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

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Showing 16 posts from November 2006.

Superior Court Rejects Breach of Contract and Apparent Authority Claims, Grants Summary Judgment

Pisano v. Delaware Solid Waste Auth., C.A. No. 05-C-03-132-FSS (Del. Super. Nov. 30, 2006).

 

In this opinion granting Defendant’s motion for summary judgment, the Superior Court rejected Plaintiff’s argument that Defendant had breached an alleged contract with Plaintiff to sell used waste-processing equipment, and found that Plaintiff’s argument that Defendant granted apparent authority to a third party to sell the equipment unconditionally lacked merit. Plaintiff alleged that he had entered into an unconditional contract with a third party serving as Defendant’s agent to acquire the equipment for $150,000, and that Defendant breached that contract when it later sold some of the equipment to another party. Defendant argued that it did not have a contractual relationship with Plaintiff, and that Plaintiff’s argument that the third party had authority to act on Defendant’s behalf was clearly unfounded. The Superior Court concluded that even viewing the facts in a light most favorable to Plaintiff, there was no basis for a jury to determine that Defendant had breached any contract with Plaintiff or had given the third party authority to act on Defendant’s behalf.

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Court of Chancery Resolves Conflict With SEC Rule

Esopus Creek Value LP v. Hauf, C.A. No. 2487-N (Del. Ch. November 29, 2006).

Delaware law requires an annual stockholder meeting. The SEC rules prohibit calling a stockholder meeting when the company is delinquent in its SEC filings. In this case and in its decision in Newcastle Partners LP v. Vesta Insurance Group, Inc., 887 A.2d 975 (Del. Ch. 2005), aff'd., 906 A.2d 807 (Del. Ch. 2005) the Delaware Court of Chancery has resolved this apparent conflict. Here, the Court held that a stockholder meeting should go forward with adequate disclosures to the stockholders entitled to vote on the proposed sale of substantially all of the company's assets. The Court ordered the company to apply to the SEC for an exemption from the rules prohibiting the calling of a meeting. More ›

Federal Court Denies Motion For Reconsideration

Pell v. E.I. DuPont de Nemours & Co. Inc., Civil Action No. 02-21 KAJ, 2006 WL 3391375 (D. Del. Nov. 22, 2006).

Plaintiffs filed a Motion for Reconsideration and/or Alteration in Judgment pursuant to Fed.R.Civ.P. 59(e). The Court had earlier found for plaintiffs under an equitable estoppel theory of relief involving misrepresentation but had denied the plaintiffs’ request for restitution for unduly low pension payments made to him. Plaintiffs now sought to have the Court reconsider its earlier holding that the defendants did not owe them compensation for unduly low pension payments because - allegedly - the Court had viewed the governing ERISA provision – Section 502(a)(3) - more restrictively that the Supreme Court did in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002).

The Court denied the motion because there were no grounds presented for reconsideration. Specifically, the Court noted that the motion failed because the plaintiffs did not demonstrate: (1) an intervening change in the controlling law; (2) that new evidence was available; or (3) that there was clear error of law or fact present on the record or to avoid causing manifest injustice. Here, plaintiffs sought to implicate the “clear error of law or fact” provision but did not discharge the high burden required to prevail on such a motion. Accordingly, the Court denied the motion.

Court of Chancery Rejects Inadequate Settlement

In Re SS&C Technologies, Inc. Shareholders Litigation, C.A. No. 1525-N (Del. Ch. November 29, 2006).

The Court of Chancery for over 30 years has cautioned against reaching a settlement of a class or derivative case and closing the transaction that was the subject of the litigation without having first secured court approval of the settlement. The concern is that the closing may make the court's approval a moot question. Here, the settlement involved additional disclosures in connection with the stockholder vote and payment of attorney fees, but the Court was not asked to approve the settlement before the transaction closed. After the fact, the Court declined to approve the settlement. 

There is no clear solution to the problems presented when there is a need to close a deal before a hearing may be scheduled, with the usual 45 days notice to the class. At a minimum, the Court should be notified of the settlement and probably should be asked for leave to close the deal before the settlement hearing occurs. This is particularly true when the settlement does not involve any post-closing relief, such as future corporate governance provisions. More ›

Court of Chancery Approves Awards Large Fees!

A few recent articles have questioned the willingness of the Court of Chancery to award adequate fees in class and derivative litigation. These articles focus on one or two instances where fee requests were not met with full approval. This anecdotal approach is misleading. After all, it would be a sign of a failing system if every fee request were given blanket approval regardless of its merits.

Two more recent decisions by the Court of Chancery show it is fully responsive to appropriate fee requests and is willing to award large fees when appropriate. In the McKesson/HBOC litigation, Chancellor Chandler  awarded the plaintiff's attorneys $10 Million for their years of hard work on behalf of McKesson in a derivative suit. More recently, Vice Chancellor Strine in the Hollinger case awarded plaintiff's counsel $2,500,000 in fees for his work in a case where the actual litigation work was fairly brief, but the results were outstanding.

Both of these cases were what are known as Caremark cases alleging that the Board had failed to perform its oversight duty to avoid accounting and other problems. That type of case is fairly characterized as among the most difficult to prove, given the high standard to establish liability.  Thus, when the plaintiffs won a good settlement, their attorneys were rewarded, fairly and even generously.

In short, bring a good case, fight hard, achieve a decent result and the Court of Chancery will reward your effort. That is all we should expect.

Court of Chancery Upholds Conspiracy Theory

Allied Capital Corporation v. GC-Sun Holdings, LP, C.A. No. 1954-N (Del. Ch. November 22, 2006).

This is the first decision that applies the law of civil conspiracy in the context of a parent and its subsidiaries. While there is authority that entities under common control cannot be held to have conspired together, that is not now the law of Delaware. This holding is particularly important in the way it may be applied to deal with coordinated conduct by related entities. The implications include that civil conspiracy may take the place of other legal theories, such as veil piercing, that previously were used to hold parent entities responsible for the wrongful conduct of their subsidiaries. More ›

Federal Court Denies Class Certification Predicated On Bogosian Theory Of Common Impact Injury

American Seed Co., Inc. v. Monsanto Company, Civ. No. 05-535-SLR, 2006 WL 3276831 (D. Del. Nov. 13, 2006).

Plaintiffs brought a class action alleging that the defendant and its subsidiaries illegally maintained monopolistic practices in four product markets by driving competing biotechnology corn products out of the market through illegal financial incentives and bundled rebate programs. These programs allegedly enabled the defendants to charge monopoly prices to farmers and retailers.

Plaintiffs sought to certify three categories of classes pursuant to Fed.R.Civ.P. 23(b)(3): (1) a group of national direct purchasers of the products whose claims would be brought under federal antitrust law; and (2) groups of purchasers in Iowa and Minnesota, with claims under their respective state laws. The plaintiffs further identified various subclasses within each class on the basis of certain characteristics of the corn products purchased. The Court examined the challenges connected with the procedural requirements under R.23(a) in a detailed manner. First, the Court noted that if the plaintiffs were not direct purchasers of the corn seed, they may not be proper representatives of the national direct purchasers' class nor under the plaintiffs’ own definitions of class member. Second, the Court further noted that if the plaintiffs were direct purchasers, they may still not have suffered direct injury if they passed on the excess charges to their customers. However, because the Court denied certification on alternate grounds – namely under R. 23(a)(2) and (3) - it declined to address the standing issues.  

The plaintiffs primarily relied on their expert witness to prove that common questions predominated in this case and they advanced the Bogosian presumption to demonstrate common impact injury, citing In re Linerboard Antitrust Litig., 305 F.3d 145, 151 (3d Cir. 2002)(in turn citing Bogosian v. Gulf Oil Co., 561 F.2d 434, 455 (3d Cir. 1977)). To this end they advanced their expert’s damage formulas for the dual purpose of damage measurement and common injury. The Court however rejected the plaintiffs’ claim because they did not furnish any factual basis demonstrating how the expert’s formulas could provide proof on damages and common injury. This is because the Bogosian presumption of impact requires additional evidence of class-wide impact to sustain class certification. In short, the Court rejected the plaintiffs’ expert’s common impact theory because it was not factually supported. Accordingly, the Court denied the plaintiffs’ motion for class certification.

Superior Court Rejects Affirmative Defense of Res Judicata at Damages Stage

Gibbs v. Fairbanks Capital Corp., C.A. No. 04C-06-258-JRJ (Del. Super. Nov. 20, 2006).

In this opinion denying Defendant’s motion for summary judgment, the Superior Court rejected Defendant’s argument that the affirmative defense of res judicata barred Plaintiffs’ claims for damages. Plaintiffs, residential mortgage customers of Defendant, sued for breach of contract, consumer fraud, defamation, and violation of the Uniform Deceptive Trade Practices Act. After Defendant failed to answer the complaint, the Court entered default judgment against it, and Defendant’s subsequent motion for an order vacating that judgment was denied. Defendant then moved for summary judgment as to Plaintiffs’ damages claims, arguing that res judicata barred the claims because Plaintiffs were class members in a similar suit in Massachusetts, and could not relitigate the same damages claims in the Delaware action. The Superior Court denied Defendant’s motion for summary judgment, concluding that it “[could not] assert res judicata as an affirmative defense under the particular circumstances….”  More ›

Court of Chancery Explains When Directors Are Interested In The Deal

In Re Primedia Inc. Derivative Litigation, C.A. No. 1808-N (Del. Ch. November 15, 2006).

This case dealt with when directors would be considered interested in a deal so as to preclude the application of the business judgment rule and permit the suit to proceed.  Many of the directors were affiliated with the controlling stockholder who had purchased the corporation's preferred stock at a deep discount just before the board voted to redeem that stock at its face value. That decision was justified, it was argued, because the coupon rate on the stock was higher than market rate. The Court held that might well be so, but at the pleading stage it was too soon to accept that as a justification for the purchase that gave the controlling stockholder a big gain. The decision is particularly interesting for its discussion of when directors are considered sufficiently connected to a controlling stockholder so as to preclude application of the business judgment rule. More ›

Federal Court Permits Motion To Transfer Using Multi-Factor Balancing Test

Weisler v. Barrows, C.A. No. 06-362 GMS, 2006 WL 3201882 (D. Del. Nov. 6, 2006).

Plaintiff, a shareholder of Sycamore Networks, Inc. (“Sycamore”), a Delaware corporation with its principal place of business in Massachusetts, brought this derivative action against several of its directors and officers, including its chairman, CEO and CFO. The complaint alleged six counts: (1) a count against each director for section 14(a) violations of the Securities and Exchange Act of 1934 (“Exchange Act”); (2) one count of disgorgement against four directors under section 304 of the Sarbanes-Oxley Act of 2002 (“Oxley Act”); (3) one count of breach of fiduciary duty against all directors; (4) one count of unjust enrichment against five directors; (5) one count of gross mismanagement against all defendants; and (6) one count of waste of corporate assets against all defendants.

The defendants moved to transfer the matter pursuant to 28 U.S.C. § 1404(a) and the Court granted the motion because it would convenience the parties and witnesses and serve the interests of justice.

The plaintiff alleged that the defendants had jointly and severally breached their fiduciary duties of care, loyalty, good faith, and candor by failing to: (1) discover or prevent the intentional manipulation of stock option grants between 1999 and 2004; (2) prevent the misreporting of earnings that was caused by the manipulation of the option grants; (3) oversee the administration of Sycamore’s stock-based compensation plans; (4) ensure Sycamore operated in compliance with applicable state and federal laws pertaining to dissemination of financial statements; (5) ensure the company did not engage in any improper or illegal practices; and (6) ensure that the company’s financial statements were compliant with GAAP. The conduct is alleged to have violated section 14(a) of the Exchange Act and section 304 of the Oxley Act.

The Court permitted the transfer of the matter on its individualized consideration of the motion under section 1404(a) and on whether it would convenience the parties and witnesses and serve the interests of justice. The Court also held that it was the defendants’ burden to establish the need for transfer. The Court observed that the standard for transfer did not demand a demonstration of compelling circumstances; rather, the defendants only needed to show that the case would be better off if transferred to the other jurisdiction. That inquiry required a “multi-factor balancing test” that consisted of not only the convenience of the parties and the witnesses but also the examination of certain public and private interests. The Court listed the private interests as: (1) a plaintiff’s choice of forum; (2) the defendant’s preference; (3) where the claim arose; (4) the convenience of the parties and witnesses; and (5) the location of the books and records. The Court listed the public interests as: (1) the judgment’s enforceability; (2) practical trial considerations making it easy, expeditious or inexpensive; (3) the administrative difficulty presented in the two fora; (4) local interest in deciding the controversy at home; and (5) the public policies of the fora under consideration. The Court found that the private and public factors weighed in favor of transfer and therefore permitted the defendants’ motion.

Court of Chancery Rejects Attempt To Revive Derivative Suit

West Coast Management & Capital LLC v. Carrier Access Corporation, C.A. No. 2262-N (Del. Ch. November 14, 2006) is a classic example of what can go wrong in trying to plead a derivative suit. The Court of Chancery dismissed the complaint because the plaintiff had filed a prior complaint in federal court that had been dismissed for failure to establish that demand on the directors was excused. Here, the plaintiff tried to pursue a stockholder inspection claim to establish that demand was excused, but the Court held it was precluded from doing so by the dismissal of its prior complaint. This shows that a plaintiff better know what it is doing when it files a derivative suit because the chances to correct errors will be limited. More ›

Federal Court Dismisses Class Action For Lack Of Diversity

Davis v. Union Pacific Railroad Co., C.A. No. 06-128 KAJ, 2006 WL 3218707 (D. Del. Nov. 7, 2006).

Plaintiff, an incarcerated citizen of Nebraska, instituted a diversity-based class action for personal injuries allegedly sustained from lead poisoning from the soil in that state. Defendant, a Delaware corporation with its principal place of business in Nebraska, moved to dismiss for lack of subject matter jurisdiction. The Court dismissed the Complaint for lack of diversity under 28 U.S.C. § 1332 because both parties were citizens of Nebraska. The Court ruled that a corporation’s citizenship may be derived from its place of incorporation and its principal place of business.

Federal Court Affirms Arbitration Award That Included Share Valuation By Agreement

Millennium Validation Services, Inc. v. Thompson, C.A. No. 02-1430 (GMS), 2006 WL 3159821 (D. Del. Nov. 3, 2006).

Plaintiff, a Delaware corporation, and defendant filed motions to vacate/modify and confirm the arbitration award respectively. The Court granted the defendant’s motion to confirm the award. Defendant Thompson and two others founded Millennium Validation Services, Inc. (“Millennium”) with equal shareholding. Due to some differences, the two other members sought to compel defendant Thompson to withdraw from Millennium, by triggering some clauses under their Shareholder Agreement (“Agreement”). Subsequently, plaintiff sought to buy-out the defendant’s shareholding, with its valuation computed under the Agreement. In the interim, the plaintiff discovered through its agents that defendant was allegedly violating the terms of his non compete provisions of the Agreement because he was employed by a competitor. Plaintiff therefore suspended its buy-out of his shares.

Plaintiff then filed suit for breach of contract and interference with prospective contractual relations and the defendant cross-claimed for breach of fiduciary duty. Thereafter, the parties stipulated to binding arbitration. The independent arbitrator denied the plaintiff’s claims for lost profits, breach of contract and tortious interference and ordered it to pay defendant a far greater amount representing the buy-out value of his shares and accumulated interest, in addition to a loan that the defendant had advanced the plaintiff company. The arbitrator declined to amend or modify the award and the above cross-motions ensued.

The Court held that the limited grounds on which the arbitration award could have been vacated were absent in the present matter. Here, the plaintiff alleged that the arbitrator had exceeded his powers by revaluing the shares of the defendant, a matter solely governed by the Agreement. This argument was dismissed because the parties had agreed to arbitration of the entire dispute – a term that included the valuation of the shares too. Similarly, the Court found that plaintiff’s non-compete violation and other claims failed to assert any grounds for vacating the arbitration award. Finally, the Court dismissed plaintiff’s argument that it was impermissible for the arbitrator to order a subsequent hearing to determine attorney fees and costs because there was no authoritative support for that contention.

Court of Chancery Rejects Challenge To Stockholder Consent

B.F. Rich Co., Inc v. Gray,  C.A. No. 1896-N (Del. Ch. November 9, 2006) refused to consider the defense in Section 225 case that the plaintiff would hurt the corporation if he took it over. As the Court noted, the issues in Section 225 cases are tightly confined to the validity of the stockholder consent.  Any abuse of the power gained by use of those consents is for a later proceeding. More ›

Supreme Court Interprets The "Duty" To Act In Good Faith

Stone v. Ritter,  C.A. No. 93, 2006 (Del. Supr. November 6, 2006).

The Supreme Court has issued the latest Delaware decision to interpret the duty to act in good faith. Indeed, it is possible to read Stone as holding there is no separate duty of directors to act in good faith. While that would be a mistake, the implications of this decision may be far reaching. At the very least, Stone upholds the conventional wisdom in Delaware that under Caremark the directors' duty to act is most easily triggered when there are red flags indicating something is wrong with the way the entity is being operated. A complaint that fails to plead those red flags has a good chance of being dismissed. More ›

Delaware Supreme Court Adopts the Caremark Standard for Oversight Liability

Posted In Case Summaries

Stone v. Ritter __ A.2d __ (Del. Nov. 6, 2006)

 

As had been widely expected, the Delaware Supreme Court recently adopted the standard for director “oversight” liability of In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996). The decision should provide comfort to directors of Delaware corporations concerned about the risk of liability for corporate wrongdoing about which they had no knowledge but which happened under their watch.  

 

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