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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 9 posts from April 2008.
Young v. Klaassan, C.A. 2770-VCL (Del. Ch. April 25, 2008)
The use of a special committee of the board to avoid derivative suits over allegations of breach of duty is well recognized. What is less well known is how to use the work of such a committee. Here the defendants improperly argued that a derivative suit should be dismissed because of the conclusions of a special committee formed after the complaint was filed. That use of information not alleged in the complaint converted the motion to dismiss into a motion for summary judgment and thereby permitted discovery into the work of the special committee.
The opinion also notes the "unusual" nature of the special committee in this case. The committee did not issue a report, barely had its existence disclosed, and otherwise proceeded irregularly. One has to wonder why it was even formed if it was to act so poorly.
Ebay Brings Stockholder Action In Court of Chancery Against Craigslist And Its Directors For Diluting Its Minority Stake
Yesterday eBay Domestic Holdings Inc. brought an action in the Court of Chancery, C.A. 3705-CC, against Craigslist and certain of its directors, challenging recent transactions implemented by the Craigslist board. eBay acquired a minority ownership interest in Craigslist (28.4%) back in 2004. It now alleges that Craigslist's directors have taken unilateral action in violation of their fiduciary duties and have disadvantaged eBay and its investment.
The complaint was filed under seal. The matter has been retained by Chancellor Chandler.
Superior Court Dismisses Negligent Misrepresentation Claim Because Contract Barred Reliance On Extra-Contractual Representations
This case illustrates Delaware’s objective theory of contract interpretation and underscores the importance of certain standard contractual provisions.
The plaintiff purchased software from the defendants and argued that it incurred significant losses due to material misrepresentations, including, for example, the extent of completion of the software. The defendants argued that the material misrepresentation claim was barred by the plain language of the contract, namely the exclusive remedy clause, integration clause, and disclaimer of extra-contractual representations.
The contract stated that indemnification was the exclusive remedy “in respect of any breach of or default under this Agreement . . . .” The integration clause stated that the written agreement was the entire agreement. And, the reps and warranties clause stated that the seller was making no representation or warranty in respect of any of its assets. The court held that the thrust of these three provisions was unambiguous: “no representations made outside of the four corners of the Agreement are to be given consideration by the parties in interpreting the terms.” That is, the provisions precluded the plaintiff’s argument that it justifiably relied on the extra-contractual claims made by the defendants.
Accordingly, the Superior Court dismissed the plaintiff’s negligent misrepresentation claim.
Levitt Corp. v. Office Depot, Inc., C.A. No. 3622-VCN (Del. Ch. April 14, 2008)
This is a case of bylaws gone bad. While the obvious intent of the company's advance notice bylaw was to obtain notice of what directors a dissident slate might want to nominate, the language of the bylaws was fatally deficient. Thus, this decision gives a good drafting lesson .
The bylaw required advanced notice of an intent to bring a matter before the annual meeting. However, the bylaw made an exception for any matter the company itself had noticed for the meeting. When the company, as always, noticed the meeting would include the election of directors, the court held that included the nomination of directors as part of the matters to be considered. Thus, the court held that the intent to nominate a dissident slate need not be noticed again by the dissidents in accordance with the advance notice bylaw provisions.
The way to avoid this mistake is to make it clear in the bylaws that the intent to nominate a slate different than that proposed by the company is subject to a reasonable advance notice provision in the bylaws. In short, state the rules of the game clearly.
Attorneys who cause a benefit for stockholders are entitled to be awarded. However, the benefit must be caused by the litigation they filed and not just happen to follow the institution of litigation. This gets tricky to determine sometimes as the plaintiff's attorneys insert themselves into the process of negotiating a higher merger price and then claim credit for it. Who gets that credit is the question.
That issue will be decided based on a record that includes the views of the participants in the merger discussions. Hence, that needs to be kept in mind and the record made at the time the events occur.
In the most recent edition of the ABA's Business Law Today publication, Vice Chancellor Donald F. Parsons, Jr., of the Delaware Court of Chancery, and Judge Joseph R. Slights, III, of the Delaware Superior Court review the history and development of the Delaware courts as the leading business courts in the country. The article titled, "The History of Delaware's Business Courts - Their Rise to Preeminence,"(available here) details some of the many features of both the Court of Chancery and the Superior Court that have made Delaware the forum of choice for complex corporate and commercial litigation.
Corporate Property Associates 14 Inc. v. CHR Holding Corp., C.A. No. 3231-VCS (Del. C. April 10, 2008)
In this case of first impression, the Court of Chancery held that a corporation had a duty to a warrant holder to truthfully answer its inquiries about corporate plans. This is significant because normally there is no fiduciary duty running to warrant holders and no duty to keep them informed. Here, however, finding that when asked about a matter that implicated the warrant holders' financial interest, there was a duty to answer a question truthfully.
Miller v. McDonald, C.A. 07-51350 (Bankr. Del. April 9, 2008)
In a case of apparent fist impression, a bankruptcy court in Delaware has held that Caremark duties apply to corporate officers as well as directors. Thus, corporate officers also have the duty to exercise reasonable care in oversight of corporate operations in their area of responsibility. This is hardly a surprise. However, given that the officer involved in this case was considered the company's general counsel, this decision has some far-reaching implications.