Delaware Business Litigation Report

Court Of Chancery Rejects SLC Report

Edward M. McNally — Thu, 11 Mar 2010 11:25:19 -0500

London v Tyrrell, C.A. 3321-CC (March 11, 2010)

When should the recommendations of a SLC to not pursue a derivative suit be accepted? As this opinion points out, certainly not when the defendants appoint their relative to the SCL and those that are indebted to them. Nor will the SCL be respected when its members approach their investigation with views fixed before their investigation was performed and when their non-Delaware counsel does not understand Delaware law.

This decision summarizes the Zapata principles for examining the report of a SLC, including a good summary of prior case law. Apart from the basic rules it sets down on burden of proof, independence and the scope of any SLC investigation [all of which alone are worth reading], the decision's analysis of the internal logic of the SLC report is critical. Put simply, the Court wants the report to make sense under an objective review and when it does not, trouble will follow.

Court Of Chancery Explains Rights Of Preferred Stock

Edward M. McNally — Mon, 08 Mar 2010 10:31:58 -0500

LC Capital Master Fund, Ltd. v. James, C.A. 5214-VCS (March 8, 2010)

Lately, there seems to be a lot of interest in the rights of preferred stock compared to the rights of common stock and how the board of directors should act when caught in the middle of their conflicting claims. This decision summarizes the past decisions and explains what to do.

Here are some "rules" to go by:

1. When the certificate of incorporation speaks to the preferred stock's rights on an issue, that controls and the board does not need to consider granting greater rights to the preferred. The charter ends the discussion.

2. When the certificate of incorporation is silent on an issue and leaves the prefererd in the same position as the common [such as on the right to get the highest price for the company in a merger] then the board needs to consider the preferred and common as having the same rights and owed the same fiduciary duty.

3. When the issue somehow falls in a gap between the preferreds rights under the certificate of incorporation and the rights of the common stock, get a good lawyer. Seriously, the board needs to do its best to strike a fair balance under the circumstances.

Court Of Chancery Upholds Nullification Claim

Edward M. McNally — Fri, 05 Mar 2010 10:25:56 -0500

Thor Merritt Square LLC v. Bayview Malls LLC, C.A. 4480-VCP (March 5, 2010)

On occasion, the members of an LLC try to end its life by filing a certificate of cancellation with the Delaware Secretary of State. This is done in the hope that it will provide a defense to suits over the LLC's obligations. Well, that does not work. As this decision explains, a creditor may then file a claim to nullify the certificate of cancellation and to seek a receiver.

Court Of Chancery Applies Brophy To Insider Trading

Edward M. McNally — Wed, 03 Mar 2010 09:34:34 -0500

Pfeiffer v. Toll, C.A. 4140-VCL (March 3, 2010)

The by now ancient Brophy decision upheld a claim against insiders for trading on confidential corporate information. This decision affirms that Brophy is still good law in Delaware. That is no real surprise, given the Court's strict enforcement of the duty of loyalty. The Court's discussion of possible damages that might be recovered also is very expansive.

On a different level, the opinion is revealing on how the Court goes about the task of deciding what is the law of Delaware. It is apparent that the Court is willing to conside a wide range of sources in a detailed analysis. This raises the bar for brief writers as well.

Court Of Chancery Upholds NOL Pill

Edward M. McNally — Fri, 26 Feb 2010 09:23:41 -0500

Selectica Inc. v. Versata Enterprises, Inc., C.A. 4241-VCN ( February 26, 2010)

In a case with an unusual factual setting, the Court of Chancery has upheld a poison pill with a 5% trigger. The very low trigger is explained by the need to protect a NOL that might be adversely affected by the acquisition of 5% of a company's stock.

In its discussion of the Unocal standard of review that applies to defensive measures, the Court applied a very differential approach to the board's decisions. Arguably, that is not the higher standard of review that had been suggested by Moran as applicable to the adoption of a poison pill.

This decision illustrates the Court's limited role in reviewing board's decisions that are not affected by any conflict of interest on the part of directors. Briefly, unless there is a duty of loyalty issue involved, directors just will not be second guessed in Delaware.

Court Of Chancery Discusses Scope Of Arbitration

Edward M. McNally — Thu, 25 Feb 2010 13:26:29 -0500

RBC Capital Markets Corp. v. Thomas Weisel Partners LLC, C.A. 4709-VCN (February 25, 2010)

Many decisions discuss when arbitration is required by an agreement. This one deals with the rarer problem of what claims may be presented to arbitrators in a matter that the parties concede must be arbitrated. The Court will usually leave that decision to the arbitrators in the first instance, but will at least consider if a claim is so far outside the scope of the arbitration clause that its presentation should be barred.

Court Of Chancery Interprets Exculpation Clause In LLC Agreement

Edward M. McNally — Wed, 24 Feb 2010 13:21:46 -0500

Kelly v. Blum, C.A. 4516-VCP (February 24, 2010)

It is well known that an LLC agreement may limit the right to sue for breaches of fiduciary duty. What is less well thought out is what language needs to be used to do so. This decision tells you what to say if you want to limit liability.

Court Of Chancery Explains How To Apply For Fees

Edward M. McNally — Wed, 24 Feb 2010 13:17:29 -0500

Global Link Logistics Inc. v. Olympus Growth Fund III, L.P., C.A. 4444-VCP ( February 24, 2010)

This decision explains what should be in a fee application to the Court of Chancery. Redacted bills, explainations of what the time was for and why it was spent are all required in a contested matter.

Court Of Chancery Explains Damage Calculations In Trade Secret Litigation

Edward M. McNally — Thu, 18 Feb 2010 13:12:34 -0500

Agilent Technologies Inc. v. Kirkland, C.A. 3512-VCS ( February 18, 2010)

Calculating damages in trade secret litigation is often difficult. Lost profits may overlap with unjust enrichment claims and the whole process may be affected by possible injuntive relief. This decision explains how a court will decide the right remedy and calculate damages. It is also a particularly good example of the Court of Chancery's thoughtful approach to remedies.

Court Of Chancery Denies Power To Eliminate Board Seats

Edward M. McNally — Tue, 09 Feb 2010 13:02:23 -0500

Kurz v. Holbrook, C.A. 5019-VCL (February 9, 2010)

This significant decision holds that you cannot eliminate a director by amending the bylaws to reduce the number of seats on the board of directors. Of course, this only came up in the odd context of a stockholder who could not vote for directors and hence could not vote to eliminate them as well. Nonetheless, it is interesting as a limit on the power to amend bylaws

Perhaps more importantly, the decision explains the complicated and often misunderstood ways in which proxies are obtained to vote the shares of public companies. Those shares are mostly held in the name of Cede & Co., a depository for brokers and banks. Getting the proxy from Cede, and then to the brokers and then to the actual beneficial owners has proved cumbersome in fast proxy battles. This decision helps that process by letting the records of Cede act as a list of owners.

Court Of Chancery Holds Old Guys Do Not Rule

Edward M. McNally — Fri, 05 Feb 2010 16:16:58 -0500

Concord Steel Inc v. Wilmington Steel Processing Co. Inc., C.A. 3369-VCP (February 5, 2010)

In this decision, the Court modestly reduced an attorney fee award because too much of the legal work was done by a senior partner when a lower cost associate could have been used. While perfectly reasonable, it only shows getting old is not for sissies.

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.