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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 4 posts from November 2008.
The Court of Chancery rejected the proposed settlement of this derivative suit for two reasons. First, the transaction under attack in the litigation was completed after a modification favorable to stockholders before the settlement was presented for approval, the modification was considered by the board before suit was filed, and the transaction was not dependent on approval of the settlement. Thus, the Court concluded that there was no consideration for the settlement because the modification to the deal that plaintiff relied upon to justify the settlement would have happened anyway without the suit. A benefit received by stockholders that is not caused by litigation is not valid consideration for the settlement of the litigation.
In addition, the Court was troubled by the effect of the release that was part of the settlement on related litigation in New York. Given that the stockholders received virtually nothing for the release, it was wrong to affect their rights in the litigation elsewhere that might benefit them.
District Court Awards Punitive Damages Based in Part on Discovery Abuse, Denies Attorneys' Fees for Inadequate Proof
In this opinion the Court sanctioned the defendant’s conduct, including discovery abuse, by awarding punitive damages. The Court first entered default judgment against the defendant after his “repeated dilatory discovery conduct and his refusal to appear for deposition.” The plaintiff sought punitive damages in addition to compensatory damages, and the Court found that the entry of default did not preclude awarding punitive damages. The failure to appear for deposition was “but one example of the kind of willful conduct that requires an award of punitive damages.” The plaintiff also sought attorneys’ fees and expenses both for the Delaware action and proceedings in South Africa. The Court, however, denied this claim, finding that an award for fees in the South African litigation was unsupported by law, and the summary information submitted for fees for the Delaware proceeding was inadequate as a matter of law because it did not allow the Court to make a thorough analysis of the time records.
In a novel attempt to invoke the jurisdiction of the Court of Chancery, the plaintiff tried to rely upon Section 111(a)(2) of the Delaware General Corporation Law that provides the Court of Chancery jurisdiction in disputes over stock. Here the plaintiff was really seeking money damages for the failure to be paid the full value of his SARs. The court held this was a claim for money damages that it did not have jurisdiction to decide, not a claim over ownership of stock.
In this major opinion, the Court of Chancery held that a manager of a Delaware Statutory Trust has a fiduciary duty to the Trust absent a clear exclusion of that duty in the trust instrument. This conclusion has broad implications including that the owners of the manager may also have such duties in connection with transactions that arguably benefit the owner. That is consistent with a long line of Delaware case law in other contexts, such as for corporations and limited partnerships.
This once again illustrates the need for very careful drafting in these alternative entities where the governing instrument may set the rules of the game. Failure to do so means that principles of corporate law, or in this case, trust law, will control by default. That will defeat the whole purpose of using an alternative to the traditional corporate form to gain the right to draft rules for that particular transaction.