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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
This interesting decision both explains the conspiracy theory of jurisdiction and upholds an equitable contribution claim by the company required to advance fees to a director to have the director’s companies contribute toward those fees. This occurs when the second company has benefited by the conduct of the director acting for it.
This decision explains that an advancement agreement that covers a former director for claims “related to the fact” he was a director has the same meaning as the more typical provision providing for advancement for claim arising “by reason of the fact” he was a director. More ›
This is an interesting decision for the way it treats a fee request in connection with the settlement of Delaware litigation. More ›
In what the Court itself characterized as an unusual case, the Supreme Court denied a fee to the lawyers for a plaintiff who won a small victory for their plaintiff stockholder. Unfortunately for the lawyers, their client sold his holdings and thereby lost any standing to pursue the case, making it moot. The Court held that when it is the plaintiff who moots his own case, the lawyers do not get a fee even for success. Of course, the facts are truly odd in that the plaintiff victory was indeed very small and he lost most of the rest of his claims as well. But the point remains that if your client bails out on you, the fee you want may not be what you get.
Often corporate bylaws or charters provide for advancement of attorney fees to directors and officers for acts taken in connection with "their duties to the company or by reason of their service as an officer or director." Then when it comes time to pay up to former officials, the company tries to avoid its obligation by arguing the underlying litigation involved an employment contract and is not "in connection with" or by reason of performing their official duties. This decision by a Master in Chancery reviews the case law and explains why that defense usually does not work.
This decision explains two aspects of advancement law that may be troubling to some. First, it explains when fees may be recovered for asserting a counterclaim. In general, the rule is that fees may be won for a compulsory counterclaim that may also diminish the recovery of the original plaintiff. Second, the opinion explains again how to treat the difficulty in assessing how much may be recovered in an advancement suit when the underlying litigation is on-going, including the fees-for-fees and interest issues.
This decision upholds a bylaw that requires the payment of attorneys' fees by a plaintiff stockholder or member in a non-stock corporation who sues a corporation or its directors and loses. The decision is limited to just the bare legal question presented and is careful to note that a bylaw adopted for an inequitable purpose may still be declared invalid. Nonetheless, it is not hard to predict that a host of similar bylaws will now be adopted by Delaware corporations. This decision is another in the line of decisions upholding bylaws that affect litigation, such as the forum selection bylaw also just upheld. How far this will go remains to be seen.
This is another case where a company tries to avoid its advancement obligation by arguing that the conduct in question did not arise out of the former officer's official duties, but instead arose under an employment or similar contract. That distinction just does not work and it did not work here. The decision is also interesting because it points out that advancement rights in an LLC are not limited by the statutory language of Section 145 of the DGCL dealing with actions in "defense."
This decision explains how to calculate an attorney fee when there are 2 potential causes for a favorable settlement of a class action. The fee is divided based on the Court's views as to what is fair. A class member who hires its own attorney who is a cause of much of the recovery is not for that reason alone able to avoid a fee award to class counsel.
Too often corporate documents refer to "indemnification" when they really mean "advancement." Here the Court was required to interpret an agreement that really called for advancing attorney fees but did not use the word "advancement." Hence, even if the right terminology is not used it still may be possible to win advancement.
This ruling illustrates an often overlooked point that the decision to advance attorneys' fees may constitute a self-dealing transaction when the party getting advancement is the party voting to do so. Hence, absent a proper basis, advancement is improper under those circumstances. Of course, when advancement is required by the bylaws, then it is required and acceptable even if the decision is made by the same parties whose fees are to be paid.
This is an interesting decision because it awards fees for some complicated non-monetary benefits the plaintiffs' counsel claimed to have achieved. How the Court analyzed the benefits is a guide to how it will do so in the future when the benefits go beyond mere additional disclosures.
In general, a successor entity is not liable for its predecessor's obligations when there has been a fundamental change in the identity of the entity. Here, the Court held that the conversion of a corporation into an LLC did not make the LLC obligated to advance attorney fees for claims that arose out of actions taken while a director of the predecessor corporation. The decision turned on the terms of the LLC's advancement provisions in its operating agreement. Hence, if you want to include a right to advancement for actions taken for the predecessor entity, you had better say so. Note also that the result may well have been different for a claim for indemnification after a merger because the merger statute provides that obligations of an entity in a corporate merger pass to a resulting entity after a merger.
This is an excellent summary of the Delaware law on advancement and why all the arguments against improvidently granted advancement rights are wrong. For example, it explains why the right to be "defended' includes advancement, but the right just to be indemnified does not. In short, it is a good case to read before drafting advancement contracts.
This is an interesting decision because it involves calculating how much litigation contributed to an increase in merger consideration when a competing bid drove the merger price up. There is no formula to apply to reach the result. Significantly, the attorneys were aided by the presumption that their efforts did have a positive affect. It may be that the fee awarded was also influenced by calculations of a "fair" hourly rate for the hours worked.