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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 14 posts from March 2012.
It is well understood that when a controlling stockholder stands on both sides of a transaction with his controlled entity that he will need to show the transaction is entirely fair to the other owners. But when he receives such a special benefit so as to be on both sides of the deal is not always so easy to decide. After all, it is common such acquirors to want to retain management. If the insiders get an employment contract, do they stand on both sides of the negotiations? This decision helps to answer that question. In general, if the controllers get an equity interest in the surviving entity to a merger that is not shared with the other owners, then they are on both sides of the transaction and must show it is entirely fair.
When must a litigant raise any issue over the choice of the law that governs a dispute? Right away is the answer. As this decision correctly holds, if the parties brief their issue under Delaware law, trying to argue later that some other jurisdiction's law applies is too late.
When a post-closing adjustment is due after a merger is sometimes disputed, particularly when it depends on the closing of another deal. Here the Supreme Court concludes that when the payment is due on the closing of another "deal" that new deal needs only to close, not to be exactly what the parties might have contemplated when they signed the merger agreement. Thus, this is another example of "you-get-what-you bargained-for" in Delaware.
This is an important decision because it clarifies when a stockholder will be deemed to have acquiesced to a merger, thereby losing her right to continue to litigate. In short, voting for the merger or accepting a tender offer is acquiescence. Accepting the merger consideration when the merger is inevitable is not acquiescence.
This decision is also useful for its explanation of how the Court will calculate the fees to be awarded.
Like many aspects of Delaware corporate law, the law of a corporate director or officer's entitlement to advancement is not black and white, but it is probably one of the more well established areas of law.
The contours of the law in this area have been addressed so often that members of the Delaware Court of Chancery have on occasion expressed frustration with corporations advancing defenses to mandatory advancement provisions that have little merit to them. (See, e.g., Barrett v. American Country Holdings Inc. a 2008 opinion in which the court wrote: "The accumulation of cases like this, where the stockholders get it coming and going because of the corporation's refusal to honor mandatory advancement contracts, is regrettable, and at some point, a case of sufficient dollar value will arise such that a board is sued for wasting the corporation's resources by putting up a clearly frivolous defense.") More ›
Chancellor Leo E. Strine Jr. has long had a high regard for the ability of stockholders to decide for themselves what is in their own best interests. A corollary of that is judicial restraint when stockholders on full information of flaws and conflicts of interests in a sales process have the opportunity to approve or reject a merger transaction with a substantial 47.8 percent control premium, albeit one likely not as robust as a well-run sales process may have generated. More ›
After a board makes a decision that has consequences that last for years, the question arises of when the time to litigate over that decision expires. Some decisions hold that when the decision is not reviewable later, such as when a long term contract is awarded, the time to attack that contract starts to run out the day the contract is approved. Here, however, the Court noted that the company had the right to cancel the contract every year. Thus, the Court held that each time the board decided not to cancel the contract, it made a new business decision that was subject to court attack from the date the contract was not cancelled.
In this case the Court appointed a receiver for an insolvent corporation under Section 291 of the DGCL. The Court reasoned that the appointment was needed to break a deadlock over whether to implement a proposed tax strategy when there was little time left to deal with the IRS. This illustrates when a receiver may be appointed to make business decisions.
The Delaware Court of Chancery recently took the largely unprecedented step of appointing a receiver for a Delaware limited liability company. While Jagodzinski v. Silicon Valley Innovation Co. LLC is a short opinion, it has large implications. Here are just a few, but first it is necessary to focus on its odd facts. More ›
For the second time in a month, the Court of Chancery has denied an injunction against a merger despite serious breaches of duty by the lead merger negotiator. Here the controlling stockholder refused to vote for the transaction unless he received a "bonus" in the form of more for his stock than the other stockholders were to receive on a per share basis. This odd demand arose out of some equally odd provisions in the certificate of incorporation where the controller had agreed to equal treatment in any merger but now sought to take back that provision. That was wrong, the Court held. However, the deal was too good to enjoin when there was no other deal on the table and none likely to arise later if an injunction stopped the show. Hence, out of concern for the minority stockholders, the Court let the deal go through and left the stockholders with a damage claim.
While some commentators have argued that such a result is wimpy, they do not seem to worry about the impact on stockholders of killing a deal that represents the golden goose. The threat of a damage remedy should be enough to deter such conduct in the future, just as it does in other contexts.
It occurs more than you might think that a party to a release later claims that the release is not binding because she was fraudulently induced to sign it. Applying recent New York law, here the Court holds that if the release covers "unknown claims," then it cannot be set aside by an claim that it was fraudulently induced.
It is often thought that the jurisdiction where suit is first-filed will obtain priority over later filed actions. As this decision makes clear, that is not true when the litigation involves a representative action and Delaware corporate law applies. For in that case, the Delaware courts will apply the doctrine of forum non conveniens that gives only slight weight to where the first suit was filed. More important in class or derivative actions is Delaware's interest in applying its corporate law to Delaware entities.
Among the more vexing tasks of a Court is setting the fees to be awarded in an advancement case. If left to itself, this can become a monthly job as the parties endlessly quarrel over how much is to be paid. The Court of Chancery has tried several approaches to avoid getting stuck in this endless quagmire. Here is a new one. The Court is charging the senior Delaware lawyers for each party with the duty to resolve any difference through a detailed process including monthly meet and confer sessions. That may be enough to interject some sanity into these disputes.
This is an interesting application of corporate law principles to an LLC dispute where the LLC operating agreement defined the managers' duties by language closely following common law duties for directors. Thus, the analysis included determining if they acted with gross negligence, were interested in 2 transactions to invoke the entire fairness test, etc.