Posts from 2012

Court Of Chancery Imposes Attorney Fees For Bad Faith

Soterion Corporation v. Soteria Mezzanine Corporation, C.A. 6158-VCN (October 31, 2012)

Too often a plaintiff will file suit just to put pressure on the other side to get a settlement of a business dispute.  In this decision, after finding that the complaint included knowingly false factual allegations, the Court imposed attorneys' fees on the plaintiff for suing when it had decided "not to bring his claim to definitive adjudication."  This illustrates the Court of Chancery's understandable lack of tolerance for litigants who waste its time and the other side's money.

Share

Reports of Industrywide Investigation and Prior Settled Lawsuits Don't Make a Claim Real

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | October 24, 2012

In light of the dismissal risk to plaintiffs who do not use the tools at hand to inspect books and records prior to bringing a claim for management failure to oversee a corporation's business and affairs, guidance regarding the standard necessary to support a demand for inspection is important. The recent decision of Louisiana Municipal Police Employees' Retirement System v. Lennar, 2012 WL 4760881 (Del. Ch. Oct. 5, 2012), indicates that newspaper articles reflecting an industrywide government investigation of compliance with the Fair Labor Standards Act and prior lawsuits alleging violations of the FLSA will not suffice.

The plaintiff's demand for books and records pursuant to Section 220 of the Delaware General Corporation Law followed publication in The Wall Street Journal of articles describing an investigation by the U.S. Department of Labor, the IRS and state regulators into compliance by large homebuilders with the FLSA and state law. The defendant's 2011 10-K acknowledged that failure by its employees or subcontractors to comply with state or federal labor law could cause financial and reputational harm to the company. The plaintiff demanded documents, including board minutes, relating to the company and its subcontractors' compliance with federal and state labor, tax and immigration laws. The defendant declined to provide any documents on the ground that the evidence relied upon by the plaintiff — solely the newspaper articles — did not reflect "a credible basis for thinking there has been wrongdoing." The plaintiff sued, claiming that the newspaper articles and the prior lawsuits provided sufficient credible evidence of wrongdoing. More ›

Share

Court Of Chancery Permits Interested Manager Vote

Feeley v. NHAOCG LLC, C.A. 7304-VCL (October 12, 2012)

At common law, a director who was interested in the outcome of a board of directors vote simply could not vote on the issue before the board.  Her vote was literally void.  That old law was changed by statute in Delaware, under Section 144 of the DGCL.  This decision holds that even absent a similar statute in the LLC Act, a manager may vote on a transaction that he is interested in, absent some restriction in the LLC Operating Agreement.  Of course, merely having the power to vote does not make any vote the right thing to do.

Share

Court Of Chancery Explains Scope Of Inspection

Rock Solid Gelt, Ltd. v. The SmartPill Corporation,  C.A. 7100-VCN (October 10, 2012) This decision addresses one of the more perplexing problems of book and records litigation - what exactly is the plaintiff entitled to review? The Court of Chancery expects plaintiffs to limit their demands to what is really necessary and to explain to the Court, sometimes with witnesses, exactly what should be inspected to meet the proper purpose established at trial.  A blunderbuss approach is likely to irritate the Court and get you less than you really want.  This decision spells out the sort of evidence that should be presented to inspect specific records. Share

Court Of Chancery Upholds Waiver Of Fiduciary Duties

Hite Hedge LP v. El Paso Corporation, C.A. 7117-VCG (October 9, 2012)

This simple decision is still important because it contains the contract language that effectively waives any fiduciary duty to the limited partners in a Delaware LLP.  This has been a source of confusion in the past where the language was less clear and complete.  For example, there are Delaware decisions that find that efforts to waive fiduciary duties did not extend to the duties owed to minority owners.

Share

Court Of Chancery Explains Sufficient Basis For Inspection

Louisiana Municipal Police Employees' Retirement System v. Lennar Corporation, C.A. 7314-VCG (October 5, 2012)

To inspect corporate records to see if there has been "wrongdoing,"  a stockholder has to have a basis to suspect that wrongdoing has occurred. The evidence needed has been described as the lowest level possible if there is to be any standard at all.  This decision illustrates that a standard does exist.  Past lawsuits that have been settled are not sufficient to show present wrongdoing. General news articles about an industry-wide investigation are not sufficient.  Both together do not get there either and the suit was dismissed.

Share

Court Of Chancery Explains Non-Profit Corporate Law

Hockessin Community Center Inc. v. Swift , C.A. 7789-VCL (October 5, 2012)

Delaware does not have a separate corporate statute dealing with non-profit corporations. Hence, the non-stock sections of the DGCL usually apply to such entities.  It is sometimes hard to decide what parts of the DGCL do apply, however, as the integration of stock with non-stock provisions is less than clear.  This decision helpfully explains how to decide what parts of the DGCL to apply to non-stock entities

Share

Court Of Chancery Explains How To Calculate Award In Non-Monetary CAse

Dias v. Purches, C.A. 7199-VCG (October 1, 2012)

This is a classic example of what not to say in an argument unless you want to get the Court mad. In addition, this decision again explains how to calculate a fee award when the corporate benefit achieved is non-monetary.

Share

Court Of Chancery Explains A Director's Duty Of Loyalty While Objecting To Policy

Shocking Technologies Inc v. Michael,  C.A. 7164-VCP (September 28, 2012, revised October 1, 2012)

Everyone agrees that a director should speak up even if he disagrees with the rest of the board of directors.  But when does a director go too far in his opposition to policies he wants to change?  In this decision, the Court wrestled with this question and decided that leaking confidential corporate information to pressure the company went too far.  Significantly, the information was not about any wrongdoing.  Hence, the finding of a breach of the duty of loyalty only goes so far as a precedent.

Share

Court Of Chancery Explains Evidence Needed For Reformation

CC Financial LLC v. Wireless Properties LLC,  C.A. 5927-VCN (October 1, 2012)

This decision establishes that "clear and convincing" evidence is needed to warrant reformation of a contract for mutual mistake or unilateral mistake coupled with knowing silence.

Share

Court Of Chancery Upholds Duty To Arbitrate Of Alter Ego

Legend National Gas II Holdings LP v. Hargis, C.A. 7213-VCP (September 28, 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.

Share

Court Of Chancery Declines To Restrict Access To Documents

Czarninski Baier de Adler v. Upper New York Investment Company LLC,  C.A. 6896-VCN (September 28, 2012)

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.

Share

Court Of Chancery Interprets Preferred Stock Rights

Greenmont Capital Partners I LP v. Mary's Gone Crackers Inc., C.A. 7265-VCP (September 28, 2012)

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.

Share

Court Of Chancery Requires Effective Pre-Suit Investigation

South v. Baker, C.A. 7294-VCL (September 25, 2012)

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.

Share

The Court of Chancery Speaks by Transcript

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | September 12, 2012

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 ›

Share