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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 11 posts from November 2012.
For years the Court of Chancery has repeatedly held that the controllers of an LLC owe fiduciary duties to the members - at least absent an express disclaimer of those duties in the LLC Operating Agreement. Then on November 7, 2012 in the Gatz Properties decision, the Delaware Supreme Court said "not so fast" and indicated in no uncertain terms that the fiduciary duties of an LLC controller were not yet decided under Delaware law. Well in this decision, the Court of Chancery decided that so long as the Supreme Court continued to not rule on the question, the Court of Chancery would continue to hold those duties exist. Maybe this will force the Supreme Court to decide that issue.
This decision is also interesting for its ruling on when a claim must go to arbitration. If the claim might have been brought even without the contract having the arbitration clause in existence, then it need not be arbitrated.
This transcript has an excellent review of the case law on deal protection clauses that limit what a Board can do upon receiving a possible better offer. The Court enjoined compliance with a "don't ask, don't waive" clause in such circumstances.
In transactions where a majority of directors or a controlling stockholder stands on both sides, the Delaware courts apply the entire fairness standard of review. That standard also applies in the limited liability company or limited partnership context where the parties adopt that standard by contract. While the two prongs of this nonbifurcated standard are well known — fair dealing and fair price — not that many cases have been tried and resulted in a Court of Chancery opinion that is then subject to review by the Delaware Supreme Court.
Gatz Properties v. Auriga Capital, No. 148, 2012 (Del. Supr. Nov. 7, 2012), is the most recent post-trial entire fairness decision by the Delaware Supreme Court. The court's affirmance that the contract at issue adopted the entire fairness standard for affiliated transactions, that fiduciary duties had been breached, that the limited liability company agreement provided no exculpation and that the lower court properly determined damages provides important guidance to practitioners for transactions subject to entire fairness review. More ›
For some time the conspiracy theory of jurisdiction, first set out in the famous Istituto Bancario decision, has had little success in conferring jurisdiction over foreign entities. With this new decision by the Delaware Supreme Court, that trend may be reversed. The key holding is that the defendant should have known that it was involved with a Delaware corporation and the dissolution of that company as part of the alleged conspiracy was enough to give jurisdiction over the non-US defendant. While the parameters of this possible extension of jurisdiction are to be determined later, it may be very broad.
This is a troubling decision. One plaintiff, through the efforts of the other plaintiff who is a lawyer, used a false verification when the complaint was filed. The Court of Chancery requires all complaints be verified. As a result, the Court dismissed the complaint under the rule of Parfi where the dismissal is on the merits.
Seems right so what is troubling? Delaware lawyers typically believe their clients when they are sent a verification that the client did what the verification says, appeared before a notary to sign it. This is an odd case because there was some indication that was not being done. Still, how far should we go? The short answer is that we need to ask the client: "Did you get this signed in front of a notary like it says"?
This decision deals with a hole in Delaware jurisprudence. Generally, the statutes authorizing each form of Delaware entity contain a provision whereby the managers of that entity submit themselves to the jurisdiction of the Delaware courts for acts in their managerial capacity. But, as this decision points out in dismissing the complaint for want of personal jurisdiction over the defendants, that is not the case under the Delaware limited liability partnership statute. This seldom used act may need to be amended as a result.
A Section 225 action is supposed to be limited to the narrow question of the composition of a corporation's board of directors. Subsidiary questions, such as who owns what stock, may be resolved as well but are generally not binding on persons who are not parties to the litigation. However, as this decision points out, if you are a party and consent to the Court deciding stock ownership in a Section 225 action, you are stuck with the judgment.
In the absence of a provision that excludes fiduciary duties, do the managers of a Delaware LLC have those duties? The Court of Chancery has long said "yes" but this decision of the Delaware Supreme Court says "not so fast." Instead, the Supreme Court held that the terms of the LLC agreement in this case imposed fiduciary duties on the manager in a self-dealing transaction. Thus, the Court held, it was premature to also hold, as the Court of Chancery did, that under the LLC statute such fiduciary duties existed absent a renunciation of those duties in the agreement.
Will the Supreme Court ever decide that issue and if it does, how will it come out? Is it time for the Delaware General Assembly to resolve this issue? If LLCs are ever to be used for more publicly traded entities, their managers will need to have a fiduciary duty. Trusting to the LLC agreement to protect investors is to ask too much of drafters of such agreements who cannot anticipate every circumstance that may occur. That calls for the legislature to act.
The Delaware Supreme Court on October 22 decided when and how Delaware lawyers may be sanctioned for the way they conduct litigation. For the first time, that court firmly held that the so-called "objective test" applies in Delaware to determine if a lawyer's conduct is sanctionable under Rule 11. Second, the court held that an attorney is entitled to a hearing where he is able to defend himself before a sanction is imposed. Because the lawyer conduct involved did not violate the objective test, the trial court's sanction was vacated. The decision in Crumplar v. Delaware Superior Court has important implications for the practice of law in Delaware's courts. More ›
This transcript is noteworthy for 2 reasons. First, it reflects the Court's view that a conflict committee in an LLC must examine all the important aspects of a proposed transaction before a motion to dismiss will be granted based on the committee's approval of the deal under attack. Second, the transcript shows the Court's respect for the NYSE definition of when a director is "independent."
This decision in a bench ruling has some interesting issues on what should be disclosed in discovery. First, it is important to not fail to list the witnesses that you will call at trial when answering interrogatories. Hanging back to the last minute may mean the witness will be barred from testifying. There was more to this than just delay but that is still a point worth remembering.
Second, the scope of expert discovery may well include notes and work papers of everyone who is on the team assisting the expert witness and will certainly include prior studies the expert has done on the same subject matter for other clients. This points out the need to be careful in setting up the expert's team and in selecting the expert.