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

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Court Of Chancery Explains Acquiescence Defense

Lehman Brothers Holdings Inc. v. Spanish Broadcasting Systems Inc., C.A. 8321-VCG (February 25, 2014)

When may a large stockholder wait before asserting its voting rights arising out of the failure to pay dividends to preferred stock?  The short answer is that it all depends, particularly when the corporation is in the process of raising money by issuing debt that the preferred stock arguably had a right to prevent.  For if the stockholder waits until after significant corporate action is taken, it may have acquiesced in that action and lost the right to object to it.

Court Of Chancery Explains When Actions Are Void

Klaassen v. Allegro Development Corporation, C.A. 8676-VCL (October 11, 2013)

There is still an important distinction under Delaware law between actions that are void and those that are merely voidable. For only voidable actions may be ratified. This decision traces the history of that distinction with respect to calling of directors' meetings. Only meetings called in violation of the bylaws or certificate of incorporation are void. Others subject to some equitable attack are still able to be ratified.

Federal Court Dismisses Novel Voting Rights Claim

Freedman v. Redstone, No. 12-1052-SLR (D. Del. July, 16, 2013)

Under the IRS Code, executive compensation over $1,000,000 a year is not deductible absent a stockholder vote to approve a compensation plan that meets certain objective criteria.  Here the Court dealt with a complaint that alleged that the approval vote had to include the vote of stock that under the corporation's certificate of incorporation did not normally have the right to vote.  The Court rejected that argument and held that only voting stock had the right to approve a compensation plan.  Hence, the DGCL was saved from the IRS.

Court Of Chancery Explains Non-Profit Corporate Law

Hockessin Community Center Inc. v. Swift , C.A. 7789-VCL (October 5, 2012)

Delaware does not have a separate corporate statute dealing with non-profit corporations. Hence, the non-stock sections of the DGCL usually apply to such entities.  It is sometimes hard to decide what parts of the DGCL do apply, however, as the integration of stock with non-stock provisions is less than clear.  This decision helpfully explains how to decide what parts of the DGCL to apply to non-stock entities

Court Of Chancery Interprets Preferred Stock Rights

Greenmont Capital Partners I LP v. Mary's Gone Crackers Inc., C.A. 7265-VCP (September 28, 2012)

This is a useful, if not surprising, example of how the Court will interpret a corporate charter regarding the rights of preferred stock.  It is also an example of the principle that if you want a veto power in the charter,  you had better be clear and complete or the charter will be changed to your detriment.

Court Of Chancery Clarifies Ultra Vires Statute

Southeastern Pennsylvania Transportation Authority v. Volgenau,  C.A. 6354-VCN (August 31, 2012)

Section 124 of the Delaware General Corporation Code sets out the Delaware limits on the common law doctrine of ultra vires.  This decision holds that Section 124 does not limit suits for breach of fiduciary duty, but does protect corporate transactions that have closed from some attacks alleging a lack of power to do the transaction.

CCLD Follows Chancery Analysis

ALTA Berkely VI C.V. v. Omneon, Inc., C.A. N10C-11-102 JRS CCLD (July 21, 2011)

On one level this is not a particularly unusual decision and that is just the point.  For here the Superior Court's new CCLD shows that it is going to make the same studied analysis and follow the same precedent as the Delaware Court of Chancery.  This will increase confidence in the CCLD and, as this decision shows, its experienced and competent judges, for business disputes.

The Delaware Supreme Court affirmed this decision on MArch 5, 2012.

Court Of Chancery Explains Step-Transaction Doctrine

Liberty Media Corporation v. The Bank of New York Mellon Trust Company, N.A. , C.A. 5702-VCL (April 29, 2011) affirmed, Del Supr September 21, 2011. Both Section 271 of the DGCL and many indentures provide that a corporation may not sell all or substantially all of its assets without stockholder approval.  For years, a recurring problem has been how to apply that law to a series of asset sales that when taken all together amount to a sale of almost all the company's assets.  This decision explains the so-called "step-transaction doctrine" under which such multiple sales may be aggregated to be considered one sale requiring stockholder approval. The short [and probably too simplistic answer] is that when the sales each have their own business justification, the Court will not aggregate them.

Court Of Chancery Again Explains Preferred Stock Rights

Fletcher International LTD v. Ion Geophysical Corp., C.A. 5109-VCS (March 29, 2011)

This is another in the line of decisions that stress that preferred stockholder rights are what is set out in the certificate of incorporation and nothing more.  Thus, if the preferred stockholders bargain for the right to consent to the sale of stock by any subsidiary, then they do not also have the right to vote on the sale of subsidiary stock by the parent.

To be fair, this brief description does not do justice to the Court's careful reasoning and simplifies the charter provisions at issue.  However, best to state the principle starkly to avoid any misunderstanding.

Court Of Chancery Explains Charter Interpretation Rules

KFC National Council and Advertising Cooperative Inc v. KFC Corporation, C.A. 5191-VCS (January 31, 2011)

When a certificate of incorporation is ambiguous, the Court must decide what it means.  This decision explains how a court will do that job.

At least in the case of a publicly traded corporation, the Court is less inclined to use parol evidence and more inclined to fall back on rules of construction.  One such rule is that it is presumed that stockholders retain the power to decide matters that are usually reserved for stockholder decision.  Hence, if a stockholder or the board claim unusual powers, they had better spell those out clearly or lose the dispute.

Court Of Chancery Upholds Limits On Redemption Right

SV Investment Partners, LLC v. Thoughtworks, Inc., C.A. 2724-VCL (November 10, 2010)

Private equity investors often want to use preferred stock to invest in a company.  In doing so the investors expect to be cashed out at some defined point.  They frequently provide for that by having the certificate of incorporation require mandatory redemption of the preferred stock.  One customary limit on those redemption rights is that only "funds legally available" be used for the redemption. Investors may assume that means that if the company's assets exceed its liabilities that redemption is required at least to the extent of the excess.

Well if they think that they are wrong. This decision holds that the "funds" available refers to the company's cash and that cash may only be used if to do so will not impair the company's ability to pay its creditors in due course. As a result,  what seemed like mandatory redemption may instead be put off indefinitely.

This is not just a simple matter to cure by drafting, however.  While it is true, as the decision points out, that all sorts of investment vehicles exist to permit an investor to demand and get back its investment, those may not always be appropriate.  Preferred stock has the advantage of being treated as equity on a balance sheet. Other investment vehicles may not have that advantage.

The real issue is who calls the shots once the mandatory redemption deadline passes without redemption.  If the investors want to do so, then they need to bargain for that power when they make their investment.

This decision was affirmed by the Supreme Court on November 15, 2011.

Court Of Chancery Explains Conversion Cap

ION Geophysical Corporation v. Fletcher International Ltd., C.A. No. 5050-VCP (November 5, 2010)

This decision explains how a  'conversion cap' works to prevent the holders of convertible securities from converting those securities to common stock.  These provisions thereby avoid running afoul of the SEC rules on registering ownership of stock.

Court Of Chancery Addresses "Blank Check Company" Agreement

Ruffalo v. TransTech Service Partners Inc., C.A. 5039-VCP (August 23, 2010)

This decision addresses the rights of investors in a so-called "blank check company" where a pool of money is raised to invest in some to-be determined business.  Not surprisingly,  the investors' rights are determined by what the certificate of incorporation provides. That may not be an easy matter to determine, as such "contracts' are, as here, complicated and not always clear.

Court Of Chancery Limits Remedy For Charter Breach

Fletcher International Inc. v. ION Geophysical Corp.,  C.A. 5109-VCP (March 24, 2010)

When a provision in a certificate of incorporation is violated, the question that often arises is what is the remedy. Often the Court  will enjoin the violation, but not always. Here the preferred stock had approval rights for certain corporate transactions. Those rights were violated. Finding that an injunction would cause more harm than was merited, the Court denied the injunction and remitted  a damages remedy to the plaintiff.

Court of Chancery Approves "Continuing Directors"

San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals Inc., C.A. 4446-VCL (May 12, 2009)

One defense against a hostile takeover is a provision that permits only "continuing directors" to approve certain important corporate acts.  In general, to be a "continuing director" you need to be "approved" by the existing board.  Hence, if you are elected in a proxy contest that marks the beginning of a takeover battle, you may not be an approved "continuing director."  That would be a bad thing for your client.

In this decision, the Court upheld the power of the board to approve even candidates from an opposition slate of directors to be "continuing directors."  This unusual circumstance was the result of a bond debenture provision that would have triggered a default if there were too many non-continuing directors on the board.  To avoid a default, it was decided to approve even the enemy.

That, in turn, lead the Court to be concerned about whether the board had acted in the stockholders' best interests.  The Court cautioned that the approval must be a considered act and that the adoption of such continuing director provisions needs to be carefully reviewed by the board in the future if they are to be upheld.