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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 13 posts from May 2007.
Under Section 253 of the DGCL, a parent corporation that owns 90% or more of the stock entitled to vote in a subsidiary may merge the subsidiary into itself without a stockholder vote. Here, however, some of the subsidiary's stock had the right to 'consent' to major corporate events, but not to vote on those events. Illustrating the importance of adherence to proper corporate formalities, this decision holds that the right to "'consent' is not the same thing as the right to vote". Hence, the merger was valid when the parent company had 90% of the voting stock of the subsidiary, even if the minority stockholder with the right to consent to the merger did not do so. In short, be careful how you write a corporate charter because the words used really count.
On January 15, 2008, the Delaware Supreme Court affirmed the Court of Chancery's judgment.
It is often thought that even a short delay in seeking injunctive relief may bar a claim. Certainly in the case of claims to rescind a corporate transaction, any delay may be fatal. However, when the Court is satisfied that the plaintiff has been diligent, it is less likely to punish the delay that occurs in following the command of the Delaware Supreme Court to use the right to review corporate records before filing suit.
In this decision, the plaintiff knew he objected to the sale of securities by the PHLX and filed a demand to review its records on that sale. A year after the sale, he sued to have it rescinded. The Court denied the motion of the defendants for summary judgment on the claim for rescission because much of the delay in suing was attributed to the time the PHLX took in producing the documents the plaintiff had sought to review. In short, if you follow the rules to use the tools at hand you may get the time to do so.
Under very unusual circumstances, this decision entered a stay of a Delaware proceeding to dissolve a Delaware corporation because of prior filed litigation in Canada. While the law governing stays of Delaware litigation is very well developed, it is unusual to stay a proceeding for dissolution of a Delaware corporation. That is a particularly Delaware-based remedy that its courts are reluctant to forgo when the statutory prerequisites are met.
Here, however, the facts supporting the issuance of a stay were particularly strong. These included extensive and abusive litigation between the parties in Canada, the jurisdiction of the Canadian courts over the key assets in dispute and the existence of orders by the Canadian courts that dealt with the merits of the underlying dispute between the parties that had little to do with Delaware law.
North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, C.A. No. 521, 2006 (May 18, 2007).
For many years, the rights of corporate creditors to bring breach of fiduciary duty claims against directors has been the subject of much debate. For the most part, commentators have felt there was little need to protect creditors who it was said should protect themselves through their loan agreements. Nonetheless, substantial case law existed that upheld the right of creditors to sue directors.
In this decision, the Delaware Supreme Court has effectively ended the debate. It holds that creditors may not bring a direct claim against directors for breach of their fiduciary duties. This is true whether the corporation is insolvent or is close to insolvent. Creditors may, however, bring derivative claims when the corporation is insolvent because then they are the residuary risk takers for whom the directors should act. While the opinion does not answer this question, it seems likely that creditors may not bring derivative claims when their corporation is close to but not actually insolvent. More ›
Corporate bylaws sometimes require that the company be given advance notice of the intent to nominate anyone for election to the board. When those provisions are not clear, they will be interpreted in the way that expands stockholder rights. However, when the provisions are clear enough to give notice of their minimum requirements, then they will be enforced. That is what occurred here where the winning candidate was disqualified for his failure to comply with a reasonably clear advanced-notice bylaw.
To obtain inspection of corporate records, a stockholder must show that her purpose is a proper one. This decision holds that determining the suitability of a candidate to serve as a director is a proper purpose. That much is no surprise.
What is potentially more significant is the Court's other holding. This decision protects confidential business information from being used in a proxy contest, at least when the relevance of the confidential materials to the election seems strained. The Court was clearly concerned about discouraging frank communication to the board. More ›
It is widely thought that fee provisions in indemnification agreements are always enforceable. Think again. This decision held void a provision in an indemnification agreement that would have provided for payment of attorney fees even when the plaintiff lost his right to indemnification. Hence, agreements to pay attorneys fees to directors will need to be redrafted to make sure that an employment benefit is not dependent on the right to indemnification itself.
Wilmington Paper Corp. v. ANDA Management LLC, C.A. No. 2568-VCN (May 14, 2007).
When a dispute is subject to an arbitration agreement, it is often the case that immediate relief is needed to protect the parties in the period before the arbitration is decided. While sometimes an arbitration panel may have the power to issue orders that provide that relief, that is not always the case. Here, the Court of Chancery issued a status quo order that limited management powers while an arbitration panel was being formed and was to review the disputes.
Status quo orders are thus a way to deal with problems that occur before the arbitrators can decide what to do. Note, however, that the Court limited the status quo order to the period before the arbitrators could act.
Crescent/Mach I Partnership LLP v. Turner, C.A. 17455-VCN (May 2, 2007).
Predicting how the Court of Chancery will determine value in an appraisal proceeding is a difficult task. To some extent, each appraisal case will involve a battle of experts. Which side will ultimately prevail can be hard to predict, at least before cross examination. Further, the discounted cash flow approach frequently used by the Court of Chancery can be complicated. This decision offers a primer on that process and is well worth the trip for those willing to put in the time.
The race is not always won by the first to start. In this case the Court of Chancery declined to stay a Delaware case attacking a proposed merger even though a similar New York case had been filed earlier. Explaining that the internal affairs doctrine leaves to the state of incorporation the right to decide internal corporate legal issues, the Court of Chancery held it would proceed with this case. More ›
Provisions for payment of the attorney's fees of the winning party are not uncommon in contracts. What is "winning" is not always clear, however. This decision holds that when the contract says you must win to collect, then you must win it all to invoke the contract or at least the contract at issue in this case. In other words, you do not get paid for winning half the loaf. More ›
For the sixth consecutive year in a row, Delaware has received the #1 Ranking from the Harris Poll State Liability Systems Ranking Study which is compiled by the United States Chamber of Commerce Institute for Legal Reform. The Study attempts to quantify the perceptions corporate attorneys have about each state's legal system. Respondents to the study are asked to grade states in each of the following areas:
- having and enforcing meaningful venue requirements;
- overall treatment of tort and contract litigation;
- treatment of class action suits and mass consolidation suits;
- punitive damages;
- timeliness of summary judgment or dismissal;
- scientific and technical evidence;
- non-economic damages;
- judges' impartiality and competence; and
- juries' predictability and fairness.
To read a copy of the study, click here.
A company subject to an appraisal petition argued that a beneficial owner who acquired its shares after the record date to vote for the merger should be required to prove that those shares had been voted against the merger by the record holder, Cede & Co.
The Court rejected that argument and noted that the Delaware Supreme Court has long held that a beneficial owner may demand appraisal through a record owner such as Cede & Co. Given that it is not practical for a beneficial owner to trace its shares through depositories such as Cede, this result seems fair and in compliance with prior decisions.