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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 15 posts from November 2010.
Merger agreements or asset purchase agreements frequently include provisions for resolving post merger disputes. This is particularly true when there is an escrow to cover contingent claims. In this decision, the Court holds that an agreement to submit such a dispute to an "expert " to resolve is the same thing as agreeing to arbitrate the dispute. As a result, all the law governing what the arbitrator is to decide applies, including what facts he may consider in rendering his decision.
Of course the parties to an agreement may be compelled to arbitrate any dispute if that is what their agreement provides. But when may a non-party to an agreement with an arbitration clause also be made to arbitrate a dispute with one of the parties? The short answer is not too often.
This decision carefully explains the exceptions to the rule that only the parties to the arbitration agreement may be made to go to arbitration. The exceptions are: (1) incorporation by reference, (2) assumption, (3) agency, (4) veil piercing/alter ego, (5) third-party beneficiary and (6) equitable estoppel.
In this decision, the Delaware Supreme Court reversed a decision by the Court of Chancery and held that in a staggered board, directors must serve the 3 year term to which they were elected. Hence a Chancery decision permitting the meeting date to be moved up to replace directors sooner than a full 3 year term was invalid.
When is a letter of intent or term sheet an enforceable contract? Delaware says it is enforceable when the parties intend to be bound and when the agreement contains "all essential terms." Exactly what all that means is often disputed. This decision summarizes case law in a manner that will help to resolve this important question.
The Morris James Intellectual Property Litigation Group provides out-of-state firms and their clients help in navigating the Delaware court system. The Group combines its on-the-ground, technical and trial experience to address the complex intellectual property protection issues moving global markets today. They represent clients in complex disputes involving patents, trade secrets, trademarks, copyrights, unfair competition, and antitrust issues and have successfully litigated cases in all areas of technology in the Delaware District Court, the Delaware Court of Chancery and Superior Court, and federal courts throughout the country, including the Court of Appeals for the Federal Circuit.
In this decision, the Supreme Court held the Court of Chancery erred in holding plaintiffs had failed to establish a tortious interference with contract claim where a third party had lawfully terminated the contract with plaintiffs. According to the Supreme Court, the focus of a tortious interference claim is whether the defendant wrongfully induced contractual termination, not whether the termination was legal. While an unlawful termination will support a tortious interference claim, a plaintiff can also state a tortious interference claim when the defendant's tortious conduct causes a third party to terminate a contract lawfully.
Stock splits have often been a problem, especially for non-Delaware lawyers who somehow think that all they need to do is have the Board decide to split the company's stock. Not so. This decision sets out the 3 essential steps to follow. Moreover, pleas to the Court's equitable powers to uphold what parties intended to do, even if they messed up the formalities, are not going to work. For as the Court held, in the area of a Delaware corporation's capital structure, formalities must be followed to achieve certainty. Hence, in this area at least, "law trumps equity".
There seems to be one constant issue in decisions dealing with motions to stay court proceedings in favor of arbitration -- who decides if the claims are subject to arbitration, the court or the arbitrators. Under Delaware law, absent an express provision directly dealing with that question, a reference in the parties' agreement to arbitration rules that provided the arbitrator decides that issue will be upheld.
Sometime litigants try to get around that result by pointing to provisions in their agreement that leave certain disputes to the courts to decide and then argue the claims in dispute fall within that exception. One such frequent carve out is the Equitable Remedy Provision. That sort of provision permits a court to grant an injunction to avoid harm while the dispute is in arbitration. This decision holds that carve out does not swallow the whole, at least in this case. As a result, the court granted the stay.
Private equity investors often want to use preferred stock to invest in a company. In doing so the investors expect to be cashed out at some defined point. They frequently provide for that by having the certificate of incorporation require mandatory redemption of the preferred stock. One customary limit on those redemption rights is that only "funds legally available" be used for the redemption. Investors may assume that means that if the company's assets exceed its liabilities that redemption is required at least to the extent of the excess.
Well if they think that they are wrong. This decision holds that the "funds" available refers to the company's cash and that cash may only be used if to do so will not impair the company's ability to pay its creditors in due course. As a result, what seemed like mandatory redemption may instead be put off indefinitely.
This is not just a simple matter to cure by drafting, however. While it is true, as the decision points out, that all sorts of investment vehicles exist to permit an investor to demand and get back its investment, those may not always be appropriate. Preferred stock has the advantage of being treated as equity on a balance sheet. Other investment vehicles may not have that advantage.
The real issue is who calls the shots once the mandatory redemption deadline passes without redemption. If the investors want to do so, then they need to bargain for that power when they make their investment.
This decision was affirmed by the Supreme Court on November 15, 2011.
Once the right to fee advancement has been determined, there remains the potentially vexing question of how to determine if the fees on any given statement are reasonable. The last thing the Court wants to do is become the monthly fee arbitrator for a case. Hence, the Court has now several times established the procedures to follow including certification that any question or objection to a request is in good faith, payment of undisputed amounts and the use of special masters to resolve any remaining disputed fee issues.
Now all the Court has to do is get someone to sit between 2 lawyers arguing over fees and to resolve the fees of the special masters.
This decision explains how a 'conversion cap' works to prevent the holders of convertible securities from converting those securities to common stock. These provisions thereby avoid running afoul of the SEC rules on registering ownership of stock.
Transcript of Panel Including Current and Former Members of Delaware Judiciary on Corporate Governance after Financial Crisis
The latest issue of the New York University Journal of Law & Business contains an interesting transcript of a January 22, 2010 symposium panel addressing Corporate Governance After the Financial Crisis. Members of the panel included Justice Jacobs, former Chancellor Allen and then-Vice Chancellor Lamb. The panel covered a variety of current corporate governance topics, including whether corporate governance played any significant role in the crisis, the role of shareholders in the crisis, director independence and the changing make-up of corporate boards and say on pay.
Morris James LLP Receives "Award of Excellence" From The Marvin S. Gilman Superstars in Business Awards Sponsored by the DSCC
We are very pleased to receive this honor from the Delaware State Chamber of Commerce," said David H. Williams, Managing Partner of Morris James LLP, "Our firm is deeply rooted in Delaware and we are committed to providing our community with top-tier legal services.”
The Marvin S. Gilman Superstars in Business Award, named for one of Delaware’s leading small business entrepreneurs, honors businesses and non-profit corporations for their outstanding achievements and model approaches to business and management. The awards are presented to companies that have been in business for at least three years, are small businesses based on number of employees, and are members of the Delaware State Chamber of Commerce. Awards of Excellence are also granted to deserving companies. More ›
Morris James is pleased to congratulate the lawyers listed below who were the most recommended by their professional peers, as determined by a Delaware Today survey of Delaware attorneys.
Gretchen S. Knight
Mary M. Culley
Keith E. Donovan
Jill S. Di Sciullo
To view the entire list of "Top Lawyers", please click here.
Creditors of a Delaware corporation have standing to sue derivatively when the corporation is insolvent. However, this decision holds that creditors of an LLC [and presumably an LLP] lack standing to sue derivatively. The difference is that the LLC statute expressly says who has standing to bring a derivative suit and does not mention creditors. In contrast, the corporate code only says when stockholders have standing and does not then actually define who else may have standing.
As the Court rightly points out, the solution to this problem is for creditors to have any rights they want set out in the LLC agreement before they invest. This again highlights the Delaware law that LLCs and LLPs are creatures of contract, not of judge-made fiduciary duties. Buyer beware.