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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 15 posts from August 2012.
Section 124 of the Delaware General Corporation Code sets out the Delaware limits on the common law doctrine of ultra vires. This decision holds that Section 124 does not limit suits for breach of fiduciary duty, but does protect corporate transactions that have closed from some attacks alleging a lack of power to do the transaction.
Acquisition agreements often have provisions for post-closing adjustments to the purchase price. How to invoke the right to such an adjustment is set out in the agreement. This decision deals with such a notice provision requiring "reasonable particularity" for the claimed adjustment. While the Court reserved for trial the decision on whether that standard was met, the discussion of the notice provision is an excellent guideline on how to draft and interpret notice provisions.
Delaware limited partnership agreements frequently have provisions governing how to deal with conflict of interests between the GP, the limited partners and the owners of the GP. This decision sets out the language needed to protect the GP and its owners from attacks in conflict transactions when the deal is approved by a conflicts committee. If the committee acts in the subjective good faith belief the transaction is in the best interests of its constituency, an attack alleging objective unfairness will be dismissed.
This then may be the definitive guide to drafting limited partnership agreements. And while the Court recognizes that the decision offers little protection for limited partners, it points out that is part of the risk they bear when they invest in such LPs.
This decision was affirmed on July 22, 2013.
When may an expert change his mind after he has provided his report under a court-ordered deadline? This decision answers that question. Briefly, absent agreement between all the parties, once the report is served, it may not be materially changed. Of course, this just makes common sense if scheduling orders are to have any force.
What the expert is then to do when he realizes he has erred is a tough question. Confession is said to be good for the soul and that probably applies here as well. But the opposing party needs to be cautious as well, for nothing in this ruling bars a surprise during cross examination of its expert, who absent a correction by the opposing expert, may not be as prepared as he might have been with that disclosure.
It is striking that a vast majority of deals involving a controlling stockholder lead to litigation filed within days, if not hours, of the public announcement of the transaction. In fact, sometimes litigation is filed even before an actual transaction is announced, simply upon notice that a transaction may be proposed soon. It strains credulity to believe that today so many deals involving controlling stockholders are actionable for breach of fiduciary duty or failure to properly disclose the background to the deal.
Of course, the reality is that these early filings seldom involve a meaningful analysis of the merits. Instead, these early filings represent a race to the courthouse by plaintiffs law firms. The race begins when a law firm first posts on its website or on a company blog set up by day traders that the firm is "investigating" a proposed deal with a controlling stockholder. Soon, the firm and other plaintiffs firms find stockholders who are willing to be their plaintiffs, and the suits follow immediately. Once the company's public filings are made, the various complaints may be amended to attack the filings as inadequate or misleading. Too often, negotiations with the plaintiffs' lawyers immediately follow. A settlement is reached with some modest benefit conferred on the stockholder class and with attorney fees included. This form of "pay-off" is cheaper than litigating all the suits and gains a class-wide release of stockholder claims that adds certainty to the final deal terms. More ›
This is an important decision because it explains the theory of jurisdiction over alleged conspirators. While that basis for jurisdiction has been around since the Istituto Bancario decision, it is still hard to understand. The guidance this decision provides to that law and the conspiracy theory in general is very helpful.
This decision clarifies the extent of a controlling shareholder's duties when selling her company. The controller is not required to sacrifice her own interests to benefit the minority, such as by accepting less for herself than others receive. Of course, the safe harbor is still equal treatment.
While this issue continues to come up, it is still not clear when limited partners may terminate a manager when their limited partnership agreement only says they must act in "good faith." Absent some more definitive standard, this decision holds the termination must be done honestly in fact and observe reasonable commercial standards. Now is that clear enough? In any case, if the manager fails to meet the deadline for submitting an annual financial statement, you may "in good faith" fire her.
Affirmed, Del Supr. August 26, 2013
It has long been thought that Cede & Co. v Joule Inc., 2005 WL 736689 (Del. Ch. Feb. 7, 2005) denied standing to a party to object to a third party subpoena except on privilege grounds. Well no more. In this recent decision, the Court declared that Joule is wrong and that it will protect a party from excessive discovery.
This decision clarifies that to have discovery of work product a party needs only show a "substantial need" and that it would be an "undue hardship" to get the information some other way. Despite some contrary language in the famous Garner case, there is no requirement that you also show the information is sought in "good faith."
This is another in a series of recent discovery decisions limiting the use of subpoenas. Here the Court balanced the limited relevance of the information sought with the potential prejudice to the party asked to produce its trade secrets and denied some of the discovery.
A contract provision in a limited liability company agreement that entitles the prevailing party to reimbursement for all reasonable fees and costs in connection with enforcement of the agreement, including reasonable attorney fees, is not unusual. In defending against such a claim, a nonprevailing party may challenge whether the claims arose under the agreement, whether expenses incurred in related litigation in other courts merit reimbursement and whether the fees are reasonable in light of the comparable fees and rates of the nonprevailing party. Sometimes a question arises, where similar issues exist involving substantially similar contracts but different parties, of whether the court must allocate the fees among the separate parties. What is unusual is for all of these issues to be addressed in one opinion. The Court of Chancery's recent decision in ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, 2012 WL 3027351 (Del. Ch. July 9, 2012), does just that and provides important guidance to practitioners regarding the nature of a claim for breach of the implied covenant of good faith and fair dealing and enforcement of contractual fee-shifting provisions. More ›
Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, C.A. 5140-CS (August 7, 2012)
When a complaint is amended, the issue sometimes arises whether any new claims relate back to the original filing date so as to avoid the expiration of the statute of limitations. In this decision, the Court explains that when the breach of contract alleged in the amended complaint arises out of different facts and is a different breach than in the original contract, then it does not relate back. Hence, it is a bad idea to wait to amend a complaint.
This decision explains how to calculate damages in an accounting action for breach of fiduciary duty.