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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 8 posts from June 2012.
Derivative suits alleging excess compensation are hard to plead. To avoid dismissal, the plaintiffs must show the directors were interested in the compensation awarded and their customary director fees do not count. Indeed, even bonus awards to themselves are not enough when the bonuses are approved by a stockholder vote. But this decisions shows why there is an exception to this general rule.
Here the bonus plan did not contain any limit on the board's discretion, except for a cap on the total awarded. Finding that this made the awards free from any real stockholder control, the Court held the complaint stated a valid derivative claim. The lesson then is to put some guidance on the awards into the plan when it is submitted for the stockholders' approval.
This is a run -of -the mill dismissal of a derivative suit for failure to justify the lack of demand on the board, but with a twist. For the decision highlights just how hard it is to show that a board is liable for paying an executive too much. Hence, curbs on compensation are left to the stockholders' vote to control.
It is often said that the Court of Chancery will not stay or dismiss an action filed under one of the statutory provisions for summary adjudication of a claim, such as to decide a proxy contest, because there is prior litigation filed elsewhere. That is generally true, but not always and this decision involves 1 of the rare exceptions. Here the plaintiff sought a decree of dissolution by his complaint filed several months after a similar claim was filed by the other side in New Jersey. Noting that any decision by it would impact a preliminary ruling by the New Jersey court, the Court of Chancery dismissed its case to avoid such a conflict.
The Delaware Court of Chancery just issued possibly the most important decision in the last 10 years on derivative claims. In Louisiana Municipal Police Employees' Retirement System v. Pyott, Del. Ch. Ct. 5795-VCL (June 11, 2012), the court clarified when a previously dismissed derivative suit may be refiled and what plaintiffs should do to properly satisfy the requirement that individual stockholder plaintiffs adequately allege why they, rather than a corporation's board of directors, should control derivative claims brought on behalf of the corporation. Because derivative litigation is a principal tool to ensure proper corporate governance, this decision has large implications. More ›
Cases brought under Section 220 of the Delaware General Corporation Law reflect the Delaware General Assembly's effort to balance the stockholder's important right to seek inspection of books and records to investigate wrongdoing with the directors' right to manage the business and affairs of the entity without undue interference from stockholders. In 2003, the Delaware General Assembly extended the right to demand inspection from stockholders of record to beneficial stockholders, but only if the beneficial holder states under oath with the demand that he or she is a beneficial holder, provides documentary evidence of beneficial ownership of the stock and states that such evidence is a true and correct copy of what it purports to be. More ›
This is one of the most important decisions on derivative litigation in many years. There are 3 key holdings, at least one of which may reverse prior law. First, the Court held that a derivative suit dismissed for failure to plead sufficient grounds to proceed under the demand rules may be refiled by a different plaintiff who has a better complaint. This may modify prior law that had held that once dismissed with prejudice, the suit could not be revived by a better complaint from a new plaintiff.
Second, this decision effectively kills off the old first-filed rule that held that the plaintiff who files the first complaint will control the litigation even if other complaints are filed later by different plaintiffs. From now on, the better plaintiff will be the lead plaintiff.
Third, the decision again stresses the value of inspecting a company's records before filing a derivative suit. Indeed, the failure to do so may cause the Court to view the complaint as presumptively meritless, at least with respect to whether the demand rules have been meet.
The opinion is worth reading for many other reasons as well. Its discussion of the Caremark case alone is a good reason to study the decision.
What is the role of a "stockholder representative" in an arbitration proceeding? When there are many parties to an agreement, it is common for the parties on one side (such as the selling stockholders entitled to an earn out payment) to chose one of their bretheren to act for them all. While most assume that the representative chosen has the right to call the shots in the arbitration, her role may be much more. This decision explains why that may be important. It holds that notice to the representative that begins the period in which an appeal may be filed also counts as notice to all the parties the chosen one represented. Hence, if she does not file a timely appeal, the others may not do so later. Moreover, the decision suggests that only the representative may argue the merits of an appeal.
Parties often try to plead as many different legal theories as possible. Pleading tort claims is particularly popular because there is a sense that it may lead to bigger damages and sounds aggressive. After all, who wants to be a "tortfeasor?" This careful decision explains when there is a tort claim and when there is not when the dispute arises out of a contractual relationship.
Briefly, after the contract has been at least partially performed, it is not a tort to promise to continue performance even if you do not mean to do so. Instead, that is just a breach of the contract. Therefore, there is no claim in such circumstances for fraudulent inducement. Also, when the damages arising out of the breach are not different than the damages recoverable in tort, there is no tort claim either.