Posts from 2009

Court of Chancery Rejects Attack on Board Discretion to Retain 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.

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Conference Board Issues Report on Executive Compensation

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

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Court of Chancery Enjoins Violation of Non-Compete

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.

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Court of Chancery Upholds Claw Back Agreement

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.

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District Court Applies Stone v. Ritter in Rule 23.1 Case

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.

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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.

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

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.

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Court of Chancery Explains Beneficial Ownership Proof Requirement

Smith v Horizon Lines, Inc., C.A. 4573-CC (August 31, 2009)

When the statute governing demands for inspection rights was changed to permit a demand by a beneficial owner, it also required proof of beneficial ownership. This decision explains what form that proof must take. An account statement that just has the owner's last name and does not indicate the date is not good enough. You would think that someone named "Smith" would have been told by now to be more explicit.

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Court of Chancery Approves Settlement in Countrywide Financial Case

Vice Chancellor Noble has approved a settlement in the class action arising from the merger of Countrywide Financial Corporation and Bank of America.  The opinion approving the settlement can be viewed here.

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Court of Chancery Explains Scope of Permitted Release

In Re Countrywide Corporation Shareholders Litigation, C.A. 3464-VCN (August 24, 2009)

This is another in a series of decisions explaining the limits of a release in settlement of a class action. The opinion particularly focuses on when a common law fraud or federal securities law claim may be released.

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Court of Chancery Addresses Effect of Typical Merger Agreement Provision

Case Financial Inc. v. Alden, C.A. 1184-VCP (August 21, 2009)

This decision is of interest because it explains the effect of a common merger agreement provision that is often misunderstood. It is common for such an agreement to say that representations expire at a certain date, such as the merger date. What does that mean? Some would argue it means that any claim for misrepresentation ends that day. That is not correct.

As this decision explains, this language only means exactly what it says-the representation of a fact ends on that date and the facts may change afterwards. A claim for fraud or misrepresentation may still be filed later.

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Laster Nominated for Vice Chancellor

J. Travis Laster, a highly-regarded Delaware corporate litigator and founding partner of the firm Abrams & Laster, has been nominated by Governor Jack Markell to fill Vice Chancellor Lamb's seat on the Court of Chancery.  An article from the Delaware News Journal announcing the nomination can be viewed here.

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Court of Chancery Explains Limits of Review of Arbitration Award

World-Win Marketing Inc. v. Ganley Management Co., C.A. 3905-CC (August 18, 2009).

The extent to which a court will review an arbitration award is a tricky question. The court may do so when the arbitrator exceeds his authority. But, what does that really mean? This decision explains this vague standard of review.

In general, if the decision seems grounded in the facts presented to the arbitrator and is within the subjects that she may deal with under the parties agreement to arbitrate, the decision will be upheld even if the court would have decided the matter differently.

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Court of Chancery Extends Time To Seek Indemnification

Wesley T. O'Brien v. IAC/Interactive Corp., C.A. 3892-VCP (August 14, 2009).

In this decision, the Court dealt with an odd set of facts that are not likely to be repeated. However, the opinion is noteworthy because the Court declined to bar a suit for indemnification even when the complaint had been filed more than three years after the right to indemnification arose. The plaintiff was, in a sense, a victim of a judicial nightmare in Florida where his claim had first been barred and then reinstated by an appeal court after the statutory limitations period expired. In permitting his claim to go forward, the Court of Chancery again showed its support for indemnification claims.

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Three Nominated for Vice Chancellor

Delaware's Judicial Nominating Commission, a panel tasked with screening candidates for judgeships in Delaware, has forwarded three candidates to Governor Jack Markell for his consideration as potential replacements for Vice Chancellor Lamb on the Court of Chancery.  The three are:

• Mary Johnston, a former partner at Morris James and a Superior Court Judge since 2003;
• Richard Forsten, a partner at Saul Ewing;
• Travis Laster, a partner at Abrams & Laster.

Governor Markell is expected to forward one of these three names to the Delaware Senate for a confirmation vote that is expected to occur in September.

 

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