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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 10 posts from July 2009.
This is an example of the Court of Chancery, even absent an objection from the corporation involved, carefully examining a fee request. The Court cut the request, because the benefit conferred was not significant. Too often critics claim the Court awards fees too generously, but here the Court again shows that it is mindful of its oversight duty.
The Court of Chancery frequently acts to promptly resolve actions seeking inspection rights even faster than the parties might expect or ask. This is an example of the Court reviewing the complaint and response and deciding to grant judgment on the pleadings when there does not seem to be any valid defense.
It is settled law that, when a corporation abandons a proposed corporate transaction after a suit is filed, to avoid payment of fees, the corporation must prove the litigation was not the cause of the transaction's termination. That burden was not carried here and, as a result, fees were awarded. The decision is also interesting because it shows that it is possible that the amount of the fees will be reduced when there is some doubt the litigation was the sole cause of the end of the transaction.
This decision applies corporate case law to a demand for the records of an LLC. The Court held that a right to review "all books and records" under the LLC agreement means just that, all the pertinent records. It also held that the grant of access to the records includes the right to copy them.
This is a major decision with implications for all special committees. The Court denied a motion to dismiss, because the special committee did not stand up to the controlling stockholder. That much is not news. But the decision goes on to at least suggest that a special committee may have more than just the duty to say "no." In addition, a special committee needs to act affirmatively to make the controlling stockholder follow his fiduciary duties.
The decision is very fact specific, and the Court makes it clear that the context of a motion to dismiss strongly affected its analysis. However, it is also clear that those who predicted that Lyondell v. Chemical Co v. Ryan, 970 A2d 235 (Del. 2009) marked a lessening of scrutiny of board action may be wrong.
The question sometimes arises over what are the disclosure duties of the buyer under a stockholder agreement that compels a stockholder to sell her stock upon some triggering event, such as retirement. This decision clarifies the rules that apply.
In general, when the sale is strictly pursuant to the stockholder agreement, then that agreement determines if any disclosure is required. However, it is not always clear whether the sale is "strictly" pursuant to the agreement as sometime other terms are discussed, extra stock added [as was the case here] and the agreement for some reason not followed. When that happens, the rules change.
While the corporation itself may not have any disclosure duties, the directors as fiduciaries do have those duties. Thus, if they are the buyers, then they need to disclose material facts when they purchase a stockholder's shares outside the provisions of a stockholder's agreement.
Directors sometimes face a conflict between what is best for the common stockholders compared to what is best for the preferred stockholders. While it is generally recognized that preferred stockholder rights are largely contractual and not based on fiduciary duties, that does not resolve all conflicts with common stockholders. The certificate of incorporation just cannot deal with every possible conflict. Here the Court held that common stock is to be favored in any conflict with the preferred that is not resolved by the terms of the certificate of incorporation. That will not solve all the problems, of course, and in this case, the Court held that a full trial might be needed to reach a final decision on how the preferred/common conflict should be resolved.
Where then does that leave a board of directors faced with such a conflict in the interests of the common and preferred stockholders? The answer probably lies in the case law dealing with what to do when a company is insolvent and the creditors are the residual risk holders. In that instance, the stockholders want the board to use every last dollar to reverse the company's fortunes, while the creditors want asset preservation and liquidation to get what they can. The Delaware Courts have held in that circumstance, the board is charged with making a business judgment over what is the best course for the entity to follow. That is easier said than done but may boil down to a risk/benefit analysis somewhat like a card player makes when deciding if it is time to fold his hand. So long as the board acts in good faith, its decision should be upheld.
This is possibly the best decision to read to understand how to interpret the often confusing advancement and indemnification rights contained in limited partnership agreements. The discussion of the history of those rights under Delaware law is very useful as well.
There are three basic holdings that should be noted: (1) ambiguous agreements are to be construed against the entity, be it partnership or corporation, (2) acquittal of criminal charges puts the burden on the entity to show why any conditions to indemnification have not been meet (such as the lack of good faith, etc.) by the claimant, and (3) there is no need to wait until all proceedings against a director are concluded before he is entitled to indemnification for the proceedings that he won.
In this precedent setting decision, the Supreme Court holds that stockholders who are cashed out in a short-form merger may bring a class action for damages when there are violations of the duty of disclosure in the materials sent to them notifying them of the merger. In prior decisions, the Court of Chancery had reached somewhat inconsistent results in such cases, granting a quasi-appraisal remedy, but sometimes requiring stockholders to opt-in to be part of the stockholder group obtaining appraisal rights and also requiring an escrow of the merger consideration.
Here, the Supreme Court rejected both of those limits on the remedy. Instead, it held that all the minority stockholders had the right to be part of a class entitled to appraisal rights, subject to a right to opt-out of the class. In addition, stockholders do not have to escrow any of the merger consideration while the action is pending.
This result creates a "free rider" issue as there is little incentive for stockholders to opt-out. While it is possible the trial court will decide the fair value of their stock in the appraisal proceedings is less than the merger consideration, for smaller stockholders, the amounts in question may not justify the company enforcing any right to a refund.
Of course, the way out of this dilemma is to provide fair disclosure in the first place.
City of Roseville Employees’ Ret. Sys., v. Horizon Lines Inc., C.A. No. 08-969 (D. Del. June 18, 2009)
In this putative class action, the plaintiffs allege that Horizon, a container shipping and logistics company, fraudulently inflated the value of its securities by entering into illegal price-fixing agreements with its competitors in order to manipulate prices in certain markets. In an unopposed motion for appointment of lead plaintiff and counsel, the district court applied In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001) and the terms of the PSLRA to appoint the Police and Fire Retirement System of the City of Detroit as lead plaintiff and their choice for lead and liaison counsel.