Delaware Business Litigation Report

Court Of Chancery Upholds Caremark Complaint

Edward M. McNally — Tue, 21 May 2013 10:53:29 -0500

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

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

Court Of Chancery Explains Exculpation Clause

Edward M. McNally — Fri, 17 May 2013 08:41:34 -0500

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

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

Is the Court of Chancery Reforming Merger Litigation?

Edward M. McNally — Thu, 16 May 2013 11:11:36 -0500

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | May 15, 2013

There is an uproar going on about the practice of filing suit over every merger announced for a publicly traded company. At least 90 percent of merger announcements are followed in a day or two by the filing of complaints alleging the merger is unfair to one or both of the companies involved. Given that these suits are filed so quickly and in almost every deal, they cannot be well researched and may well be meritless. That impression is further confirmed when virtually every one of these suits is soon settled, often for meager, additional disclosures to stockholders and attorney fees for the plaintiffs' lawyers. The whole practice looks too much like legalized extortion. As more than one court has noted, corporate defendants find it cheaper to settle than to litigate these cases.

The problem is compounded when several suits are filed in multiple jurisdictions. That drives up the cost of defense when multiple law firms are retained to cover all the jurisdictions involved. Jurisdictional disputes also occur, again increasing defense costs. Critics have written no end of articles decrying this mess.

What then was to be done about this problem of multiple litigations over every merger of publicly held companies? The first step was for transactional lawyers to actively address the common complaint that the merger was the product of an unfair process or dominated by self-interested, controlling stockholders. As is evident from the most recent decisions, acquirers have quickly adapted the preferred practices that the courts hold leads to a fair process. These include using independent directors on special negotiating committees with the power to say no, independent advisers to those committees, majority of minority stockholder approval requirements and other steps to foster fairness. While it remains to be decided if those practices will cleanse the self-dealing transaction initiated by a controlling stockholder, they do negate unfairness claims in many cases.

But what about the claims the disclosures are inadequate? Again, transactional lawyers are trying to at least minimize those claims by new tactics. Those include quickly producing to the plaintiffs the key documents involved in the merger negotiations, such as the board of directors' minutes, the investment banker analysis and similar materials. The plaintiffs' lawyers are then asked for any additional disclosure they might suggest and almost anything they ask for is sent out in supplemental disclosures.

While these new tactics and procedures may moot many complaints, what about the plaintiffs attorneys' excessive fee requests? This is where the Delaware Court of Chancery is increasingly stepping in to reform the process and curtail excessive fees. This does not mean any fee request is unwarranted. There is some utility to have the disclosures sent to stockholders be reviewed with the critical eye of someone who stands to earn a fee for any deficient disclosure he can find. What some critics fail to acknowledge is that many of the complaints alleging deficient disclosure have led to material, additional information going to stockholders. When the merger's terms and how those terms were set are fully disclosed, the deal is more often seen as fair to all. This is a good business result. Even the mere threat of disclosure litigation encourages more disclosure.

As to those suits where the supplemental disclosures were not really beneficial, recent Court of Chancery decisions both criticize the lawyers involved and cut their fees. This trend perhaps began in earnest in the now-well-known opinion in In re Sauer-Danfoss Shareholders Litigation, Del. Ch. (Apr. 29, 2011), that drastically cut a fee application. That decision was soon followed by the settlement hearing in In re Amylin Pharmaceuticals Shareholders Litigation, C.A. 7673-CS (Transcript, February 5, 2013). There, the court spelled out in painful detail why the supplemental disclosures were not material, why the plaintiffs lawyers' fee request was objectionable and why their fees would be minimal.

The Sauer-Danfoss opinion and the Amylin transcript are no longer unique in their criticisms and refusal to award unwarranted attorney fees. The transcript in In re Transatlantic Holdings Shareholders Litigation, C.A. 6574-CS (February 28, 2013), and In re Interclick Shareholders Litigation, C.A. 7038-VCG (March 27, 2013), confirm the Court of Chancery is serious about its review of fee requests. The court's recent opinion in In re Paetec Holding Shareholders Litigation, C.A. 6761-VCG (March 29, 2013), again evidences this careful scrutiny. Indeed, there are several instances where the Court of Chancery refused to award any fees or approve a settlement that did not benefit stockholders.

In short, the Court of Chancery and transactional lawyers are working to eliminate meritless claims over mergers. Delaware law continues to develop in this area and it seems likely that more steps will be taken to connect any litigation abuses. Plaintiffs lawyers would also be better off if they voluntarily dismissed suits where discovery shows a lack of merit. That practice of dismissal without prejudice or with prejudice to only the named plaintiff did occur in the past and served to preserve the reputations of the lawyers involved. As every good lawyer knows, her reputation is her most important asset. Those lawyers who pursue frivolous claims and bear the sometimes tough criticism of the Court of Chancery only lose out in the long run.

Court Of Chancery Limits Third Party Discovery

Edward M. McNally — Wed, 15 May 2013 13:56:19 -0500

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

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

Court Of Chancery Explains Limits Of Review Of Appraiser Decision

Edward M. McNally — Mon, 13 May 2013 15:17:55 -0500

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

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

Court Of Chancery Explains When A Derivative Suit Survives A Merger

Edward M. McNally — Fri, 10 May 2013 10:36:38 -0500

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

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

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

Court Of Chancery Upholds Acceptance Of One Offer Without Market Check

Edward M. McNally — Thu, 09 May 2013 15:23:20 -0500

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

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

Supreme Court Sets Reformation Rules

Edward M. McNally — Thu, 09 May 2013 15:13:35 -0500

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

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

Should Directors Sue Their Company for Its Misdeeds?

Edward M. McNally — Wed, 08 May 2013 14:40:17 -0500

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | May 8, 2013

What should directors do when their company ignores their efforts to end corporate mismanagement? Until recently, this question rarely came up. Rogue companies are rare in the sense of openly refusing to comply with the law. Directors almost always were able to obtain corrective action when violations of the law came to light. But what if those directors were not able to cure serious management problems? What should they do?

This is not just a hypothetical question. In just the last three months, two Delaware Court of Chancery decisions suggested that directors who resigned in protest over the failure to take corrective action at their companies might well still be held liable for corporate wrongdoing. Their resignation did not immunize them. That is no big surprise. But what was a surprise was the court's questioning of whether the very act of resigning was itself a dereliction of the directors' duty to stockholders and if it might make them liable for wrongdoing that occurred even after they resigned.

Both those decisions did involve very unusual facts. For example, the April 25 decision in Rich v. Chong, Del. Ch. C.A. 7616-VCG, dealt with a corporation's refusal to pay for an investigation of obvious illegal conduct or to follow up to prevent similar conduct from reoccurring. The corporate entity, Fuqi International Inc., had refused to hold a stockholders' meeting for years, despite a court order to do so, and had failed to prove it had recovered $120 million in cash improperly transferred to a third party. That sort of recurring conduct might well have led to government intervention here in the United States had the company's assets not been located only in China.

It is wrong to suggest this sort of persistent failure to obey the law is confined to Chinese-based companies. Similar patterns of continuing bad conduct have been found to exist in U.S.-based companies as well. Several recent decisions have upheld continuing derivative litigation that alleged a conscious failure to govern properly by corporate directors. Such claims, known in Delaware as Caremark cases, may be difficult to win, but they continue to be filed with detailed factual allegations that suggest they have some merit.

So then what should a director do if she believes her corporation's management has or still is acting improperly and will not stop despite her demands that it do so? Just quietly resigning is not enough, particularly if the bad governance is ongoing. After all, just resigning does not inform the stockholders of the harm to their interests caused by bad conduct. It does not seem too much to ask of a fiduciary that she warn her wards that they are being harmed.

There are at least three steps the director might take after her attempts to stop bad conduct are unsuccessful. Each has its own pitfalls, however. The law in this area is still undeveloped. That makes the consequences of these choices hard to predict. Here are the choices and what to consider.

First, a director may make a "noisy withdraw" when she resigns. By announcing why she is resigning, she will at least warn stockholders they need to consider what is going on with their investment. It can then be argued that should transfer to the stockholders the obligation to protect themselves. This course of action does not correct past harm to the corporation. The departing director may then still be charged with responsibility for the harm that occurred on her watch. Moreover, it is not clear how effective a noisy withdrawal really will be, particularly if the corporation refuses to file any public statement to notify stockholders whose identities may be unknown to the director.

Another alternative may be for the director to pursue legal action against those corporate officers and even her fellow directors who fail to do their duty to the corporation. After all, we would expect a trustee to file suit against anyone who would harm the trust's assets. Why should a director not have that same duty? Yet such suits by a current director are very rare. That is not just because such litigation would be unpleasant. Litigation is expensive and, as in the case of the two recent Court of Chancery decisions that criticized directors for inaction, the defendants may not be able to pay any recovery. It is not at all clear that a suit by a director is covered by D&O insurance. Insurance policies often exclude coverage of "insured versus insured" litigation, for example. Hence, the plaintiff-director may find herself much poorer for her efforts.

A third choice for the director may be to support action filed by entrepreneurial plaintiffs' law firms. So long as the director does not initiate the litigation, her support may not trigger the "insured versus insured" clause of a D&O policy. If she can prove that she resisted the wrongful conduct after she knew about it, she should be able to defend against claims against her. A smart plaintiffs lawyer would then welcome that director's support in the litigation. He gains insider knowledge and gives up nothing by way of forgoing a claim against the cooperating director that is not worth much anyway.

I am aware that joining with the plaintiffs somehow seems unsavory, like deserting to the enemy. That reaction is unjustified. The director's duty is to the corporation and its stockholders, not to her former fellow directors or the corporate officers who failed to do their own duty to the corporation. This point was made by Chancellor Leo E. Strine Jr. in In re Puda Coal Stockholders Litigation, C.A. No. 6476-CS (Feb. 6, 2013), where he noted that the directors who had resigned might have been better to join with the plaintiffs in the litigation.

The director who finds herself unable to get corrective action when faced with bad management is in a difficult position. Is it better to stay to continue the fight for what is right, to resign in noisy protest, or even to join with stockholder-plaintiffs in litigation? While the right choice will depend on the particular circumstances, it does seem clear that a silent withdrawal is not enough in many cases.

Court Of Chancery Agrees To Consider Post Merger Evidence

Edward M. McNally — Wed, 08 May 2013 11:17:20 -0500

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

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

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

Edward M. McNally — Wed, 01 May 2013 12:47:43 -0500

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

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

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

Court of Chancery Addresses At-Issue Exception to Attorney-Client Privilege

Katherine J. Neikirk — Wed, 01 May 2013 11:22:56 -0500

Authored by Katherine J. Neikirk
This article was originally published in the Delaware Business Court Insider | May 1, 2013

In a little over a week, the Court of Chancery issued two decisions addressing the at-issue exception to the assertion of attorney-client privilege. The at-issue exception applies when: (1) a party injects privileged communications into the litigation; (2) a party injects an issue into the litigation, the truthful resolution of which requires analysis of privileged communications. Applying this standard, the Court of Chancery reached different conclusions regarding the applicability of the at-issue exception in In re Comverge Shareholders Litigation, C.A. No. 7368-VCP (Del. Ch. Apr. 10, 2013), and JPMorgan Chase & Co. v. American Century, C.A. No. 6875-VCN (Del. Ch. April 18, 2013).

In Comverge, Vice Chancellor Donald F. Parsons Jr. denied the plaintiffs' motion to compel documents based upon the at-issue exception. The plaintiffs were stockholders of Comverge and alleged that the Comverge directors breached their fiduciary duties by failing to enforce the terms of a standstill provision in a nondisclosure agreement (NDA) between Comverge and H.I.G. Capital LLC, Peak Holding Corp. and Peak Merger Corp. The plaintiffs sought documents relating to communications about the NDA, including documents discussing how to interpret the NDA. In response to the Comverge defendants logging these documents as privileged, the plaintiffs argued that the Comverge defendants had waived the attorney-client privilege by asserting a reliance on the advice of counsel defense at the preliminary injunction stage of the proceedings. The Comverge defendants had stated that they consulted counsel throughout the underlying transactions. Applying the first prong of the at-issue exception, the court found that the Comverge defendants had not injected or sought to inject specific attorney-client communications into the litigation. The plaintiffs, not the Comverge defendants, had initially raised whether the Comverge defendants consulted counsel at all and the Comverge defendants simply responded to that contention.

Turning to the second prong, the court considered whether examination of privileged communications was necessary for truthful resolution of the litigation. The court concluded such an examination was not necessary because the Comverge defendants were not relying on the substance of legal advice they had received to defend against the plaintiffs' claims. The Comverge defendants were simply contending that they consulted with attorneys. According to the court, these contentions were comparable to what would be disclosed on a privilege log and there was no waiver of the attorney-client privilege through the at-issue exception.

In JPMorgan, Vice Chancellor John W. Noble granted defendant American Century Cos. Inc.'s motion to compel discovery relating to plaintiff JPMorgan Chase & Co.'s setting of litigation reserve numbers pursuant to the at-issue exception. The litigation arose from a settlement agreement between American Century and JPMorgan and an arbitration between the parties regarding American Century's breach of contract claims against JPMorgan. In connection with the settlement agreement, American Century had the right to buy back its shares from JPMorgan. The share price was to be determined by an independent adviser, Duff & Phelps, which was employed by American Century. When American Century exercised its share purchase rights, the parties were awaiting a decision from the arbitration panel. The arbitration panel ultimately awarded an American Century subsidiary approximately $373 million. JPMorgan claimed American Century breached the implied covenant of good faith and fair dealing by failing to provide Duff & Phelps with information about the value of the pending arbitration claims. American Century sought discovery relating to JPMorgan's calculation of its litigation reserve numbers with respect to the arbitration claims, arguing that the information was not work product and, even if it were, JPMorgan had put this information at issue.

The court agreed with JPMorgan that the litigation reserve information was work product, but still had to address whether JPMorgan had put the litigation reserve information at issue. Applying the first prong of the at-issue exception, the court found JPMorgan had not injected any privileged communications into the litigation. Applying the second prong of the at-issue exception, the court concluded that truthful resolution of the litigation required disclosure of JPMorgan's litigation reserve numbers.

According to the court, JPMorgan should have foreseen that American Century would try to defend itself against JPMorgan's claims by arguing that JPMorgan knew about the potential value of the arbitration claims from its own internal analysis and failed to disclose those numbers to Duff & Phelps. Such a defense was reasonable in light of the facts of the case and JPMorgan had unfairly hindered this defense by denying American Century discovery on the issue of JPMorgan's litigation reserves. In reaching this decision, the court distinguished Comverge as factually dissimilar because the substance of privileged communications was not injected into that litigation. The court also found that American Century had met the burden for production of work product because it had demonstrated that the information was directed to a pivotal issue and a compelling need for the information.

These cases illustrate the careful analysis the Court of Chancery will perform in determining whether a party has waived the attorney-client privilege pursuant to the at-issue exception. Comverge reflects that if a party simply states it has consulted with counsel, but not that it relied upon counsel's advice, then the at-issue exception will not apply. JPMorgan reflects that if a party makes claims in which its own knowledge of an issue is relevant, then the at-issue exception could apply. Counsel should keep these distinctions in mind when bringing or defending against certain types of claims.

Court Of Chancery Rejects Special Rights For Minority Stockholders

Edward M. McNally — Tue, 30 Apr 2013 12:42:27 -0500

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

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

Court Of Chancery Explains When Board Must Respond To Demand

Edward M. McNally — Thu, 25 Apr 2013 11:43:43 -0500

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

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

When Is Advice of Counsel a Defense You Can Raise, but Not Disclose?

Edward M. McNally — Wed, 24 Apr 2013 10:51:46 -0500

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | April 24, 2013

Most defendants in corporate fiduciary duty litigation want to say, "My lawyer said it was all right." They usually avoid making that point for fear of waiving the attorney-client privilege. A recent Court of Chancery decision suggests that it is possible to say your lawyer advised you without opening the door to disclosure of exactly what the lawyer said. Doing so involves walking a tightrope. One slip and you're waiving your privilege. Yet, the benefits may be worth the risk.

At least in Delaware corporate litigation, in claims that the directors breached their duty to stockholders, the directors' good faith is critical to the outcome. Usually, the corporation will have the provision in its certificate of incorporation authorized by the Delaware General Corporation Law that exculpates directors for honest errors of judgment. However, that provision cannot bar claims for directors who don't act in good faith. Hence, being able to say you relied on a lawyer's advice may be important to demonstrating you acted in good faith. Nonetheless, corporations do not often make the "reliance on counsel" claim for fear of waiving their attorney-client privilege. Whether that fear is really justified by the consequences is another matter, particularly if the lawyer's advice is sound, complete and consistently favorable. Here, we want to only examine if you can say "advice of counsel," but not waive the privilege.

In re Comverge Shareholders Litigation, Del. Ch. C.A. 7368-VCP (April 10, 2013), suggests that asserting "advice of counsel" will not alone waive the privilege. Comverge involved a claim that the defendant, Comverge Inc., had violated a nondisclosure agreement with H.I.G. Capital. The plaintiffs asserted that Comverge had not even sought legal advice before taking the action that allegedly violated the H.I.G.-Comverge agreement. Comverge responded it had "sought legal advice ... on multiple occasions." Predictably, the plaintiffs then demanded to see that advice.

The Court of Chancery decided that merely asserting "legal advice" in defense did not waive the attorney-client privilege. The court applied a two-part test. First, the court ruled that privilege may be waived by the party that interjects the existence of an attorney's advice into the litigation. Because it was the plaintiffs that had first alleged "no attorney advice," Comverge was not the party that had interjected that issue into the litigation. That seems only fair.

Second, the court determined whether reviewing the substance of the attorney's advice was necessary to decide an issue already in the litigation. For example, if a defendant in patent litigation seeks to avoid exemplary damages for infringement by claiming it had a noninfringement opinion from patent counsel, the substance of that opinion must be disclosed. Applying this test is where things get tricky for corporate defendants in fiduciary breach litigation.

The defendants only said they had "sought legal advice" before completing the transaction under attack. They did not say what that advice was, such as to prove they were fully informed. After a careful review of precedent, the Court of Chancery ruled the attorney-client privilege was not waived. Now you might ask, what good did it do to say you "sought legal advice" when you failed to disclose the advice that supported your action? After all, for corporate defendants claiming they acted in good faith, the disclosure of the substance of the legal advice they received would seem to be necessary. Is there any value then in doing less than disclosing the actual advice?

Sure, there is. The plaintiffs in Comverge apparently believed that by arguing Comverge had not had legal advice, they would taint the court's view of Comverge. Portraying your opponent as a scofflaw is an age-old tactic that does work sometimes. Moreover, defense counsel is often confronted by an outraged client that cannot understand why such accusations of lawlessness are unrebutted out of some seemingly hypertechnical fear of waiving the attorney-client privilege.

Now under the Comverge ruling, counsel probably should assert the client did "seek legal advice," at least when the opposition claims the client acted without such advice. Of course, that assertion of advice received must be true; even better if you can name counsel recognized for their expertise in the law involved. Indeed, after the Comverge decision, the failure to rebut a claim of failure to seek appropriate advice may now be taken as an admission the claim is true. Hiding behind a fear of waiving the attorney-client privilege will no longer work to avoid the sting of such a claim.

Finally, it is important to recognize the limits of the Comverge decision. The Court of Chancery was undoubtedly affected by the unfairness of letting the plaintiffs' allegations go unanswered. The defendants' response was limited "fairly assiduously" to "assertions that the board sought, obtained, received or considered the advice of counsel," but no more. Going beyond that may be a run off the cliff.

Court Of Chancery Permits Access To Litigation Reserves

Edward M. McNally — Thu, 18 Apr 2013 12:42:06 -0500

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

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

Court Of Chancery Explains When Directors May Shield Other Directors

Edward M. McNally — Wed, 17 Apr 2013 12:35:25 -0500

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

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

Does Allergan Spell Litigation Relief?

Edward M. McNally — Wed, 17 Apr 2013 10:45:03 -0500

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | April 17, 2013

The corporate defense bar is excited over the Delaware Supreme Court's April 14 decision in Pyott v. Louisiana Municipal Police Employees' Retirement System, No. 380, 2012 (more often referred to as the "Allergan case"). The Supreme Court reversed a Court of Chancery decision that had refused to dismiss a Delaware derivative complaint notwithstanding that a California federal court had previously dismissed virtually the same complaint. The Court of Chancery ruled that it was not bound under principles of collateral estoppel to follow the federal court ruling. It further held that even if it would normally follow the prior court's decision, it would not in the Allergan case because the California plaintiff had not adequately represented the Allergan stockholders before the California federal court.

The Court of Chancery's Allergan decision had been widely criticized by counsel for corporate defendants. They pointed to the abuse presented when multiple complaints are filed in multiple jurisdictions over a single transaction. That forces defendants to wage a multistate defense. Thus, if the Allergan case decision in the Court of Chancery had been upheld, defendants feared that even if they won one battle, the war against them would continue on another front. The defendants' concern led to several amicus briefs filed in the Delaware Supreme Court urging reversal of the Court of Chancery's Allergan decision.

The Delaware Supreme Court gave the corporate defendants the relief they sought. First, the Supreme Court held that Delaware courts must respect the decision of a state or federal court dismissing a derivative suit by also dismissing a pending Delaware derivative suit filed by a different plaintiff stockholder over the same transaction. Second, the Delaware Supreme Court rejected the Court of Chancery's conclusion that the California plaintiff had failed to adequately represent the Allergan stockholders. Therefore, the Supreme Court decided that the Delaware Allergan case should be dismissed.

The immediate impact of the Delaware Supreme Court's decision in Allergan is that there probably will be a race to file motions to dismiss derivative suits in the jurisdiction the corporate defendants believe will most likely grant their motion. By winning in one state, they will hope to win the whole war by then claiming Allergan mandates dismissal of all similar derivative claims. Indeed, Allergan may actually foster just what the Court of Chancery critics feared, multiple litigation in different jurisdictions. For if the corporate defendant fails to win its motion to dismiss in one jurisdiction, it may well try again in a different jurisdiction. After all, a decision denying a motion to dismiss is not a final judgment. Therefore, the defendants may be free to argue that because only a final judgment is entitled to preclusive effect, their motion to dismiss in another case must be decided on its own merits. Such a tactic would be ironic indeed.

The longer-term effects of the Supreme Court's Allergan decision, however, may well depend on how it is interpreted. The Supreme Court carefully noted that it did "not address the merits of" whether Delaware should hold there is always privity among all derivative stockholders in every case. Hence, the court did not rule that collateral estoppel will always require a second court to dismiss a derivative suit that has been previously dismissed by a different court dealing with another stockholder's similar complaint. This leaves open a potential way for plaintiffs to escape collateral estoppel's effects.

Understanding this loophole requires focusing on the facts in Allergan. The California case that the federal court dismissed involved an amended complaint that had the benefit of being drafted based in part on internal Allergan documents. The California plaintiffs had access to those documents because the plaintiffs in Delaware had used a books-and-records case to force Allergan to produce the documents. The California plaintiffs then obtained those documents and amended their complaint. Eventually, as the Delaware Supreme Court noted, the Delaware and California complaint "are so similar that the California complaint could not be [held] 'grossly deficient.'"

But what will happen if a Delaware plaintiff does use a books-and-records case to support its complaint and other plaintiffs in other jurisdictions rush to file without those records? It is possible that the Delaware Supreme Court would conclude that dismissal of the complaint in other jurisdictions that lacked records to support its allegations should not be given preclusive effect in Delaware. After all, the Delaware Supreme Court favorably cited the Restatement (Second) of Judgments § 42(1) that recognizes an exception to collateral estoppel when a prior judgment was the result of a lack of "due diligence and reasonable prudence." Meanwhile, it is probable that any Delaware court will more quickly decide any motion to dismiss to avoid having its decision dictated to it by another state's courts. Of course, if the Delaware court upholds the Delaware complaint, no later decision elsewhere will be preclusive. If all that happens, Allergan will have little long-term consequences.

It is also possible that some plaintiffs firms will now try to avoid Allergan by not filing suits in jurisdictions less friendly to derivative claims. Previously, multiple filings were encouraged by giving some preferences to attorneys who filed first or who was able to move their cases faster. After Allergan, it will be risky to sue in unfriendly forums and the plaintiffs bar should be more open to sharing leadership in the litigation in more favorable jurisdictions to discourage such filings. Delaware has a balanced reputation for permitting good complaints to proceed, particularly if based on a prior records inspection. Hence, it may become the forum of choice. We will just have to wait and see what Allergan produces.

Court Of Chancery Explains Privilege Waiver Law

Edward M. McNally — Wed, 10 Apr 2013 09:29:19 -0500

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

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

Supreme Court Reverses Important Decision Giving Delaware Primacy

Edward M. McNally — Thu, 04 Apr 2013 14:21:49 -0500

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

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

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

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