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Showing 9 posts from January 2009.

Supreme Court Clarifies Stockholder Ratification Law

Gantler v. Stephens, C.A. 132,2008 (Del. Jan. 27, 2009)


This is an important decision because it limits when stockholder approval of a transaction has the effect of ratifying director action. Moreover, it limits the effect of stockholder ratification by holding that the business judgment level of review still applies to the directors' action, rather than holding that ratification extinguishes any claim.


The ratification holding is that stockholder ratification only occurs when the stockholders approve a transaction that the directors are empowered to take without the approval of the stockholders. For example, because directors are able to issue stock without stockholder approval, the added approval of the stockholders would ratify their decision to sell stock. In contrast, because a merger already requires stockholder approval, the approval of the stockholders does not constitute "ratification" of the directors' decision to recommend the merger. They approve it but do not "ratify" it. How is that for a distinction?


The rationale for this tightly reasoned result lies in the difference under Delaware law between complying with a controlling statute's requirements to carry out a transaction and having a good reason for doing the transaction in the first place. In other words, in Delaware just because you have the power to act (the stockholders voted for it) does not mean you should act (a decision that is measured by Delaware's law of fiduciary duty).

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Delaware's Top 10: The Most Important Corporate Law Decisions of 2008

    The following is a summary of the top 10 most important corporate law decisions published in 2008. The Delaware courts addressed a range of issues this past year in the areas of fiduciary duty, the negligence - bad faith continuum, advancements and mergers.

Fiduciary Duty

    The Delaware courts found occasion to reaffirm in one case and expand in two cases the reach of fiduciary duty law.

    The Court of Chancery reaffirmed that warrant holders are not owed fiduciary duties and there is no duty to keep them informed. See Corporate Prop. Assoc. 14 Inc. v. CHR Holding Corp., C.A. No. 3231-VCS, 2008 WL 963048 (Del. Ch. Apr. 10, 2008). However, the Court found further that a corporation has a duty to a warrant holder to truthfully answer its inquiries about corporate plans. When asked about a matter that implicated the warrant holders' financial interest, the corporation had a duty to answer truthfully.  More ›


Court of Chancery Denies TRO for Laches

Posted In Injunctions

Topspin Partners L.P. v. Rocksolid Systems. Inc., C.A. 4275-VCL (Del. Ch. Jan. 21, 2009)


This decision illustrates the sometimes forgotten Delaware rule that if you get a TRO you better act fast. Here the plaintiff sat on its rights for ten months and the Court, while finding that irreparable harm might occur and that the claims appeared meritorious, denied immediate relief because of the delay.



Court of Chancery Refuses To Dismiss Business Tort Case

Posted In Business Torts

Agilent Technologies, Inc. v. Kirkland, C.A. 3512-VCS (Del. Ch. Jan. 20,  2009)


This decision is interesting because it illustrates what a party to litigation can or cannot say about the case. The failure to adhere to the rules results in a business tort claim for unfair practices, etc. Here is the rule in a nutshell: You can say that there is a suit on file but you cannot say that you are sure to win and put the other side out of business. After all, that is for the Court to decide.



Superior Court Holds Chancery Has Exclusive Jurisdiction To Appoint Arbitrator

Firemen's Insurance Co. v. Birch Pointe Condo. Assoc., Inc., C.A. No. 08C-04-081 JAP (Del. Super. Dec. 17, 2008).

In this decision, the Superior Court ruled sua sponte that it lacked subject matter jurisdiction over an action seeking declaratory relief and requesting the appointment of an arbitrator. The court held that under 10 Del. C. § 5704 the Court of Chancery has exclusive jurisdiction to appoint an arbitrator when the parties’ agreed upon method of appointment fails for any reason.   


Court of Chancery Explains the Role of Merger Subs

Posted In M&A

Alliance Data Systems Corporation v. Blackstone Capital Partners V, LP, C.A. 3796-VCS (Del. Ch. Jan. 15, 2009)


Here the target tried to argue that the parent entity should be responsible to pay damages for its sub’s failure to close under the facts of this case. It claimed that as all the parties knew the parent had to support the sub to get the deal done, the merger agreement should be read to imply that obligation. The Court of Chancery rejected that argument as inconsistent with the terms of the merger agreement and noted that if the target knew of the risk and failed to cover that risk by securing the parent's guarantee in its agreements, then that was too bad.


Many mergers involve the use of a new, assetless entity that is a subsidiary of the real acquiror, as a merger partner. When the parent does not guarantee the obligations of the sub, however, the merger agreement then is really just an option for the parent to exercise or not as it sees fit. For if the sub does not close the merger, the other parties to the deal are left without a real remedy. This insulation of the parent entity is understood and intended, and is a risk the target is willing to take to get the best price.




Court of Chancery Awards Fees in Closely Held Entity Litigation

Julian v. Eastern States Construction Company, C.A. 1892-VCP (Del. Ch. Jan. 14, 2009)


This decision answers the question of whether the normal rules governing attorney fee awards in derivative litigation will be applied in closely held entities. This has been a concern because some have argued that when the entity is closely held, the recovery in the derivative litigation benefits the few owners more directly and immediately than in the case of publicly held companies. For example, in subchapter S companies, the recovery is often distribution to the owners; hence, the argument goes, there is no need to award fees to give an incentive to the plaintiff to bring a derivative suit.


Here the Court rejected that argument and awarded fees.  After all, the amount distributed to the successful owner in such cases may not be enough to pay her attorneys and some additional incentive is appropriate.


The opinion is also interesting in its discussion of how to calculate those fees. Given that the recovery is fairly small, so should the fees and a multiple of hourly rates may not be warranted in such cases.


Court of Chancery Dissolves a Deadlocked LLC

Fisk Ventures, LLC v. Segal, C.A. 3017-CC (Del. Ch. Jan. 13, 2009)


It has long been established that a limited partnership may be dissolved when a deadlock makes it impossible to carry on the partnership business. Here the Court of Chancery applied that same law to an LLC as the statute also provides for a judicial dissolution when it is "not reasonably practical to carry on the business" for which the entity was created.


Court of Chancery Approves Option Back Dating Case Settlement

Posted In Directors

Ryan v. Gifford, C.A. 2213-CC (Del. Ch. Jan. 2, 2009)


In this decision the Court approves the settlement of a stock option back dating case. The opinion carefully goes through all the analysis of when to approve a settlement, particularly when the recovery is adequate under the circumstances.


The attorney fee award of $9,000,000 or about $1,100 per hour shows that contrary to some beliefs, the Court is prepared to award significant fees for hard, excellent work that achieves a good result.


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