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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
In addition to explaining the seldom-used doctrines of mutual, running accounts and continuing wrongs as exceptions to the running of the statute of limitations, this decision is important for its review of when a claim of breach of duty may be tolled. A plaintiff cannot simply stand by without using means available to her to monitor her investment and then claim her case was tolled. While it is still possible to show a claim was inherently unknowable or that the plaintiff justifiably relied on a fiduciary to not seek information, the more sophisticated the plaintiff the less those exceptions to the running of the statute of limitations will apply.
It is well-settled under Delaware law that in a merger a stockholder loses standing to assert a purely derivative claim. That claim passes instead to the acquiring company. As an asset of a Delaware company, derivative claims should be valued in a merger transaction. Directors of a selling company, however, who fail to value derivative claims and who also bargain for their extinguishment following the merger are at risk of being found to have breached their fiduciary duty.
The Court of Chancery's recent decision in In re Riverstone National Stockholder Litigation, C.A. No. 9796-VCG (Del. Ch. July 28), instructs that a complaint asserting that directors, who faced personal liability on known derivative claims, both attributed no value to the derivative claims and bargained in a merger transaction that the buyer would not assert them, is sufficient to avoid dismissal based on the general rule of post-merger loss of standing, if the stockholder pleads the claims as part of a direct attack on the merger. More ›
This decision applies the Corwin doctrine to dismiss a suit attacking a merger that received stockholder approval. It explains that approval by a fully-informed, uncoerced majority of disinterested and independent stockholders invokes the business judgment rule standard of review – leaving waste as the only grounds to attack the transaction. Interestingly, the decision still examined whether the plaintiffs had alleged a basis for entire fairness review. Here, those allegations concerned whether a majority of the directors were either self-interested in the transaction or were manipulated by improper conduct.
When a derivative suit is settled in connection with a merger that cashed out minority stockholders, it makes sense to have the settlement proceeds go to those stockholders in proportion to their ownership. Thus, if they owed 10% of the stock and the majority owner is the party funding a settlement, the former stockholders get 10% of a settlement. How then is the attorney fee award for creating that benefit to be calculated? This decision holds that the fee should be based on just the amount of the actual benefit received by the former stockholders.
Harrison v. Quivus System LLC, C.A. 12084-VCMR (August 5, 2016) (transcript )
This decision provides an excellent review of when the right to advancement under an LLC agreement vests so as to not be lost by the later discharge of the officer involved. Basically, when advancement is provided for upon becoming a covered person, the later discharge and suit against that person does not cause her to lose the right to have her fees advanced. Importantly, in the LLC context – where the LLC Act defers to the parties’ choices in contracting – ultimately, the contractual language will control in any given case.
Stratcap Investments Inc. v. Mears, C.A. 12548-CB (July 11, 2016)
This transcript ruling shows that the Court is not sympathetic to parties who make up excuses for violating the forum selection provisions of their contract.
This is a significant decision because it explains how filing suit somewhere other than in the contractually-designated jurisdiction does not toll the time to sue in the proper jurisdiction. Hence, if the improperly-filed suit is dismissed, it may be too late to bring suit in the proper jurisdiction.
Among the most-discussed issues in corporate law today is whether appraisal actions should be curtailed. Triggered by above-merger price awards after deals were shopped in the market, the argument is that the appraisal process is being used unfairly and sometimes ends in a home-run result for plaintiffs. In response to those concerns, Delaware recently amended its appraisal statute to address some of the perceived abuses. But, before the reformers claim success too soon, recent developments may actually increase appraisal actions. First, some background is helpful in understanding these changes. More ›
Lawyers who practice in the Delaware Court of Chancery probably can recite the shorthand rule that, for most claims, the Court of Chancery will decide whether a claim is filed too late by application of the statute of limitations by analogy. In application, however, the rule is not quite that simple, nor is it applied consistently. In Kraft v. WisdomTree Investments, C.A. No. 10816-CB (Del. Ch. Aug. 3, 2016), the Court of Chancery waded through the murk to bring some clarity to the analysis. More ›
The Court of Chancery’s highly-publicized decision in In re Trulia, Inc. Stockholders Litigation, 129 A.3d 884 (Del. Ch. 2016) (Bouchard, C.) (discussed here) took aim at the problem of disclosure-only settlements and class-wide releases in M&A litigation. Trulia announced the Court’s preferred approach for adjudicating disclosure claims – either (1) on a pre-closing preliminary injunction motion, or (2) on a mootness fee application after defendants moot plaintiffs’ claims with voluntary supplemental disclosures. Trulia also warned that parties choosing the “suboptimal” disclosure-only settlement and class-wide release path should expect the Court to be “increasingly vigilant” in assessing the reasonableness of the “give” and “get.” After Trulia, the Court will only approve disclosure-only settlements if the supplemental disclosures address a “plainly material” misrepresentation or omission and the release is “narrowly circumscribed.”
When setting forth the “plainly material” standard for disclosure-only settlements in Trulia, Chancellor Bouchard noted that disclosures need not be plainly material to support a mootness fee award. In the Chancellor’s words, awards in the mootness fee scenario “may be appropriate for supplemental disclosures of less significance than would be necessary to sustain approval of a settlement.” Id. at 898 n.46. The Court of Chancery has since adhered to this view in Louisiana Municipal Police Employees’ Retirement System v. Black, 2016 WL 790898 (Del. Ch. Feb. 19, 2016) (Noble, V.C.) (discussed here). There, then-Vice Chancellor Noble awarded a mootness fee for disclosures that were material, “if not much more than material,” noting that “Trulia does not require a ‘plainly material’ inquiry in the mootness fee award context.” Id. at *7 n.53.
No Court of Chancery opinion, however, addressed whether, post-Trulia, a disclosure must at least cross the threshold of materiality to support a mootness fee award until the recent decision in In re Xoom Corporation Stockholder Litigation, 2016 WL 4146425 (Del. Ch. Aug. 4, 2016) (Glasscock, V.C.). In Xoom, Vice Chancellor Glasscock held that the standard for disclosures on a mootness fee application is whether the disclosure was helpful and there was a benefit to the class, and not whether the disclosure was material. More ›
This decision holds that when stock issued is void, the recipient is not entitled to records inspection even if he is listed as a stockholder on the company's stock ledger.
This decision explains when a Caremark claim exists based on illegal corporate conduct. The “substantial likelihood” of liability that justifies excusing a pre-suit demand on the board must involve a knowing violation of the duty to follow the law. That occurred in the well-known Massey and Pyott cases. Here, however, the best the plaintiff could allege is that the board should have known its company was violating the antitrust laws and the Court held that was not good enough to excuse demand. The key is that the record showed the board was advised that the conduct involved was legal. This highlights that the “should have known better” argument is not going to work in almost all cases when the board has advice it has not crossed the line into illegal conduct.
With the rise of appraisal arbitrage, an increasing number of appraisal petitions and an increase in the size of appraisal classes, corporate practitioners have closely followed recent appraisal decisions in the Delaware Court of Chancery. In cases involving third-party arm's-length transactions and robust bidding, several more recent decisions established a level of predictability to the valuation analysis, looking to the negotiated merger price as the best evidence of the fair value that appraisal claimants are entitled to receive. In those cases the court rejected expert valuations of higher or lower amounts based on discounted cash flow and other expert financial analyses. The Court of Chancery's recent decision in In re Appraisal of DFC Global, C.A. No. 10107-CB (July 8), will likely create new uncertainty about the reliability of the market to establish fair value in an appraisal. More ›
There is often some confusion over how the Court of Chancery will determine when a plaintiff has filed its action too late. A statute of limitations may apply directly or the doctrine of laches may apply and then apply the same statute by analogy. Through a careful historical analysis, the Chancellor explains how to decide, while also noting some tension in the case law. The answer, whether statute or laches, controls what arguments are available to the dilatory plaintiff.
Court Of Chancery Reviews Corporate Opportunity Doctrine Where Derivative Claim Eliminated By Merger
This is an excellent explanation of the corporate opportunity doctrine’s four elements, under which directors may be liable for taking a business opportunity that: (1) the corporation is financially able to take for itself; (2) is within its line of business; (3) would have been of interest to the corporation; and (4) presents a conflict of interest to the directors. More ›