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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 9 posts from May 2009.
What to do about unclaimed funds from a class action settlement is often a problem. While the funds should not go back to the defendants, thereby rewarding them, the funds otherwise might be escheated to the State or sent to a charity. Here the Court has the unclaimed finds going to Boston University, and the discussion will serve as guidance in future cases.
The Court of Chancery has become increasingly unhappy with litigants who fail to preserve electronic "documents" such as email. In this latest expression of the concern, the Court sets out in detail the duties of client and counsel and explains when sanctions will be imposed for the failure to preserve evidence.
This is a particularly good opinion for its careful analysis of how to determine what sanction should be imposed. The goal is to make the sanction fit the offense, such as by awarding a presumption that the destroyed emails would have hurt the case of the guilty party. Exactly how much this will help remains to be seen, but it is a start.
A claim that stockholders were wrongly diluted by the issuance of additional stock is generally consider a derivative claim that must meet tough pleading standards. However, when the dilution is caused by a controlling stockholder, the claim is also a direct claim that may be filed without meeting the rules for derivative suits. This is a big advantage.
This decision holds that a group may be consider a "controlling stockholder" for purposes of determining when a direct claim may be filed. Note that acting in parallel or voting together on an issue is evidence of acting as a group but is not enough to meet the rule requiring the pleading of facts that show an agreement to act together as a group.
This decision is also important as the first time the Court has addressed what must be disclosed in the information statement that must be sent to stockholders after stockholder consent under Section 228 is executed. Fair, if not full, disclosure is required, including whether corporate insiders benefited from the action taken by consent.
In the good old days, the multiple counsel for plaintiffs class or derivative litigation always seemed to be able to agree on how to split the fee awarded by the Court. Well, the good old days are over. Here the Court explains how to split the fee in a complex settlement.
This case illustrates the exception to the statute of frauds of "substantial part performance."
The seller of a $5MM home, and other items, brought a breach of contract action, because the buyer backed away. The buyer moved to dismiss on the grounds that there was no meeting of the minds, and, in any case, the statute of frauds bars enforcement of such a handshake agreement.
But the Superior Court denied the motion to dismiss, holding, among other things, that the fact that the buyer took possession and began making modifications to the home supported an inference that there was substantial part performance, an exception to the statute of frauds.
While it is well known that directors and officers have fiduciary duties, what about employees who are neither a director nor an officer? This decision addresses that issue. While the decision goes into a detailed analysis, in general, even a non-essential employee may have a fiduciary duty to her employer as an agent of the employer. That duty then would require the employee to disclose certain conflicts of interest and to not compete with her employer.
This decision also has an excellent discussion of how to calculate lost profits in a business tort case.
One defense against a hostile takeover is a provision that permits only "continuing directors" to approve certain important corporate acts. In general, to be a "continuing director" you need to be "approved" by the existing board. Hence, if you are elected in a proxy contest that marks the beginning of a takeover battle, you may not be an approved "continuing director." That would be a bad thing for your client.
In this decision, the Court upheld the power of the board to approve even candidates from an opposition slate of directors to be "continuing directors." This unusual circumstance was the result of a bond debenture provision that would have triggered a default if there were too many non-continuing directors on the board. To avoid a default, it was decided to approve even the enemy.
That, in turn, lead the Court to be concerned about whether the board had acted in the stockholders' best interests. The Court cautioned that the approval must be a considered act and that the adoption of such continuing director provisions needs to be carefully reviewed by the board in the future if they are to be upheld.
When the business of an LLC is limited, so too may inspection rights be limited. Here the "business" was to exploit a license that was about to come to an end, and the Court held there was no need to inspect business records to value the business as there may well be nothing left to value.
Further, the Court held that mere allegations, unsupported by facts at trial, do not provide a basis to inspect records to determine if there has been any wrongdoing.
This is an interesting case, because it upholds the right of a member of an LLC to have it dissolved at the end of the term set for its existence in the LLC Agreement even when more than 90% of the members want it to continue. In the current recession, many limited purpose investment funds are seeking to extend the term of their existence, because they have not been able to find an investment for their member or stockholders' money. When the LLC agreement or the corporate certificate of incorporation limits how long the entity may exist without making an investment of its funds, management may try to extend the life of the entity by amending its governing instrument. However, at least in the case of an LLC, when the LLC agreement says that all members must consent to extending the entity's existence, the court will uphold that requirement.
This decision reflects the primacy of contract law in the LLC context. The result may have been different for a Delaware corporation where a requirement for unanimous voting by stockholders is probably not valid.