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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Showing 9 posts from August 2008.

Court of Chancery Defines Bad Faith, Again

McPadden v. Sidhu, C.A. 3310-CC (Del Ch. Aug. 29, 2008) 

This decision again affirms that bad faith is not the same a gross negligence and explains the difference. That distinction is important because usually directors are immunized from decisions made in good faith, even if negligent.

 

Court of Chancery Permits Reasonable Time To Invoke MAC Clause

Posted In Case Summaries, M&A

Henkel Corp. v. Innovative Brands Holdings LLC, C.A. 3663-VCN (Del. Ch. Aug. 26, 2008)

Merger agreements frequently permit a merger to be terminated in the event of a materially adverse change to the business of the company to be acquired. When the right to invoke such a MAC clause is not set by the agreement, this decision holds that it must be invoked within a reasonable time. What is reasonable depends on the circumstances.

Superior Court Holds D&O Insurer's Consent Was Required For Settlement

Federal Ins. Co. v. Hilco Capital, LP, 2008 WL 3021109 (Del. Super. Ct. Aug. 5, 2008).

This coverage dispute arises out of the settlement of an underlying breach of fiduciary duty action. The plaintiffs and defendants (insureds) in that underlying action, along with the first-layer D&O carrier, reached a settlement agreement without the consent of the excess liability carrier, despite the settlement implicating that policy. 

 

The excess liability carrier objected to the settlement arrangement and refused to consent. The plaintiffs informed the insureds that it would not seek to recover any part of the judgment from them if they agreed to the settlement, despite the excess liability carrier’s lack of consent.  More ›

Court of Chancery Sanctions Counsel

Postorivo v. AG Paintball Holdings Inc., C.A. 2991-VCP (Del. Ch. Aug. 20, 2008)

This decision carefully reviews the rules that attorneys must follow in Delaware when dealing with possibly privileged documents belonging to another party or in interviewing former employees of an opposing party. Counsel must take care to preserve a possible privilege even if she thinks it is waived or not properly asserted. Further, what has become know as a Monsanto statement must be given to former employees of an opposing party before they are interviewed.

Court of Chancery Answers its Critics of the Ryan Decision

Ryan v. Lyondell Chemical Company, C.A. 3176-VCN (Del Ch. Aug. 29, 2008)

The recent decision in this case denying summary judgment has set off a storm of protest that the Court of Chancery is ignoring the business judgment rule and the director exculpation statute. The critics argue that when directors are disinterested in a merger, have independent advice and secure a market premium, their decision cannot be reviewed. This more recent decision in the same case denying an application to take an appeal effectively answers those critics.

This opinion makes it clear that the Court knows very well that even gross negligence is not the same thing as bad faith. Thus, a board that is negligent cannot be held liable for a bad decision when its company has a director exculpation provision in its charter. The opinion carefully reviews the key precedents that discuss the limited circumstances where bad faith will exist, particularly when there is an "intentional dereliction of duty or a conscious disregard of one's responsibilities."

The key to the prior opinion, as the court’s opinion points out many times, is that it was based on a limited summary judgment record that required the court to accept all the allegations of the complaint and draw all reasonable inferences against the directors. Indeed, two even more recent decisions make it clear the Court of Chancery is upholding the business judgment rule and the statutory protection of directors who act in good faith. See McPaddin v. Sidhu, C.A. 3310-CC (Del. Ch. Aug. 29, 2008) and In re Lear Corporation Shareholders Litigation, C.A. 2728-VCS (Del. Ch. Sept. 2, 2008).

Court of Chancery Upholds Waiver of Dissolution and Receiver Rights in LLC

R&R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, C.A. 3803-CC (Del. Ch. Aug. 8, 2008)

This decision upholds provisions in an LLC agreement that waived the rights of members to seek its dissolution or the appointment of a receiver. Thus, once again, the Court has held that the principle of freedom of contract will be enforced in Delaware. The covenant of fair dealing, which cannot be waived by statute, remains as the remedy for abuses.

Superior Court: Implied Contract Created When Party Accepts Responsibilities Beyond Written Terms

Gay v. Delmarva Pole Bldg. Supply, Inc., 2008 WL 2943400 (Del. Super. Ct. July 18, 2008).

This case will give pause to contracting parties who consider taking on responsibilities beyond the written terms of the contract.

Here, the parties entered into a contract for the construction of a building. The property owner made a down payment to the builder, pursuant to a contract which placed the responsibility on the property owner to make sure the location did not conflict with any building code or zoning ordinance. But the proposed use violated the zoning code, so a variance was needed. More ›

Superior Court Bars Indemnification Claim Brought By Successful Chancery Plaintiffs

LaPoint v. Amerisourcebergen Corp., 2008 WL 2955511 (Del. Super. Ct. July 25, 2008).

This decision will counsel plaintiffs to seek indemnification under a contract during the underlying action for breach of that contract, and not to initiate a subsequent, separate action. 

 

The plaintiff shareholders of a subsidiary brought an action against the parent company for breach of the merger agreement between the two companies. The plaintiffs prevailed in that action and were awarded damages. They sought attorneys’ fees and costs, but the Court of Chancery’s final order did not address that issue.

 

After the final order and judgment was entered, the plaintiffs requested reimbursement for their attorneys’ fees, pursuant to the indemnification provision in the merger agreement. When the defendant refused, the plaintiffs filed this action in Superior Court.  More ›

Court of Chancery Explains Tortious Interference Claim

Excite LLC v. Soni, C.A. 2476-CC (Del. Ch. Aug. 1, 2008)

In this decision, the Court explains in detail what is needed to plead a claim for tortious interference with a business relationship. The opinion is particularly helpful in tackling the difficult issue of when a director may be considered to have interfered in a contract with his own corporation.