Posts from 2011

Supreme Court Clarifies Test Of Pleadings

Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, No. 595, 2010 (August 18, 2011)

This important decision clarifies that Delaware courts should apply the "conceivability" test to determine if a complaint states adequate facts to state a claim.  Previously, Delaware's trial courts had applied the "plausibility" test from the United States Supreme Court's Twombly decision.  As the Delaware Supreme Court makes clear, the "conceivability" test is the more liberal test and will result in sustaining more complaints in response to motions to dismiss.

For years, the Chief Justice has cautioned in public statements that Twombly was not Delaware law.  While his opinion in this case may leave that open for a later review,  for now he has the last word.

The decision also significantly liberalizes the scope of a "good faith and fair dealing" claim.  So long as such a claim does not depend on an actual breach of the contract involved, it may survive a motion to dismiss as well.

Court Of Chancery Permits Innovative Use Of Declaratory Judgment

K&K Screw Products LLC v. Emerick Capital Investments Inc., C.A. 5633-VCP (August 9, 2011)

Sometimes a lingering contract dispute causes problems in obtaining financing or just getting on with a company's business.  Here the Court upheld the use of a declaratory judgment action to establish the parties rights in such a dispute.

Court Of Chancery Permits Full Transfer Of Membership

Achaian Inc. v. Leemon Family LLC, C.A. 6261-CS (August 9, 2011)

It is often unclear when a member of an LLC may transfer not just her financial interests but her voting rights as well.  The LLC Act leaves that issue to be determined by the LLC operating agreement.  Here the Court closely examines this issue and an LLC agreement and decides that a member's full interest may be transferred by her without the other members' consent.

Court Of Chancery Upholds Fiduciary Duty In An Alternative entity

Paige Capital Management LLC. v. Lerner Master Fund LLC, C.A. 5502-CS (August 8, 2011)

This is an important decision and a lot of fun to read to boot.  The fun is in the all-too-human story it tells of personal ambition frustrated and what happens then.

There are 3 key points in its holding.  First, those who control an LLC owe fiduciary duties to the members unless the LLC Agreement clearly cancels those duties. This may be contrary to the views of at least 1 Supreme Court Justice who favors requiring those duties be spelled out in the agreement.

Second, vesting in a manager the "sole discretion" to decide a matter only means she is the only one who gets to vote on it.  It does not mean she can vote anyway she likes even if that is unfair. Here better drafting is needed.

Third, the Court will decide cases on their legal merits even if the winning party is a jerk.  Of course, here there was a bit of a contest to see who could be the biggest jerk.  Nonetheless, it is reassuring that the Court saw though all that to get to the real merits.

CCLD Explains Pleading Rules For Fraud

Brevet Capital Special Opportunities Funds L.P. v. Fourth Third LLC, C.A. N10C-12-071 JRS (CCLD)

The Superior Court's Complex Commercial Civil Division is issuing more and more opinions in the various matters that are now becoming ripe for decision.  Here the Court explains when both fraud and breach of contract claims may be filed in the same case and how to adequately plead the fraud count under the particularity standard required.

Paying for Your Opponent's Lawyer: A Common Dilemma

Court Of Chancery Explains Limits To Guaranty

Roseton OL LLC v. Dynegy Holdings Inc., C.A. 6689-VCP (July 29, 2011)

This decision explains the limits on a parent's guaranty of a subsidiary's performance in the context of what the parent can do with its assets and its ability to later honor the guaranty.  It is an illustration of the need to understand the client's business and for careful drafting of such agreements.

Court Of Chancery Determines When Discovery Permitted To Vacate Award

Chartis Specialty Insurance Company v. LaSalle Bank,  C.A. 6103-VCN (July 29, 2011)

This decision discusses when a party may obtain discovery in an action seeking to vacate an arbitration award.  The short answer is "not very often."  However, discovery was granted in this case alleging arbitrator bias.

Court Of Chancery Limits Interim Fee Applications

Frank v. Elgamol, C.A. 6120-VCN (July 28, 2011)

Recently, the Court of Chancery has permitted fee applications before a case is finally decided. This decision notes that practice should and will be limited to unusual situations. That cuts off that trend before it goes too far.

Court Of Chancery Modifies the Duthie Procedures

Fuhlendorf v. Isilon Systems Inc.,  C.A. 5772-VCN (July 22, 2011)

When a director is sued, he often is entitled to have his attorney fees advanced by his company, even when it is his former company.  A fight over the fees sometimes results, however, when the fees are high and the relationship with the director is not the best.  The Court of Chancery, after having to referee several of these fee fights, adopted what are known as the Duthie  procedures where a percentage of the fees are paid and any disputed fees are sent to a special master to determine reasonableness.  The parties then split the fees of the master.  This decision modifies the Duthie procedures by having the fees of the special master paid by the company and not split with the director when his advancement agreement calls for payment not just of his fees but of any "expenses."

CCLD Follows Chancery Analysis

ALTA Berkely VI C.V. v. Omneon, Inc., C.A. N10C-11-102 JRS CCLD (July 21, 2011)

On one level this is not a particularly unusual decision and that is just the point.  For here the Superior Court's new CCLD shows that it is going to make the same studied analysis and follow the same precedent as the Delaware Court of Chancery.  This will increase confidence in the CCLD and, as this decision shows, its experienced and competent judges, for business disputes.

The Delaware Supreme Court affirmed this decision on MArch 5, 2012.

Why You Should Care What Law Applies to Your Contract

This article, authored by Edward M. McNally, was originally published in the Delaware Business Court Insider | July 20, 2011

It is striking how often drafters fail to consider what law applies to the contract they write. This is true of even big contracts. For example, Directors & Officers insurance policies frequently fail to choose the applicable law, leaving the choice of law to depend on where the policy is written or the insured company resides. But to ignore the choice of law is to forego many possible advantages that the right choice may provide. This article touches upon those advantages in the context of two recent decisions where the result turned on the choice of Delaware law.

Choosing the right law for your client will always be the right choice compared to ignoring the issue. First, at least the choice may avoid costly arguments later. People argue over what law applies because it may make a real difference. Those arguments cost real money. Second, if you choose wisely, you will choose in favor of predictability. Trying to decipher the law of some jurisdictions (such as Saudi Arabia) can be very difficult. If you do not know for sure what the applicable law provides, then you do not know if what you wrote in your contract actually works as you thought. Third, you can often simplify a contract by choosing the law that applies. That saves money just in the drafting process alone.

What law, then, should you choose? Better to pick the law you know than to guess at what some other jurisdiction's law might be. That just is common sense. However, two recent decisions illustrate why you might want to consider Delaware law for your next contract. Indeed, Delaware law is now the preferred law in most merger and acquisition documents, even for those not involving a Delaware corporation. In that practice area, Delaware law is considered a neutral compromise when the parties are from different jurisdictions whose laws might otherwise apply but for the contractual choice of Delaware. Delaware M&A law is also well-developed and thus more predictable than the law in some other jurisdiction. More ›

Supreme Court Explains Duties In Electronic Discovery

Genger v. TR Investors, LLC,  No.  592, 2010 (July 18, 2011)

For years the federal courts have steadily increased the sanctions for not following the rules governing email production in pretrial discovery.  Now the Delaware Supreme Court has affirmed that it too will impose harsh penalties when emails are destroyed.  The opinion has a useful explanation of the rules governing storage of emails and what should be done to protect them.

The opinion also clarifies that a Delaware court may decide who may vote the stock in a Delaware corporation even when the individuals claiming that right are not before the court.  However, the court may not determine who owns that stock unless it has personal jurisdiction over them.

Court of Chancery Denies Expedited Process in Merger of Limited Partnership Even Though Plaintiff Stated Colorable Claim

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | July 13, 2011

The Court of Chancery often hears applications for expedition of a plaintiff's motion to enjoin a merger transaction. While the court "has followed the practice of erring on the side of more hearings rather than fewer" (Giammargo v. Snapple Beverage Corp. (1994)), it will not schedule an expedited hearing unless the plaintiff can show good cause.

The June 10 opinion in In Re K-Sea Transportation Partners L.P. Unitholders Litigation illustrates that, even where a plaintiff can state a colorable claim, the court will not schedule an expedited hearing if the plaintiff fails to show "a sufficient possibility of a threatened irreparable injury, as would justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited preliminary injunction proceeding," (citing Giammargo).

The K-Sea case also illustrates that when parties to agreements governing limited partnerships, limited liability companies or other alternative entities modify or eliminate fiduciary duties, a Delaware court will enforce the agreements as written. Courts will not undo what one party now believes is a bad bargain through the application of fiduciary duties or the implied covenant of good faith and fair dealing.

PARTNERSHIP ACQUISITION

K-Sea involved the acquisition of a Delaware partnership. The acquirer sought to acquire the limited partnership by merger for either cash or a combination of cash and the acquirer's stock. Representatives of the board of directors of target's general partner negotiated the terms of the merger agreement. A special committee approved the transaction.

The plaintiffs argued that the special committee's approval did not comply with the K-Sea Limited Partnership Agreement (LPA) for two reasons. First, the special committee failed to consider separately an $18 million payment to the general partner for its incentive distribution rights (IDRs). Second, the members of the special committee were not independent because shortly before the beginning of merger negotiations with the acquirer, the target granted them each 15,000 phantom units that would immediately vest upon a change of control.

The plaintiff-unitholders also challenged the disclosure provided the common unitholders in the registration statement.

  More ›

Chancellor Explains How Representations And Warranties Work

GRT, Inc. v. Marathon GTF Technology Ltd., C.A. 5571-CS (July 11, 2011)

One of the more misunderstood aspects of merger agreements is how their representations and warranties are intended to work.  Do they continue after closing?  What is the limit on when litigation may be filed over any breach?  This decision answers those questions and is therefore essential reading for those who deal in these agreements.

Of particular importance is the decision's holding that a 1 year limitation of litigation is binding  and may cut off claims for breach of the representations and warranties.