Posts from January 2013

Court Of Chancery Explains Perils Of LLC Agreements

Zimmerman v. Crothall, C.A. 6001-VCP (January 31, 2013)

The Delaware Supreme Court has made it clear that investors in LLCs get what they bargained for in their LLC agreement, but not much more.  That seems attractive to those who manage LLCs because they feel they can limit their liabilities to investors by the terms of the LLC agreement.  Yet, management may be overstating the benefits of the LLC form, as this decision points out.

In this case, very sophisticated counsel advised on how to issue additional interests in the LLC to raise more capital. Unfortunately, and despite being the drafter of the LLC agreement, he got it wrong and failed to follow the terms of the agreement.  This points out that LLC agreements are often so complicated that compliance with their terms is tricky. Each agreement is individually crafted, unlike in a corporation where the statute generally spells out in well understood terms what are the rights and obligations of the investors and managers.  These errors have happened time after time.  Hence, use of the LLC or LLP form needs to be with great caution.

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Court Of Chancery Limits Claims In Section 220 Cases

The Ravenswood Investment Company LP v. Winmill & Co. Incorporated, C.A. 7048-VCN (January 31, 2013)

In a books and records action, may the plaintiff also add a count for breach of duty?  This decision holds that he cannot do so.  After all, a books and records action is meant to be summarily litigated.  That fast track cannot be achieved if other claims must also be decided at the same time.

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Court Of Chancery Limits Fees For Unsuccessful Claims

Dawson v. Pittco Capital Partnership,  C.A. 3148-VCN (January 31, 2013)

This decision affirms the rule that attorney fees should be apportioned between those claims that succeeded and those that did not.

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Court Of Chancery Explains Effect Of Disinterested Director Approval

In re BJ's Wholesale Club Shareholders Litigation, C.A. 6623-VCN (January 31, 2013)

When a majority of a board of directors is not personally benefiting from a transaction they approve, the business judgment rule applies.  How do you overcome that BJR?  A plaintiff may do so by showing an "extreme set of facts" sufficient to support the inference the board acted in bad faith.  In trying to do so, however, it is not enough to allege the board "should have known" the deal stunk. Instead the plaintiff needs to allege facts that show the board actually knew that the deal was not in their company's best interests.

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Court Of Chancery Explains Promissory Fraud

Boulden v. Albiorix Inc., C.A. 7051-VCN (January 31, 2013, rev. Feb. 7, 2013)

Plaintiffs often try to allege fraud by claiming that the defendant made a promise that he did not intend to keep.  As this decision points out, that mere allegation is not good enough to state a claim. Rather, the complaint must allege facts that support the allegation the promise was made all the while with the intent to not keep it.  For example, if the promisor lacked the means to keep his promise or had no reasonable expectation of getting the means to do so, then it might be said he lied when he said what he could not deliver.

This decision also has an excellent analysis of the conspiracy theory of jurisdiction.

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Court Of Chancery Explains Contract Damages

Henkel Corporation v. Innovative Brands Holdings LLC,  C.A. 3663-VCN (January 31, 2013)

When a buyer breaches a contract to buy a business, how are the seller's damages to be calculated?  This is not as easy as it sounds.  For if the seller finds a new buyer and demands damages equal to any dimunition in the sale price, the defaulting buyer will claim the duty to mitigate requires the loss be offset by any income earned prior to the later successful sale.  How do you decide what that is?  This decision carefully analyzes this issue.  The short answer is it depends on the conduct of the parties after the breach.

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Court Of Chancery Explains Corporate Opportunity Doctrine

In Re MobilActive Media LLC, C.A. 5725-VCP (January 25, 2013)

This is an essential decision for anyone dealing with the corporate opportunity doctrine.  Under that doctrine, a fiduciary who takes an opportunity that might have been instead given to his corporation (or LLC or LLP) is liable for any gain made by him as a result.  One prime defense to such a claim is that the entity lacked the means to develop  the opportunity itself and thus suffered no real harm when it lost that opportunity.  This decision significantly undercuts that defense.

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What's Behind the Chancery Court's New Rule 5.1

Authored by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider | January 23, 2013

On January 1, Court of Chancery Rule 5.1 became effective, replacing the now-deleted Rule 5(g). The adoption of Rule 5.1 represents a fundamental change to most aspects of the handling of confidential filings in the Court of Chancery. As with any rule, the drafters attempted to craft the rule to account for almost all situations, cognizant of the fact that application of the rule likely would reveal unintended consequences that would need to be addressed in the future. Until the court has sufficient information to determine whether any amendments are necessary, an understanding of the purpose behind certain of the changes in the handling of confidential filings may help bridge any unintended gaps. While the factors listed below are by no means exhaustive, the key tenets behind Rule 5.1 should provide some guidance in uncertain situations. More ›

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Court Of Chancery Explains Special Committee Standard Of Care

Gerber v. EPE Holdings LLC, C.A. 3543-VCN (January 18, 2013)

It is now common for LLC and LLP agreements to have provisions permitting a "special committee" to approve  transactions with a controller.  What the limits are of that form of protection is the subject of this interesting opinion.  As the Court points out, surely not every committee approval, no matter how onerous, can immunize the transaction from judicial review.  Here, even when the transaction did not get an independent adviser's review and was at a price reflecting a startling run up in value for the underlying assets, the complaint failed to allege facts sufficient to state a claim that the approval was in bad faith.  More was required.

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Court of Chancery Discusses Expedited Proceedings

The Renco Group Inc. v. MacAndrews AMG Holdings LLC, C.A. 7668-VCN (January 18, 2013)

This decision provides a good review of when the Court will expedite a proceeding.

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Agreement to Indemnify Does Not Include Fees

Bear Stearns Mortgage Funding Trust 2007-AR2 v. EMC Mortgage LLC,  C.A. 6861-CS (January 15, 2013, revised January 17, 2013) As this decision points out, an agreement to indemnify against loss does not necessarily mean that the indemnitee also recovers its attorney fees. This decision was substantially modified on 1/12/15 Share

Delaware Supreme Court Radically Changes Discovery Scheduling Practice

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | January 9, 2013

In four decisions issued on the same day, January 2, the Delaware Supreme Court has radically changed the common practice among Delaware lawyers concerning discovery schedules in Delaware litigation. Not only do these opinions change how lawyers will handle discovery in Delaware cases, but they also potentially will affect how Delaware's trial courts control their dockets. Much more formal, active case management will be the result. There are severe consequences for those lawyers who do not follow these new procedures. More ›

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Court Of Chancery Awards Fees Separately For Disclosure And Settlement

In re MoneyGram International Inc. Shareholder Litigation, C.A. 6387-VCL (January 7, 2013)

This is a somewhat unusual fee award because of the way the Court did the calculation of the amount. The court divided the award into two parts, one for the additional disclosures and the second part for the settlement fund created by the plaintiff's efforts. The disclosure award is also larger than typical awards for added disclosures.

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Court Of Chancery Explains Bad Faith Claim

In re Novell Inc. Shareholder Litigation, C.A. 6032-VCN (January 3, 2013)

This decision well explains what may constitute a claim that a merger was entered into in bad faith. Such a claim is necessary to sustain a complaint when the majority of the directors are independent and disinterested.  Deal protection devices such as termination fees are not enough to show bad faith, at least when their terms are typical of such provisions.

Here the complaint adequately pled bad faith by alleging that the board favored 1 of 2 bidders for no good reason. For example, if the losing bidder made the highest offer, there must be some reason to not take its bid.  If not, the the board may be said to have acted in bad faith because that would knowingly violate its duty to get the best deal.

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Court Of Chancery Permits Limits On Advancement

Miller v Palladium Industries Inc., C.A. 7475-VCN (December 31, 2012)

This decision illustrates the need for careful drafting of bylaws regarding advancement rights.  The plaintiff claimed entitlement to mandatory advancement under the Company's bylaws.  However, the bylaws also provided that advancement was required "unless" the Board decided otherwise. The Court held that the word "unless" made advancement discretionary.  In contrast, a different bylaw that made advancement subject to board approval has been held to be mandatory so long as the request met the board's technical requirements as to the form of the requested advancement.  A word can make a lot of difference.

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Supreme Court Refines Rule On Failure To Follow Scheduling Order

The Delaware Supreme Court has issued 4 opinions that significantly refine the rules set out only 2 years ago in the Drejka decision on when a case may be dismissed for failing to meet the timetable in a scheduling order.  See Christian v. Counseling Resource Associates Inc., No. 460, 2011 (January 2, 2013);    Hill v. DuShuttle, No. 381, 2011 (January 2, 2013);   Adams v Aidoo, No. 177, 2012 (January 2, 2013) and Keener v. Isken, No. 609, 2011 (January 2, 2013). The Christian decision is perhaps the most significant.  From now on, if a party fails to meet a deadline for discovery, the opposing party will be precluded from objecting unless the opposing counsel alerts the Court to the failure and asks for formal relief.  Note that the Supreme Court's wording is very broad because it says that the first failure to object to a delay means the opposing party has "waived the right to contest any late filings by opposing counsel from that time forward." Literally then, all future delays are waived.  This seems too broad to be taken literally. For example, a failure to object to a 2 day delay on a minor matter should not preclude a failure later to provide an expert report.  Nonetheless, the current, somewhat lax, informal extensions are now a thing of the past.

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