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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 5 posts from March 2010.
When a provision in a certificate of incorporation is violated, the question that often arises is what is the remedy. Often the Court will enjoin the violation, but not always. Here the preferred stock had approval rights for certain corporate transactions. Those rights were violated. Finding that an injunction would cause more harm than was merited, the Court denied the injunction and remitted a damages remedy to the plaintiff.
When should the recommendations of a SLC to not pursue a derivative suit be accepted? As this opinion points out, certainly not when the defendants appoint their relative to the SCL and those that are indebted to them. Nor will the SCL be respected when its members approach their investigation with views fixed before their investigation was performed and when their non-Delaware counsel does not understand Delaware law.
This decision summarizes the Zapata principles for examining the report of a SLC, including a good summary of prior case law. Apart from the basic rules it sets down on burden of proof, independence and the scope of any SLC investigation [all of which alone are worth reading], the decision's analysis of the internal logic of the SLC report is critical. Put simply, the Court wants the report to make sense under an objective review and when it does not, trouble will follow.
Vice Chancellor Laster took the unusual step of removing and replacing co-lead counsel and Delaware liaison counsel in a proposed settlement of a class action challenging a proposed merger by a controlling stockholder and a subsequent exchange offer by the target company. Despite the refusal of the Special Committee's financial advisor to render a fairness opinion on the proposed merger and the refusal of the Special Committee to recommend the original transaction, plaintiffs' counsel engaged in minimal litigation efforts and quickly reached a settlement with the defendants. Vice Chancellor Laster was highly critical of the actions of the New York and Delaware firms representing the class and proposing the settlement. Among other things, Vice Chancellor Laster noted the New York and Delaware law firms' extensive history of filing and settling representative cases in the Court of Chancery, the existence of significant discrepancies between the plaintiff counsel's actions as set forth in the memorandum of understanding and the exchange offer, the strong possibility of the entire fairness standard applying to the exchange offer, the failure of the exchange offer to receive a majority of the minority shares and the lack of litigation by the plaintiffs' counsel. Although the new counsel had only sought to represent stockholders who exchanged their shares in the exchange offer, Vice Chancellor Laster appointed that counsel to represent the entire class and take over the litigation. Interestingly, Vice Chancellor Laster rejected the leadership structure proposed by new counsel, which would have consisted of two non-Delaware firms known for performing the same type of work as former counsel as lead counsel and a Delaware firm less known for performing similar work as Delaware liaison counsel. Instead, Vice Chancellor Laster appointed the Delaware firm to act as lead counsel along with the non-Delaware firms and gave the Delaware firm decision-making authority in the event of disagreements.
Plaintiffs' counsel and defense counsel should pay close attention to this decision in negotiating settlements, drafting disclosures related to such settlements and defending such settlements in the Court of Chancery. This decision could also encourage law firms not traditionally associated with frequent representative litigation in the Court of Chancery to bring such actions and seek appointment as lead counsel.
Lately, there seems to be a lot of interest in the rights of preferred stock compared to the rights of common stock and how the board of directors should act when caught in the middle of their conflicting claims. This decision summarizes the past decisions and explains what to do.
Here are some "rules" to go by:
1. When the certificate of incorporation speaks to the preferred stock's rights on an issue, that controls and the board does not need to consider granting greater rights to the preferred. The charter ends the discussion.
2. When the certificate of incorporation is silent on an issue and leaves the preferred in the same position as the common [such as on the right to get the highest price for the company in a merger] then the board needs to consider the preferred and common as having the same rights and owed the same fiduciary duty.
3. When the issue somehow falls in a gap between the preferreds rights under the certificate of incorporation and the rights of the common stock, get a good lawyer. Seriously, the board needs to do its best to strike a fair balance under the circumstances.
On occasion, the members of an LLC try to end its life by filing a certificate of cancellation with the Delaware Secretary of State. This is done in the hope that it will provide a defense to suits over the LLC's obligations. Well, that does not work. As this decision explains, a creditor may then file a claim to nullify the certificate of cancellation and to seek a receiver.