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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 12 posts from January 2012.
When answering an interrogatory asking about the documents a litigant relies upon, it is not enough to just refer to the documents produced. Instead, the specific documents must be identified, such as by bates numbers.
It is often the case that a controlling owner wants to eliminate the minority interests. How to do so and abide by his fiduciary duties is the stuff that makes for litigation. This is an example. This decision is particularly important for 2 reasons. First, it makes clear that even a controlling owner who does not really want to be a seller must consider going through a validly conducted sale process to show that he has been entirely fair with the minority.
Second, it explains the role of fiduciary duties in LLCs, including those LLC agreements that try to modify or eliminate those duties. That is possible to do but needs to be done very explicitly.
Authored by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider | January 25, 2012
Defendants in class and derivative litigation often view the plaintiffs in those cases, especially the repeat players whose names are familiar to devoted readers of Court of Chancery opinions, as minor investors with little directly at stake in the litigation. Sometimes, however, the plaintiffs have significant equity stakes in the companies whose transactions they seek to enjoin. In those cases, the plaintiffs may be sharp investors who value the investment more than the principle at stake. What happens, then, to these investors when they see the chances at success in litigation passing them by? In any other circumstance, they might be inclined to trade out of their position or arbitrage the risk appropriately. When, however, these investors have chosen to be the plaintiff in a case seeking to halt the challenged transaction, the ability to act like an ordinary investor is severely restricted. More ›
This is a classic example of just about everything that you should not to do in running a closely-held company. Everybody involved seems to have ignored his or her fiduciary duties. Hence, it is a useful precedent because the breaches cover all sorts of misconduct, any one of which might be found in your case.
Another important point about this decision is its recognition that breaches of duty may be waived if not objected to, particularly when some benefit is received by the party who later objects to what was done.
This decision is an example of the growing Court of Chancery litigation over enforcement of loan agreements. The court reviewed the recent deicisions over when to issue an injunction or instead leave the parties to a damages remedy. Here the decision is affected by the procedural stance of the litigation because the burden the plaintiff must bear is somewhat less at the TRO stage and the decision fully explains how that affected its conclusion to issue an injunction.
The U.S. District Court for the District of Delaware has now taken a bold step to address the cost of civil litigation due to ESI discovery. The court recently adopted its "Default Standard for Discovery, Including Discovery of Electronically Stored Information." These new standards expand the court's previous ESI standards, first adopted in 2004 and later amended in 2007. As was the case with the 2007 standards, the parties are still free "to reach [their own, different] agreements cooperatively on how to conduct discovery." While the parties to litigation have frequently done just that and crafted their own ESI discovery procedures, the 2007 standards successfully prodded parties to reach agreements and provided useful guidelines to do so. These new standards will have a similar, laudatory effect.
Morris James Welcomes Bryan Townsend as an Associate in its Corporate and Fiduciary Litigation Group
Mr. Townsend focuses his practice on litigation involving complex corporate, commercial and fiduciary matters. He clerked for Chancellor William B. Chandler III in the Delaware Court of Chancery from 2009-2010 after graduating from Yale Law School in 2009, where he served as Co-Editor-In-Chief for the Yale Journal on Regulation. Mr. Townsend earned an M.Phil. in Chinese Studies from the University of Cambridge in 2006 after attending Peking University (Beijing Daxue) in 2005, where he studied Chinese language, economics, and politics. He received three degrees from the University of Delaware: an Honors B.A. with Distinction in Philosophy and Biology in 2004, and an M.A. and Honors B.S. in Economics in 2003.
Mr. Townsend is a volunteer attorney for the Delaware Office of the Child Advocate, Delaware Volunteer Legal Services, and Widener Law School’s Veterans Law Clinic. He is a director on the board of the University of Delaware Alumni Association and served from 2004-2005 on the University’s Board of Trustees. Mr. Townsend is an ardent supporter of Special Olympics Delaware and is a volunteer Big Brother with Big Brothers Big Sisters of Delaware. For his commitment to leadership in the public service, Mr. Townsend was selected as a 2003 Harry S. Truman Scholar, one of seventy-six individuals nationwide to receive the honor. He is a member of the bars of Delaware (2010) and the United States District Court, District of Delaware (2011).
A class representative may not trade in the stock held by his class members based on information he learns in the litigation. That is the usual rule reflected in the typical confidentiality order entered in such cases in Delaware. This decision collects several other unreported decisions following that rule and shows how to calculate the trading profits that must be returned to the class when the rule is violated.
This is an important decision because it reaffirms the ability in an LLC agreement to severely limit the right to sue. Here the LLC agreement first said that if the committee appointed to review conflict of interest decisions did so, then there was no right to sue for breach of fiduciary duty by the controllers. The Plaintiff tried to argue that the implied duty to act in good faith and fairly still meant the controllers could not have acted in good faith by submitting the conflicted transaction to the committee. However, the LLC agreement also said that if the controllers acted after receiving expert advice the transaction was fair, then they were conclusively presumed to have acted in good faith. The Court agreed that cut off the claim based on implied duties.
This decision is a clear explanation of how to determine if a contract is ambiguous on a point. If it is, then evidence of the parties' intentions is necessary to decide what the contract provides.
Delaware officers and directors are usually entitled to have their litigation expenses advanced when they are sued for their conduct in those corporate capacities. Exactly what conduct is alleged to be wrongful is key to determining if that right to advancement applies. For example, if after a merger a director ceases to be a director, then he is not entitled to advancement for litigation over that conduct. This decision illustrates how the Court will decide what conduct is involved in the underlying litigation so as to decide if advancement is required.