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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Morris James attorneys Lewis Lazarus, Albert Manwaring and Albert Carroll authored an article published in Transaction Advisors titled Delaware Corporate and Commercial Case Law Year in Review – 2016. The article summarizes ten significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past year, including matters such as disclosure-only settlements, appraisal rights, books and records inspections, and the standards of review in shareholder litigation. Continue reading for the full article. More ›
Under the Delaware Limited Liability Company Act, a non-Delaware resident may be deemed to have consented to being sued in Delaware if she is a “manager” of the LLC. But who, exactly, is such a manager? That question is answered by the recent decision in In re Dissolution of Arctic Ease, C.A. No. 8932-VCMR (Del. Ch. Dec. 9, 2016). As that decision points out, all who manage are not “managers” under the Delaware LLC Act. More ›
It is well understood that minority stockholders have limited rights to object to a short-form merger under Delaware law. This decision affirms that minority stockholders cannot challenge the merger on fairness grounds alone, but must seek appraisal as the remedy for an inadequate price. However, since the stockholders are faced with the decision of whether to accept the deal price or seek appraisal, the duty of disclosure still applies. This decision is helpful for its in-depth analysis of the many disclosure allegations.
The well-known Corwin decision requires that the Court of Chancery apply the deferential business judgment rule to attacks on a merger approved by a majority of the disinterested stockholders who had all the material information. The current plaintiff strategy is to plead that the stockholders were not fully informed such that the vote should not have a cleansing effect. Most notably, this decision addresses who has the burdens of pleading and proof regarding the sufficiency of the disclosures for a Corwin defense. As the Court explains, the plaintiff must first sufficiently plead one or more disclosure violations, and only then will the burden shift to the defendants to show that the stockholders were fully informed. The decision also explains that Corwin did not change the disclosure standard—directors are only obligated to disclose material information to satisfy Corwin.
This decision explains the extent of an attorney fee lien in Delaware. The lien extends to the entire fee when the fee is based on hourly rates, regardless of whether all the time spent was necessary for the recovery. In other words, the lien is for unsuccessful efforts as well as those that resulted in the actual recovery.
Morris James LLP is pleased to announce that Patricia A. Winston and James J. Gallagher, II have been elected partners effective January 1, 2017. More ›
This is an important decision because it limits the use of the typical fraud exclusion in a D&O policy to avoid liability to the insured. The insured David Murdoch was found to have breached his fiduciary duty to Dole Foods resulting in a damage opinion awarding over $148,000,000. He soon settled the case by paying the damages and the suit was dismissed prior to the entry of a final judgment. He then sought to be reimbursed by the Dole D&O carriers. The insurers defended on the basis that the policy excluded coverage for litigation over a director’s personal gains obtained by fraud. However, the policy also required that the adjudication of wrongful conduct be reflected in a final judgment. The court held that even though there was a Court of Chancery opinion finding Murdock liable there was no final judgment and thus the exclusion for fraud did not apply. Further, the Court held that the insurers could not be subrogated in a suit against Murdock. While the case is not yet over, this result is probably upsetting to most insurers who do not expect to have to cover their insured’s frauds. But as the Superior Court correctly pointed out, there is precedent for this result. Hence, it can be said the insurers were on notice this might occur. Of course, the answer to this problem is to change the policy wording to not require a final adjudication when a case is settled.
After the enactment of Section 109(b) of the Delaware General Corporation Law, one would have thought that fee-shifting bylaws were invalid. However, this decision deals with another attempt to shift fees, this time when a stockholder violates the company’s exclusive forum bylaw. Nice try, but the Court holds the bylaw is invalid.
The derivative complaint alleged that Zynga's CEO, Chairman and controlling stockholder Mark Pincus, along with certain other top managers and directors were given an exception from the company's standing rule preventing insider sales until three days after an earnings announcement. The exception permitted the insiders to sell 20.3 million shares of stock for $236 million as part of a secondary offering. The insiders sold their shares for $12/share. Following the earnings announcement the market price dropped to $8.52 and following more negative news three months later dropped to $3.18, a 75 percent decrease from the offering price. The complaint alleged wrongdoing by the directors who approved the exception and those who participated in the sales. Of the company's nine directors, the Court of Chancery found that only the two directors who participated in the sale, Pincus & Hoffman, were interested and therefore could not impartially consider a demand. The Chancery Court rejected the argument that the facts alleged in the complaint were sufficient to create a reasonable doubt about the independence of director Siminoff because of an allegation that she was a "close family friend" of Pincus and had a business relationship with Pincus as co-owners of a private plane. The Chancery Court also rejected the argument that directors Doerr and Gordon lacked independence because of investment relationships they had with Zynga and Hoffman and Pincus. More ›
Buyers unhappy with the performance of a company or assets purchased frequently assert claims that the seller fraudulently induced the purchase by providing false information of the value of the company or assets in the sale process.
The Delaware Court of Chancery has often addressed whether the language in a disclaimer of extra-contractual representations in a purchase agreement is sufficient to shield a seller from liability for fraud. In these decisions, the court has provided guidance for the language in disclaimers or anti-reliance clauses necessary to avoid claims of fraud based on extra-contractual representations.
To start in Abry Partners V. v. F&W Acquisition, 891 A.2d 1032, 1059 (Del. Ch. 2006), the court ruled that a standard integration clause, barring contract claims based on prior written agreements, and prior or contemporaneous oral agreements, but without explicit anti-reliance language disclaiming reliance on extra-contractual representations, will not shield the seller from liability for fraud.
Further, in FdG Logistics v. A&R Holdings, 131 A.3d 842, 860 (Del. Ch. 2016), the court ruled that a disclaimer must come from the aggrieved party, meaning the buyer who asserts the fraud. Thus, a seller's disclaimer of what it did or did not represent is insufficient by itself to bar a fraud claim based on extra-contractual representations. Lastly, in Praire Capital v. Double E Holding, 132 A.3d 35, 51 (Del. Ch. 2015), the court ruled that to disclaim reliance does not require any "magic words," or even that a disclaimer or anti-reliance clause be styled negatively to deny reliance on extra-contractual representations. More ›
This is another decision in the continuing development of Delaware law on how to determine the acquired company’s fair value in an appraisal action. The decision carefully reviews the more recent opinions on whether the merger price constitutes fair value, concluding that, in this case, it did. Factors considered in weighing the use of the merger price included: meaningful competition during the pre-signing phase, that adequate and reliable information was provided to all parties during the pre-signing phase, and the lack of collusion or unjustified favoritism towards particular bidders. In addition, because fair value is determined at closing, evidence from the post-signing period may also be relevant, such as the absence of a topping bid, and the company’s post-signing performance. The decision is also useful for seeing how the Court will work carefully through the parties’ competing expert reports.
Just in time for Christmas, on December 20, 2016, the Delaware Supreme Court issued a Christmas present – or lump of coal, depending on your view – in its opinion in El Paso Pipeline GP Company LLC v. Brinckerhoff. In this opinion, the Supreme Court reversed the Court of Chancery’s opinion holding that claims of a limited partner challenging a drop down transaction between the general partner’s parent and the partnership as a breach of the limited partnership agreement were direct, and therefore survived the merger of the limited partnership after trial with a third party. The Court of Chancery had awarded $171 million in damages for the breach. The general partner had argued that the merger extinguished the limited partners’ claims. More ›
Partner Charles H. Toliver, IV Receives the Delaware State Bar Association Outstanding Service to the Courts Award
The Delaware State Bar Association has selected Morris James LLP partner Charles H. Toliver, IV as the 2016 recipient of the Award for Outstanding Service to the Courts and the Bar. Established in 1999, the award is presented to a Delaware attorney or judge who has substantially assisted the Courts and the Bar and has strengthened public trust and confidence in the courts in the state of Delaware and the administration of justice. More ›
Parties typically seek to narrow the scope of potentially responsive documents by meeting and conferring and reaching agreement on appropriate search terms. The parties next run those search terms against the data collected from the relevant custodians and review the resulting information for responsiveness. This method of identifying responsive electronic data has more or less become the norm in cases involving large data collection efforts. Occasionally, however, search terms miss the mark and fail to capture the information the opposing party is entitled to receive. The Delaware Court of Chancery recently addressed this and other related issues in deciding motions to compel filed by the defendant in BTG International v. Wellstat Therapeutics, No. 12562-VCL (Oct. 4). More ›
Partner P. Clarkson Collins, Jr. Receives the Delaware State Bar Association Daniel L. Herrmann Professional Conduct Award
The Delaware State Bar Association has selected Morris James LLP partner P. Clarkson Collins, Jr. as the 2016 recipient of the Daniel L. Herrmann Professional Conduct Award. The award is presented to a member of the Delaware Bar who has demonstrated those qualities of courtesy and civility which, together with high ability and distinguished service, exemplifies the Delaware lawyer. More ›