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

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Showing 7 posts from June 2007.

District Court Declines to Exercise Supplemental Jurisdiction Over Fiduciary Duty Claims, Grants Motion to Dismiss

Lemon Bay Partners LLP v. Hammonds, C.A. No. 05-327 (D.Del. June 26, 2007)

 

In this shareholder derivative action for breach of fiduciary duties against various corporate defendants, the Court held that the state law claims asserted so predominated the lone federal claim that exercise of supplemental jurisdiction was inappropriate. Plaintiffs, former shareholders of MBNA Corporation, asserted various claims against the defendants based on breach of fiduciary duties in connection with earnings reports and the merger of MBNA with Bank of America. Defendants moved to dismiss based on lack of subject matter jurisdiction, arguing that the Plaintiffs’ sole claim that rested on federal jurisdiction was so predominated by the state law claims as to make the exercise of the Court’s supplemental jurisdiction inappropriate. The Court concurred with the defendants, concluding that Plaintiffs’ federal law claim bore only a tangential relationship to the rest of the claims. The Court therefore granted Defendants’ motion to dismiss for lack of subject matter jurisdiction.  More ›

Superior Court Applies Contract Choice Of Law Rules

AT&T Wireless Services, Inc.v. Federal Insurance Company, C.A. No. 030-12-232-WCC (June 25, 2007).

What law applies is often a thorny issue in complicated business cases. It is even more complicated when tort and contract claims are mixed together. Throw in a merger or two and it is a real mess. Here, the Superior Court has cut through this fog to decide that one state's law applies in the whole litigation.

First, the Court determined that the principles of the Restatement of Conflict Section 188 that governs choice of law in contract cases would apply. This was done even though tort claims were also raised by the complaint. The Court reasoned that as the tort claims were based on the existence of the contract, it met the parties' probable expectations to apply contract choice of law principles.

In doing so, the Court focused on the principle place of business of the insured in this contract dispute with its insurers. While that is one of the five factors set out in the Restatement, the Court gave it great weight under the unusual circumstances of this case.

District Court Finds Claims Don't Implicate ERISA, Remands to Superior Court

Gallagher v. E.I. Du Pont de Nemours & Co., C.A. No. 07-47-JJF (D. Del. June 19, 2007).

In this suit for breach of contract, specific performance, and wages under the Delaware Wage Payment and Collection Act, Plaintiff filed the action in Superior Court. Defendant subsequently filed Notice of Removal to the District Court, asserting that the state law claims were completely preempted by ERISA. The Court held that Plaintiff’s claims did not implicate ERISA, and no grounds existed for federal jurisdiction. Plaintiff’s Motion to Remand to Superior Court was therefore granted. More ›

Court of Chancery Limits Stockholder Agreement Buy Rights

Seidensticker v. The Gasparilla Inn Inc., C.A. No. 2555-CC (June 17, 2007).

Agreements among stockholders of privately held companies usually restrict the sale of company stock and give the other stockholders a right of first refusal. As with any contract, these agreements will be enforced by Delaware courts in accordance with their terms and not as the stockholders may wish years later when a dispute arises. Here, the Court enforced the time limits set out in such an agreement for when the option to acquire a fellow stockholder's shares must be exercised.

  More ›

Court of Chancery Explains Proper Merger Negotiations

Posted In Case Summaries, M&A

In Re: Lear Corporation Shareholders Litigation, C.A. No. 2728-VCS (June 15, 2007).

The tactics to use and the terms to seek in merger negotiations are often debated and misunderstood. In this decision, the Court sets out considerable guidance on what to do and what to avoid.  Moreover, the Court once again points out the problem created by leaving too much of the work to the CEO whose personal economic interests are also at stake. In short, that is a process to be avoided.

The Court's extended discussion of termination fees, go-shop provisions, voting agreements and matching rights are mandatory reading for anyone with a role to play in an M& A deal.

Court of Chancery Overturns Standstill Agreement

Posted In Case Summaries, M&A

In Re: The Topps Company Shareholders Litigation, C.A. No. 2786-VCS (June 14, 2007).

The duties of directors in a sale of the company situation are often difficult to articulate except to say they should get the best price. Here, however, the Court of Chancery examines a real world problem of dealing with two competing bids and explains in detail how to do so properly. Moreover, when as here the Court concludes the directors have been unreasonably favoring one bidder over another, it will intervene to level the playing field.

The Court required that the board of Topps, the baseball card company, end a standstill agreement it had with Upper Deck, amend Topps proxy materials that had unfairly portrayed the Upper Deck offer for Topps and otherwise act to be sure that Upper Deck's proposal to acquire Topps was fairly considered. The decision also illustrates the problems management may have when they are given assurances of continued employment by one bidder who they then seem to favor in the bidding process.

Court of Chancery Rejects Options Suit

Desimone v. Barrows, et. al., C.A. No. 2210-VCS (June 7, 2007).

Since the Tyson decision, some have predicted that the Court of Chancery will be hard on option granting abuses. That has proved to be so, but not always. Here the Court discussed a suit that alleged improper option granting because the plaintiff really could not plead a case that the board of directors was knowingly breaking the rules.

Many of the options involved were granted to lower level employees when the board itself was not directly involved. In that case, the plaintiff could not show that the members of the board had enough culpability to fear personal liability. Under those circumstances, the plaintiff could not meet the rules for showing a demand on the board to bring suit would be fatal.

In the case of other options, while they may have been granted at favorable times before good news caused the market to rise or after bad news caused it to fall, the options were part of a prearranged plan with set grant dates. Hence, timing of the grants was not at issue. Again, under these circumstances board liability was too remote to excuse demand under Rule 22.1.