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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 15 posts from May 2013.
In this important decision the Court of Chancery for the first time has applied a business judgment rule analysis to a review of a merger where a controller is on both sides of the deal. This result limits the old Lynch doctrine that mergers involving a controller on both sides is subject to the intrinsic fairness standard that almost always requires a trial to resolve. While this short blog cannot do justice to the Court's analysis, it held that the BJR will apply when: (1) the deal is subject to the approval of a SNC and the majority of the minority stockholders, (2) the SNC is independent, (3) the SNC has its own advisors and can say "no", (4) the SNC meets its duty of care, (5) the stockholder vote in fully informed and (6) the vote is not subject to coercion.
This is an important decision because it upholds the power of the Delaware Court of Chancery to enforce by an injunction the forum selection clause in a contract. Previously, there was some doubt under the existing case law whether such an injunction would issue, but, at least among sophisticated litigants, there is no doubt any more. Note that the clause in question provided that a "court in Delaware" would hear any dispute. A clause that attempted to vest jurisdiction only in the Court of Chancery is questionable because a contract alone cannot confer jurisdiction on that court with its limited equity jurisdiction.
This is another in the continuing series of cases involving buyers of companies who claim to have been misled by the sellers and where the sellers rely on exculpation clauses to defeat the buyers' claims. What is interesting about this decision is that it upholds the novel argument that a concealment claim is not barred by such exculpation language. The decision has an excellent review of prior Delaware law interpreting such clauses.
This decision affirms the consensus that a limited partnership agreement may set the standards for resolving a conflicted transaction and thereby absolve the controllers from any liability.
One of the harder aspects of practicing Delaware corporate law is dealing with all the decisions. This is an excellent summary of current Delaware law on Rule 23.1, Caremark and a lot of other aspects of Delaware law that are implicated by derivative complaints. It is also yet another example of a Chinese-based entity whose controllers seem to have no concern about compliance with our law.
Many acquisition agreements contain provisions that are intended to limit the buyer's remedies. This decision explains what language to use to cut off claims based on extra-contractual representations. The contract must specifically say that there is no reliance on anything outside the terms of the contract.
There is an uproar going on about the practice of filing suit over every merger announced for a publicly traded company. At least 90 percent of merger announcements are followed in a day or two by the filing of complaints alleging the merger is unfair to one or both of the companies involved. Given that these suits are filed so quickly and in almost every deal, they cannot be well researched and may well be meritless. That impression is further confirmed when virtually every one of these suits is soon settled, often for meager, additional disclosures to stockholders and attorney fees for the plaintiffs' lawyers. The whole practice looks too much like legalized extortion. As more than one court has noted, corporate defendants find it cheaper to settle than to litigate these cases.
The problem is compounded when several suits are filed in multiple jurisdictions. That drives up the cost of defense when multiple law firms are retained to cover all the jurisdictions involved. Jurisdictional disputes also occur, again increasing defense costs. Critics have written no end of articles decrying this mess. More ›
This decision discusses when discovery from a third party not involved in the transaction under attack in the litigation is justified. In part, the Court denied the discovery because it was not convinced the information to be obtained would be all that helpful in the litigation.
This decision explains the limits on any substantive review of an appraisal determination the Court will undertake when the parties' agreement limits that review. it is an excellent overview of the way in which parties may decide how much judicial review they want in such cases.
This is a major decision. Generally, a merger ends the standing of a plaintiff to pursue derivative litigation. To get around this problem, derivative plaintiffs have alleged that the merger itself was invalid because the consideration paid to the stockholders eliminated in the merger did not include anything for the value of a pending derivative claim. Until this decision, that claim did not go very far because the courts found that the derivative claim was worth very little. But what if the claim is worth a lot?
This decision explains how to deal with that situation to effectively assert what is known as a "Parnes" claim. As a result, we may see more such claims at least when the derivative litigation asserts big damages.
This is an important decision because it sets the rules for when a contract may be reformed for a unilateral mistake. First, it is not a defense to a reformation claim that the other party failed to read the contract. That may be a defense to a rescission claim, but not reformation. Second, a unilateral mistake, known to the other party who remains silent, may justify reformation. Third, the defense of ratification of such a mistake must be based on knowledge of the mistake.
As this decision points out again, when a board of directors is disinterested in the transaction, its decision to accept the first offer for its company does not run afoul of the Revlon doctrine just because there was no pre-agreement market check. Instead, their decision is subject to the business judgment rule.
The Delaware appraisal statute is generally interpreted to preclude consideration of post-merger events in determining the fair value of the company. However, in this transcript ruling, the Court indicated that it would consider such evidence when: (1) it sheds light on what the parties were thinking at the time of the merger (such as on revenue projections) and (2) it helps prevent a true outlier (such as wildly wrong revenue projections). The Court cautioned that it might not give much weight to this evidence and it remains to be seen how far this transcript will go to permit other post-merger evidence.
What should directors do when their company ignores their efforts to end corporate mismanagement? Until recently, this question rarely came up. Rogue companies are rare in the sense of openly refusing to comply with the law. Directors almost always were able to obtain corrective action when violations of the law came to light. But what if those directors were not able to cure serious management problems? What should they do? More ›
When does a corporate fiduciary owe a special disclosure duty to a minority stockholder whose stock he purchases? There are several approaches to this question and this decision fully reviews them all. Ultimately the Court adopted the so-called "special circumstances" rule that requires disclosure when the buying fiduciary knows of material facts not known to the seller. Note that in this context what is "material" is a higher bar to pass than in a more common disclosure case.
The decision is also useful for its review of the equitable fraud and common law fraud rules, particularly after a duty to disclose arises because of a past disclosure.