Posts from 2009

Court of Chancery Explains Anti-Reliance Clause

Airborne Health, Inc. v. Squid Soap, LP, C.A. 4410-VCL (November 13, 2009)

In this decision, the Court explains that an anti-reliance clause is different from an integration clause. The anti-reliance clause bars claims of reliance on extra contractual promises and must be very specific in doing so. A more general integration clause will not bar such claims of reliance.

There are two aspects of this decision that are particularly worth noting. Most importantly, this is the first extensive and significant opinion by the newest Vice Chancellor. It shows he writes wonderfully well and is fun to read.

Second, he brings to the task his extensive business background. That shows how important it is to have a judge who knows what he is talking about.

As a result, the future of the Court of Chancery looks secure.

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Court of Chancery Expands Dissolution Remedy

Lola Cars International Limited v. Krohn Racing LLC, C.A. 4479-VCN (November, 12, 2009)

The Delaware Limited Liability Company Act permits the Court of Chancery to dissolve an LLC when it is not "reasonably practicable to carry on the business" of the LLC. The initial decisions under this statute tended to adopt a narrow construction of its terms and dissolution was not ordered just because of a business dispute between the members of the LLC. More recent decisions have expanded the circumstances when dissolution will be ordered, including when there is a management deadlock. This decision expands that trend to permit dissolution when there is serious mismanagement established. While not yet to the point of "no-fault" dissolution, the trend is headed that way, and it remains to be seen exactly how much mismanagement needs to be shown to win a dissolution decree. Probably disloyalty such as self-dealing is still required.

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Court of Chancery Explains Duty of Good Faith and Fair Dealing

Amirsaleh v. Board of Trade of The City of New York, Inc., C.A.2822-CC (November 9, 2009)

The law of good faith and fair dealing in contracts is a “judicial tool used to imply terms in a contract that protect the reasonable expectations of the parties." This decision clearly explains Delaware law in this area, including the point that not acting in good faith involves bad faith and that is proved by showing an improper motive.

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Court of Chancery Demonstrates its Understanding of Modern Discovery

eBay Domestic Holdings, Inc. v. Newmark, C.A. 3705-CC (October 29, 2009)

Modern discovery is often subject to problems, particularly with electronic "documents." As a result, some courts have imposed harsh sanctions for a party's failures to follow all the requirements. While not in any way excusing those failures, this decision shows that the Court of Chancery is aware of the difficulties involved. The Court held that only deliberate failures to follow the rules will be sanctioned by a fee award.

The opinion is also noteworthy for the discussion of a party’s offer to help the Court do an in camera document review. That offer took a lot of nerve to make and, characteristically, the Court politely declined the offer to do its job for it.

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Court of Chancery Resolves How to Treat Preemption Issue

Petroplast Petrofisa Plasticos S.A. v. Ameron International Corp., C.A. 4304-CC (October 28, 2009)

When does the Uniform Trade Secrets Act preempt claims arising out of the misuse of documents based on other legal theories such as  conversion? While not answering that question definitively, this decision does go a long way to clarifying how to decide that issue at the pleading stage.

Briefly, it holds that, if the alternative legal theory may be applied after trial because the documents in dispute are found not to be trade secrets under the Trade Secret Act definition, the case should go forward on alternative theories of recovery. This let the Court decide the case on the evidence and not some preliminary assessment based on the pleadings alone.

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District Court Rejects Recommendation that Complaint Is Not Adequately Specific

Collins & Aikman Corp. v. Stockman, C.A. No. 07-265-SLR/LPS (D. Del. Sept. 30, 2009).

Upon review of the Report and Recommendation issued by Magistrate Judge Leonard P. Stark, and the objections thereto, the district court rejected Judge Stark's recommendation that the complaint did not contain adequately specific allegations that the defendants knew or should have known that the company's financial statements were false in connection with a Rule 10b-5 claim. The complaint is a rare example of a pleading that sufficiently raised red flags which should have alerted the defendants to accounting irregularities from the fraudulent schemes asserted against the director and officer defendants.

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District Court Finds Late Fee is Not Liquidated Damages

Leeseberg v. Converted Organics Inc., C.A. No. 08-926-GMS (D. Del. Oct. 7, 2009).

Applying Delaware law, the district court concluded that a late fee provision was not a liquidated damages clause and dismissed the defendant’s motion to dismiss the plaintiff’s claim for actual damages. The late fee provision did not bear the label liquidated damages and there was no explicit evidence in the contract indicating that the late fee was the plaintiff’s sole damages in the event of a breach.
 

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Court of Chancery Explains McWane Exceptions

Choice Hotels International Inc. v. Columbus-Hunt Park DR BNK Investors LLC, C.A. 4353-VCP (October 15, 2009)

Delaware courts frequently must decide if a case filed in Delaware should be stayed in favor of another action filed elsewhere. While we wonder why anyone would want to leave Delaware, it happens. This decision carefully reviews when even "summary" proceedings filed in Delaware may be stayed in favor of another litigation. When a "summary" proceeding seeks to determine who is in change of a Delaware entity, there is a policy against staying the action because of the need to promptly resolve that important issue.

This is a case where that policy did not overcome the rule that a first filed action should proceed even over a Delaware case. Of course, given that the plaintiff in Delaware had filed first in Maryland, that hurt its claim to proceed in Delaware. The use of a status quo order also mitigated against the need to move quickly in Delaware.

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Court of Chancery Upholds Jurisdiction Over Nonresident Partner

Total Holdings USA Inc. v. Curran Composites, Inc., C.A. 4494-VCS (October 9, 2009).

In a case of first impression, the Court of Chancery has upheld its jurisdiction over a nonresident partner in a Delaware partnership. The current version of the Delaware Uniform Partnership Act authorizes jurisdiction over nonresident partners for disputes arising out of the internal affairs of the partnership. Here the parties' joint venture agreement expressly created a partnership "under Delaware law," and that was enough to support the Court's jurisdiction over a partner who had no other contact with Delaware.

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Court of Chancery Upholds Forum for Trade Secret Litigation

LeCroy Corporation v. Hallberg, C.A. 4328-VCP (October 7, 2009).

This decision is another example of why Delaware is more frequently chosen to litigate trade secret or unfair competition disputes. For, while the defendant had no ties to Delaware other than its incorporation here, the Court declined to dismiss the litigation on venue grounds. Instead, the Court promptly dealt with the dispute, entering a status quo order, and resolving the venue dispute to get on with the case.

Moreover, it is widely thought that Delaware law is more favorable to protecting trade secrets than other jurisdictions. Delaware, for example, recognizes that it is inevitable that a former employee will use a valuable trade secret in competition with her old employer even if the secret is held only in her head. Other states are not so favorable.

Here, the defendant was dismissed for want of jurisdiction over the non-resident individual. Whether that result would have been the same had her employment contract contained a forum selection and consent to jurisdiction clause for Delaware remains to be seen.

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Vice Chancellor Strine Discusses Stockholders' Role in Corporate Troubles

In this New York Times piece, http://dealbook.blogs.nytimes.com/2009/10/05/dealbook-dialogue-leo-strine/, Vice Chancellor Strine discusses the role of stockholders, particularly institutional investors, in recent corporate woes.

 

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Court of Chancery Appoints Lead Counsel

Dutiel v. Tween Brands Inc., C.A. 4743-CC (October 2, 2009).

The Court has recently explained the criteria to determine who should be appointed lead counsel in a class action. In this decision it added a new twist, giving advantage to counsel that has shown it gets along best with co-counsel in the case. This just makes sense, if only to avoid the Court supervising the play in the sandbox.

Note, however, that on a motion for reargument, the Court stressed that not too much should be made of its re ference to coorperation among some counsel as a factor to be consided. Moreover, in that October 28, 2009 opinion the Court detailed how to assess the relative stockholder interest in deciding whose counsel should lead.

Recently, at least one fellow Delaware attorney has suggested that the way to win such favor from your co-counsel is to known as generous with the fee splitting that occurs when the case ends. Given that the division of the fee awarded by the Court among all the plainitff attorneys is not done publicly, that may be an insight into the world of plainitffs counsel that is worth remembering.

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Court of Chancery Explains Lynch, Again

In re John Q. Hammons Hotels Inc. Shareholder Litigation. C.A. 758-CC (October 2, 2009).

The application of the Lynch doctrine to a merger is an often discussed topic. This decision does a great job of summarizing and explaining the rationale for applying the entire fairness test to a merger that has the majority stockholder on both sides of the deal. Given that Lynch has been applied to other deals where a majority stockholder was not involved [such as when a controlling stockholder dictates a self-dealing transaction], the parameters of that doctrine need such an explanation.

This decision also settles two other points. To shift the burden of proving fairness from the defendants, the vote of the minority stockholders must be by a majority of all the minority stockholders eligible to vote, not just a majority of those who did vote. Second, the vote must be binding and not waivable by a special committee.

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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.

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Court of Chancery Enforces Non-Compete Agreement

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.

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