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

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Showing 13 posts from December 2009.

Court of Chancery Holds Accountant Liable for Insider Trading

Posted In Business Torts

Deloitte LLP v. Flanagan, C.A. 4125-VCN (December 29, 2009)

This decision holds a partner in an accounting firm liable for trading on the nonpublic information that he received in connection with his work at his firm. The Court upheld several theories of liability in what appears to be a case of first impression in Delaware. Thus, this decision paves the way for enforcing the duty to not misuse insider information apart from the Federal Securities laws.

Court of Chancery Imposes Severe Sanctions for Refusal to Arbitrate

Posted In Arbitration

Aveta Inc. v. Bengoa, C.A. 3598-VCL (December 24, 2009)

After the entry of an order compelling arbitration, the defendant delayed the arbitration and even sought to re-litigate the underlying suit compelling arbitration. The Court was not impressed and found the defendant in contempt, imposing severe sanctions.

Court of Chancery Explains When Receiver Appointed

Posted In Dissolution

In re Texas Eastern Overseas, Inc., C.A. 4326-VCN (December 23, 2009)

When it is "reasonably likely" that a corporation has some assets, the Court will appoint a receiver even if the corporation has been dissolved for 15 years.

Court of Chancery Explains Disclosure Rules

Posted In M&A

In re 3Com Shareholders Litigation, C.A. 5067-CC (December 18, 2009)

This decision explains that in litigating a disclosure claim it is important to relate the disclosures at issue to past decisions determining when a particular type of disclosure was actionable. Here the Court dealt with when projection must be disclosed and noted that not everything considered by management or a board must be put into the proxy statement.

Court of Chancery Awards Fees Based on Improved Nonmonetary Terms of Offer

Off v. Ross, C.A. 3468-VCP (December, 10, 2009)

In this unusual decision, the Court of Chancery awarded attorney fees after having previously declined to do so in a November 26, 2008 decision in the same case. The prior decision had been decided because of pending litigation that the Court did not want to affect by a premature approval of a settlement in this case. When that other litigation was settled, it was time to address the settlement here. This illustrates the flexibility of the Court of Chancery in dealing with competing litigation.

The settlement was approved and fees awarded based on the plaintiff’s success in opening up a limited offer to purchase stock to all of the entity's stockholders.

Court of Chancery Declines to Upset Unusual Arbitration Ruling

Posted In Arbitration

Zurich America Insurance Company v. St. Paul Surplus Lines Inc., C.A. 4095-VCP (December 10, 2009, revised April 14, 2010)

In this case, the Court of Chancery declined to upset an arbitrator's decision and explained the limits on the Court's review of arbitration awards. Here, that limit applied even when the arbitrator had declined to rule based on his decision that he lacked jurisdiction.

Court of Chancery Explains Sanctions for eDiscovery Abuse

TR Investors LLC v. Genger, C.A. 3994-VCS (December 9, 2009)

This is the most important recent decision on the Court's handling of discovery of emails and other e-documents. For spoliation, the Court imposed four forms of sanction: (1) it increased the burden of proof to a clear and convincing standard for the offending party to prove his case, (2) it held his testimony must be corroborated by other evidence to meet that burden, (3) it denied any claim of attorney-client privilege to certain documents, and (4) it imposed attorney fees for the sanction motion work.

This is also a good read for its explanation of how e-documents are stored in computers and servers and may be retrieved long after they were thought to be destroyed.

Court of Chancery Reviews Advancement Law on Counterclaims

Paolino v. Mace Security International Inc., C.A. 4462-VCL (December 8, 2009)

In this decision the Court examines when a corporate officer is entitled to have his fees advanced in defending a counterclaim against him. The opinion does so in the context of a full explanation of the Cochran. line of cases that determine when an employee is entitled to indemnification (when sued for acting in an official capacity) and when he is not (when sued for breaching his employment contract). That is not as easy a distinction as it may seem, and this case helps us understand it

Court of Chancery Limits When a Stockholder May Claim Appraisal

Posted In Appraisal

DiRienzo v. Steel Partners Holdings L.P., C.A. 4506-CC (December 08, 2009)

While it is well known that appraisal rights are limited to stockholders of record, sometimes stockholders do not really understand what it means to be "of record." They think if their name is on a brokerage statement, they are a "stockholder of record." Wrong! They must be listed on the records of the company to be "of record," and most stock in public entities is held by nominees, such as Cede & Co., to facilitate trading.

Here, the Court examines when the corporation is estopped by its conduct from denying appraisal rights and finds that the elements of waiver or estoppel are hard to establish and not present in this case.

Court of Chancery Summarizes Privilege Law

Posted In Discovery

Cephalon Inc. v. John Hopkins University, C.A. 3505-VCP (December 4, 2009)

This is a short, but excellent summary of the law of attorney/client privilege. It also is an example of how the Court conducts an in camera review of documents to decide privilege questions.

Expert Preparation Fees Permitted

Posted In Discovery

Reid v. Johnston, C.A. 08C-01-025-JRS (December 3, 2009)

In this case of first impression, the Court held that a party seeking to depose an opponent’s expert must pay for the expert's preparation time. However, to prevent abuse, the Court limited the fees to a time period equal to the length of the actual deposition. Talk fast to save money.

Court of Chancery Extends Jurisdiction to Parent Entity

Posted In Jurisdiction

Vichi v. Koninklijke Philips Electronics N.V., C.A. 2578-VCP (December 1, 2009)

This decision provides a full review of the basis for jurisdiction over foreign entities by the Court of Chancery. This includes a discussion of the limits of the conspiracy theory of jurisdiction.

Most interestingly, the Court holds that a parent company may be subject to Delaware jurisdiction because of the acts of agents of its subsidiaries, at least when those agents had the apparent authority to act for the parent. That may occur when, as here, the parent entity touts the business interrelationship of it and all its subsidiaries. This is another example of getting not wanting what you wished for and a caution against ignoring the separateness of corporate entities in how they do business.

Court of Chancery Explains Beneficial Ownership

Mangano v. Pericor Therapeutics Inc., C.A. 3777-VCN (December 1, 2009)

This decision illustrates another loop hole in a stockholder agreement designed to restrict voting rights. Briefly, the agreement provided that an otherwise controlling stockholder would place his stock in a voting trust that would then vote his stock as did the other stockholders. However, there was a provision that permitted the otherwise majority stockholder to transfer his stock to a family member and another provision that terminated the trust if the majority stockholder's stock in trust fell below 45% of the stock outstanding.

Of course, what the majority stockholder did was transfer enough stock to his sister to make him own less than 45% and thereby terminated the trust. His sister then voted with him, and they took control of the corporation.

The Court held that the stockholder did not have a beneficial ownership in the sister's stock as she had no obligation to vote with him or give him any benefit from her ownership of the stock.  To be a beneficial owner you have to have some interest in the stock.