Delaware Business Litigation Report

Failure to Include Acceleration Clause Costly

This article was originally published in the  On cross-motions for partial summary judgment, the Delaware Court of Chancery, in Knutkowski v. Cross, C.A. No. 4889-VCG (Oct. 13, 2014), found that certain payments due under a promissory note were barred by the applicable statute of limitations where the note called for repayment of the loan in installments, but did not include an acceleration clause. The plaintiff asserted various equitable and legal claims, and, with respect to the legal claim for recovery under the note, the court found that 6 Del. C. Section 3-118(a) barred the recovery of any payments that were due more than six years before the plaintiff initiated the action. As the note did not include an acceleration clause, the plaintiff was not in a position to accelerate the amounts due and seek a recovery of the full amount of the note. More ›

Court Of Chancery Explains Rule 23.1 Standards

In Re Sanchez Energy Derivative Litigation, C.A. 9132-VCG (November 25, 2014) This decision is another helpful explanation of what is required to meet Rule 23.1 requirements to plead a derivative case.  Mere personal friendships or employment by a company that is a subsidiary of a company where the alleged controller is on the board are not enough to show a director is under the control of others. Indeed, merely being in management does not establish control over an entity because you must show control over its board.

Court Of Chancery Explains Bad Faith Claim

In Re Novell Shareholders Litigation, C.A. 6032-VCN (November 25, 2014) When does a board act in bad faith so as to not be entitled to exculpation under a corporate charter? As this decision explains, mere mistakes in complicated negotiations do not come close to supporting a bad faith claim.

Court Of Chancery Explains Third Party Beneficiary Standing

United Health Alliance LLC v. United Medical LLC, C.A. 7710-VCP (November 20, 2014) This decision has a good explanation of when a non-party to a contract may seek to enforce its terms as a third party beneficiary.

Court Of Chancery Explains The Implied Covenant Rules

NAMA Properties LLC v. Related WMC LLC, C.A. 7934-VCL (November 17, 2014) This is a virtual treatise on the implied covenant of good faith and fair dealing.  As it points out, the covenant is a gap filler that is to be used rarely and is considered part of the contract. Hence, it does not require a showing of bad faith for it to be violated. Here the court dealt with the duties of an escrow agent. The opinion is also very good at explaining what is required to find a tortious interference with a contract by the parent of a subsidiary. It is often wrongly thought that members of the same corporate family cannot be held liable for the breach of contract by another member of the family for a contract they did not sign. As this decision shows, that may not be so and a parent can be on the hook when it wrongly causes a subsidiary to breach its contract.

Court Of Chancery Explains The Conspiracy Theory Of Jurisdiction

Reid v. Siniscalchi, C.A. 2874-VCN (November 20, 2014) Under the conspiracy theory of jurisdiction, a non-resident may still be subject to Delaware court jurisdiction if a co-conspirator commits an act in Delaware in furtherance of the conspiracy. While that is a simplified version of the law, this decision explains the theory in detail.

James Semple to Speak at Delaware Legal Ethics Seminar

James Semple will be a moderator at the Lorman Legal Ethics in Delaware Live Seminar on December 11, 2014 in Wilmington, Delaware. Topics of the seminar include Conflicts of Interest, Confidentiality and Privilege, 2014 Ethics Opinions and Developments, Ethical Concerns in Litigation, and more. The CLE seminar will take place at the DoubleTree Hotel in Wilmington. To register online, please click here.

Delaware Continues Struggle Over Multijurisdictional Litigation

Authored By Edward M. McNally This article was originally published in the Delaware Business Court Insider | November 19, 2014 Delaware's courts continue to struggle with the problem of how to control multiple suits in multiple jurisdictions, over the same basic dispute. Just recently, the Delaware Supreme Court explained how the lower courts should deal with this problem, in its decision in The North River Insurance v. Mine Safety Appliances, 2014 Del. LEXIS 527 (Del. Nov. 6, 2014). The Supreme Court's careful analysis is worth reviewing. More ›

Charles H. Toliver, IV Presented Justice Thurgood Marshall Award

The Delaware Barristers Association awarded Morris James partner, Charles H. Toliver, IV, the Justice Thurgood Marshall Award at the Louis L. Redding Benefit and Awards Gala on November 14, 2014. More ›

Court Of Chancery Upholds Novel Fiduciary Breach Case

Lee v. Pincus, C.A. 8458-CB (November 14, 2014) This decision holds that the waiver of a lockup in favor of 4 directors may constitute a breach of their fiduciary duties to the other stockholders who were subject to the lockup and whose shares could only be sold later at a reduced market price. There is no prior case dealing with this set of facts. The key point is that the directors secured a benefit for themselves that was not available to the class of stockholders who remained subject to the lockup and who presumably would have sold their stock before the price declined had they been able to do so. This leaves open some interesting damages issues.

New Jersey District Court Rejects Shareholder Derivative Action Based on Cybersecurity Breach

In Palkon v. Holmes, C.A. No. 2:14-CV-01234 (SRC) (October 20, 2014), the United States District Court for the District of New Jersey dismissed with prejudice a shareholder derivative action arising from three distinct breaches of Wyndham Worldwide Corporation (“Wyndham”).  The Court granted the Defendant Directors’ Motion to Dismiss pursuant to Rules 23.1(b) and 12(b)(6) of the Federal Rules of Civil Procedure.  The matter was resolved on demand-refusal grounds, but the opinion provides fresh guidance to corporate boards in how to address their exposure to risk based on cybersecurity breaches and shareholder actions arising from those breaches.  Specifically, the decision highlights the importance of independent advice and of making a record of board review of policies and procedures to address the threat of a cyber-security breach.  As this decision illustrates, boards who seek independent legal and other advice and who make an appropriate record of reviewing policies for addressing the risk of cyber-security breaches are more likely to be able to withstand a shareholder derivative claim for breach of fiduciary duty. More ›

Court Of Chancery Explains Amendment-By-Merger Doctrine

In re Kinder Morgan Inc. Corporate Reorganization Litigation, C.A. 10093-VCL (November 5, 2014)

This decision explains the Amendment-By-Merger Exception that is found in alternative entity agreements. The purpose of the Exception is to be sure that a merger agreement that has the affect of amending the operating agreement gets the same vote, including class votes, that an equivalent amendment to the operating agreement would require under the terms of the operating agreement.  Such clauses try to prevent a merger agreement from being used, as is done for corporations, to amend the basic deal set out in the parties' agreement.

The decision also has an interesting discussion of what constitutes an amendment to an operating agreement, a point that is not always clear.

Court Of Chancery Explains When A False Statement Consitutes A Breach Of Duty

Higher Education Management Group Inc. v. Mathews, C.A. 9110-VCP (November 3, 2014) It is a breach of the duty of loyalty for a corporate director to lie to the entity's stockholders. But, as this decision explains, a false statement is not a lie unless the speaker knows it is false. Hence, a complaint that asserts a derivative action must contain facts that show a majority of the board is not disinterested because they knew they had lied. Just alleging their statement was wrong does not get you there.

Rural/Metro May Affect Delaware Breach of Fiduciary Duty Litigation

Authored By Edward M. McNally This article was originally published in the Delaware Business Court Insider | November 5, 2014 A recent decision of the Court of Chancery may significantly affect how breach of fiduciary litigation is conducted in the Delaware courts. In re Rural/Metro Stockholders Litigation, 2014 Del. Ch. LEXIS 202, held that RBC Capital Markets as a financial adviser to Rural/Metro was liable for about $75.8 million as a result of the Rural/Metro directors improperly negotiating a merger at too low a price and sending stockholders misleading information. Even more startling, the directors had settled the claims against them for just $6.6 million and had no obligation to contribute to the $75 million that RBC had to pay. How could this happen? More ›