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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 14 posts from October 2011.
This scholarly review of Delaware law explains the "physical evidence requirement" in some insurance policies.
It is sometime claimed that the act of incorporating a Delaware corporation is enough to subject the incorporator to jurisdiction in Delaware. After all, an old case does do just that. But as this decision points out, the act of incorporating has to be an integral part of the actions that give rise to the claims asserted. That is not so easy to show and did not work in this case.
What is a derivative claim is sometimes hard to decide but may be central to a plaintiff's right to bring suit. Under the Supreme Court's Gentile decision, a claim that the controlling stockholder has improperly diluted the minority shareholders' stock may be filed as a direct claim on behalf of those stockholders and does not have to pass the tough rules governing the filing of derivative litigation. Who then constiutes a "controlling stockholder?" This decision holds that a group may be in "control" for the purposes of the Gentile rule and explains how to decide if that control group exists.
The decision also further explains what sort of dilution qualifies to invoke Gentile, when disclosures after action by stockholder consent must be complete and that a pending class action tolls the statue of limitations until the class certification process is complete.
Parties to a well-drafted contract can expect the Delaware courts to enforce the bargain reflected in their agreement, and that includes an agreement on forum selection. The Court of Chancery's Sept. 14 decision in ASDC v. The Richard J. Malouf All Smiles Grantor Retained Annuity Trust provides guidance to practitioners on how to draft and enforce a forum selection clause. The key takeaway is that a party who negotiates for dispute resolution in a Delaware forum can expect the Delaware Court of Chancery to enforce its forum selection and, where appropriate, enjoin the opposing party from going forward with litigation elsewhere.
That outcome, however, results only when the parties properly draft their forum selection clause not only to choose a forum that has jurisdiction, but also to provide that their clause covers all disputes that arise from or relate to their contract. In these circumstances, a Delaware court will specifically enforce the agreement and enjoin the breaching party from litigation elsewhere as the Malouf decision illustrates.
Authored by Edward M. McNally
Originally published in the Delaware Business Court Insider on October 19, 2011
In recent years, limited liability companies and limited partnerships have become the preferred form of entity for new businesses. In Delaware, for example, there are now more LLCs and LLPs formed each year than Delaware corporations. There are various reasons for this development, particularly the flexibility of management these alternative entities permit. More ›
A frequent issue is how to calculate a fee award when the prevailing party has only been partially successful. This decision turns on the unique provisions of English law, but is still an interesting exercise in awarding some but not all the fees to a party who only partially prevailed.
This is the largest monetary award in the history of the Court of Chancery, $1.263 Billion plus interest. Indeed, except for 1 other case decided outside of Delaware, it may be the largest breach of fiduciary duty case anywhere else. It certainly should end the claim that the Delaware courts always favor management.
The decision is particularly instructive about how a special negotiating committee should conduct or not conduct itself. For that reason alone it is required reading for anyone who cares about such things.
Delaware corporate law permits a Delaware corporation to exonerate directors from claims that they acted negligently. Those claims are known as "duty of care" claims. However, the same statute also states that claims for acting in bad faith [known as "duty of loyalty" claims] may not be so easily precluded. Hence, plaintiffs often seek to cast their complaints as duty of loyalty claims. Often, this takes the form of alleging that no loyal director could have been so stupid as to do what those directors are alleged to have done and so they must have been disloyal, not just negligent.
Well as this decision shows, it is just not that easy to plead a duty of loyalty claim. You need really strong facts, not just conclusions. This decision is a good example of how the Court analyzes those sorts of allegations and will dismiss a complaint that lacks the facts to sustain a duty of loyalty claim.
Some corporate mergers give stockholders of the acquired company an option to take cash or the stock of the acquiror. If the stockholder fails to chose, then she typically gets the cash. The appraisal statute only provides for an appraisal claim when the stockholder is required to take cash and not publicly traded stock. Here the plaintiff who had not made the election to take stock and so got cash argued she was forced to take cash and hence was entitled to appraisal of her shares.
The Court said "no," reasoning that so long as she had a choice she was not forced to take the cash. Risking the wrath of some members of Congress, the Court cited to a famous French philosopher on why you still have a choice even when you do not decide to act. That too is your choice.
Every so often, a corporation acts so badly that a plaintiff decides to take a run at attacking the business judgment rule and sues the corporation's directors alleging their decisions have been too stupid to be protected by that rule of Delaware law. That was true in the famous Disney case and this is another example of such a suit. After all, who could stand up for Goldman Sachs these days?
Well, showing that the business judgment rule is alive and well, the newest member of the Court of Chancery in this decision reaffirms that hindsight alone does not support a good claim. The decision is noteworthy because Vice Chancellor Glasscock exhibits the same care and scholarship as his predecessors in his opinion dismissing the complaint.
Authored by Edward M. McNally
Originally published in the Delaware Business Court Insider l October 5, 2011
The Delaware Court of Common Pleas recently adopted new procedures that will make this often-overlooked court much more attractive to both businesses and lawyers. Historically, the Court of Common Pleas has not been used to resolve many business disputes because its jurisdiction is limited to claims not exceeding $50,000. However, its new procedures will speed up litigation, cut down on litigation costs and provide some added benefits to law firms.
Called the "SPEED" docket - the name is an acronym for Special Election and Expedited Docket - it should be used more often for several good reasons. First, businesses often must deal with smaller disputes that may have serious implications. If a business does not act to enforce its rights in small matters because it wants to avoid litigation costs, it risks being known as a mark for the unscrupulous. Businesses need to stand up for their rights to preserve their reputations. The SPEED docket will help them do so because it will reduce litigation costs.
Second, law firms need to serve their business clients or those clients may go elsewhere. The firm that refuses to help a client with a dispute that "is too small for us to handle" risks another law firm taking its place. Often, law firms solved this problem by cutting their fees for small matters to please the client. But that means losing the value of the time spent on that matter and is hardly a good solution. Again, the SPEED docket will help cut the time needed to handle a small dispute, helping both the firm and its client.
Third, law firms need trials to train inexperienced associates how to try a case. That does not work well in the "big" case where there is too much at risk to let the inexperienced lawyer handle significant parts of the trial. The smaller cases handled by the Court of Common Pleas provide an opportunity to let a newer lawyer try a case with less risk of a significant loss to the client. Even apart from trying a case, the SPEED docket will teach lawyers how to manage their time. They will have little choice but to focus on getting the job done when the trial schedule does not permit procrastination. That is good training. More ›
What should be disclosed in a proxy is not always clear. This decision notes the reasons and the precedent to disclose free cash flows used to do a discounted cash flow analysis by an investment bank giving the fairness opinion.
A recent letter from a Delaware Superior Court judge gained national attention for its criticism of the lawyers involved in pending cases before it and particularly for the court’s novel remedy — a mandatory Sunday session in civility.
While I have no opinion on whether the judge’s reprimand was deserved or not, her attempt to call attention to what she saw as incivility points out the need to address incivility in civil litigation. Lawyer squabbling and other ill-mannered acts only breed disrespect for the law.
After all, the rule of law is supposed to be a step up from the use of force to settle disputes. But if the lawyers seem to be acting to avoid resolutions based on merit in favor of who has the most abusive advocate, then the law is no better than “might makes right.” We cannot let that happen. More ›