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

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Showing 17 posts from August 2006.

Court of Chancery Holds Dividends May Not Be Forced

Superior Vision Services, Inc. v. Reliastar Life Insurance Company, C.A. No. 1668-N (Del. Ch. August 25, 2006). This decision answers the question of when a minority shareholder may block a dividend payment pursuant to the authority to do so in the company's certificate of incorporation. The Superior Vision charter provided that a dividend could not be paid absent the consent of 2/3 of the shareholders. As a 44% owner, the defendant refused to consent to the dividend. The company sued alleging that the defendant had violated a fiduciary duty to consent to the dividend and its duty of good faith and fair dealing. The Court first held that absent actual control over the board of directors, a minority shareholder would not be deemed to be in control of the board just because it can block a board decision to pay a dividend. As a result, the Court concluded that the defendant did not owe a fiduciary duty to the company or its shareholders. In addition, the Court held that when, as here, the certificate of incorporation confers a power to veto a transaction and does not condition the exercise of that right, then there is no duty to act reasonably in that regard. Hence, the duty of good faith and fair dealing was not implicated and the Court dismissed the complaint. More ›

Superior Court Dismisses Suit by Corporation Representing Former Shareholder for Lack of Standing

Appriva Shareholder Litigation Co. v. ev3, Inc., C.A. No. 05C-11-208 JOH, 2006 WL 2555348 (Del. Super. Ct. Aug. 24, 2006). Plaintiff entity controlled by certain former stockholders of acquired corporation sued acquirer alleging breach of merger agreement and fraud. Upon motion by defendant acquirer, the court dismissed the action on ground that plaintiff lacked standing. The court noted that the merger agreement appointed two individuals as shareholder representatives who were required to act in concert, one of whom the complaint reflected was not affiliated with plaintiff in any way. The court also noted that the merger agreement did not permit assignment of the shareholder representatives' rights without defendants' consent, which was never given. Finally, the court rejected plaintiff's argument that it be permitted to bring the action as a third-party beneficiary as inconsistent with the merger agreement's express terms.

Supreme Court Clarifies Tooley

<a href="http://www.delawarebusinesslitigation.com/archives/gentile.pdf" Gentile v. Rossette, C.A. No. 573, 2005 (Del. Supr. August 17, 2006). This Delaware Supreme Court decision significantly clarifies the Court's Tooley decision that governs when a claim is a derivative claim. Because a derivative claim must meet significant pleading requirements under Court of Chancery Rule 23.1, this decision affects much of the corporate litigation in the Delaware Court of Chancery and merits careful reading. More ›

Delaware Supreme Court Affirms Chancery Court Ruling that Preferred Stock Was Properly Issued

Benihana of Tokyo, Inc. v. Benihana, Inc., No. 36, 2006, 2006 WL 2465412 (Del. Aug. 24, 2006). The Delaware Supreme Court affirmed post-trial ruling by Court of Chancery that $20 million issuance of preferred stock to a third-party holding company was authorized by the corporate charter and that the directors acted properly in approving that transaction. More ›

Court of Chancery Interprets DRULPA

Hillman v. Hillman, C.A. No. 1557-N (Del. Ch. August 23, 2006, modified,November 16, 2006).

When a general partner is dismissed as the limited partnership's general partner, the DRULPA is not clear on what happens to the interest of that former general partner. After a close reading of the statute and its legislative history, the Court of Chancery concluded that the former general partner is entitled to be paid back his partnership interest, but otherwise has no continuing interest in the limited partnership. The decision affects partnerships that have not provided for the result of a general partner dismissal in the partnership agreement. Note also, this decision deals solely with a general partner who is dismissed, not one who withdraws and is then subject to other sections of the statute.

Superior Court Resolves Contract Dispute Arising Out of Separated Ophthalmology Practice

Moore v. O'Conner, C.A. No. 01C-02-103 MJB, 2006 WL 2442027 (Del. Super. Ct. Aug. 23, 2006). Doctor sued former colleague for money allegedly owed pursuant to agreements the parties entered into upon the separation of their ophthalmology practice. Defendant counterclaimed for various alleged breaches of those same agreements, including (1) plaintiff's alleged misfiling or changing the labels on defendant's patients charts to reflect plaintiff as the treating physician; (2) plaintiff's alleged promise not to operate under the parties' prior trade name; (3) plaintiff's failure to return to defendant any of the amounts he paid to join the practice; (4) plaintiff's failure to list defendant as a Medicare provider; and (5) plaintiff's failure to include an agreed-upon automated telephone message on her office telephone. After trial and post-trial briefing, the court held that defendant was bound by the parties' agreement even though he was not aware of several of the terms at issue, including a provision requiring defendant to pay plaintiff a $30,000 "good will payment." The court also rejected most of defendant's counterclaim, finding no evidence of much of the alleged misconduct. The court did find, however, that plaintiff's failure to include an agreed-upon automated telephone message on her office telephone was a breach of the parties' agreement and that defendant's loss of patients was directly attributable to that breach. The court awarded defendant $128,102 in actual damages on this basis.

Court of Chancery Interprets Charter For Preferred Stock

Blue Chip Capital Fund II Limited Partnership v. Tuberger, C.A. No. 1611-N (Del. Ch. August 22, 2006). The Court of Chancery frequently is called upon to interpret a corporate certificate of incorporation. In this decision, the Court held that a certificate provision permitting a corporation to withhold a reserve for contingent liabilities in connection with calculating the liquidation preference for preferred shareholders did not automatically authorize the board to hold back the highest possible amount, even if doing so was unreasonable based on objective factors. The Court also held that the authority granted by 8 Del C. §281 to hold back a reserve for continent liabilities did not authorize the board to do so under the charter. Instead, the terms of the certificate need be interpreted on its own terms. More ›

Superior Court Holds Alleged Oral Employment Agreement Unenforceable Under Statute of Frauds

Aurigemma v. New Castle Care LLC, C.A. No. 05C-04-113 MJB, 2006 WL 2441978 (Del. Super. Ct. Aug. 22, 2006). Plaintiff sued defendant medical facility for breach of an alleged oral agreement under which plaintiff was to serve as defendant's medical director from October 1, 2003, until October 1, 2004. Plaintiff claimed that this oral agreement was made on September 4, 2003. The court granted defendant's motion for summary judgment on the ground that, even if it had reached an oral agreement with plaintiff, such agreement would be unenforceable under the statute of frauds because it could not be performed within a year. More ›

Court of Chancery Awards Both Appraisal And Equitable Relief

In re PNB Holding Co. Shareholders Litigation, C.A. No. 28-N (Del. Ch. August 18, 2006). As it has several times in recent years, the Court of Chancery has decided a case combining appraisal rights and a class claim for inequitable treatment in a merger. The Court held that when directors get together to freeze out the other stockholders the entire fairness test applies even when they do not own a majority of the stock. This follows because the interests of those directors in remaining shareholders differs from the other shareholders who will be frozen out. Absent some insulating procedure such a majority of the minority vote, the directors then have the burden of proving the merger was entirely fair. More ›

Court of Chancery Rejects Deepening Insolvency Theory

Trenwick America Litigation Trust v. Ernst & Young LLP, C.A. No. 1571-N, 2006 WL 2333201 (Del. Ch. Aug. 10, 2006). The Delaware courts have struggled for the last fifteen years over the scope of the duties of directors to creditors when their company is in the vicinity of insolvency. In two landmark decisions, the first in 2004, and just recently, the Court of Chancery sought to define the limits of that duty. Indeed, in this decision the Court rejected the very idea that there is a duty to avoid taking risks that may have the effect of deepening the insolvency of a Delaware corporation, at least in most circumstances. More ›

Court of Chancery Awards Fees For Bad Faith

Posted In Case Summaries
In re Grupo Dos Chiles LLC, C.A. No. 1447-N (Del. Ch. August 17, 2006). In a rare case awarding fees for bad faith litigation, the Court stressed that litigants who change their sworn testimony to gain an advantage face a fee award if the Court is convinced they lied. The Court will look to the surrounding circumstances to assess if a lie has occurred.

Court of Chancery Denies Stay In Books and Records Case

Wynnefield Partners Small Cap Value L.P. v. Niagara Corp., C.A. 1261-N, 2006 WL __________ (Del. Ch. Aug. 9, 2006). The normal rule in a books and records case is that a stay of the inspection will be granted when there is an appeal. In this case, however, the Court of Chancery denied a stay because the records related to a stockholder meeting that was about to occur. Subsequently, the Supreme Court granted the stay of inspection but ordered an expedited appeal to be able to issue an opinion before the stockholders' meeting. More ›

Court of Chancery Expands Duty To Act in Good Faith

Horizon Personal Communications, Inc. v. Sprint Corp., C.A. No. 1518-N, 2006 WL 2337592 (Del. Ch. Aug. 4, 2006). There is no duty that is more often cited and so little understood as that requiring a contracting party to act in good faith and deal fairly with the other contracting parties. In this case the Court of Chancery exhaustively examined the contract between the parties, determined what was required to act in good faith, and fairly awarded an injunction to preclude a breach of that duty. In doing so, the Court's analysis provides a road map for tracking the duty to act in good faith in the performance of a contract. More ›

Delaware Recognizes New Defense to Contract Claims

Posted In News
In what the Court itself noted is an unprecedented decision for Delaware, the Delaware Superior Court has ruled that a defendant in a contract case may plead as a defense that the plaintiff violated the implied covenant of good faith and fair dealing. This decision in Daystar Construction Management Inc. v. Mitchell has particularly broad implications because of the wide-spread adoption of Delaware law as the choice of law in contracts. The Court noted that it is rare for the covenant to be used as a defense to a breach of contract claim. However, the Court's decision cited to an impressive list of sources in its detailed and thoughtful analysis. Given that the Court also held that the breach of covenant is an affirmative defense that must be specifically plead to be asserted, a review of the decision is now mandatory for any defense of a contract case governed by Delaware law.

Court of Chancery Sustains Complaint Attacking Settlement

Kosseff v. Ciocia, C.A. No. 188-N, 2006 WL 2337593 (Del. Ch. Aug. 3, 2006). In this decision, the Court dealt with a complaint attacking the transaction implemented to settle a proxy contest. The proxy contest was settled by an agreement that put the dissidents on the board and had the CEO resign. However, the CEO was given the right to buy certain lucrative businesses of the company, a right he later exercised. The complaint alleged that this deal was improvident. After reviewing the complaint, the Master declined to grant a motion to dismiss. More ›

Court of Chancery Upholds Advance Notice Bylaw

Acciptier Life Sciences Fund L.P. v. Helfer, C.A. No. 2057-N, 2006 WL 2252376 (Del. Ch. Aug. 2, 2006). The Court of Chancery has upheld the use of a press release to announce a stockholder meeting date and to trigger the provisions of a ten day advance notice bylaw. The plaintiff's employees read the press release, which mostly focused on financial results, but they neglected to notice it also announced the annual meeting date. Thus, the plaintiff failed to get the names of its nominees to the company in the time required by a bylaw provision triggered by the notice of meeting. More ›

Court of Chancery Affirms Application of Delaware Law to LLC

Facchina v. Malley, C.A. No. 783-N, 2006 WL 2328228 (Del. Ch. Aug. 1, 2006). In this case the Court of Chancery has again affirmed that Delaware law applies to the internal affairs of a Delaware LLC. The LLC was the result of a merger of a California corporation into a Delaware LLC. The California entity had a stockholders' agreement that the defendants wanted to enforce. The Court rejected their arguments because the California entity had ceased to exist in the merger. More ›