Posts from 2008

Court of Chancery Refuses Dissolution of LLC

In re Seneca Investment LLC, C.A. 3624-CC (Del. Ch. Sept. 23, 2008)

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.

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Superior Court Employs Objective Contract Principles, Grants SJ To Builder

Capano Homes, Inc. v. Syed, 2008 WL 4182039 (Del. Super. Ct. Sept. 8, 2008).

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 ›

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Court of Chancery Breaks New Ground with Remedy

In re Loral Space and Communications Consolidated Litigation, C.A. 2808-VCS (September 19, 2008).

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.]

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Superior Court Addresses Allocation Of Defense Costs Across Multiple Towers

HLTH Corp. v. Agricultural Excess and Surplus Ins. Co., 2008 WL 3413327 (Del. Super. Ct. July 31, 2008).

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.   

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Superior Court Denies SJ, Leaves For Jury Whether Agent Had Authority

Jack J. Morris Assoc. v. Mispillion Street Partners, LLC, 2008 WL 3906755 (Del. Super. Ct. Aug. 26, 2008). 

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.

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Court of Chancery Establishes Procedures for Contested Advancement Claims

Duthie v. CorSolutions Medical, Inc., C.A. 3048-VCN (Del. Ch. Sept. 10, 2008)

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.
 

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Court of Chancery Dismisses Derivative Suit for Bad Conduct and Lack of Standing

Parfi Holding A.B. v. Mirror Image Internet Inc., C.A. 18507-VCS (Del. Ch. Sept. 4, 2008)

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.

 

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Court of Chancery Permits Settlement of Suit with Suit To Be Filed Against Insurers

In re Electronics for Imaging Inc. S’holders Litig., C.A. 2797-VCL (Del. Ch. Sept. 4, 2008)

 

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.

 

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Court of Chancery Permits Discovery for a Settlement Hearing

In re Countrywide Corp. S'holders Litig., C.A. 3464-VCN (Del. Ch. Sept. 3, 2008)

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.

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Court of Chancery Upholds Director Decision Rejected by Stockholders

In re Lear Corp. S'holder Litig., C.A. 2778-VCS (Del. Ch. Sept. 2, 2008)

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.

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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.

 

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Court of Chancery Permits Reasonable Time To Invoke MAC Clause

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.

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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 ›

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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.

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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).

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