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

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Showing 5 posts from September 2007.

Court of Chancery Applies Issue Preclusion To Derivative Suit

Posted In Case Summaries

In re Career Education Corporation Derivative Litigation, C.A. No. 1398-VCP (September 28. 2007).

This decision decides when to give preclusive affect to a prior decision of a federal court that a derivative case should be dismissed under Rule 23.1. Basically, the standard that the Delaware court applied was whether the claims in the prior litigation that had been dismissed for failure to meet Rule 23.1 had a substantial overlap with the claims in the case here in Delaware. Finding that this overlap existed, the Court of Chancery dismissed the Delaware case.

What is unusual about this result is that the Delaware case was brought by a different party than the prior federal litigation. However, as the 'real' party in interest in both cases was the corporate nominal party, the rights litigated in the federal case were the same as those litigated in Delaware-the right to control the litigation.

Court of Chancery Upholds Use of Merger to Change Partnership Governance

Twin Bridges Limited Partnership v. Draper, C.A. No. 2351-VCP (September 14, 2007).

This decision deals with how to change the governance structure of a limited partnership by using a merger to amend the partnership agreement. At the outset, the Court ruled that the doctrine of independent legal significance would not be applied to a two-step transaction involving an amendment to a limited partnership agreement to permit a merger and then the merger itself. Instead, the Court ruled that the two transactions were integrated and thus, considered as if they were a single event. This may mean that the corporate law concept of treating two transactions separately if they are authorized by two different sections of the corporate law will not apply in the context of a limited partnership that is based on contract law.

In addition, the Court held that using a merger to add an additional, tie-breaking general partner to the partnership governance structure was permissible absent a clear prohibition in the partnership agreement.

Court of Chancery Permits Option Backdating Case To Proceed

Conrad v. Blank, C.A. No. 2611-VCL (September 7, 2007).

In the latest of the Delaware option cases, the Court of Chancery permits the action to go forward when it appears that the Board considered the option backdating and did nothing about it. It is noteworthy from its decision that this apparent indifference to a wrong served to distinguish this case from others where the backdating appeared to be a simple mistake.  In the case of a simple mistake, the error would not be enough to expose the board to liability and that would excuse demand before the derivative suit was filed.

The Court also declined to apply the "continuing wrong" theory. Under that theory, a plaintiff who acquires her stock during the series of wrongful acts has the right to challenge all the actions including even those that occurred before she acquired her stock. Instead, here the court held that each backdated option was a separate wrong and the plaintiff could only sue for those that had occurred  after she bought her stock.

Court of Chancery Explains Weight of Evidence

LaPoint v. Amerisourcebergen Corporation, C.A. No. 327-CC (September 7, 2007).

In this otherwise fairly common breach of contact case, the Court of Chancery has once again emphasized the importance of evidence that is contemporaneous with the parties' contract and their conduct. Explanations after the fact are viewed as much less convincing than, as in this case, emails created at the time when litigation was not on everyone's mind.

Supreme Court Upholds Contract Based Fee Award

Posted In Case Summaries

Mahani v. EDIX Media Group, Inc., Del. Sup. C.A. No. 91, 2007 (September 4, 2007).

In this decision upholding a fee award by the Court of Chancery, the Delaware Supreme Court held that a fee based on a contract right to recover fees is not limited by the results in the case. That limitation, the Court held, is more appropriate in fee shifting pursuant to a statute. Instead, the fees awarded under a contract should take into account the 8 factors set out in Rule of Professional Conduct 1.5(a)(1). The results obtained are among those factors but not the driving force to a decision.

This case had an odd set of facts involving a misbehaving litigant - never a good idea in a Delaware court. Hence, the fee award of a multiple of the actual recovery is not often to be repeated.