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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
This decision does a good job of explaining when there is an adequate showing of possible wrongdoing sufficient to justify a books and records inspection. It also explains why conducting a proxy contest does not warrant denying inspection.
This decision holds that a creditor lacks standing to bring breach of fiduciary duty claims arising out of the management of an LLC. Of course, creditors are better served by drafting the loan documents to protect their rights.
In its now famous Corwin decision the Delaware Supreme Court held that when a majority of the stockholders in a fully informed, noncoercive vote approve a transaction, the business judgment rule applies and the transaction is virtually immune from attack. However, plaintiffs continue to argue that Corwin did not hold that the stockholder approval precluded a claim based on a Unocal theory that by virtue of excessive deal protection devices the vote was coercive. Such a claim had been upheld in the older Santa Fe case and Corwin expressly declined to overrule Santa Fe. This decision notes that the status of Santa Fe may be unclear, but then goes on to hold that the agreements alleged to be preclusive deal protection devices do not violate Unocal even if it were applicable. More ›
This decision is a primer on most of the major issues in Delaware corporate law. However, what it is most likely to be remembered for is its explanation of the duties that directors have to the enterprise as a whole, even when they are elected by or beholden to preferred stockholders. Thus, it has big implications for venture capital investors. Briefly, the decision holds that it may be a breach of the directors’ fiduciary duty to cause the corporation to sell off parts of its business to satisfy a liquidation preference of its preferred stockholders. More ›
It matters whether a claim may be characterized as a direct claim belonging to the owners of an entity or as a derivative claim that may only be brought in the name of the entity. This decision explains which is which in the context of a limited partnership.
Under the well-known Brinckerhoff decision, a claim may be both a direct claim and a derivative claim. When that occurs the complaint need not comply with Rule 32.1 demand requirements. This decision points out that Brinckerhoff is very limited and only claims that involve a dilution of voting rights may be considered dual claims.
Investment bankers play a central role in the exploration, evaluation, selection and implementation of strategic alternatives for Delaware companies. To enable stockholders to carefully assess how much weight to give an investment banker's analysis of a proposed strategic transaction, Delaware law requires full disclosure of a banker's compensation or financial interest, and other potential banker conflicts of interest in connection with the transaction. If the banker's financial interest in the proposed transaction is "material" and "quantifiable," full disclosure of the financial interest to stockholders is required under Delaware law. To obtain meaningful relief for the benefit of stockholders, the Delaware Court of Chancery has indicated its strong preference for plaintiffs to assert claims to correct disclosures to stockholders in advance of the stockholder vote on the proposed transaction. More ›
Stockholder approval of an equity compensation plan may or may not constitute ratification over awards to the directors under the plan. When it does, the Court of Chancery will review challenges under the business judgment rule. There are Delaware decisions coming out both ways on the issue of ratification. As this decision illustrates, whether or not ratification applies depends on how specific the plan is that the stockholders approved (and whether the vote was informed and uncoerced). When it comes to the level of specificity required in the plan, generally speaking, a plan that sets specific and meaningful limits on the grants could constitute ratification of grants within those limits. This decision, where the Court applied ratification, provides guidance on just how specific the plan must be.
Litigation involving Delaware corporate law is undergoing major changes. Some commentators predict that Delaware will cease to be the favored forum for M&A litigation. While we disagree with that forecast, it is important to understand what is going on and how those changes may affect future litigation. There are two major evolutions and one more minor development that are worth considering. More ›
Contract interpretation is a staple of litigation in the Delaware Court of Chancery. Disputes over the meaning of commercial contracts, foundational documents such as certificates of incorporation or bylaws or agreements governing alternative entities such as limited liability companies or limited partnerships require the court to interpret language in contracts. More ›
This is a significant decision because it is the first to find that a stockholder vote did not invoke business judgment review under Corwin because the vote was coerced and not fully informed. Under Corwin, a transaction approved by a majority of the disinterested stockholders in an informed, uncoerced vote is subject to business judgment rule protection. A Corwin-qualifying vote practically means an early dismissal. Thus, the key question on a motion to dismiss under Corwin is whether the stockholder vote was both informed and uncoerced. More ›
Persuaded by the arguments of the appellant noteholders, the Delaware Supreme Court ruled that two fee-shifting provisions in the promissory notes entitled them to recover attorney fees the noteholders incurred filing suit to secure warrants issuable under the notes. Relying on an exception to the American rule permitting fee-shifting where a contract so provides, the Supreme Court in Washington v. Preferred Communications Systems, No. 436, 2016 (Del. Supr. Feb. 27), ruled that the amended notes unambiguously provided fee-shifting in this case. It rejected the company's argument that under the relevant contractual provisions the warrants did not constitute "any indebtedness" and that the noteholders action to recover them did not amount to a collection action after default. Having found a clear basis in the contract to support its fee award, the Supreme Court declined the opportunity to broaden its ruling and have Delaware address an emerging trend in other states to treat a one-sided fee provision as a mutual fee-shifting provision. More ›
This is an interesting decision because it applies the rules for determining when a derivative plaintiff, in the LLC context, has sufficiently alleged that pre-suit demand on the board would have been futile. More ›
This is an interesting decision even if only because it is so well written and deals with an unusual family corporation. Its legal significance is that it explains that a vote taken in violation of a bylaw requiring notice is void, rather than voidable, where equitable defenses could apply. The distinction between a void and voidable failure to give proper notice has not always been clear, but Vice Chancellor Laster attempted to reconcile prior cases in the Klaassen decision, and Vice Chancellor Montgomery-Reeves signs onto his approach in this case.
A board must disclose all information material to the stockholder vote for a transaction. Moreover, disclosures may be inadequate when they are buried in various places in a lengthy proxy statement. One piece of material information is conflicts involving the board’s advisors. The Court of Chancery is prepared to preliminary enjoin a transaction where the proxy omits or fails to sufficiently disclose material details concerning, for instance, a banker’s conflict. For example, the inadequately disclosed conflict warranting an injunction in this case involved the fees the buy-side banker expected to receive for its participation in debt financing for the deal.