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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 10 posts from May 2008.
Berger v. Pubco Corp., C.A. 3414-CC (Del. Ch. May 30, 2008)
More often than we may expect, Delaware corporations commit errors in notifying stockholders of their right to an appraisal after a merger. For some reason, on several occasions the wrong version of the appraisal statute was sent to the stockholders, violating the statutory requirement that a current version accompany the notice of appraisal rights. More commonly there is a disclosure problem, often a failure to provide enough information to permit the stockholders to decide if they should seek appraisal rights. This case involves both using the wrong version of the statute and failing to tell the stockholders of a closely held company how the merger price was set. Both those errors called for the Court to grant quasi appraisal rights.
The decision is particularly interesting for its explanation of how quasi appraisal proceedings should work. Basically, it involves starting all over again by sending out a corrected notice with the right statute attached and giving stockholders another chance to seek appraisal. Note that this is more favorable to the company than simply holding that the case may proceed as a class action for all minority stockholders.
When a board is about to be sued, it is a good idea to review the bylaws to see if they provide the right to have your attorney fees advanced by the corporation. Here the claim was that the board's decision to amend the bylaws to cover advancement rights was an interested transaction that was subject to the intrinsic fairness rule. Prior case law had applied that rule when the litigation was actually pending and a board acted to confer advancement rights as a result. The Court ruled that the decision to confer advancement rights for any future litigation was protected by the business judgment rule. Hence, the fact that the litigation had not yet been brought was important.
It is possible to overstate the holding of this case as it involved an odd set of facts. If the filing of suit against the directors was virtually assured, the decision might have been different. Some caution is required before deciding that the rule of this case applies to all pre-litigation decisions on advancement.
A Special Committee appointed by the Delaware Superior Court has released its report and recommendations on Superior Court toxic tort litigation. The report (copy available here) followed the Special Committee’s investigation into concerns expressed by the Delaware State Chamber of Commerce that an increasingly large number of asbestos cases was adversely impacting the ability of the Delaware Superior Court to effectively and fairly adjudicate civil cases.
The Special Committee
- solicited input from all the parties involved in toxic tort litigation in Delaware
- held a public hearing where numerous persons spoke (including practicing attorneys, law professors and Chamber representatives) and
- met separately with representative groups of defendants’ and plaintiffs’ counsel.
Almost entirely, the focus of all these groups was on asbestos litigation. After studying all this information for over five months, the Committee concluded “that the Delaware asbestos litigation is fairly conducted for both defendants and plaintiffs and is effectively resolving claims ... very well.”
The Special Committee particularly noted the willingness of the Superior Court judges to meet with the litigants’ counsel to structure unique procedures that fit their needs in this high-volume litigation. Recently, those procedures were amended to address concerns over plaintiffs’ disclosures and other matters. Hence, the Special Committee recommended that the parties to Delaware's asbestos litigation continue to address amongst themselves how to solve any remaining concerns over how that litigation is conducted.
While it is too early to know if the Special Committee’s report will be fully accepted by all concerned, initial reactions have been positive. In particular, the willingness of the Delaware courts to address litigants’ concerns in a positive manner has served to further support Delaware’s reputation for a fair court system.
Edward M. McNally, a Partner and Chair of the Litigation Practice of Morris James LLP, was a member of the Special Committee. If you have specific questions about the report, he can be contacted here.
Determining when indemnification rights apply is sometimes tough to do. The claims for which indemnification are sought are often drafted so as to avoid alleging that the defendant is being sued for something he did as an officer or director, but instead allege that he acted in a personal or agency relationship such as a lawyer. In this case, the Court of Chancery offers an insight into how that Court will parse through this problem. Put simply (and perhaps too simply), if there is a doubt as to the basis for the claim, the person seeking indemnification will prevail. This is as it should be given the importance of preserving the right of indemnification.
This opinion also has some interesting insights into how to apply the Roven analysis that permits a defendant to counterclaim and still obtain indemnification for the fees incurred for acting offensively.
Effective March 1, 2008, the Superior Court amended Civil Rule 16 and repealed Civil Rule 16.1 to alter the compulsory alternative dispute resolution ("ADR") process mandated under Court rules. The amendments substitute mediation for arbitration as the Court's default format for ADR in the event the parties cannot agree. The amendments also require parties to make a good faith effort to agree on an ADR Practitioner, or face possible Court-imposed sanctions.
Solae, LLC v. Hershey Canada Inc., 2008 WL 2011914 (D. Del. May 9, 2008)
Solae LLC (“Solae”), a Delaware LLC with a principal place of business in Missouri, brought a declaratory relief and breach of contract action in Delaware District Court against Hershey Canada, Inc. (“Hershey Canada”), a Canadian corporation with its principal place of business in Ontario. The claims arose out of a contract for Solea’s provision of soy lecithin to Hershey Canada’s Ontario facility. A shipment of the product contained salmonella, prompting a recall of Hershey Canada’s product in Canada and a Canadian government investigation. Hershey Canada informed Solae that it was liable for any ensuing damages from the recall and investigation, and also refused to accept or pay for additional deliveries of the product under the contract. Solae thereafter initiated this declaratory relief and breach action, and Hershey Canada sought dismissal, among other things, on lack of personal jurisdiction grounds. More ›
Fisk Ventuers LLC v. Segal, C.A. 3017-CC (Del. Ch. May 7, 2008)
A Delaware LLC is a creature of the members' contract. Here the LLC agreement gave voting rights to a class of members that effectively gave them veto rights over certain actions. When those members exercised those veto rights, the other members sued claiming that constituted a breach of duty. The Chancellor flatly rejected that argument as an attack on the veto rights that were given in the LLC Agreement.
The opinion also holds that a member's consultation with his designated managers on the LLC Board does not give Delaware jurisdiction over that member under the long arm statute's provisions that subject managers to jurisdiction in Delaware.
Sutherland v. Sutherland, C.A. 2399-VCL (Del. Ch. May 5, 2008)
Once again, the Court of Chancery has shot down a motion to dismiss a derivative suit based on the work of a one person SLC. This time while finding the SLC was independent, the Court felt its work was not adequate because of a lack of effort in reviewing accounting records.
The opinion is a useful collection of SLC law, particularly what not to do if you are going to use a SLC.
Personnel Decisions Inc. v. Business Planning Systems Inc., C.A. 3213-VCS (Del. Ch. May 5, 2008)
The Delaware Arbitration Act has a statute of limitations that is not found in some other arbitration acts. Here the court held that a demand for arbitration was barred by that limitation and as a result, arbitration would be enjoined. The decision is particularly important in setting out when the limitations period begins to expire.
Madison Real Estate Immobilien-Anlagegesellschaft Beschrankt Haftende KG v. KanAm USA XIX LP, C.A. 2863-VCP (Del. Ch. May 1, 2008)
This case sets out the law governing the right to inspect a limited partnership's records, particularly in the context of a possible tender offer. Delaware law draws a distinction between seeking inspection to determine the value of one's interest in the partnership and seeking inspection for purposes of making a tender offer. In the later case, inspection may be denied as not being for a purpose truly related to acting as a partner, but instead as an acquiror. While one might argue this distinction is too fine a line to draw, that is the law for now.
The opinion is also noteworthy for dealing with how to interpret a partnership agreement's contractual right to inspect. As the opinion points out, the right to inspect "books of account" is not as broad as the right to inspect "books and records."