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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Morris James Blogs
Showing 112 posts from 2007.
Court of Chancery Stays Suit In Favor of Arbitration
Court of Chancery Sets Standards For Injunction During Appeal
Gradient OC Master Ltd. v. NBC Universal, C.A. No. 3021 (July 20,2007).
This decision sets out the principles that govern when an injunction will issue after an appeal from a decision in the Court of Chancery denying a request for an injunction.
ShareCourt of Chancery Denies Stay In Backdating Case
Brand v. Deason, C.A. No. 2123-VCL (July 20, 2007).
When the Court is interested in the issues presented by a case and those issues are important to Delaware law, it will rarely grant an application for a stay of the proceedings in favor of another jurisdiction. When the application only comes after discovery has begun a stay is even less likely.
Here, the Court pointed out that option backdating law is still emerging in Delaware with only three decisions in this interesting area. Hence, there was good reason for a Delaware court to decide what is the law of Delaware and not stay its hand.
ShareCourt of Chancery Limits Inspection Rights
NAMA Holdings LLC v. World Market Center Venture LLC, C.A. No. 2756-VCL (July 20, 2007).
Frequently the rights of a member of an LLC or LP to inspect the entity's records is limited by the governing instrument. Thus, permitting only "reasonable access" is common. In this decision, the Court defines what "reasonable access" means, particularly when confidential information is involved.
ShareCourt of Chancey Upholds Fraud Claim In Company Sale
Cobalt Operating LLC v. James Crystal Enterprises LLC, C.A. No. 714-VCS (July 20, 2007).
This factually intense case is interesting for its example of the careful analysis of detail that is typical of the Court of Chancery. The opinion is a good outline of the proper remedies for fraud and breach of contract in the sale of a company.
ShareCourt of Chancery Rejects Class Action Settlement
In Re: TD Banknorth Shareholders Litigation, C.A. No. 2557-VCL (July 19, 2007).
It is a mistake to take for granted that the Court of Chancery will approve any class action settlement. Here, the Court rejected a settlement because it appeared that a valid theory of recovery had been overlooked by the plaintiff and the settlement gave very little to the class.
Also of interest was the Court's interpretation of a standstill term in the stock acquisition agreement that limited the acquirer from seeking to obtain even more stock in the target. The Court implied that asking the target board to initiate merger discussions was an invalid attempt to get around that standstill provision.
ShareCourt of Chancery Expands Right To Bring Direct Claims
Rhodes v. Silkroad Equity LLC, C.A. No. 2133-VCN (July 7, 2007).
The line between what is a direct claim and a derivative claim is frequently critical. Derivative claims can only be brought by stockholders and have other procedural hurdles to jump to survive a motion to dismiss. In this decision, the Court permitted what appeared to be a derivative claim to go forward as a direct claim by a former stockholder. Thus, the Court has expanded the type of claim that may be brought as a direct claim. While the facts of this case may seem unusual, the claims made in this case have come up before and now will certainly take on new life.
Briefly, the plaintiff alleged that the majority stockholder had run down the business of the company to force out the plaintiffs as minority owners at a reduced price under a stockholders' agreement. The damage to the company from their actions would seem to be a classic derivative claim for it was the company that suffered the injury and to whom damages would seem to flow for such a claim. However, the Court held that this conduct also would support a direct claim because the conduct in effect permitted the majority to increase its interest in the company while diluting the interest of the minority stockholders. In that sense, the claim of the minority interest was also a direct claim suffered by them alone.
ShareCourt of Chancery Defines Coercion
Gradient OC Master Ltd. v. NBC Universal Inc., C.A. No. 3021-VCP (July 12, 2007).
A line of Delaware decisions recognizes that it is improper to coerce stockholders into accepting a transaction. What exactly is coercive, however, is not well defined. After all, almost any transaction that offers a choice has incentives built into it to induce taking the deal, but that cannot be improperly coercive. Here the Court of Chancery summarizes the prior decisions and articulates helpful standards to determine when there is actionable coercion.
While the decision is complex, the bottom line appears to be whether the Court is convinced the terms offered make economic sense. Thus, in this case it made sense to ask stockholders to give up some of the restrictive covenants that went with their preferred stock to achieve a successful restructuring. In contrast, when in another case a self-tender was seen as an unjustified attempt to fight off a competing offer, the Court held the too high tender price was an unlawful attempt to coerce stockholders to take the offer or be left with an over-leveraged company in the hands of the same directors.
ShareCourt of Chancery Rejects Late Acceptance
Centreville Veterinary Hospital Inc. v. Butler-Baird, C.A. No. 1552-VCP (July 6, 2007).
Second thoughts sometimes reach the right conclusion. The problem, however, is that they may get there too late. This decision holds that once a contract offer is made, the rejection of that offer revokes the power to change your mind and later accept the offer. Based on the reasoning of the Restatement of Contracts (2nd) Section 38, the Court noted that rule works both ways and is grounded on the need to have a bright line test in such matters.
ShareSuperior Court Acts as "Gatekeeper," Excludes Experts' Testimony on Damages
The Delaware courts have adopted the United States Supreme Court’s holdings in Daubert and Kumho Tire and apply these precedents along with DRE 702 when deciding the admissibility of expert testimony. Daubert established a “gatekeeper” role for the trial judge to play in determining whether expert testimony is both relevant and reliable. And Kumho Tire extended this role to all types of expert testimony, not just the sort based on scientific knowledge.
Here, the Superior Court performed its “gatekeeper” function by excluding the testimony of two of the plaintiff’s damages experts. Plaintiff Empire won on liability, proving that one of Defendant Bank of New York’s employees reached an unlawful agreement with one of Empire’s former employees to transfer active accounts to a new debt collection business started by the departing employee. But Empire still had to prove its damages and sought to do so through the expert testimony of Zelenovskiy and Landrum. Defendant Bank of New York filed motions in limine. More ›
ShareSuperior Court Orders Insurers to Pay Defense Costs to Sun-Times Media Group, Denies Insurers' Motion to Dismiss or Stay
This insurance coverage action is an offshoot of the highly publicized, allegedly fraudulent scheme devised by Lord Conrad Black and other inside directors of Plaintiff Sun-Times Media Group (formerly “Hollinger International”) to deceive the corporation and misappropriate hundreds of millions of dollars.
The plaintiffs claim to have incurred over $20 million in defense costs—and allege that they will incur nearly $20 million more—to defend themselves and their agents in multiple lawsuits resulting from this conduct, including a securities class action filed in Illinois (“Illinois Class Action”). Specifically, Plaintiff Sun-Times Media brought this action, seeking a declaration of coverage under its excess D&O insurance policies issued by the defendants. The plaintiffs argued that the defendants were obligated to pay those defense costs and had wrongfully refused to do so.
To this end, early in the litigation, Plaintiff Sun-Times Media moved for partial summary judgment, seeking a declaratory judgment that certain insurer defendants had a duty under applicable policies to pay past and future defense costs incurred in the Illinois Class Action. The defendants countered by moving to dismiss or stay the plaintiffs’ entire complaint, citing McWane and forum non conveniens. The court ruled on both motions, issuing separate opinions. More ›
ShareCourt of Chancery Permits Inspection In Rights Offering
Robotti & Company LLC v. Gulfport Energy Corporation, C.A. No. 1811-VCN (July 3, 2007).
Applying standard books and records inspection law, this decision permitted inspection into the reasons why a subscription rights offering was structured so as to seemingly benefit insiders. This illustrates the reasoning process that the Court goes through to decide if there is enough basis to support a claim of possible wrongdoing that justifies granting a books and records inspection.
ShareCourt of Chancery Broadens Discovery of Single Member Special Committee
Sutherland v. Sutherland, C.A. No. 2399-VCL (July 2, 2007).
On several occasions, the Delaware courts have questioned why only a single member is appointed to a special committee. However, the practice continues.This decision illustrates the price to be paid by such a bad practice.
Normally, Zapata Corp. v. Maldonado, 430 A2d 779 (Del. 1981) limits discovery of a special committee to materials that reflect on the independence and diligence of the committee. Discovery into the merits of the committee's conclusions is limited. The theory behind this limitation is that to permit broad discovery into the allegations that lead to the committee's creation would effectively undermine the reasons the committee was appointed in the first place.
This decision permitted much broader discovery into the merits of the one person committee's conclusions because of the special circumstances involved in this battle between family members and the limited disclosures given about the reasons for selecting the single member of the committee. The rationale behind the decision still applies to increase discovery of other single member special committees.
ShareDistrict 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 ›
ShareSuperior 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.
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