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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
This decision explains what “costs” are recoverable under Court of Chancery Rule 54 following a successful appeal. While the amounts involved normally do not merit much discussion, the cost of bond for an appeal can be significant when the court below awards a large judgment, like in this case. As this decision points out, the circumstances surrounding the posting of the bond may determine whether or not it was a “necessary” and therefore recoverable cost.
On the same day the Delaware Supreme Court affirmed the widely-reported TransPerfect decision, which ordered the sale of a successful company by custodian under Section 226 of the DGCL in order to break deadlock, the Court of Chancery issued this decision appointing a custodian of a Delaware corporation with limited powers to break a deadlock. The decision carefully explains the reason why a custodian should be appointed and why the custodian’s powers should be limited. In that sense, this is a “normal” custodian case not involving the very unusual circumstances the Court of Chancery had to deal with in TransPerfect.
Distributing the proceeds from a class action settlement is not as easy as you might think. Tracing ownership is complicated by the use of various intermediaries such as Cede & Co. This decision explains why that is so and provides a solution to the problem.
The Supreme Court affirmed perhaps the largest award of attorney fees as a sanction for bad conduct in Delaware’s history in this very unusual decision. It is a good summary of when a Court may depart from the “American Rule.”
The Supreme Court has affirmed the Court of Chancery decision that Section 226 of the DGCL permits the Court to appoint a custodian to sell a Delaware corporation when the board of directors and stockholders are deadlocked and the company is suffering as a result.
The Delaware Supreme Court's decision in Corwin v. KKR Financial Holdings , 125 A.3d 304 (Del. 2015), reaffirmed the power of fully-informed, uncoerced, disinterested stockholder approval to immunize M&A transactions against stockholder challenge. Under Corwin, where a noncontrolling stockholder transaction "has been approved by a fully informed, uncoerced majority of the disinterested stockholders," the business judgment rule applies irrebuttably, leaving plaintiffs with a claim for waste. Since waste requires stockholder approval of an irrational deal, a Corwin-qualifying vote will likely result in dismissal. Corwin therefore sets a high bar for plaintiffs in post-closing fiduciary duty claims challenging M&A transactions. More ›
This decision explains how a provision in an LLC agreement waiving fiduciary duties is to be applied in the context of conflicted transactions. It is a good summary of Delaware law on that issue.
It also has an instructive summary of the law governing contract interpretation, albeit under New York law.
What will the Court of Chancery do when a Petitioner's attorney alters his records to increase the fees sought in an advancement or indemnification case? Here at least the Court disallows the altered fees, rather than barring the entire request.
As this decision explains, the Court of Chancery will not have jurisdiction based on the claim an injunction is needed to force a defendant to comply with the proper interpretation of a contract. Rather, the presumption is that once the Superior Court interprets the contract that the defendant will honor that judgment.
Court Of Chancery Holds That Wrong Forward Looking Statement Insufficient To Support Records Inspection
It is not enough that certain forward-looking statements failed to come true to justify requiring an inspection of corporate records. More evidence of wrongdoing is needed if your inspection is based on a theory of mismanagement.
Under the Corwin doctrine, approval by a majority of the fully-informed, uncoerced, disinterested stockholders invokes the business judgment rule so long as the transaction does not involve a controlling stockholder extracting personal benefits. This decision explains that law very well. More interestingly, however, the decision also applies Corwin to a complaint alleging a violation of the duty of care. That is unusual because almost all Delaware corporations have a duty of care exculpation clause in their charters and the result is that post-closing damages cases against directors usually focus on alleging a violation of the duty of loyalty. Why that should make a difference under Corwin is not clear but at least this decision seems to settle the issue and Corwin applies to duty of care claims as well.
This is an excellent review of when a signatory to a contract might be personally liable notwithstanding that he claims to have only signed in a representative capacity. Hint: contractual references to the signatory separate and apart from the entity for which he is signing may create an ambiguity that prevents dismissal. It also has a good discussion on the limits of immunity for court-appointed receivers.
This is an important insurance coverage decision. It upholds the claim of an insurer to bring a coverage suit to determine that a fraud exclusion applies to bar coverage on an underlying litigation that asserted a claim for fraud. This is important because fraud exclusions often depend on a finding in a final judgment of fraud by the insured in the underlying litigation. An insured may try to avoid such a judgment by settling and then asking the insurer to pay the settlement. See e.g. the decision in Arch Insurance Company v. Murdock, Del. Super. C.A. N16C-01-104 EMD (December 21, 2016), denying the use of a fraud exclusion when the underlying case was settled.
The Delaware courts have been critical of litigants who bring derivative claims without first seeking books and records. The absence of such records often makes it difficult to overcome the business judgment rule which prevents a stockholder from bringing derivative claims directly without first making a demand on the board of directors. Stockholders cannot so proceed unless they can show that a majority of directors at the time of the demand was not independent or disinterested or that the decision was not the result of a proper exercise of business judgment. The standard is even more difficult if a stockholder makes a demand which the board refuses and then seeks to proceed with litigation by claiming that the board wrongfully refused the demand. The Delaware Court of Chancery's recent decision in Andersen v. Mattel, C.A. No. 11816-VCMR (Jan. 19), illustrates the difficult burden a plaintiff bears in alleging wrongful refusal, particularly when he fails to use the tools at hand to obtain relevant books and records. More ›
Delaware Supreme Court Signals Due Process Might Prevent Dismissal Based On Demand Futility Issue Preclusion
When a derivative suit is dismissed for the failure to plead demand futility, does that also mean that any other pending derivative suit based on the same facts must be dismissed because the shareholders are precluded from relitigating the issue of demand futility? This is a particularly important question because the Delaware Court of Chancery has held that that issue preclusion applies and dismissal is required. Hence, defense counsel may well seek to obtain a fast dismissal in a favorable jurisdiction when the plaintiffs’ bar rashly files suit outside of Delaware. This Order by the Delaware Supreme Court, which remands such a dismissal for consideration of a Due Process argument, signals that issue preclusion might be inappropriate at the motion to dismiss stage under the circumstances.