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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 11 posts from January 2011.
When personal jurisdiction over a defendant is challenged, the plaintiff has the right to take limited "jurisdictional discovery." Exactly what that means is well explained by this decision.
When a certificate of incorporation is ambiguous, the Court must decide what it means. This decision explains how a court will do that job.
At least in the case of a publicly traded corporation, the Court is less inclined to use parol evidence and more inclined to fall back on rules of construction. One such rule is that it is presumed that stockholders retain the power to decide matters that are usually reserved for stockholder decision. Hence, if a stockholder or the board claim unusual powers, they had better spell those out clearly or lose the dispute.
This decision reinstates a books and records case that was dismissed by the Court of Chancery. The Court of Chancery held that a stockholder who first files a derivative complaint may not later file a books and records case. The Supreme Court overturned that bright line test.
Instead, the Supreme Court held that when a stockholder suit might prove useful even after a derivative suit is filed, the books and records case may proceed. Thus, if the derivative suit is still pending or even after it has been dismissed if it may be refiled, the inspection of company records may be requested by a book and records suit. If, however, the derivative suit is dismissed with prejudice, then inspection serves no proper purpose and will be denied.
This decision again illustrates how fast a claim may be barred by inaction. Here two weeks passed after the plaintiff was on notice of its claim before suit was filed. Too late the Court said to ask for an injunction.
On January 18, the Delaware Court of Chancery issued a one and a half page "Guidelines for Preservation of Electronically Stored Information." In summary, the Guidelines are as follows:
1. There is a common law duty to preserve potentially relevant electronically stored information (ESI) within a party's possession, custody, or control once litigation is commenced or when litigation is "reasonably anticipated."
2. Parties must take reasonable steps in good faith to meet their duty to preserve ESI.
3. Parties and their counsel should confer early in the litigation regarding the preservation of ESI.
4. Parties and their counsel must develop, oversee, and document a preservation process in collaboration with the appropriate client information technology personnel.
5. Parties and their counsel should discuss the need to identify how custodians store their information, including document retention policies and procedures as well as the processes used to create, edit, send, receive, store, and destroy information for the custodians.
6. Counsel should take reasonable steps to verify information they receive about how ESI is created, modified, stored, or destroyed.
7. The preservation process should include a written litigation hold notice to individual custodians instructing them to take reasonable steps, act in good faith, and with a sense of urgency in preserving potentially relevant information.
8. Parties and their counsel may face "serious consequences" for failing to take reasonable steps to preserve ESI.
9. The reasonableness of a party's preservation process is judged on a case-by-case basis.
10. Counsel for all parties should confer about the scope and timing of discovery of ESI and may agree to limit or forgo the discovery of ESI.
This is another decision in the Airgas takeover battle. In this decision, Chancellor Chandler addressed Air Products' motion to compel Airgas' compliance with the protective order and Airgas' motion in limine to preclude Air Products from offering evidence that its $70 offer was indeed its "best and final" offer. With respect to the motion to compel, Air Products sought to reduce Airgas' designation of large chunks of deposition testimony and documents as "Litigators' Eyes Only" ("LEO"). The Court found that Air Products was itself somewhat responsible for the large designation of deposition testimony as LEO since it had not segregated LEO and non-LEO subject matter when deposing Airgas witnesses. The Court ordered Air Products to indicate the testimony that it did not believe should be LEO and then Airgas to respond within 5 hours of receipt of each transcript. Additionally, the Court ordered Airgas to produce a non-LEO version of an institutional shareholder letter setting forth that shareholder's opinion of the fair value of Airgas based on publicly available information. Finally, the Court refused to order Airgas to re-review documents previously produced and designated LEO given the rapidly approaching supplementary evidentiary hearing, but held Air Products could specify LEO documents it thought should be de-designated.
In its motion in limine, Airgas sought to preclude Air Products from offering documentary evidence that its $70 offer was its "best and final" offer because it had refused to produce internal analyses or valuations that the Air Products board relied upon in deciding to make its $70 offer. The Court had previously ordered in a December 23, 2010 opinion that the parties conduct limited discovery on Air Products' "best and final" offer. This discovery was limited to documents relating to the decision to make the final offer and limited depositions of people directly involved with that decision. The Court rejected Airgas's reliance on cases where defendants blocked discovery on privilege grounds to support its motion in limine. According to the Court, those cases involved situations where a party shielded evidence and then relied on that evidence at trial to meet its burden of proof on an issue central to resolution of the case. Air Products' characterization of its $70 offer was not an issue central to resolution of the case. Resolution of the case would depend upon whether Airgas' board had a good faith, honest belief that the $70 offer posed a "threat" to Airgas. The Air Products board's knowledge of Air Products' internal valuations of Airgas was not relevant to that inquiry. The Court was careful to point out, however, that there could be circumstances where a buyer's view of a target's value might be relevant to a fairness inquiry. In this case, Air Products was not required to prove the fairness of its offer or whether the offer was more or less than its internal valuations of Airgas. Accordingly, the Court the denied Airgas' motion in limine.
Significantly, the Court held that Air Products' public announcement of its $70 offer as its "best and final" offer meant Air Products had irrevocably represented to the Court it would not seek judicial relief for any additional offers. Bidders should keep this in mind when characterizing offers as "best and final".
When a reverse stock split eliminates minority stockholders, they are entitled to be paid the "fair value" of their stock. This decision explains what that means. In particular, it does not mean they get the same value as if their stock were subject to an appraisal. While the valuation process is very similar, it is affected by the standard of review involved, particularly if the squeeze out was done unfairly and the intrinsic fairness standard applies.
The opinion is also an excellent review of the overall Delaware law on the standard of review for any transaction.
The Delaware corporate and alternative entity laws have several provisions for expedited treatment of corporate disputes, such as over the right to inspect corporate records. Those matters are to go to trial quickly and, as this decision explains, are seldom subject to motion practice such as for summary judgment. Thus, the better practice is to ask for a trial date, soon.
A word of caution is in order on this point, however. When the Court calls in response to a request for a fast schedule, you had better be prepared to say why any trial is needed. At least in some cases, the Court has been known to rule on the merits during such a call when faced with a lawyer who has no good reason to oppose inspection or a decision on entitlement to vote stock.
When a controlling shareholder has the power to veto any proposed transaction, it is sometimes claimed that his support for a particular deal has forced the other shareholders to accept that deal or get nothing. This decision rejects such a claim and holds that the controlling shareholder's veto power in itself is not coercion that the other shareholders may complain about later.
This opinion is also an excellent summary of the exceptions to the entire fairness rule of the Kahn case and is worth reading for that reason as well.
Sometimes a contract cannot have been intended to mean what is says. This decision is an example where the contract read literally would require 1 party's compensation to double every year forever. The opinion contains a good overview of the remedies available in such a situation.
Arbitration between insurance companies is different. To begin with, the arbitrators are expected more than most to follow the statutory scheme they are supposed to enforce. Here, when the arbitrator made a clear mistake of law, the Court vacated the award. Whether it would do so in a less clear cut case involving other sorts of arbitration claims remains to be seen.