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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
It is common in a Section 225 action seeking the determination of the composition of a company's board of directors for the court to issue a status quo order. Those orders stop the company from taking any actions out-of-the-ordinary course of business until the Court decides who is really in control. Here the Court issued a similar order pending a decision on whether the plaintiff was entitled to have stock issued to it to take control. This extends the use of status quo orders to a new realm.
This decision holds that a clickwrap agreement is sufficient to bind an employee to a non-compete agreement. This is an important innovation as it will permit employers to implement non-compete agreements quickly and without much fuss.
Anti-suit injunctions to enforce a choice of forum clause are not always easy to get. Delaware courts do not like to interfere with other courts jurisdiction. Instead, they prefer that a party aggrieved by the violation of a contract that selects Delaware as the forum to resolve disputes ask the non-Delaware court to stay its hand. However, as this decision illustrates, when pressed, a Delaware court will enjoin litigation elsewhere in the right circumstances. One such circumstance is when the party to be enjoined has tried to manipulate the system by taking inconsistent positions on what forum the contract requires. Trickery with the Courts is never a good idea.
The Court of Chancery has again denied a request for an anti-suit injunction. This time the Court noted that the litigation sought to be enjoined would actually continue by a party not before the Court. Hence, the injunction was not going to accomplish an end to duplicative litigation.
The Court of Chancery often enters standstill orders or status quo orders when the control of a Delaware entity is in dispute. The orders are designed to prevent actions that may not be what the actual management would do in circumstances when the identity of that management is not in doubt. Disputes over the form of these orders are common and this decision seems to settle how one provision should be worded. At least in the absence of special circumstances, the provision of the order that prevents extraordinary actions should be worded so as to permit action after 7 days notice to the other side, who is then free to seek court action if it objects.
This is an important decision because it upholds the power of the Delaware Court of Chancery to enforce by an injunction the forum selection clause in a contract. Previously, there was some doubt under the existing case law whether such an injunction would issue, but, at least among sophisticated litigants, there is no doubt any more. Note that the clause in question provided that a "court in Delaware" would hear any dispute. A clause that attempted to vest jurisdiction only in the Court of Chancery is questionable because a contract alone cannot confer jurisdiction on that court with its limited equity jurisdiction.
This is an important decision dealing with a so-called "Proxy Put." Briefly, a Proxy Put permits creditors to call corporate debt when a new board of directors is elected without the consent of the current board. This decision applies the reasonableness standard of Unocal rather than the stricter standard of review of Blasius to decide if the Board has properly refused to approve a competing slate of directors for purposes of preventing a Proxy Put.
The Court carefully distinguished other circumstances where such a Put might be upheld, such as when a competing slate's election might cause immediate harm to the corporation.
It is not always easy to have the Court of Chancey expedite your case just because you ask for an injunction. Here, the Court denied expedition because the plaintiff had waited 5 months to ask for it and because the plaintiff's claim was really just for damages.
This decision provides a good review of when the Court will expedite a proceeding.
This is an interesting decision because it may extend the circumstances where the Court of Chancery will issue a preliminary mandatory injunction requiring the payment of money. It is often said, perhaps wrongly, that there is an adequate remedy by the award of damages that precludes issuing an injunction requiring such a payment. Here, however, the parties' contract contained a provision recognizing that irreparable harm would occur if the payment was not made and the failure to make the payment also frustrated a key provision in the parties' contract governing how their entity would be operated. That was enough to get the injunction.
This decision is an example of the growing Court of Chancery litigation over enforcement of loan agreements. The court reviewed the recent deicisions over when to issue an injunction or instead leave the parties to a damages remedy. Here the decision is affected by the procedural stance of the litigation because the burden the plaintiff must bear is somewhat less at the TRO stage and the decision fully explains how that affected its conclusion to issue an injunction.
Frequently a contract will have a provision selecting Delaware as the forum to litigate any dispute. What happens then when a case is filed elsewhere and one party seeks to enforce the forum selection clause by an injunction in Delaware against the prosecution of the other litigation? Well, this decision tells us the result and resolves possible conflicting holdings in other courts including the Delaware Supreme Court. Briefly:
1. The Court of Chancery will grant the injunction if the forum selection clause properly confers jurisdiction in Delaware courts. Note that this means that selecting the Court of Chancery may not work if the dispute is not subject to equitable jurisdiction in that court. Better to select "any" court with jurisdiction in Delaware over the subject matter of the dispute.
2. The forum selection clause must be broad enough to include any dispute "arising out of" or "related" to the dispute. A narrower clause may not work.
This decision again illustrates how fast a claim may be barred by inaction. Here two weeks passed after the plaintiff was on notice of its claim before suit was filed. Too late the Court said to ask for an injunction.
When a Delaware corporation becomes insolvent, it is possible to have the Court of Chancery appoint a receiver to take over its management. Possible, but not easy as this decision shows. Assuming that insolvency is proved, a receiver will be appointed when it will serve a "beneficial purpose". What that translates into is when there is no real alternative to protect creditors effectively.
When it is possible to use the usual methods of enforcing a judgment or there are other, less dramatic remedies available, a receiver is not warranted. For example, if the plaintiff has the right to appoint directors, then it should use the statutory remedy to force a stockholder meeting and the election of those directors.
Finally, to the extent the plainitff's case is based on what it alleges to be corporate abuses by current management, it needs to first prove those abuses before the court will appoint a receiver. After all, the extent of the abuse has to be determined before the remedy may be crafted.
Behind all this cautionary approach is the natural reluctance of any court to be dragged into the everyday management of a business. For once a receiver is appointed, the court knows that every dispute over what the receiver does is probably going to end up before the court for resolution. That is not fun.
When the economy is in stress, contracts to supply materials at a fixed price seem to be broken more often. This decision explains what you have to show to get a TRO against the breaking of such a contract by the supplier. In short, it is not easy but can be done when the ability to "cover" is not available.