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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 6 posts from September 2012.
When a non-party to a contract is still bound by its arbitration provision is surprisingly often litigated. This decision reviews the past law and reiterates that a non-party may need to arbitrate when it is the alter ego of the a party that agreed to the arbitration clause, such as a successor partnership.
This decision illustrates the Court's reluctance to permit protective orders to limit access to documents. The Court permitted the plaintiff's husband and non-US attorneys access to the documents that would otherwise have been confidential under a protective order.
This is a useful, if not surprising, example of how the Court will interpret a corporate charter regarding the rights of preferred stock. It is also an example of the principle that if you want a veto power in the charter, you had better be clear and complete or the charter will be changed to your detriment.
Many lawyers believe that it may be okay to file suit and do an investigation of the facts later through discovery. Not so in some derivative litigation. This decision explains what pre-suit investigation is required to sustain a derivative suit alleging a Caremark claim. It is required reading for its detailed review of the current law.
Briefly, at least when a Caremark claim is asserted, it is almost mandatory that a Section 220 action to inspect the corporation's records be done before filing suit. Absent that inspection, a plaintiff better have a very good factual basis to allege that the directors violated their duty to oversee their company's compliance with the law.
Once again, the Internet is changing how Delaware law is made. Those who are not aware of this change will be at a significant disadvantage in litigation in the Court of Chancery. But before describing this change, some background is in order.
In the "good old days" of the 1970s, some important Delaware corporate law was contained in unreported decisions of the Court of Chancery. The court sometimes would decide a major corporate law issue but not submit its decision to the official reporters for publication in the Atlantic Reporter. Usually, this happened when the author of the opinion was pressed for time and did not feel the decision represented his or her best written work. Nonetheless, some of these unpublished opinions went on to become established precedents, at least in Delaware. More ›
Since Kahn v. Lynch in 1994, the Delaware Supreme Court has subjected cash-out merger transactions proposed by controlling stockholders to a higher level of entire fairness scrutiny than the more deferential business judgment review, regardless of whether disinterested directors negotiated the transaction or a majority of the disinterested minority stockholders approved the transaction. Even in a third-party transaction where a controlling stockholder is not on both sides, courts have applied the test of entire fairness where stockholders can allege that a controlling party used its power to cause the company to enter into a transaction that diverted proceeds unfairly to the controlling stockholder at the expense and to the detriment of the minority stockholders. Likewise, since the landmark Revlon decision in 1986, the Delaware Supreme Court in sale-of-control transactions has required defendant directors to prove they followed a reasonable decision-making process and acted reasonably in light of the available information. Because in any of these circumstances the standard of review is less deferential, a minority stockholder attacking a transaction materially increases the prospects of surviving a motion to dismiss if able to plead facts that demonstrate that either entire fairness or intermediate Revlon-level scrutiny applies. In In re Synthes Shareholders Litigation, C.A. No. 6452, 2012 WL 3641014 (Aug. 17, 2012), the Court of Chancery dismissed a complaint attacking a sale transaction in an opinion that demonstrates that mere conclusory allegations that a controlling stockholder favored a sale transaction will not suffice to trigger a higher level of judicial scrutiny where the plaintiff cannot allege a genuine conflict of interest. More ›