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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Showing 11 posts from September 2013.

Supreme Court Reaffirms Fraud Exception's Narrow Scope

Posted In Case Summaries

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | September 25, 2013
  

Delaware law has long required that a stockholder own shares on the date of an alleged wrongful act of which he or she complains and continue to own shares during the course of a derivative action. The principles of contemporaneous ownership and continuous ownership lead to the well-settled rule that a merger in which a stockholder's shares are extinguished results in that stockholder losing standing to pursue the derivative claim, as seen in Lewis v. Anderson, 477 A.2d 1040 (Del. 1984). This is the case because a derivative plaintiff cannot satisfy the continuous-ownership requirement following such a merger. The derivative claim instead is transferred to the acquiring corporation, which can choose to dismiss the action. An exception exists where the merger was accomplished "merely" to destroy derivative standing. The so-called fraud exception to the Anderson rule is narrow, as the Delaware Supreme Court reaffirmed in Arkansas Teacher Retirement System v. Countrywide Financial, No. 14, 2013 (Del. Sept. 10, 2013) (en banc). This clear reaffirmance eliminates any argument that the Delaware Supreme Court's dictum in a prior decision involving the same merger transaction was intended to broaden or change the scope of the fraud exception to the Anderson rule.

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Court Of Chancery Permits Creeping Takeover

Posted In Fiduciary Duty

In re Sirius XM Shareholder Litigation, C.A. 7800-CS (September 27, 2013)

This is an interesting decision because it discusses the duties, or lack thereof, a large stockholder who is buying more stock on the open market to take control.  Here the stockholder had a contract that it entered into when it loaned a lot of money to the company that limited the company's ability to adopt a poison pill or otherwise prevent such stock purchases.  Yet even absent that contract, the court indicated that there is no fiduciary duty to offer a "fair" price when buying stock on the open market and no duty of a board to act to prevent those purchases.

Court Of Chancery Declines To Order Election

Canmore Consultants Ltd. v. L.O.M. Medical International Inc., C.A. 8645-VCG (September 19, 2013)

This is the first decision under  Section 223(c) of the DGCL to decide whether to order an election to fill the vacancies on a board that has less than a quorum of directors in office.  The Court held that the stockholders had the burden to show an election was appropriate and that due to the company's precarious finances, it was best not to hold the election but let the incumbent board members fill the vacancies.

Court Of Chancery Refuses Temporal Limit On Waiver Of Privilege

Posted In Discovery

Mennen v. Wilmington Trust Company, C.A. 8432-ML (September 18, 2013)

If it is upheld upon review, this decision by a Master in Chancery needs to be studied by all practitioners.  Briefly, it holds that when a party waives the attorney-client privilege, it does so with respect to the entire subject matter of the communication involved in the waiver.  There is no temporal limit such that later communications on the same subject matter may be protected from discovery.

Court Of Chancery Explains When To Award Fees For Litigation Misconduct

ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member LLC, C.A.5843-VCL (September 16, 2013)

When does a litigant"s conduct before or after the litigation is filed justify fee shifting? This careful decision answers that question.

To begin with, mere silence about a drafting error during contract negotiations is not the sort of fraud that warrants fee shifting.

As to post litigation fee shifting, needlessly increasing the costs as a leverage technique does warrant fee shifting. The decision also gives a litany of other examples that is a useful guide.

Court Of Chancery Orders New Arbitrator

Posted In Arbitration

Lynn v. Ullrich, C.A. 7098-ML-VCN (September 12, 2013)

This decision ordered the parties to pick a new arbitrator when the prior arbitrator concluded he was biased.  Why anyone would argue this seems odd.

Supreme Court Explains Merger Effect On Derivative Claims

Arkansas Teacher Retirement System v. Countrywide Financial Corp, No. 14, 2013 (September 10, 2013)

When does a derivative suit survive a merger?  This decision says "not very often."   There seems to be two rules at play here. First, when the merger's sole purpose is to eliminate the standing of the derivative plaintiff, then the derivative suit may continue.  Second, the merger may be attacked when it is an "inseparable" part of a fraud alleged as part of a direct pre-merger suit.  Note the word "direct."  A direct claim is not a derivative claim, but instead alleges wrongs for which the plaintiff may recover for herself.  Hence, even if the merger is cast as part of some fraud inseparable from pre-merger acts, a derivative suit will not survive the merger just for that reason.

Court Of Chancery Enforces Indemnification Rights Under LLC Agreement

Posted In LLC Agreements

Costantini v. Swiss Farm Story Acquisition LLC, C.A. 8613-VCG (September 5, 2013)

This decision holds that language in an LLC agreement that mirrors the indemnification language of the Delaware Corporation law will be interpreted the same way to mandate indemnification to a prevailing manager.

Court Of Chancery Permits Employee Email Inspection

Posted In Discovery

In re Information Management Services Inc. Derivative Litigation, C.A. 8168-VCL (September 5, 2013)

This decision holds that an employee's email communications with his attorneys are not privileged. The holding is limited to circumstances where the employer has at least told the employees not to expect that their email is private.  Furthermore, the Court notes that this decision may not be followed in the typical derivative case where an outsider is trying to gain access to those emails.  That decision will need to wait for another day.

Superior Court Explains Non-Reliance Law

Alltrista Plastics LLC. v. Rockline Industries, Inc., C.A. N 12C-09-094 JTV (September 4, 2013)

This is an excellent summary of what language is needed to prevent a claim based on reliance on representations outside the terms of the actual contract.  The language must clearly refer to the intention of the parties to bar such claims.

Are Preferred Stockholders Second-Class Citizens?

Posted In Case Summaries

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | September 4, 2013  

A recent decision of the Delaware Court of Chancery significantly affects the ability of preferred stockholders to cash out their investment in a Delaware corporation. Preferred stockholders need to take notice if they are to realize their investment expectations. The decision in In re Trados Shareholder Litigation, C.A. 1512-VCL (Del. Ch. Aug. 16, 2013), holds that directors elected by the preferred stockholders must protect the interests of the common stock or face potential liability if they favor the interests of the preferred stockholders. More ›