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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 15 posts from July 2013.
This decision is a good example of when a complaint about really nothing to complain about will be dismissed, even in the current environment where every merger is subject to litigation. Here there was virtually no evidence any better deal was available, almost every director was disinterested, there was an extensive search for suitors, and the claims over the way the fairness opinion was done were just quibbles.
This decision explains how to determine if too much time has passed to permit a complaint to go forward, under a variety of circumstances. It also discusses the various rules that may be applied when a class action is not certified but there is tolling while the class certification issue is pending.
This transcript ruling explains the Court of Chancery practice on hearing motions for summary judgment. Briefly, it does not want to do so when there is less than 90 days after all briefing is done before the trial is to start. Not only do such late-filed motions put a burden on the party preparing for trial but they require the court to decide those motions quickly when the circumstances do not warrant expedited treatment.
When is a limitation on a damages clause enforceable? This decision explains Delaware law on that issue, particularly when the actual damages are too difficult to predict and the limitation is reasonable.
This decision is another example of the increasing scrutiny of complaints attacking mergers without an adequate factual basis. At the outset of the decision, the Court gives an extensive justification for going beyond the mere confines of the allegations of the complaint to review SEC filings and other materials touched on in the complaint. From those documents, the court is able to conclude the Revlon claim has no merit.
The Court of Chancery once again has affirmed that the proper use of a conflicts committee may immunize a transaction from attack. This is now a common feature of LLP and LLC agreements but each agreement's terms are critical to its impact and its implementation.
Recently, several stock appraisal cases have turned out well for those stockholders persistent enough to see their claims through a trial. Does this mean that more stockholders will demand that the Delaware Court of Chancery ask that court to determine the value of their shares when they are cashed out in the merger? While it is too early to tell, there are several good reasons to believe that more appraisal cases will be filed.
Before reviewing the recent decisions, however, it is useful to recall why there generally have been so few appraisal cases filed compared to the hundreds of mergers that cashed out stockholders against their will. First, appraisal actions need seriously motivated plaintiffs. Unlike a traditional class action, each stockholder whose stock is to be appraised must actually demand appraisal. You cannot simply go along with the other stockholders as part of a class led by a class representative who may have been solicited by a plaintiffs law firm. At least to date, the plaintiffs bar has not shown much interest in motivating stockholders to join together by individually asking for their appraisal rights. More ›
When there is an argument over whether part of a dispute is subject to the Court or the arbitrator's judgment, there has been considerable confusion. The classic formulation of the test is:
Issues of substantive arbitrability are gateway questions relating to the scope of an arbitration provision and its applicability to a given dispute, and are presumptively decided by the court. Procedural arbitrability issues concern whether the parties have complied with the terms of an arbitration provision, and are presumptively handled by arbitrators. These issues include whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met, as well as allegations of waiver, delay, or a like defense to arbitrability.
In this Supreme Court decision, the Court adopts this test at first and then seems to back away from it for a new test of its own. The new test seems to be whether the dispute is simply part of the overall controversy. If it is, then the arbitrator decides it. Now that may be a misguided view of the holding, but it is the best that I can do.
When stock options are awarded may be important to their actual value. Get an option when the market price is in the toilet and you will do better when the market turns than with an option granted at the top of the market. But is option grant timing itself actionable? This decision says that it is and that a complaint that alleges such timing may withstand a motion to dismiss.
Under the IRS Code, executive compensation over $1,000,000 a year is not deductible absent a stockholder vote to approve a compensation plan that meets certain objective criteria. Here the Court dealt with a complaint that alleged that the approval vote had to include the vote of stock that under the corporation's certificate of incorporation did not normally have the right to vote. The Court rejected that argument and held that only voting stock had the right to approve a compensation plan. Hence, the DGCL was saved from the IRS.
Roscoe Pound once wrote that "law must be stable and yet it cannot stand still." The Delaware Supreme Court in Unocal v. Mesa Petroleum, 493 A.2d 946, 957 (Del. 1985), likewise noted that "our corporate law is not static." Circumstances change and the law cannot be so inflexible as to require the law to stand still. Recently, the burden and expense of stockholder litigation in multiple forums, particularly in merger cases, has increased, creating the additional risk that a court other than the appellate court in the state of incorporation will resolve novel and fundamental questions affecting the internal affairs of a corporation. It is to address this threat that the directors of Chevron and FedEx (and 250 other public corporations) used the power conferred in their certificates of incorporation to adopt bylaws that made Delaware the exclusive forum to bring suit for matters involving the internal affairs of the corporation. In Boilermakers Local 154 Retirement Fund v. Chevron, Civil Action No. 7220-CS (Del. Ch., June 25, 2013), Chancellor Leo E. Strine Jr. echoed Pound and followed Unocal to find that the mere fact that Section 109(b) of the Delaware General Corporation Law had not previously been used to create binding forum-selection clauses for specified shareholder litigation did not preclude boards of a Delaware corporation from so acting today. In so holding, the court provides a useful primer on the standard applicable to facial challenges to bylaws, and a clear rationale for why a board-adopted forum-selection clause is valid statutorily and why it creates a contractual obligation binding on the stockholders even though they did not approve it.
Stockholders Bear Burden of Establishing Invalidity
Delaware law presumes the validity of bylaws. A plaintiff challenging the facial statutory and contractual validity of a bylaw bears the burden of showing "that the bylaws cannot operate lawfully or equitably under any circumstances." To prevail, a plaintiff must show that the bylaw does not address a subject matter within the scope of Section 109(b) and can never operate consistently with law. The court emphasized that whether a bylaw that serves a legitimate purpose may also be used inequitably is irrelevant to its determination of facial statutory and contractual validity. Such a challenge can occur when there is a real-world, extant controversy over the enforcement of a forum selection clause. "By long-standing, settled law, such as-applied challenges are to be raised later, when real-world circumstances give rise to a genuine, concrete dispute requiring judicial resolution," the opinion said. More ›
The Delaware Supreme Court on June 10 brought back to life claims alleging liability for a general partner's failure to act in good faith and to deal fairly with limited partners. Until the court's decision in Gerber v. Enterprise Products Holdings, 2013 LEXIS ____ (June 10, 2013), the Court of Chancery permitted general partners to almost escape liability to the limited partners by adopting sweeping exculpation language in limited partnership agreements. Gerberhas now limited the protection such language was thought to provide.
The background to Gerber helps explain its potential significance. The Delaware Revised Uniform Limited Partnership Act (and the Delaware Limited Liability Company Act as well) permits the partners or members to set the terms of their relationship in their partnership agreement. Freedom of contract is king. The DRULPA even permits the partner by their agreement to eliminate the traditional fiduciary duty partners owe to one another. But, there is one exception to that freedom of contract. More ›
This is another in the series of recent appraisal cases. As usual, the opinion reflects a careful analysis of the traditional methods used to value a company in an appraisal proceeding.
Particularly noteworthy is the Court's continued insistence that the expert's opinions be supported by a full explanation and that conclusions should be grounded in practices recognized by valuation literature. This translates into the point that these appraisal cases are not for novices and demand familiarity with the financial literature and processes involved.
Almost every case seems to involve the issue of when asserting that the defendant board had legal advice constitutes a waiver of the attorney-client privilege. This decision explains how far you can go and yet preserve the privilege. Basically, you can say that you consulted and still keep the privilege, but you cannot say 'he told me it was okay" without a waiver.
This careful decision explains how to calculate damages in a breach of contract case. That is not as easy as it sounds. Plaintiffs frequently try to get tort-type damages in breach of contract cases, particularly under the loss of value theory. This decision cuts off those types of damages.