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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 12 posts from September 2008.
This ninety-one page opinion is must reading on how to interpret a merger agreement and on the parameters of the obligation to proceed in good faith to close a deal. In upholding the obligation to at least try to obtain the financing to close, the Court goes into great detail on why the party seeking to escape its obligations bears a heavy burden to explain actions it has taken that may impede its ability to get financing or otherwise close a deal that it no longer finds attractive.
This decision repeats the settled Delaware law that the Court of Chancery will not appoint a receiver for a solvent Delaware corporation absent extraordinary circumstances. Of course, having a court tell the world that your tax evasion is not "extraordinary" justification for a receiver may have been punishment enough.
This decision applies the corporate law rule that the Court of Chancery will not dissolve a solvent entity except for extraordinary reasons. Merely acting as a holding company without an active business is not even close to good enough to warrant dissolution.
This decision implements the objective theory of contracts adopted by the Delaware courts. The dispute involved a homebuyer who refused to proceed to settlement, claiming that the builder breached their written agreement and that the buyer should therefore be excused from performing. The homebuyer alleged that the completed home did not meet the parties’ agreed upon specifications for the dimensions of the garage and type of veneer. The court granted summary judgment to the builder. More ›
This decision covers the now familiar ground of a review of an interested transaction with a controlling parent company that is blessed by a dysfunctional special committee. After finding the transaction was not fairly negotiated, and not substantively fair as well, the Court has granted an unusual remedy. Rather than awarding money damages, the Court has ordered the deal be restructured to make it fair, by converting the preferred stock issued to the parent to non-voting common stock.
The opinion is also particularly interesting for its discussion of the role of the special committee used in this transaction. The committee apparently felt its role was to get the best terms in the deal proposed by the parent company to make it "fair," rather than to question whether the deal was in their company's best interest. The committee's assumption that they could not just say no was in error.
The decision also touches on the rights of bondholders when a major bondholder has its consent to redemption effectively purchased. The Court noted that it is not unusual for indenture covenants to preclude that vote buying, and the absence of such a prohibition here was fatal to the complaining bondholders.
[UPDATE: The Delaware Supreme Court affirms this decision on July 23, 2009.]
When one company acquires several other companies, which carry their own D&O liability coverage, the resulting entity then holds multiple towers of coverage.
Here, the company held multiple towers of coverage and sought reimbursement for the defense costs it was advancing to certain of its officers and directors who were prosecuted in a criminal case. The issue that arose on summary judgment was whether the court had to allocate the defense costs across the multiple towers, while the criminal case was ongoing.
Since none of the contracts required such an allocation, the court held that the insured company could elect to collect payments in advance from any tower and that the court would not mandate allocation at this stage. The court left open the possibility that allocation could be required at a future time, presumably upon final disposition of the case.
This decision briefly reviews the three types of authority by which an agent may bind a principal: actual authority, implied authority, and apparent authority. The principal was a limited liability company, which failed to pay the vendor it purportedly engaged to perform marketing services.
The issue that arose on summary judgment was whether the purported agent, who was removed as the general manager of the LLC two days before signing on behalf of the entity, had authority to bind the entity. The court denied the vendor’s motion for summary judgment, holding that it was up to a jury to determine that question based on the factual circumstances.
When advancement is sought, the amounts are often objected to as too large. While the Court of Chancery in the past has not wanted to monitor fees in such cases (leaving the amounts to be finally determined at the indemnification stage), here the Court agreed to appoint a special master to review the advancement requests. It remains to be seen whether the Court will regret this step because the Delaware Supreme Court requires a master's decision to be reviewed de novo by the Court of Chancery.
In this highly unusual case, the Court of Chancery dismissed the complaint because the plaintiff had not told the truth as to why it was not proceeding promptly and because the named plaintiff had lost standing by conveying away any economic interest in the stock it held in the company.
The standing decision sets new precedent. The Court held that when a plaintiff retains only technical title to stock and assigns all economic interest in that stock to a third party, that is effectively the sale of the stock. Of course, under established law, the sale of stock while a suit is pending violates the Delaware continuous ownership rule and warrants dismissal of a derivative suit.
It is common for the settlement of a derivative suit to be funded by the D&O insurers. Here, however, in a twist to that common event, the Court upheld a settlement where the company is permitted to sue the D&O insurers, with counsel for the stockholder plaintiff as its attorneys, to force the insurers to fund.
In this admittedly unusual case, the Court of Chancery has expanded the limited discovery available to an objector of a proposed settlement of a derivative case. The discovery includes the valuation of the derivative claims' value to the company. The Court also notes the potential privilege problems that may be involved.
In this decision the court dismissed claims against directors whose decision to approve a merger was rejected by the stockholders and the company then had to pay a termination fee. The Court carefully explains why directors may sometimes be wrong, but without incurring any liability for that decision.