Posts from August 2013

Court Of Chancery Again Explains Demand Excused Rules

In Re China Automotive Systems Inc. Derivative Litigation, C.A. 7145-VCN (August 30, 2013)

The rules for determining when demand on the directors is excused apply even to Chinese-based companies despite their bad press.  This decision in a direct and clear way spells out when demand is not excused.  For example, merely being on the audit committee does not mean a director faces a serious risk of personal liability for auditing mistakes.  More "red flags" are required.

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Court Of Chancery Continues To Explain Bad Faith

Stewart v. BF Bolthouse Holdco LLC, C.A. 8119-VCP (August 30, 2013)

The interplay between fiduciary duties and contractual obligations is often hard to understand.  Add to that the task of explaining the duty to act in good faith and deal fairly and the law is even more confusing. This decision does a good job of cutting through that problem to explain: (1) when a complaint alleges enough facts to state a claim for acting in bad faith, (2) when contractual obligations take the place of fiduciary duties, and (3) when the obligation to act fairly is not superseded by contract.

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Court Of Chancery Limits Inspection From Third Party

Florida R&D Fund Investors LLC v. Florida BOCA, C.A. 8400-VCN (August 30, 2013)

This decision illustrates the danger in vesting practical control of the records an entity in a non-Delaware "agent."  Simply put, as the agent is not subject to the statutory duty to produce those records and may not even be subject to Delaware jurisdiction, the Delaware forum is not available to enforce inspection rights

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Chancery Court Reaffirms Entire-Fairness Application

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | August 28, 2013 

The standard of review for a transaction involving a controlling stockholder may determine whether the proponents can expect a Delaware court to approve a contested transaction without a trial. If the controlling stockholder is on both sides of a self-dealing transaction, entire fairness is the standard of review and defendants likely cannot avoid a trial because the question of the fairness of the process and price normally raises a triable issue of fact under Kahn v. Lynch Communication Systems, 638 A.2d 1110 (Del., 1994), and its progeny. The Court of Chancery's recent decision in In re MFW Shareholders Litigation, C.A. No. 6566-CS, which is on appeal to the Delaware Supreme Court, provides an exception if the controlling stockholder at the outset of a going-private transaction conditions consummation on negotiation and approval by a fully-informed special committee of disinterested and independent directors and a nonwaivable vote by a majority of the minority stockholders, and forgoes coercive measures that would prevent arm's-length bargaining. More ›

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Supreme Court Limits Laches Defense

Levey v. Brownstone Asset Management L.P., No. 551, 2012 (August 27, 2013)

When does laches apply to a claim filed in the Court of Chancery?  Generally that Court follows the statute of limitations that would have applied in the law court, the Delaware Superior Court.  However, the time to file suit may be extended in "unusual conditions or extraordinary circumstances," under IAC/InterActive Corp. v. O'Brien, 26 A.3d 174 (Del. 2011). This decision explains when those circumstances exist.

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When A Request For An Injunction Does Not Preempt Arbitration

Shareholder Representative Services LLC v. ExlService Holdings Inc., C.A. 8367-VCG (August 27, 2013)

Arbitration clauses often have an exemption for suits for injunctive relief. Yet just asking for an injunction in the complaint may not avoid the need to arbitrate, as this decision holds. Apparently, when the injunction is just to enforce the terms of the contract and not to prevent irreparable harm, the claim must still go to arbitration.

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Court Of Chancery Resolves Common/Preferred Conflict

In re Trados Incorporated Shareholder Litigation,  C.A. 1512-VCL (August 16, 2013)

This is an important decision.  It resolves the long-standing confusion over how a board of directors is to act when the interests of preferred shareholders conflict with those of common shareholders. The common shareholders win is the short answer.

The decision also is very helpful in setting out how the directors should act or not act when faced with the all-too-common question of whether to sell when the common stock is under water due to the preferred stock's liquidation rights.

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District Court Follows Carsanaro

Fares v. Lankau, No. 12-1381-SLR (August 15, 2013)

This federal decision follows the recent Chancery explanation of the Gentile doctrine that permits a direct claim for equity dilution.  In short, the dilution can be by paying too little cash for the additional shares and the so-called "controlling" stockholder requirement for the buyer can be satisfied by a group of buyers operating though their elected directors that are a majority of the board.

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Is Duty of Good Faith and Fair Dealing Still Alive in Del.?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | August 14, 2013 

The Delaware Supreme Court recently issued several decisions that some argue go a long way toward eliminating any duty by controllers of limited partnerships or limited liability companies to act in good faith and to deal fairly. In Norton v. K-Sea Transportation Partners L.P., 67 A.3d 354 (Del. 2013), and Brinckerhoff v. Enbridge Energy, 67 A.3d 69 (Del. 2013), both issued the same day, the court held that a limited partnership agreement effectively exculpated managers of limited partnerships in conflicted transactions. More ›

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Court Of Chancery Declines Award While Case On Appeal

Huff v. Longview Energy Company, C.A. 8453-CS (August 12, 2013)

This is an interesting decision because it involves some real nerve by directors who seek indemnification even after they lost big time in the underlying litigation. Their claim is that some of the counts against them were withdrawn, they were "successful" and hence entitled to be indemnified. The Court avoided deciding if this is correct by holding that so long as the underlying case is on appeal, it is better to wait to see how the appeal turns out and if the previously withdrawn claims are reinstated.

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Court Of Chancery Explains Injunction Out Clause In Arbitration Agreement

Medicis Pharmaceutical Corporation v. Anacor Pharmaceuticals Inc., C.A. 8095-VCP (August 12, 2013)

Agreements to arbitrate disputes often have an "out clause" that permits the parties to seek judicial relief by way of an injunction.  The scope of such a clause is the focus of this opinion that explains when a party may still file suit even after the other party has demanded arbitration.

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Court Of Chancery Explains Equitable Fraud Claim

Grzybowski v. Tracy, C.A. 3888-VCG (August 9, 2013)

When is there a claim for "equitable fraud" in the absence of a fiduciary relationship?  This may be an important issue when it is difficult to prove the scienter requirement to establish a common law claim for fraud. This decision holds that there may be a claim for equitable fraud even when the parties do not have a fiduciary relationship. However, the holding is limited to when the proper remedy is to rescind the transaction.

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Court Of Chancery Provides Guidelines On Stantdstill Orders

IMO Dissolution Of Adir Managment Services, C. A. Nos. 8717 and 8718-VCN (August 9, 2013)

The Court of Chancery often enters standstill orders or status quo orders when the control of a Delaware entity is in dispute.  The orders are designed to prevent actions that may not be what the actual management would do in circumstances when the identity of that management is not in doubt. Disputes over the form of these orders are common and this decision seems to settle how one provision should be worded.  At least in the absence of special circumstances, the provision of the order that prevents extraordinary actions should be worded so as to permit action after 7 days notice to the other side, who is then free to seek court action if it objects.

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Court Of Chancery Explains How To Determine Memerbership Interests

Grove v. Brown, C.A. 6793-VCG (August 8, 2013)

This is an interesting decision because it explains what is the effect when a member fails to pay the consideration contemplated by the LLC operating agreement to obtain his membership interest.  The answer is determined by what the operating agreement says is the consequence, loss of interest or just a debt owed to the LLC.

This is also an example of what a mess may be created when parties try to do their own legal work in setting up an entity and working their way through disputes.

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District Court Upholds Option Complaint

Halpert v Zhang, C.A. 12-1339-SLR (August 1, 2013)

This federal decision illustrates when a complaint does state a proper derivative claim because it alleges that a majority of the Board violated a clear restriction on its right to award stock options. Such violations of an option plan are akin to violations of the law that are almost always beyond the business judgment of the directors to do.

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The Other 'Nessie': An Order Vacating an Arbitral Decision

Authored by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider | July 31, 2013

In Steiner v. Meyerson, 1995 Del. Ch. LEXIS 95 (Aug. 16, 1995), former Delaware Court of Chancery Chancellor William T. Allen famously described claims of corporate waste as "rarest of all — and indeed, like Nessie, possibly non-existent." Perhaps equally rare are decisions vacating an arbitral award. Both the Federal Arbitration Act and the Delaware Uniform Arbitration Act provide for limited judicial review of arbitral decisions and awards, leaving the losing party to an arbitration very little room to argue the award should be vacated. One of the grounds often cited by disgruntled parties as a reason for vacating an award is that the arbitrator exceeded or imperfectly executed his or her powers by issuing an incorrect decision. In keeping with the public policy of limiting judicial review of arbitral awards, however, courts have construed those grounds narrowly, requiring more than a mere disagreement with the arbitrator's interpretation of the law. Instead, courts have uniformly held that to exceed or imperfectly execute his or her powers, the arbitrator must act with "manifest disregard" for the law. As such, most petitions to vacate an arbitral award relying on an arbitrator "imperfectly executing his powers" will fail, and it is the rare case in which an arbitral award is vacated because of manifest disregard for the law. More ›

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