About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Appraisal litigation has been a topic at the forefront of the minds of many legal practitioners over the past few years. Recently, amendments to Section 262 of Delaware's General Corporation Law went into effect that were effectuated to eliminate de minimis appraisal claims while also allowing companies to make a pre-judgment payment to dissenting stockholders to reduce interest costs in connection with appraisal litigation. The Delaware Court of Chancery authored several opinions concerning appraisal arbitrage and the technical requirements of Section 262. There have even been unique appraisal cases where the court discussed the circumstances surrounding the proposed settlement of only factions of the appraisal class. More ›
Plaintiffs’ attorneys in representative litigation may obtain awards of fees and expenses when their efforts prove successful and provide benefits to the represented class. This decision explains how the Court of Chancery will calculate a fee award in an appraisal case based on the benefit conferred to the dissenting stockholders; here, a $21 million bump in the consideration. The decision addresses several important issues, including when expenses should be deducted from the benefit conferred before calculating the fees. Indicative of this litigation’s complexity, the expert witness fees alone were over $3.3 million. The decision will serve as a useful guide to any future fee awards in the growing field of appraisal cases.
Directors may face liability for a failure of oversight that caused the company to suffer a loss, often involving fines imposed by various authorities. Claims alleging this oversight liability under Delaware law are governed by the famous Caremark standard. A considerable hurdle for the plaintiff is the Caremark standard’s sometimes overlooked scienter requirement—the need to show bad faith, meaning that the directors knew that they were not discharging their fiduciary obligations. This decision carefully analyzes a complaint’s allegations and the Caremark precedent to conclude the complaint should be dismissed for failure to meet that test.
Under the recent Corwin decision, a fully-informed vote by uncoerced and disinterested stockholders to approve a merger invokes the business judgment rule and effectively precludes almost any claim the merger was improper. This decision does a very good job of explaining when proxy disclosures are adequate to invoke Corwin. Here, the alleged disclosure violations concerned (i) information regarding a competing bid, (ii) potential conflicts involving one director, and (iii) the banker’s compensation and potential conflicts.
The issuance of additional stock in exchange for less than fair value typically is a harm falling on the company, and hence gives rise to a derivative claim. But, such a claim might be dual natured – partially direct and partially derivative – when a controlling stockholder has been benefited, or where the board is not independent. The question for dual-natured claims is whether they remain subject to the usual Rule 23.1 test for derivative claims: is pre-suit demand on the board excused? Here, Vice Chancellor Montgomery-Reeves adopts the view endorsed by Vice Chancellor Laster in In re El Paso Pipeline Partners, L.P. Derivative Litigation, 132 A.3d 67, 75, 105 (Del. Ch. 2015), and applies the Rule 23.1 test to dual-natured corporate overpayment claims. Had the issue been whether the claims were extinguished by a merger, then the Court would have focused on the direct nature of the claims for standing purposes.
A merger approved in accordance with the criteria set out in the M&F Worldwide decision is subject to the business judgment standard of review, and vulnerable to attack only if its terms are so extreme as to constitute waste. This decision does a good job of explaining how the M&F Worldwide criteria are to be applied to a given set of facts at the motion to dismiss stage.
Contract and fiduciary duty law intersect when how a board acts, including the vote required, is affected by a shareholder agreement. Such agreements are common to enable investors to protect their investment, either through negotiated buybacks or issuance of additional shares upon certain milestones, through board seats or through super-majority vote requirements where the investment, while substantial, does not result in majority control. When a dispute arises over the effect of a shareholder agreement on a board vote a Delaware court will apply traditional principles of contract interpretation to ascertain and enforce the parties' intent. The language the parties use to reflect their agreement at the time of the investment will determine the outcome of the dispute when it arises long after, such as when the board acts to dissolve the entity. The Delaware Court of Chancery's well-reasoned decision in The Huff Energy Fund v. Gershen, C.A. No. 11116-VCS (Del. Ch. Sept. 29), illustrates the care by which a Delaware court will examine the potential contractual and fiduciary duties at issue when a board adopts a plan of dissolution following a sale of a significant portion of its assets. More ›
The backdrop to this decision is an interesting and unfortunate one involving a divorce, allegations of illegal obscene material possessed by the former husband, followed by a civil lawsuit between the former spouses after the former husband was acquitted. Under the facts of this case, the Court finds the homeowner insurance provider has a duty to defend the former wife given the allegations of intentional and negligent conduct in her providing a harddrive and statements to the authorities about her former husband, which allegedly led to his physical injury.
Delaware District Court Finds That Controlling Stockholder Claim Falls Outside Of Forum Selection Bylaw
Forum selection bylaws are a powerful tool for companies to avoid the burdens of multi-forum litigation. But those bylaws only cover the claims falling within their terms. Where, as here, the bylaw only covers fiduciary duty claims against officers and directors, the bylaw will not be enforced for a fiduciary duty claim against a controlling stockholder.
Revenue projections are an inexact science, but they should have some basis in fact. Where they are alleged to be without a basis in reality, and indeed contrary to reality, a court may, as here, find that an officer’s fiduciary duties are implicated.
This decision holds that Revlon duties are not implicated by a decision to liquidate a company. Hence, the Court will not scrutinize whether the board sought to get the best possible deal for company assets. The decision is also helpful in reminding us that a stockholders’ agreement is not necessarily binding on the company’s board of directors who have not signed the agreement in their personal capacity.
It may surprise many of us to know that a party who does not sign a general release may still be bound by its terms. Yet, that is what this decision holds under this case’s facts, which involved New York law and a release signed by the non-signatory’s affiliates. When the release binds those for whom the releasing party is authorized to act, carve out for those other parties is needed to avoid this result.
Jiampietro v. The Goldman Sachs Group Inc., C.A. 12601-VCL (Transcript, August 11, 2016)
Many employment agreements require that any dispute be arbitrated. But when the dispute is over the employee’s right to indemnification under bylaws or statute, then the arbitration clause better expressly cover that claimed right or otherwise the non-contractual right remains for a court to decide.
Delaware recently amended Section 111 of the DGCL to confer jurisdiction on the Court of Chancery over certain actions arising out of asset sales. The intent was not to divest Superior Court of jurisdiction when the dispute was not really over how to interpret a sale or merger agreement’s terms, an area of Chancery expertise, but more of a straightforward asset sale. This decision explains that distinction.
Now that disclosure-only settlements seem almost a thing of the past, so-called “mootness” fee awards or settlements may become more common. These occur when the corporation moots the claim by doing what the plaintiff says should be done, such as removing an invalid bylaw that tries to shift attorney fees. However, attorney fees for such cases may not be as large as some might expect. This decision shows how the fee applications will be considered, with particular stress on the benefit resulting from the litigation.