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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 9 posts from June 2013.
This appraisal case is a good example of the Court's thinking processes in establishing value. The close focus on the particular industry involved, the consideration of economic trends and the reliance on valuation theory are all typical in appraisal cases. Also interesting is the Court's willingness to really dig into the reasons for any expert's opinion. The experts had better fully explain why they reached any particular opinion or bear the risk that the Court will not accept it.
The Court of Chancery has upheld a bylaw that selects Delaware as the only forum for internal corporate disputes. The Court did leave open the possibility that such a bylaw might be later challenged on narrow grounds that it was improper in limited circumstances.
This transcript decision illustrates the danger in using a computer generated privilege log. It will leave out document descriptions, addresses, etc. As a result, the Court here held that any privilege claim was waived by using the "worst" log ever. Hence, loggers beware!
Directors of a Delaware corporation have one sure defense to a derivative suit — eliminate the pesky stockholder plaintiff's standing to sue. Of course, that tactic involves also eliminating all of the other stockholders as well by a cash-out merger and that requires a willing merger partner who is willing to pay fair value for all of the stock. But when there is a controlling stockholder involved and the cash is available, the cash-out merger ends what may be costly litigation.
That is no small benefit. For when the derivative litigation challenges a transaction that allegedly benefited a controlling stockholder, that stockholder and his or her affiliated directors bear the burden of proving what they did was "intrinsically fair" to the corporation. While few such cases go to trial, the few that do have occasionally resulted in very big verdicts. The $1 billion threshold for such a verdict has now been crossed, for example. The costs to defend such claims are also worth considering, particularly for closely-held corporations that may find those costs to outweigh the expense of a cash-out merger. More ›
What happens when the Court orders the holding of an annual meeting and the company refuses to do so? In this decision the Court of Chancery appointed a receiver with the authority to hold the meeting once the receiver determines how to do so without running afoul of the SEC rules requiring audited financial statements the company presently does not have.
Over the past several years, both the Delaware Supreme Court and the Court of Chancery have recognized the problem of plaintiffs that rush to file derivative actions without first investigating their claims, usually in multiple forums, following the announcement of some corporate trauma. Typically, there is a race to the courthouse by plaintiffs' firms in an effort to obtain lead plaintiff status. Although both courts acknowledge the problem, a satisfactory solution has thus far proven elusive. On April 4, 2013, in Pyott v. Louisiana Mun. Police Employees' Retirement System, __ A.3d __, 2013 WL 1364695 (Del. 2013) ("Allergan"), the Delaware Supreme Court reversed a controversial decision last year by the Delaware Court of Chancery that attempted to address the problem of the fast-filing plaintiff. The lower court had denied dismissal on collateral estoppel grounds of a shareholder derivative action alleging Caremark claims despite the fact that substantially similar claims brought by other shareholders in an action in California had been dismissed with prejudice. Supporting its decision, the Court of Chancery determined that Delaware's demand futility law, which the court believed should be incorporated into the privity prong of California's collateral estoppel test, could not be met because a shareholder does not become the representative of the corporation until a motion to dismiss for failure to make a demand on the board is denied. Additionally, the Court of Chancery found that the shareholder plaintiffs in the California action were not adequate representatives of the corporation because they failed to investigate their claims before bringing the action. In so finding, the trial court established a presumption that fast-filing plaintiffs who do not seek to inspect a corporation's books and records before bringing Caremark derivative claims do not adequately represent the interests of the corporation, but rather represent the interests of the plaintiffs' firms who routinely bring such claims immediately after the announcement of a corporate trauma. More ›
The Delaware Supreme Court has upheld cross-jurisdictional tolling. Thus, when a class action is filed, the statute of limitations is tolled at least until the class is not certified. That is true even if, as here, the class action was filed in another jurisdiction.
This decision has big implications. In a line of past decisions, the Court of Chancery has upheld arguments that an LLC agreement may define what constitutes "good faith" in such a way as to severely limit claims based on the implied duty of good faith and fair dealing. Of course, that duty under the Delaware LLC Act cannot be eliminated in an LLC agreement. But, by permitting drafters to define what constituted good faith, the trial courts came close to eliminating that duty. No more.
Exactly what will constitute a violation of the duty of good faith and fair dealing is also implicated by this decision. Conduct that may seem permitted by the LLC agreement may now be prohibited if done to take an action that the investors never would have agreed to had they thought of it when the LLC agreement was drafted. Time will have to tell what all this means.
The Delaware Court of Chancery has long expressed its preference that the time to bring a disclosure claim regarding a proposed merger is before the stockholders vote and the deal closes. Such prompt pleading enables the court to fix any potential harm before the merger occurs. In part for that reason, the court follows the practice of "'erring on the side of more [expedited hearings] rather than fewer,'" as it wrote in Ehlen v. Conceptus, C. A. No. 8560, slip op. at 3 (Del. Ch. May 24, 2013). While the standard to obtain expedition is minimal — the plaintiff must demonstrate a colorable claim and a sufficient possibility of irreparable harm — a plaintiff fails to meet it with rote pleading or conduct inconsistent with a demand for expedition. As Ehlen illustrates, the court will require a greater showing of colorability if a plaintiff unduly delays in seeking expedition, even if the delay itself does not constitute laches, and deny as colorable disclosure claims if the plaintiff cannot demonstrate that allegedly omitted information would alter the total mix of information available to the stockholders. More ›