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

Morris James Blogs


Delaware Supreme Court Explains How To Do The Director Interest Test

Delaware Country Employees Retirement Fund v. Sanchez, No. 702, 2014 (October 2, 2015)

Deciding if a director is sufficiently tied to a controller so as to be disqualified from passing on a transaction independently is an important decision because it may determine if a derivative suit meets the demand excuse test. More ›

Court Of Chancery Explains When A Dilution Claim Is Direct

Caspian Select Credit Master Fund Ltd. v. Gohl, C.A. 10244-VCN (September 28, 2015)

It is often said that when a majority stockholder issues more stock to himself at an unfair price that is a direct claim and not derivative. But as this decision points out, that is a little too simplistic. More ›

Court Of Chancery Grants Stay Of Derivative Case

In Re Duke Energy Corporation Coal Ash Derivative Litigation,  C.A. 9682- VCN (August 31, 2015)

A stay of derivative litigation is hard to get even when there is another case pending elsewhere. But when, as here, the other litigation may expose the company to significant liability, a stay of the derivative action against the directors is easier to win in order to avoid the problems of simultaneously litigating both proceedings.

Court Of Chancery Denies Standing After Spin-Off

In re Abbvie Inc. Stockholder Derivative Litigation, C.A. No. 9983-VCG (July 21, 2015)

After a spin–off of a subsidiary, there is a question as to whether the subsidiary’s stockholders have standing to bring a derivative suit on behalf of the subsidiary for past wrongs against the subsidiary committed by the parent’s directors.  More ›

Court Of Chancery Explains That The Existence Of A Controlling Stockholder Does Not Determine Demand Is Excused

Teamsters Union 25 Health Services & Insurance Plan v. Baiera,  C.A.  No. 9503-CB (July 13, 2015)

A transaction with a controlling stockholder that is the subject of a derivative complaint still requires that a majority of the directors be interested before demand is excused. More ›

Court Of Chancery Explores Risk Management Duties

In re General Motors Company Derivative Litigation, C.A. 9627-VCG (June 26, 2015)

This decision involves the currently hot topic of the extent of a board of directors’ duty to properly assess corporate risks and act to prevent loss. More ›

Court Of Chancery Explains Claims Available To LLC Members

CMS Investment Holdings LLC v. Castle, C.A. No. 9468-VCP (June 23, 2015)

This is an interesting decision because it explains what direct claims are available to investors in an LLC. More ›

Court of Chancery Upholds Right To Secondary Offering

In Re Molycorp Inc. Shareholder Derivative Litigation, C.A. 7282-VCN  (May 27, 2015)

When investors bargain for the right to have their stock sold in a secondary offering after the company goes public, fiduciary duties normally do not operate to restrict that right. More ›

Court Of Chancery Awards Major Fee

In re Activision Blizzard Inc. Stockholder Litigation, C.A. 8885-VCL (May 20, 2015, revised May 21, 2015)

This decision will be remembered for the very large fee it awarded to some very entrepreneurial lawyers who risked their all to win a big case. More ›

District Court Considers Status Of Disclosure Claims

In re Caterpillar Inc. Derivative Litigation, No. 12-1076-LPS-CJB (June 10, 2014)

This comprehensive decision is particularly interesting because it considers whether a disclosure claim is subject to the normal Rule 23.1 demand rules.  Normally, disclosure claims are thought of as direct claims based on the violation of the stockholder's right to cast an informed vote.  But when, as here, the plaintiff chooses to assert a derivative claim for an alleged disclosure claim, he must also meet the normal demand rules.  The plaintiff argued that there was no business judgment involved in making the disclosures at issue and, hence, the demand rules should not apply.  The federal court rejected that argument, relying largely on non-Delaware cases.

Court Of Chancery Lifts Stay

In re Molycorp Inc. Shareholder Derivative Litigation, C.A. 7282-VCN (May 12, 2014)

This decision clearly explains when a derivative suit should be stayed in favor of securities litigation elsewhere. The general rule is that when the derivative suit depends on the outcome of the securities litigation because it seeks recovery of the damages to be paid for a securities law violation, the derivative suit should be stayed.  Of course, when the derivative suit is not dependent on the securities litigation outcome, the stay should be lifted.

District Court Dismissed Derivative Suits Under Delaware Law

New Jersey Building laborers Pension Fund v. Ball, D. Del. No. 11-1153-LPS-SRF (March 13, 2014) and Freedman v Mulva,  D.Del., No. 11-686-LPS-SRF (March12, 2014)

In these 2 decisions, the U.S. Magistrate shows a sound understanding of Delaware corporate law. She recommends the dismissal of these 2 derivative suits under Rule 23.1 because the complaints do not show the directors were disqualified from considering a demand they sue.  The directors' interest in a compensation plan that was only currently applicable to employees did not make them interested under Delaware law.

Court Of Chancery Explains Scienter Requirement In Insider Trading Claim

Silverberg v. Gold, C.A. 7646-VCP (December 31, 2013)

Under Delaware law, a so-called Brophy claim seeks to recover the profits made by trading on insider information. Showing that material insider information was available is not too hard.  What is harder is showing the intent to use that information, the scienter requirement.  After all, an insider may trade for a variety of reasons, such as a favorable public announcement of good future prospects.  Here the Court explains, in the context of a motion to dismiss, how to interpret the circumstances surrounding insider trades to find that they were done with the intent to benefit from the insider information.  Among the key facts are the timing of the trades in reference to obtaining the information, the failure to disclose the insider information until after the trades are completed, and the size of the trades in comparison to any prior trading.

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 Again Explains Demand Excused Rules

In Re China Automotive Systems Inc. Derivative Litigation, C.A. 7145-VCN (August 30, 2013)

The rules for determining when demand on the directors is excused apply even to Chinese-based companies despite their bad press.  This decision in a direct and clear way spells out when demand is not excused.  For example, merely being on the audit committee does not mean a director faces a serious risk of personal liability for auditing mistakes.  More "red flags" are required.