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

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Delaware Superior Court Explains When Mutual Mistake Voids A Contract

659 Chestnut LLC v. Parke Bancorp Inc., C.A. N17-05-114 MMJ (December 6, 2018)

This is an interesting decision because it deals with the rare instance when a party can prove a mutual mistake as to a contract’s terms so as to avoid having to comply with those terms. Here both a borrower and a loan officer clearly agreed a loan could be repaid without penalty. The actual loan documents had a prepayment penalty that the borrower did not read before signing. The Court held the borrower was excused from catching that penalty clause given the assurance he had there was no prepayment penalty.

Court of Chancery Explains When to Dissolve an LLC

Posted In LLC Agreements

Decco U.S. Post-Harvest Inc. v. Mirtech Inc., C.A. No. 2018-0100-JTL (Del. Ch. Nov. 28, 2018)

Under Section 18-802 of the Delaware LLC Act, the Court of Chancery may dissolve an LLC when it is “not reasonably practical” for it to carry on its business in conformity with its LLC agreement. This decision explains when that might occur, such as when the defined purpose becomes impossible to fulfill.

Court of Chancery Addresses Discovery Abuses

Posted In Discovery

Terramar Retail Centers LLC v. Marion #2-Seaport Trust, C.A. No 12875-VCL (Del. Ch. Dec. 4, 2018)

The Court of Chancery has long demanded that litigants abide by the discovery rules and respect scheduling orders. This is an excellent summary of Delaware discovery obligations and a good list of many ways a litigant can go wrong in responding to discovery. More ›

Delaware Superior Court Applies “But For” Test To Decide In What Capacity A Director Acted

Posted In Case Summaries, CCLD

Goggin v. National Union Fire Insurance Company Of Pittsburgh, PA., C.A.. N17C-10-083-PRW-CCLD (November 30, 2018)

D & O insurance covers actions taken by a director. However, when a director acts on behalf of another entity in dealing with the insured company, it is not always easy to decide if the claim against him arises out of his role as a company director. This decision applies a “but for” test in this way. If the claim would not exist “but for” the conduct on behalf of the other, non-insured entity, then the claim is not based on the director’s conduct as a director of the insured entity and the "capacity” exclusion applies to deny coverage.  This result turns in part on the specific language of the policy that insured against conduct “solely” taken as a director.

Superior Court Holds that Judgment Creditors Required to Renew Judgments Every Five Years Under 10 Del. C. § 5072

Posted In Case Summaries

Mergenthaler v. Triumph Mortgage Corp., C.A. No. 09C-09-203-AML (November 26, 2018)

This case with a tortured history presented an interesting issue regarding when a creditor is required to renew a judgment in the Superior Court.  The Court held that plaintiff (the judgment creditor) was required to renew the judgment after five years pursuant to 10 Del. C. § 5072.  Although the creditor did not renew its judgment within five years, the Court granted the creditor’s motion to renew the judgment retroactively because of the prior practice of not requiring such motions until ten years after a judgment’s entry, and the creditor’s failure was not attributable to his negligence because of intervening events, including a Supreme Court ruling, that occurred.

Delaware Takes the Lead in Litigation Reform

Posted In Articles

Once again, there are demands to reform corporate litigation. (See, e.g., Kevin LaCroix, “Time for Another Round of Securities Class Action Litigation Reform,” The D&O Diary, Oct. 23, 2018.) But once again, the Delaware courts are leading the way to cure the problems that litigation critics complain of most. Recent Delaware Court of Chancery decisions are yet another example of that leadership. We begin to show how that is being done, by outlining the perceived problems.

The critics focus on two types of corporation litigation they claim are serious problems: so-called merger objection lawsuits; and event-driven securities litigation. The principal objection to merger objection lawsuits is that they only allege a proposed merger is improper because the proxy statement asking for stockholders’ approval is inadequate, the alleged problem is then “cured” by defendants’ immaterial supplemental disclosures and the case is dismissed after the plaintiffs lawyers are paid off with a substantial fee. That seems to be tolerating a strike lawsuit that really accomplished nothing but a fee for the lawyers.

The principal objection to event-driven securities litigation is that they are based on a failure to disclose that the company was subject to a serious risk that eventually occurred, depressing the company’s stock price. The critics argue these suits are based on a risk the company did not anticipate and thus could not have disclosed. Thus, such claims lack proof of scienter and again are just lawyer-driven fee generators with fees paid to avoid the costs of defense. More ›

Delaware Superior Court Explains Privity Rule For Claim Preclusion

Posted In Case Summaries, CCLD

The Washington House Condominium Association Of Owners v. Daystar Sills Inc., C.A. N15C-01-108 WCC CCLD (November 13, 2018)

This is an interesting decision because it explains when there is privity between parties so as to preclude a claim that one party has resolved previously. Briefly, there needs to be a common interest between the parties without any conflicting interest that would make the settling party an improper representative of the other party.  In this action, the Court held that because of newly discovered evidence, the Court could no longer find that the parties were in privity, and it reversed its prior decision dismissing plaintiffs’ claims against one of the defendants on res judicata grounds.

Delaware Supreme Court Reverses Superior Court in Holding that Insured’s Claim Barred by the Statute of Limitations

Homeland Ins. Co. of New York v. CorVel Corp., No. 60, 2018 (Del. Nov. 20, 2018)

CorVel filed a complaint in the Delaware Superior Court in May 2015 arising out of a settlement of the underlying actions in January 2011.  The Supreme Court held that CorVel’s bad faith claim began to run in 2011, when CorVel settled an underlying arbitration and related class action.  Because CorVel did not file suit until January 2011, the applicable three-year statute of limitations barred CorVel’s claim.  The Supreme Court held that once CorVel could plead the necessary elements of a prima facia claim under Lousiana’s Bad Faith Statue, the cause of action accrued for purposes of Delaware’s statute of limitations.  In doing so, the Supreme Court held that it was not necessary for CorVel to actually obtain a ruling that the Homeland policy covered the claims before it could proceed with its bad faith action.

Extraordinary Circumstances MAE Allow a Buyer to Break a Bad Deal

The State of Delaware’s policy is to give maximum effect to the principle of freedom of contract. Delaware courts seek to enforce the language in an agreement negotiated by the parties and will not rewrite the agreement after the fact to reallocate risks, especially in an agreement between sophisticated parties that was bargained for at arm’s length. This includes risks allocated through “material adverse effect” (MAE) provisions in a merger or acquisition agreement. The Delaware Court of Chancery’s recent decision in Akorn, Inc. v. Fresenius Kabi AG, No. 2018-0300-JTL, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018) (Laster, V.C.), illustrates how the court applies Delaware’s policy of freedom of contract. While this is the first time that the court has found that an MAE on the seller’s business justified a buyer’s termination of a merger agreement, this decision presented an exceptional set of facts regarding the utter deterioration of Akorn’s business and widespread company regulatory compliance issues affecting its pipeline of new generic drugs. Accordingly, the court’s ruling merely represents the application of a well-known principle to enforce the language of a merger agreement, allocating the risks bargained for by sophisticated parties, to an egregious set of facts. More ›

Delaware Supreme Court Clarifies When LLC Agreement Makes A Contract Void

Posted In LLC Agreements

CompoSecure LLC v. Cardux LLC, C.A. No. 177,2018 (Del. November 7, 2018)

This is an important decision because it holds that an LLC agreement may make a contract void for failure to comply with the required provisions in the LLC agreement to enter into such a contract. If the contract is “void” it cannot be later ratified by implication when the parties follow the terms of the contract. Thus, when contracting with an LLC, it is necessary to read the actual LLC agreement to see if it requires any conditions to entering into a contract.

Court Of Chancery Explains Limits Of Incorporation By Reference In Disclosure Law

Posted In M&A

Zalmanoff v. Hardy, C.A. 12912-VCS (November 13, 2018)

This decision holds that it is acceptable to make the needed disclosures to stockholders by sending them both a Form 10-K and proxy statement at the same time. However, this does not mean that it is possible to rely on past SEC filings when a proxy statement omits material information that was disclosed previously. The key is that the various documents need to be disclosed together.

Court Of Chancery Limits Zapata Test To Properly Filed Complaint

Busch v. Richardson, C.A. 2017-0868-AGB (November 14, 2018)

A derivative complaint that meets the demand requirements of Rule 23.1 may be subject to later dismissal at the request of a properly formed and functioning special committee under the Zapata decision. Of course, such a request is subject to special scrutiny by the Court. This decision holds that Zapata does not apply in other contexts, such as when a plaintiff has been misled into making a pre-suit demand under the mistaken belief the Board was capable of making a Zapata-like decision.

Court Of Chancery Clarifies Scope Of Adequate Disclosure To Invoke Corwin

Posted In Case Summaries

In Re Tangoe Inc. Stockholder Litigation, C.A. 2017-0650-JRS (November 20, 2018)

To obtain business judgment rule protection, directors need to make adequate disclosures to the stockholders whose votes directors contend were adequate to invoke the Corwin decision. But exactly what sort of financial disclosures are needed, particularly where there are no audited financial statements available? This decision helps answer that question.  At least when the lack of audited statements is due to a failure to restate those statements after the discovery of past errors, the lack of such statements may be enough to show the disclosures were not adequate to fairly inform the stockholders before their vote. This is particularly so when there have not been quarterly reports, an annual meeting or any explanation why the past financial statements have not yet been corrected. This decision is also helpful in pointing out that when directors’ votes are influenced by their receiving extra compensation as a result, there is enough to support a claim of disloyalty to defeat a motion to dismiss.

Federal District Court Explains PSLRA Requirements For Lead Plaintiff and Counsel

Posted In Securities

Wigginton v. Advance Auto Parts Inc., CA 18-212 MN (D. Del. November 2, 2018)

This is an excellent review of how the District Court will analyze the requirements of the PSLRA in selecting the lead plaintiff and lead counsel in a securities litigation. Briefly, the plaintiff with the most at stake should take the lead with its chosen counsel so long as it is qualified by past experience to do so. That such a plaintiff may have acted in 5 or more other securities cases is not disqualifying.

Court Of Chancery Resolves 2 Significant Indemnification Issues

Posted In Indemnification

Creel v. Ecolab Inc., C.A. 12917-VCMR (October 31, 2018)

This decision resolves indemnification issues that regularly arise. First, when there are two possible indemnitors and one pays up, may the indemnitee still seek indemnification from the second indemnitor?  It depends on when the obligation to indemnify arose. If the indemnitor who actually paid up only assumed that duty after the underlying claim arose that led to the expense to be paid, then that indemnitor is a volunteer and its indemnitee may seek payment from the other indemnitor. Note that this decision does not foreclose suit by the actual indemnitor for equitable contribution. More ›