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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 14 posts from March 2008.
SEC General Counsel Brian G. Cartwright Addresses the Role of Foreign and Domestic States in Securities Regulation and General Corporation Law
SEC General Counsel Brian Cartwright discussed the emergence of transnational businesses and the global securities market in a speech at Widener University School of Law on March 28, 2008. The speech, titled "The Role of the States (Foreign and Domestic)" (available here), focused on the implications the global securities market and the spread of free market economies around the world creates for federal securities regulation and states' regulation of internal corporate affairs. Mr. Cartwright noted that as transnational businesses with global stockholder bases continue to flourish, both the SEC and Delaware may need to evaluate and adjust to the impact this will have on the regulation of these businesses.
This decision confirms that for limited liability companies the rule applies from corporate law that a suit for inspection of books and records is a limited case that may not also include other claims such as breach of fiduciary duty.
Vice Chancellor Parsons of the Delaware Court of Chancery heard arguments this afternoon in connection with Defendants motion to dismiss or alternatively to stay the Delaware TRO action in favor of the first-filed New York action. The core of Defendants argument was centered on the McWane and forum non conveniens doctrines.
The arguments raise several interesting questions: (1) to what extent would Delaware courts defer to New York courts when matters involve Delaware corporate law; and (2) how would the Delaware court handle, among several other issues, the issue of comity urged by the defendants.
Several collateral arguments were also raised with respect to obtainment of compulsory process with respect to witnesses located in New York, particularly federal witnesses and the intersection of New York Stock Exchange Rules with Delaware law.
Plaintiffs argued that unique and novel issues of Delaware law are involved and that the McWane and forum non conveniens doctrines do not require deference to New York courts under relevant Delaware precedent.
Plaintiffs requested an expedited preliminary injunction hearing before May 8, 2008. The New York court has scheduled arguments related to the first-filed New York preliminary injunction application on that date.
Vice Chancellor Parsons noted the urgency in the matter and took it under advisement. He concluded that a ruling will issue in a few days.
Directors who rely on advancement rights under a corporate bylaw need to be aware that those rights may be lost if the bylaw is amended. Delaware law, as this decision notes, permits elimination of advancement rights in a bylaw at least up to the moment those rights "vest" by the filling of a suit that entitled the director to advancement.
This decision is also interesting for its discussion of the Levy case that held when a director has his fees paid for by a third party, he may lose his right to seek advancement from the corporation. This decision limits Levy to cases where the third party is obligated to pay the fees.
Corporate bylaws sometimes provide advancement rights in litigation filed by a director, but that is rare. However, when a director is sued, the question remains if he has advancement rights in that circumstance, and whether he may get those rights to cover a counterclaim in the absence of a bylaw right to do so when bringing litigation. This decision holds that if the counterclaim is compulsory under the rules of procedure, advancement is possible.
In Re IAC/Interactivecorp, C.A. 3486-VCL (Del. Ch. March 28, 2008)
In this widely reported decision, the Court of Chancery applied well established principles of contract construction to determine when a proxy would be upheld. Once again, the Court rejected an attempt to modify the contract language to imply a duty of good faith and fair dealing, or a fiduciary duty that would override the rights given in the contract.
This comprehensive decision explains Delaware law on the settlement of a class action when the proceeds of a settlement will involve buyers, sellers, and holders of stock in a Delaware corporation. This allocation problem is a difficult one and the Supreme Court held that allocation issues may be resolved in a separate hearing after the settlement with the defendants is approved.
The opinion is also important in explaining the scope of a release that the court will approve in connection with a settlement. There is often a tension between the interests of the defendants who ask for the broadest release possible and the interests of other litigants who want the release limited. Here, for example, objectors to the settlement had a federal case pending that arose out of the same core facts involved in this settlement. The Delaware Supreme Court permitted the release to include a claim arising out of those core facts even if it might affect the federal litigation.
This case is an insurance coverage dispute between Tyson Foods, Inc., and certain of its underwriters over damages caused by Hurricane Katrina. The underwriters filed two declaratory judgment actions in Delaware seeking denial of coverage. Two weeks later Tyson filed an action in Mississippi. Tyson then moved to dismiss or stay the Delaware action.
The Superior Court found that the underwriters’ Delaware action was first filed. The court then applied the Cryo-Maid factors to determine if the Delaware action should nonetheless be dismissed or stayed on forum non conveniens grounds. The court considered (1) whether Delaware law governs the case; (2) the relative ease of access to proof; (3) the availability of compulsory process for witnesses; (4) the possibility of a view of the premises; (5) the pendency or nonpendency of a similar action or actions in another jurisdiction; and (6) all other practical considerations that would affect the trial. More ›
See latest developments on 03/31/08 above: Last Thursday, a class action complaint was filed against Bear Stearns and its directors in the Court of Chancery. The complaint alleges that the company has failed to maximize shareholder value by agreeing to be purchased by JPMorgan Chase for $2 per share. The complaint further alleges that, by agreeing to the deal, the company has favored numerous constituencies over the shareholders.
Update: The New York Times reports that JPMorgan Chase raised its offer to $10 per share. Professor Ribstein has commented , along with Pileggi.
Further Update: An additional class action was filed against Bear Stearns on Monday by the Wayne County Employees' Retirement System . And, yesterday a TRO was filed on behalf of the plaintiffs in both actions, seeking to enjoin the sale, which is set to close on April 8. Both actions, and the accompanying TRO, have been assigned to Vice Chancellor Parsons.
State of Florida, et al. v. Abbott Laboratories et al., Del. District Court 1:08-CV-00155 (filed March 18, 2008).
A group of eighteen states and the District of Columbia filed a complaint in Delaware District Court against Abbot Laboratories, Fournier Industrie et Sante and Laboratoires Fournier S.A. under the Sherman Act, alleging an unlawful monopolization of the fenofibrate market. Defendants allegedly feared that competition from generic manufacturers would reduce profits from their TriCor product, a drug which regulates triglyceride and cholesterol levels. The complaint can be viewed here.
In re infoUSA, Inc. Shareholders Litigation, Consol. C.A. No. 1956-CC (March 17, 2008).
A special litigation committee was formed by the board of infoUSA, Inc. at the end of December, after a motion to dismiss derivative litigation had been denied and after a finding had been made by the Court of Chancery that demand was excused. The SLC moved to stay the ongoing derivative litigation in January, seeking a period of 150 days in which it could investigate the substance of the claims in the action. The plaintiffs opposed such a stay, asserting that the SLC was formed "too late" and should not be allowed to derail the ongoing litigation.
The Court of Chancery rejected this position: "The fact that I have already determined that demand is excused demonstrates why the board must act by means of a special committee; it does not in any way explain why it cannot act through an SLC." Consequently, the requested stay was granted. The Court also rejected as premature any challenge to the independence of the SLC, finding it serves the purposes of judicial economy to do so after the SLC issues its report. The letter opinion can be viewed here.
This is a useful decision on the proper interpretation of a bylaw that governs stockholder proxy proposals in light of SEC Rule 14a-8. The Court held that the bylaw only applied to stockholder requests to have a proposal included in the company's proxy materials under rule 14a-8. In that way the Court again emphasized that Delaware interprets bylaws so as to increase the ability of stockholders to vote.
In the latest of the Chancery decisions on complaints challenging the grant of options, the Court has explained what it takes to state a derivative complaint that excuses demand on the Board. Briefly, the Court here focused on what was disclosed to the stockholders when they were asked to approve option plans or elect directors who had received option grants. First, full disclosure is required, particularly of practices that are likely to lead to increasing the value of the options, such as the bullet-dodging alleged in this case.
Second, the fact that a majority of the board received the options also made them interested enough to excuse demand.
For a long time it has been evident that some plaintiffs show up frequently as class representatives. The recent scandal involving perhaps the major securities class action law firm has only reminded everyone of the odd "coincidence" that one person could have so many class actions to bring. Now the Court of Chancery has done something about it and a warning has been issued as a result. This decision awarded attorney fees to the defendants in a man-bites-dog twist to the ending of a class action.
Of course, the facts in this case are highly unusual. When the named plaintiff tried unsuccessfully to have the court approve a settlement basically for attorney fees alone, he then tried to just dismiss the case, conditioned upon defendants' agreement to keep certain information confidential. Instead, the defendants fought back and discovered the named class representative had a string of investment entities that in turn owned very small stakes in many publicly owned corporations. No rational financial purpose justified these investments, except as a way to pursue law suits. When the plaintiff conditioned settlement on secrecy, the court held that was bad faith and awarded attorney fees to the defendants for resisting such a dismissal.
It is now likely that we will see much more aggressive pursuit of oppositions to class certifications. Discovery of the named plaintiff and his connections to the class counsel will be the new trend. As this decision illustrates, the ability to do data searches to find all the actions filed by a plaintiff and any law firm will also aid in that effort.