About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 10 posts from October 2012.
Too often a plaintiff will file suit just to put pressure on the other side to get a settlement of a business dispute. In this decision, after finding that the complaint included knowingly false factual allegations, the Court imposed attorneys' fees on the plaintiff for suing when it had decided "not to bring his claim to definitive adjudication." This illustrates the Court of Chancery's understandable lack of tolerance for litigants who waste its time and the other side's money.
In light of the dismissal risk to plaintiffs who do not use the tools at hand to inspect books and records prior to bringing a claim for management failure to oversee a corporation's business and affairs, guidance regarding the standard necessary to support a demand for inspection is important. The recent decision of Louisiana Municipal Police Employees' Retirement System v. Lennar, 2012 WL 4760881 (Del. Ch. Oct. 5, 2012), indicates that newspaper articles reflecting an industrywide government investigation of compliance with the Fair Labor Standards Act and prior lawsuits alleging violations of the FLSA will not suffice.
The plaintiff's demand for books and records pursuant to Section 220 of the Delaware General Corporation Law followed publication in The Wall Street Journal of articles describing an investigation by the U.S. Department of Labor, the IRS and state regulators into compliance by large homebuilders with the FLSA and state law. The defendant's 2011 10-K acknowledged that failure by its employees or subcontractors to comply with state or federal labor law could cause financial and reputational harm to the company. The plaintiff demanded documents, including board minutes, relating to the company and its subcontractors' compliance with federal and state labor, tax and immigration laws. The defendant declined to provide any documents on the ground that the evidence relied upon by the plaintiff — solely the newspaper articles — did not reflect "a credible basis for thinking there has been wrongdoing." The plaintiff sued, claiming that the newspaper articles and the prior lawsuits provided sufficient credible evidence of wrongdoing. More ›
At common law, a director who was interested in the outcome of a board of directors vote simply could not vote on the issue before the board. Her vote was literally void. That old law was changed by statute in Delaware, under Section 144 of the DGCL. This decision holds that even absent a similar statute in the LLC Act, a manager may vote on a transaction that he is interested in, absent some restriction in the LLC Operating Agreement. Of course, merely having the power to vote does not make any vote the right thing to do.
This simple decision is still important because it contains the contract language that effectively waives any fiduciary duty to the limited partners in a Delaware LLP. This has been a source of confusion in the past where the language was less clear and complete. For example, there are Delaware decisions that find that efforts to waive fiduciary duties did not extend to the duties owed to minority owners.
To inspect corporate records to see if there has been "wrongdoing," a stockholder has to have a basis to suspect that wrongdoing has occurred. The evidence needed has been described as the lowest level possible if there is to be any standard at all. This decision illustrates that a standard does exist. Past lawsuits that have been settled are not sufficient to show present wrongdoing. General news articles about an industry-wide investigation are not sufficient. Both together do not get there either and the suit was dismissed.
Delaware does not have a separate corporate statute dealing with non-profit corporations. Hence, the non-stock sections of the DGCL usually apply to such entities. It is sometimes hard to decide what parts of the DGCL do apply, however, as the integration of stock with non-stock provisions is less than clear. This decision helpfully explains how to decide what parts of the DGCL to apply to non-stock entities
This is a classic example of what not to say in an argument unless you want to get the Court mad. In addition, this decision again explains how to calculate a fee award when the corporate benefit achieved is non-monetary.
Everyone agrees that a director should speak up even if he disagrees with the rest of the board of directors. But when does a director go too far in his opposition to policies he wants to change? In this decision, the Court wrestled with this question and decided that leaking confidential corporate information to pressure the company went too far. Significantly, the information was not about any wrongdoing. Hence, the finding of a breach of the duty of loyalty only goes so far as a precedent.
This decision establishes that "clear and convincing" evidence is needed to warrant reformation of a contract for mutual mistake or unilateral mistake coupled with knowing silence.