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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 14 posts from July 2012.
When is a laches defense available in the Court of Chancery? This decision explains how to figure that out in a breach of contract case.
This decision clarifies that the rule of the Blasius decision is really just an application of the intermediate Unocal standard in reviewing director conduct.
While each disclosure case will turn on its own facts, this decision gives an excellent overview of when employment contracts with management must be disclosed when notifying stockholders of a proposed merger with an acquiring company. When management has been involved in the merger negotiations, any employment agreements and the surrounding circumstances must be disclosed.
When a plaintiff is able to show a "colorable claim" and that absent prompt relief it will suffer "irreparable harm," the Court of Chancery will expedite a hearing on its claims. However, exactly what that all means varies from case to case. This is a good example of such a showing to obtain expedition in a breach of contract case.
All Court of Chancery complaints must be verified by each plaintiff. Most of us take it for granted when the client returns a notarized verification. But should we? In this case the transcript includes an order granting discovery of a notary to see if the plaintiff actually appeared before that notary to sign his verification. The Court suggests that if he did not do so then he has committed a fraud on the Court. That is perhaps not the best way to start litigation.
This decision establishes Delaware law on what constitutes a wrongful interference with another's contract. Thus, it resolves several unsettled questions, such as concluding that a proper motive trumps an improper motive to interfere with a contract's performance.
In this unusual case, the Court of Chancery held individuals liable on a contract that was signed by a corporation. Why? The corporation did not exist. Apparently, the buyers intended to form the entity, but had a fight with their lawyer and never got around to doing the incorporation. While they argued that they had expressly refused to guarantee the contract, the Court held they could not both take the benefits of the deal themselves and then not pay for it. Big surprise!
One of the more difficult issues in appraisal litigation is how to allocate value between common and preferred stock. Here the preferred stock was entitled to dividends on an as-converted basis and the Court used that forrmula to allocate the enterprise's value between the preferred and common stock.
The decision is also a primer on how to do a discounted cash flow valuation.
Executive compensation is a hot topic. Congress entered the fray with the Dodd-Frank Act's "say-on-pay" requirements and with Section 162 of the Internal Revenue Code's limits on deductions for some executive compensation payments.
Yet, neither of those measures actually limits what companies may pay their top executives. To do so, stockholders have filed suits arguing it is a breach of fiduciary duty to not follow stockholder votes on say-on-pay resolutions or to not meet Section 162's requirements to obtain a deduction for executive pay.
Those suits have been notably unsuccessful. Indeed, these so-called "Section 162 claims" rarely get beyond the pleading stage, where they are regularly dismissed. The business judgment rule usually insulates from attack the directors' decisions on executive compensation. For example, the Delaware Supreme Court's 2005 opinion in In re The Walt Disney Co. Derivative Litigation, 906 A2d 27 (Del. Sup. 2006), upheld a board decision to pay a $130 million severance package to a single individual. Just a few weeks ago, the Court of Chancery dismissed a similar claim alleging excess compensation in Zucker v. Andreessen, C.A. 6014-VCP (June 21, 2012). More ›
A plaintiff must offer some basis to believe the defendant is subject to the Court's jurisdiction before he will be permitted to take jurisdictional discovery. Owning an interest in a Delaware LLC is not enough.
Litigation to restrain the employment of former employees is often complicated by jurisdictional issues. This decision resolves some of those issues by holding that a Delaware court may restrain a Delaware corporation from employing a former employee of the plaintiff even when that employee is not himself subject to the jurisdiction of the Delaware courts.
This decision, coupled with the enforcement of the choice of Delaware law clauses in other employment decisions, means that Delaware is a preferred forum for such litigation.
Recently, The New York Times published an article alleging that Delaware is, among other things, a potential haven for forming entities involved in criminal activities ("How Delaware Thrives as a Corporate Tax Haven," June 30, http://nyti.ms/M9fhFy). The article also criticized Delaware’s role in tax avoidance, but responding to that argument is beyond my knowledge. The article implied that Delaware is attractive to criminal activities because the state has virtually no means of determining who incorporates entities in Delaware.
In support of this contention, the article quotes a registration agent stating that Delaware requires the least amount of information in order to form a corporation under its laws. While a detailed response to this type of criticism would be beyond the scope of this article, the record should be set straight on what Delaware does require, and how the disclosure required by Delaware differs from the disclosure requirements in other states, because the article itself never discusses that. More ›
Allocating a fee claim between various losing parties in the case that you won is difficult most of the time. This decision shows that when all the claims are sufficiently related, you may not need to do so. The defendants are then jointly and severally liable.
In a "man bites dog" case, the Court of Chancery awards attorney fees for opposing a Rule 11 claim for fees. This illustrates that the Court really does not like Rule 11 motions and those need to be made only after careful thought.