerging Trends in Fiduciary Duty Litigation: Lessons Learned from Emerging Communications and Disney", a reprint of which is attached above, outlines three significant lessons for directors and corporate practitioners relating to the Delaware Court of Chancery's review and analysis of directors' fiduciary duties, including the evolving duty of good faith.

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First Annual Mid-Atlantic Super eLaw Technology Conference


The Corporate Counsel Technology Institute (CCTI) at the Widener University School of Law along with the Delaware State Bar Association and other organizations will be sponsoring the First Annual Mid-Atlantic Super eLaw Technology Conference at Widener University School of Law in Wilmington, DE. The Chair of the conference and one of the featured speakers will be Richard K. Herrmann, a partner in Morris James' IP Practice Group. When he is not in the courtroom, Mr. Herrmann teaches Electronic Discovery and technology related courses at William & Mary Law School, Widener University School of Law, and the National Judicial College. He is also the Director of Widener's Technology and Law Center.

The conference will take place from 8:30 am to 5:00 pm, on Friday, April 21, 2006. A copy of the conference brochure is available here.

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Director Liability and Its Effect on Corporate Governance Reform

ABA Section of Business Law, Spring Meeting - Tampa, FL4/7/2006
2:30 PM

Lewis H. Lazarus, a partner in the Corporate and Fiduciary and Business Litigation Practice Groups, will participate in a round table discussion by prominent practitioners on Friday, April 7, from 2:30 to 4:30 p.m. regarding the relationship between director liability and corporate governance reform. The panel discussion is part of the ABA Section of Business Law Spring Meeting being held on April 6-9, 2006.

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