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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 11 posts from January 2010.
This decision is a landmark case on Delaware law on non-compete agreements with employees. It establishes so many new precedents that it is hard to briefly summarize. For example, it holds that it is possible to assign an employee non-compete agreement in connection with an asset sale.
Perhaps the most significant part of the decision is its discussion on how to calculate damages when an at-will employee is lured away by a competitor and then violates his non-competition agreement. Damages are not, under this decision, what the new employer won in new business with the purloined employee. Instead, how to calculate damages in such a case is much more complicated and requires a careful reading of this decision.
If you are a co-defendant in an arbitration case with a claim for contribution, you had better assert it in the arbitration proceedings. Otherwise, you may lose the right under the Joint Tortfeasors Act to make your co-defendant pay more than his pro rata share. This result follows under this decision because the Act requires the cross claim be asserted before "judgment" is rendered and the arbitration award counts as a judgment for that purpose.
Litigants frequently seek to keep their dirty linen secret in litigation by asking the court to seal the court's files to public inspection. Chancery Rule 5(g) deals with the limits on that confidentality order and this decision shows that litigants cannot ask the Court for more than 5(g) permits. The better practice is to make the provisions of any order specifically subject to the rule.
Court of Chancery Holds Jilted Suitor May Recover Damages Even After Target Pays Termination Fee and Expense Reimbursement
In this decision, the Court's newest Vice Chancellor, the Hon. J. Travis Laster, substantially denied a motion to dismiss a complaint filed by a jilted suitor who sought damages from the target and the winning bidder. The complaint alleged that the target violated no-shop and prompt notice provisions of a merger agreement between plaintiff and the target that the target later terminated in favor of a superior proposal from the defendant winning bidder. Plaintiff alleged that the winning bidder violated Delaware law by fraudulently misstating its intentions in filings required by the Securities Exchange Act of 1934 ("the Exchange Act). The Court of Chancery upheld plaintiff's claims for breach of contract, tortious interference with contract, fraud, and civil conspiracy for fraud. Although the Court emphasized that its decision was required under the plaintiff-friendly standard the Court applied in analyzing a motion to dismiss a complaint at the pleadings stage, the opinion has three critical lessons for practitioners concerning (i) the potential inadequacy of termination fee and expense reimbursement provisions to preclude a damages claim, (ii) the viability of state law claims arising out of misstatements in public filings required as a matter of federal law, and (iii) the relation of prior injunction proceedings to later claims for damages.
Payment of Termination Fee and Expense Reimbursement Does Not Preclude a Damages Remedy Where Jilted Suitor Can Allege Fraud Under State Law
First, the Court rejected defendants' arguments that plaintiff was not entitled to damages because the target paid a termination fee and expense reimbursement upon termination. The Court held that if plaintiff were able to show a breach of the merger agreement between the jilted suitor and the target, it should be entitled to receive expectancy or reliance-based damages. The Court recognized that any reliance-based recovery would have to overcome the jilted suitor's receipt of a bargained-for $4 million termination fee and $2 million expense reimbursement. But at the pleadings stage, it was sufficient for the Court to note that the merger agreement excluded from the limitation on liability any termination arising from a willful or material breach of a representation, warranty or covenant in the merger agreement. The Court also noted that the target's ability to terminate and pay fees without further liability required it to comply with its obligations under the no-shop and prompt notice provisions.
Exchange Act Does Not Preclude State Law Claims for Fraud
Second, the Court of Chancery explained that the mere fact that plaintiff's allegations against the winning bidder arose out of filings mandated by the Exchange Act did not deprive a state court of jurisdiction to resolve fraud claims brought solely under state law. The Court noted that a Delaware Supreme Court decision, Rossdeutscher v. Viacom, Inc., 768 A.2d 8 (Del. 2001), and federal decisions comported with this result. The Court's scholarly analysis of this issue at pages 31-42 culminates with emphasis on Delaware's interest in "preventing the entities that it charters from being used as vehicles for fraud." In short, the opinion reaffirms that the Exchange Act contemplates a balance between state and federal roles and responsibilities and does not preempt fraud claims arising under state law.
Moreover, in permitting the jilted suitor to bring a fraud claim, the Court held it was entitled to rely on the bidder's statements in public filings. Note that the Court does not require the jilted suitor to have bought securities or limit the damages to the loss it incurred as a result of its purchase of the target's stock.
Federal Decision Denying Preliminary Injunction Based on Same Claims of Alleged Falsity of Public Filings Does Not Preclude Later State Law Claim for Damages
Third, a decision rendered denying a preliminary injunction is not case dispositive. Here an Ohio Federal District Court had denied an application by the jilted suitor to enjoin the winning bidder's merger with the target based on the same alleged misstatements that formed the basis of the jilted suitor's later state law claim. The strength of that court's conclusion - "[c]ontrary to Plaintiff's position, the Court does not perceive any falsity in [the winning bidder's] filings when they are properly viewed alongside unfolding events." (NACCO Indus., Inc. v. Applica Inc., 2006 WL 3762090, at *7 (N.D. Ohio Dec. 20, 2006)) - did not preclude a different result on a different record and in a different procedural context. The lesson for bidders and practitioners: Absent a binding final judgment, the parties proceed at their own risk.
Perhaps this opinion will focus the attention of transactional lawyers on the breadth of prompt notice provisions in merger agreements and the nature of their clients' intentions when acquiring stock in a target and making the filings required by the Exchange Act. From a target's perspective, this decision reaffirms that contractual language in merger agreements concerning no-shops and prompt notice of competing proposals will be enforced when a party can plead injury from a breach. From a bidder's perspective, this decision reinforces the importance of timely and accurate disclosure regarding a client's intentions in purchasing stock of a company that is in play. The decision is also a reminder that a holding by a Federal district court denying an injunction on a preliminary record does not prevent a later assertion of a state law claim for fraud. As the Court rendered the NACCO decision on a motion to dismiss it remains to be seen whether liability will be imposed on a fuller record.
Deal attorneys try to limit the ability of a buyer to make post deal claims for misrepresentation. That is hard to do by contractual provisions that plainitffs are all too clever at avoiding and courts are often reluctant to enforce.
Here the Court of Chancery took the time to go over exactly what contract language may limit post deal claims. All deal lawyers should study it carefully.
A recent trend is to offer 2 types of consideration in connection with a merger and to permit the stockholders to pick which they prefer, such as stock or cash. Of course, the time to pick must be limited as a practical matter. This decision deals with when the time limit may be extended and when a company may in good faith cut off the extensions. Basically, decisions that are made for neutral business reasons and not to favor a selected few will be respected by the Court.
Om August 16, 20121, the Delaware Supreme Court reversed this decision. The Supreme Court held that once a deadline was waived, that waiver could not be retracted, at least with out setting a clear new deadline.
In the famous Cox Communications case, the Court was critical of attorneys who settle fast after getting a modest and usually expected price increase in a merger and then ask for a big attorneys fee. This decision shows how the newest Vice Chancellor will calculate such fees. He is no pushover either.
Most importantly, the Court explains in detail how it approaches fee requests. The analysis is very fair and the award was ample. This added explanation is very useful in helping to predict future awards and thus facilitate settlements.
This decision upholds the unremarkable proposition that a class member whose attorneys do not contribute to an increase in merger consideration do not deserve a fee award. The case is interesting because it reflects an unusual clash among plaintiffs' attorneys over who did what to get the price increased and a company's successful defeat of a fee petition.
In an era when "too big to fail" seems to be an accepted reason to do the extraordinary, in this case the plainitffs tried to argue that a 'bet-the-company" deal requires a board to be right or be held for the consequences. The Court soundly rejects that argument and held the business judgment rule protects the board from second guessing in even the biggest deals.
This decision is also an excellent summary of the law dealing with when demand must be made on a board before filing a derivative suit. The Chancellor was once a law professor and his teaching skills are on full display in this case.
There is a dilemma over the broad rights to advancement of legal fees given the sometimes very large amounts demanded. This decision holds that some limits on advancement rights may be placed in the bylaws, even when advancement is provided for in the certificate of incorporation. Note that the bylaw cannot be inconsistent with a certificate provision and must be in place when the director began his term of office for the period when his acts are in question in the underyling litigation.
This is an interesting appraisal case for at least 2 reasons. First, it illustrates what not to do in getting a fairness opinion. A rush job with no intent to reach a fair result is doomed to be rejected. Second, the Court for the first time in recent memory notes that criticism of the efficient market theory may be justified and did not accept an arguably arms length sale as solid evidence of share value. In the past the Court was moving toward acceptance of market values as setting the "fair value" required by the Delaware appraisal statute.
The case does involve an unusual set of facts and in the long run may not mark a great shift in approach, but it is worth noting for the usual careful analysis of the facts to reach the right result free of a formulaic approach.