Delaware Business Litigation Report

Court of Chancery Now Open for Arbitration of Corporate and Commercial Business Disputes

James W. Semple — Thu, 04 Feb 2010 09:21:23 -0500

The Delaware Court of Chancery (“Court of Chancery” or “Court”) has announced new rules for arbitration procedures of business disputes. This offers businesses another attractive option to resolve not only the corporate governance disputes traditionally associated with the Court of Chancery but also other commercial and business disputes. It provides access to efficient expertise in a confidential and expedited process. Arbitration before a member of the Court will provide greater finality for the parties, and for the Chancery judge or master, more flexibility to craft a remedy or other equitable relief.

STATUTORY AUTHORITY

The General Assembly recently conferred statutory authority, 10 Del. C. § 349 to the Court of Chancery to arbitrate business disputes without the requirement of a case pending before the Court ; thus, “arbitration only” cases are now permitted. This will allow the parties to seek arbitration very early in the dispute and avoid excessive attorneys’ fees and time. Eligibility is the same as for mediation of business disputes pursuant to § 10 Del. C. 347(a) and (b), except that the parties must consent to arbitration rather than mediation. See § 349(a). While not defined in the Delaware code, the term “business disputes” has been viewed as including commercial, corporate, and technology disputes. The parties must consent to arbitration through contract or through a stipulation to arbitrate. Under the new arbitration rules, the parties must satisfy the same requirements as in the mediation process. For example, at least one party must be a business entity (e.g., a corporation, business association, partnership) and at least one party must be a Delaware business entity or have its principal place of business in Delaware. Further, if the dispute involves only monetary claims, the amount in controversy must be at least $1,000,000. Finally, each party must be represented by Delaware counsel at the arbitration.

EXPEDITION

The rules expedite the resolution of disputes. Within 10 days of the filing of the petition for arbitration, a preliminary conference is required and the arbitration hearing will generally be held within 90 days of filing. The discovery process is truncated. The parties will only exchange the information and documents or conduct the depositions necessary to permit the arbitrator to understand the dispute. The arbitrator has the last word if the parties cannot agree.

CONFIDENTIALITY

The parties’ interest in confidentiality is recognized and accommodated. The petition for arbitration is not entered on the Court’s docket. The proceedings are confidential and do not become part of the public record unless the arbitration becomes the subject of an appeal to the Delaware Supreme Court which shall exercise its authority in conformity with the Federal Arbitration Act

EFFICIENCY

On January 4, 2010 Chancellor Chandler, in an effort to encourage utilization of the arbitration rules, issued a standing order implementing the fee schedule for the arbitration of business disputes. The process is efficient. Parties must pay a $12,000 filing fee for the first day of arbitration and a $6,000 per day fee for each partial day thereafter, with all fees to be divided equally among the parties. This fee structure is quite favorable when compared to those charged in other arbitration forums, and allows disputants to eliminate the fees and expenses occasioned by a trial or unfocused settlement discussions.

EXPERTISE

The new rules provide access to the special expertise of the Court of Chancery’s judicial officers. Court of Chancery judges are accustomed to complex business litigation, have a pragmatic understanding of business realities, and are capable of prompt action. The new rules give the chancellors and masters of the Court the authority to fashion equitable and binding resolutions of complex commercial, corporate and technology disputes efficiently and expeditiously.

A copy of the jurisdictional statute can be found here: http://delcode.delaware.gov/title10/c003/sc03/index.shtml#349

A copy of the Delaware Court of Chancery’s New Arbitration Rules can be found here: http://courts.delaware.gov/rules/?Chancery96-97-98_020110.pdf

A copy of the Court’s Standing Order regarding fees of January 4, 2010 can be found here: http://courts.delaware.gov/forms/download.aspx?id=42348

Court Of Chancery Bars Late Statutory Contribution Claim

Edward M. McNally — Fri, 29 Jan 2010 19:54:37 -0500

Global Link Logistics Inc. v. Olympus Growth Fund III, L.P., C.A. 4444-VCP (January 29, 2010)

If you are a co-defendant in an arbitration case with a claim for contribution, you had better assert it in the arbitration proceedings. Otherwise, you may lose the right under the Joint Tortfeasors Act to make your co-defendant pay more than his pro rata share. This result follows under this decision because the Act requires the cross claim be asserted before "judgment" is rendered and the arbitration award counts as a judgment for that purpose.

Court Of Chancery Explains Damages For Breach Of Non-compete Agreement

Edward M. McNally — Fri, 29 Jan 2010 11:21:17 -0500

Great American Opportunities Inc. v Cherrydale Fundraising LLC., C.A. 3718-VCP (January 19, 2010)

This decision is a landmark case on Delaware law on non-compete agreements with employees. It establishes so many new precedents that it is hard to briefly summarize. For example, it holds that it is possible to assign an employee non-compete agreement in connection with an asset sale.

Perhaps the most significant part of the decision is its discussion on how to calculate damages when an at-will employee is lured away by a competitor and then violates his non-competition agreement. Damages are not, under this decision, what the new employer won in new business with the purloined employee. Instead, how to calculate damages in such a case is much more complicated and requires a careful reading of this decision.

Court Of Chancery Limits Confidentiality Agreements

Edward M. McNally — Wed, 27 Jan 2010 11:07:29 -0500

New Radio Group LLC v. NRG Media LLC, C.A. 4951-VCL (January 27, 2010)

Litigants frequently seek to keep their dirty linen secret in litigation by asking the court to seal the court's files to public inspection. Chancery Rule 5(g) deals with the limits on that confidentality order and this decision shows that litigants cannot ask the Court for more than 5(g) permits. The better practice is to make the provisions of any order specifically subject to the rule.

Court Of Chancery Explains How To Limit Fraud Claims Post Deal

Edward M. McNally — Fri, 22 Jan 2010 17:07:50 -0500

Mitsubishi Power Systems Americas Inc. v. Babock & Brown Infrastructure Group US LLC, C.A. 4499-VCL (January 22, 2010)

Deal attorneys try to limit the ability of a buyer to make post deal claims for misrepresentation. That is hard to do by contractual provisions that plainitffs are all too clever at avoiding and courts are often reluctant to enforce.

Here the Court of Chancery took the time to go over exactly what contract language may limit post deal claims. All deal lawyers should study it carefully.

Court of Chancery Holds Jilted Suitor May Recover Damages Even After Target Pays Termination Fee and Expense Reimbursement

Lewis Lazarus — Fri, 22 Jan 2010 09:12:42 -0500

NACCO Industries Inc. v. Applica Incorporated, C.A. No. 2541-VCL (December 22, 2009)

In this decision, the Court's newest Vice Chancellor, the Hon. J. Travis Laster, substantially denied a motion to dismiss a complaint filed by a jilted suitor who sought damages from the target and the winning bidder. The complaint alleged that the target violated no-shop and prompt notice provisions of a merger agreement between plaintiff and the target that the target later terminated in favor of a superior proposal from the defendant winning bidder. Plaintiff alleged that the winning bidder violated Delaware law by fraudulently misstating its intentions in filings required by the Securities Exchange Act of 1934 ("the Exchange Act). The Court of Chancery upheld plaintiff's claims for breach of contract, tortious interference with contract, fraud, and civil conspiracy for fraud. Although the Court emphasized that its decision was required under the plaintiff-friendly standard the Court applied in analyzing a motion to dismiss a complaint at the pleadings stage, the opinion has three critical lessons for practitioners concerning (i) the potential inadequacy of termination fee and expense reimbursement provisions to preclude a damages claim, (ii) the viability of state law claims arising out of misstatements in public filings required as a matter of federal law, and (iii) the relation of prior injunction proceedings to later claims for damages.

Payment of Termination Fee and Expense Reimbursement Does Not Preclude a Damages Remedy Where Jilted Suitor Can Allege Fraud Under State Law

First, the Court rejected defendants' arguments that plaintiff was not entitled to damages because the target paid a termination fee and expense reimbursement upon termination. The Court held that if plaintiff were able to show a breach of the merger agreement between the jilted suitor and the target, it should be entitled to receive expectancy or reliance-based damages. The Court recognized that any reliance-based recovery would have to overcome the jilted suitor's receipt of a bargained-for $4 million termination fee and $2 million expense reimbursement. But at the pleadings stage, it was sufficient for the Court to note that the merger agreement excluded from the limitation on liability any termination arising from a willful or material breach of a representation, warranty or covenant in the merger agreement. The Court also noted that the target's ability to terminate and pay fees without further liability required it to comply with its obligations under the no-shop and prompt notice provisions.

Exchange Act Does Not Preclude State Law Claims for Fraud

Second, the Court of Chancery explained that the mere fact that plaintiff's allegations against the winning bidder arose out of filings mandated by the Exchange Act did not deprive a state court of jurisdiction to resolve fraud claims brought solely under state law. The Court noted that a Delaware Supreme Court decision, Rossdeutscher v. Viacom, Inc., 768 A.2d 8 (Del. 2001), and federal decisions comported with this result. The Court's scholarly analysis of this issue at pages 31-42 culminates with emphasis on Delaware's interest in "preventing the entities that it charters from being used as vehicles for fraud." In short, the opinion reaffirms that the Exchange Act contemplates a balance between state and federal roles and responsibilities and does not preempt fraud claims arising under state law.

Moreover, in permitting the jilted suitor to bring a fraud claim, the Court held it was entitled to rely on the bidder's statements in public filings. Note that the Court does not require the jilted suitor to have bought securities or limit the damages to the loss it incurred as a result of its purchase of the target's stock.

Federal Decision Denying Preliminary Injunction Based on Same Claims of Alleged Falsity of Public Filings Does Not Preclude Later State Law Claim for Damages

Third, a decision rendered denying a preliminary injunction is not case dispositive. Here an Ohio Federal District Court had denied an application by the jilted suitor to enjoin the winning bidder's merger with the target based on the same alleged misstatements that formed the basis of the jilted suitor's later state law claim. The strength of that court's conclusion - "[c]ontrary to Plaintiff's position, the Court does not perceive any falsity in [the winning bidder's] filings when they are properly viewed alongside unfolding events." (NACCO Indus., Inc. v. Applica Inc., 2006 WL 3762090, at *7 (N.D. Ohio Dec. 20, 2006)) - did not preclude a different result on a different record and in a different procedural context. The lesson for bidders and practitioners: Absent a binding final judgment, the parties proceed at their own risk.

Perhaps this opinion will focus the attention of transactional lawyers on the breadth of prompt notice provisions in merger agreements and the nature of their clients' intentions when acquiring stock in a target and making the filings required by the Exchange Act. From a target's perspective, this decision reaffirms that contractual language in merger agreements concerning no-shops and prompt notice of competing proposals will be enforced when a party can plead injury from a breach. From a bidder's perspective, this decision reinforces the importance of timely and accurate disclosure regarding a client's intentions in purchasing stock of a company that is in play. The decision is also a reminder that a holding by a Federal district court denying an injunction on a preliminary record does not prevent a later assertion of a state law claim for fraud. As the Court rendered the NACCO decision on a motion to dismiss it remains to be seen whether liability will be imposed on a fuller record.

Court Of Chancery Explains Good Faith In Extending Time Limit To Accept Merger Consideration

Edward M. McNally — Tue, 19 Jan 2010 11:38:40 -0500

Amirsaleh v. Board of Trade of the City of New York, C.A. 2822-CC ( January 19, 2010)

A recent trend is to offer 2 types of consideration in connection with a merger and to permit the stockholders to pick which they prefer, such as stock or cash. Of course, the time to pick must be limited as a practical matter. This decision deals with when the time limit may be extended and when a company may in good faith cut off the extensions. Basically, decisions that are made for neutral business reasons and not to favor a selected few will be respected by the Court.

Court Of Chancery Sets Fee For "Cox Communications" Case

Edward M. McNally — Fri, 15 Jan 2010 16:53:49 -0500

Brinckerhoff v. Texas Eastern Products Pipeline Co. LLC., C.A. 2427-VCL (January 15, 2010)

In the famous Cox Communications case, the Court was critical of attorneys who settle fast after getting a modest and usually expected price increase in a merger and then ask for a big attorneys fee. This decision shows how the newest Vice Chancellor will calculate such fees. He is no pushover either.

Most importantly, the Court explains in detail how it approaches fee requests. The analysis is very fair and the award was ample. This added explanation is very useful in helping to predict future awards and thus facilitate settlements.

Supreme Court Upholds Denial Of fees

Edward M. McNally — Thu, 14 Jan 2010 16:43:06 -0500

Alaska Electrical Pension Fund v. Brown, C.A. 240, 2009 (January 14, 2010)

This decision upholds the unremarkable proposition that a class member whose attorneys do not contribute to an increase in merger consideration do not deserve a fee award. The case is interesting because it reflects an unusual clash among plaintiffs' attorneys over who did what to get the price increased and a company's successful defeat of a fee petition.

Court Of Chancery Affirms Business Judgment Rule Applies In Bet The Company Case

Edward M. McNally — Mon, 11 Jan 2010 08:13:54 -0500

In re The Dow Chemical Company Derivative Litigation, C.A. 4319-CC (January 11, 2010)

In an era when "too big to fail" seems to be an accepted reason to do the extraordinary, in this case the plainitffs tried to argue that a 'bet-the-company" deal requires a board to be right or be held for the consequences. The Court soundly rejects that argument and held the business judgment rule protects the board from second guessing in even the biggest deals.

This decision is also an excellent summary of the law dealing with when demand must be made on a board before filing a derivative suit. The Chancellor was once a law professor and his teaching skills are on full display in this case.

Court Of Chancery Permits Limits On Advancement In Bylaws

Edward M. McNally — Fri, 08 Jan 2010 11:00:16 -0500

Xu Hong Bin v. Heckmann Corporation, C.A. 4802-CC ( January 8, 2010)

There is a dilemma over the broad rights to advancement of legal fees given the sometimes very large amounts demanded. This decision holds that some limits on advancement rights may be placed in the bylaws, even when advancement is provided for in the certificate of incorporation. Note that the bylaw cannot be inconsistent with a certificate provision and must be in place when the director began his term of office for the period when his acts are in question in the underyling litigation.

Court Of Chancery Retreats From Efficient Market Theory

Edward M. McNally — Tue, 05 Jan 2010 16:27:22 -0500

In re Sunbelt Beverage Corp. Shareholder Litigation, C.A. 16089-CC (January 5, 2010)

This is an interesting appraisal case for at least 2 reasons. First, it illustrates what not to do in getting a fairness opinion. A rush job with no intent to reach a fair result is doomed to be rejected. Second, the Court for the first time in recent memory notes that criticism of the efficient market theory may be justified and did not accept an arguably arms length sale as solid evidence of share value. In the past the Court was moving toward acceptance of market values as setting the "fair value" required by the Delaware appraisal statute.

The case does involve an unusual set of facts and in the long run may not mark a great shift in approach, but it is worth noting for the usual careful analysis of the facts to reach the right result free of a formulaic approach.

Court of Chancery Holds Accountant Liable for Insider Trading

Edward M. McNally — Tue, 29 Dec 2009 11:04:23 -0500

Deloitte LLP v. Flanagan, C.A. 4125-VCN (December 29, 2009)

This decision holds a partner in an accounting firm liable for trading on the nonpublic information that he received in connection with his work at his firm. The Court upheld several theories of liability in what appears to be a case of first impression in Delaware. Thus, this decision paves the way for enforcing the duty to not misuse insider information apart from the Federal Securities laws.

Court of Chancery Imposes Severe Sanctions for Refusal to Arbitrate

Edward M. McNally — Thu, 24 Dec 2009 16:33:26 -0500

Aveta Inc. v. Bengoa, C.A. 3598-VCL (December 24, 2009)

After the entry of an order compelling arbitration, the defendant delayed the arbitration and even sought to re-litigate the underlying suit compelling arbitration. The Court was not impressed and found the defendant in contempt, imposing severe sanctions.

Court of Chancery Explains When Receiver Appointed

Edward M. McNally — Wed, 23 Dec 2009 16:44:07 -0500

In re Texas Eastern Overseas, Inc., C.A. 4326-VCN (December 23, 2009)

When it is "reasonably likely" that a corporation has some assets, the Court will appoint a receiver even if the corporation has been dissolved for 15 years.

Court of Chancery Explains Disclosure Rules

Edward M. McNally — Fri, 18 Dec 2009 16:38:45 -0500

In re 3Com Shareholders Litigation, C.A. 5067-CC (December 18, 2009)

This decision explains that in litigating a disclosure claim it is important to relate the disclosures at issue to past decisions determining when a particular type of disclosure was actionable. Here the Court dealt with when projection must be disclosed and noted that not everything considered by management or a board must be put into the proxy statement.

Court of Chancery Declines to Upset Unusual Arbitration Ruling

Edward M. McNally — Thu, 10 Dec 2009 11:14:38 -0500

Zurich America Insurance Company v. St. Paul Surplus Lines Inc., C.A. 4095-VCP (December 10, 2009)

In this case, the Court of Chancery declined to upset an arbitrator's decision and explained the limits on the Court's review of arbitration awards. Here, that limit applied even when the arbitrator had declined to rule based on his decision that he lacked jurisdiction.

Court of Chancery Awards Fees Based on Improved Nonmonetary Terms of Offer

Edward M. McNally — Thu, 10 Dec 2009 11:04:20 -0500

Off v. Ross, C.A. 3468-VCP (December, 10, 2009)

In this unusual decision, the Court of Chancery awarded attorney fees after having previously declined to do so in a November 26, 2008 decision in the same case. The prior decision had been decided because of pending litigation that the Court did not want to affect by a premature approval of a settlement in this case. When that other litigation was settled, it was time to address the settlement here. This illustrates the flexibility of the Court of Chancery in dealing with competing litigation.

The settlement was approved and fees awarded based on the plaintiff’s success in opening up a limited offer to purchase stock to all of the entity's stockholders.

Court of Chancery Explains Sanctions for eDiscovery Abuse

Edward M. McNally — Wed, 09 Dec 2009 15:12:34 -0500

TR Investors LLC v. Genger, C.A. 3994-VCS (December 9, 2009)

This is the most important recent decision on the Court's handling of discovery of emails and other e-documents. For spoliation, the Court imposed four forms of sanction: (1) it increased the burden of proof to a clear and convincing standard for the offending party to prove his case, (2) it held his testimony must be corroborated by other evidence to meet that burden, (3) it denied any claim of attorney-client privilege to certain documents, and (4) it imposed attorney fees for the sanction motion work.

This is also a good read for its explanation of how e-documents are stored in computers and servers and may be retrieved long after they were thought to be destroyed.

Court of Chancery Limits When a Stockholder May Claim Appraisal

Edward M. McNally — Tue, 08 Dec 2009 15:04:22 -0500

DiRienzo v. Steel Partners Holdings L.P., C.A. 4506-CC (December 08, 2009)

While it is well known that appraisal rights are limited to stockholders of record, sometimes stockholders do not really understand what it means to be "of record." They think if their name is on a brokerage statement, they are a "stockholder of record." Wrong! They must be listed on the records of the company to be "of record," and most stock in public entities is held by nominees, such as Cede & Co., to facilitate trading.

Here, the Court examines when the corporation is estopped by its conduct from denying appraisal rights and finds that the elements of waiver or estoppel are hard to establish and not present in this case.