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

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Showing 9 posts from September 2009.

Court of Chancery Explains the "Parnex Exception"

In re NYMEX Shareholders Litigation, C.A. 3621-VCN (September 30, 2009).

When is a claim that the merger was unfair a derivative and not a direct claim? This is a perplexing question under Delaware law. Generally, a claim that the merger price is too low because management manipulated the process to drive down value is derivative, because the claim asserts it is the company that was hurt by the actions taken. When, however, the price was unfairly reduced by the actions of a corporate fiduciary, then the so-called "Parnex exception" may apply, and a direct stockholder class action may be brought.

This decision explains the Parnex Exception. In general, a direct claim may be brought when the alleged breach of fiduciary duty was intended to benefit a particular fiduciary at the expense of all the other stockholders. The breach of duty must be directly connected to the reduced price, however, and any large gap in time may be fatal to the direct claim.

Keep in mind that all claims challenging a merger are not derivative, and it is only because this was an entrenchment claim that the court held it was derivative. This points out the importance of picking your legal theory wisely. A mistake can cost you the case in this complicated area.

Court of Chancery Enforces Non-Compete Agreement

Posted In Business Torts

Concord Steel Inc. v. Wilmington Steel Processing Co. Inc., C.A. 3369-VCP ( September 30, 2009).

This is another in a line of decisions enforcing agreements not to compete. What is striking about this case is the apparent utter disbelief of the defendants that the agreement would actually be enforced. Defendants in these cases seem to think that, if they are not actually engaged in the exact same business as the other party to their agreement not to compete, the Court will say there is "no harm, no foul." Wrong!

Agreements not to compete may cover not just exactly the same business but any line of work that may be a substitute for a business' normal work. In any case, it is the language of the agreement that counts, and this decision illustrates that point.

Court of Chancery Rejects Attack on Board Discretion to Retain Directors

Posted In Directors

City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., C.A. 4473-VCN (September 28, 2009).

This is the first Delaware decision to deal with the so-called Pfizer policy on when directors may be retained despite a shareholder vote on dissatisfaction. Axcelis had a bylaw that any director up for re-election who did not get a majority of the votes cast must tender her resignation to a committee of the whole Board, and that committee had the discretion to accept or reject the resignation. When three directors did not get the majority vote and tendered their resignations, the committee rejected the resignations and the directors stayed on the Board. The plaintiff then filed a books and records case to discover why.

The Court held that under the company policy the committee had the discretion to reject the resignations. In the absence of even a minimal showing that the exercise of discretion was wrongful, the Court denied inspection into the committee's reasoning. That seems consistent with existing Delaware law. Otherwise, any stockholder who disliked a board decision might demand inspection of corporate records to fish for a basis to sue.

The implications of this opinion are that any committee who rejects a director resignation under a policy giving it broad discretion will have its decision upheld. Indeed, the decision is virtually unreviewable.

Conference Board Issues Report on Executive Compensation

Posted In News

On September 21, 2009, the Conference Board Task Force on Executive Compensation issued its recommendations on executive compensation.  Recommendations include the use of clawback policies and the avoidance of controversial pay practices such as excessive golden parachutes and gross-ups.  The full report can be found at http://www.conference-board.org/ectf

Court of Chancery Enjoins Violation of Non-Compete

Posted In Injunctions

Zrii LLC v. Wellness Acquisition Group, Inc., C.A. 4374-VCP (September 21, 2009).

This is an interesting case because of the limitations on the remedy imposed for violating a non-competition agreement. The decision illustrates the rule that no matter how wrong the conduct, the remedy of an injunction will be limited to stopping the competition for the period provided for in the agreement. Of course, a damage remedy is also available.

Court of Chancery Upholds Claw Back Agreement

Posted In Discovery

eBay Domestic Inc. v. Holdings Inc., C.A. 7705-CC (September 16, 2009).

This decision upholds the right to claw back privileged documents inadvertently produced in discovery, at least when there is an agreement permitting claw back rights.

District Court Applies Stone v. Ritter in Rule 23.1 Case

Posted In Case Summaries

King v. Baldino, C.A. No. 08-54-GMS-MPT (D. Del. Aug. 26, 2009).

This memorandum order issued by Magistrate Mary Pat Thynge is an example of the continued judicial reluctance to impose liability on boards of directors for alleged failures in oversight responsibility, where the plaintiff fails to plead that the board was on notice, through “red flags,” of corporate misconduct. The Magistrate applied Delaware law on oversight liability as set out in Stone v. Ritter, 911 A.2d 362 (Del. 2006) to find that the plaintiff failed to plead demand futility and comply with Federal Rule of Civil Procedure Rule 23.1.

Court of Chancery Tackles Contested Advancement Issue

Martinez v. Regions Financial Corporation, C.A. 4128-VCP (September 9, 2009).

There is a recurring problem of what is the Court to do when the parties fight over the reasonableness of fees requested in an advancement case.  As the fee requests are recurring, the Court has made it clear it does not want to be put in the role of monitoring play in the sandbox every month.  In the past, the Court has appointed a special master as in Duthie v. CorSolutions Medical Inc., C.A. 3048-VCP (September 10, 2008).  That approach has its own problems, as under Delaware law the decisions of a master are reviewable de novo by the Court.

The solution to this problem adopted by this decision is to have the parties submit any disputed bills to the court who will then rule on the dispute in a teleconference.  See the order attached. While the Vice Chancellor involved in this case is the most patient of men, he will need some good luck with this process.

Court of Chancery Holds That Statutory Right to Fair Value May Be Arbitrable

Posted In Appraisal

Julian v. Julian, C.A. 4137-VCP (September 9, 2009).

For a number of reasons, a plaintiff may seek to litigate his claim in the Court of Chancery rather than trust his case to arbitration.  This decision illustrates how hard it is to avoid arbitration when the arbitration clause in the parties' contract is broadly drafted.  Thus, this decision holds that the statutory right to fair value for a retiring member of an LLC may be subject to arbitration, if the LLC agreement so provides.