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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Showing 16 posts from June 2014.

Court Of Chancery Determines Reasonable Fees

Wayman Fire Protection Inc. v. Premium Fire & Security, C.A. No. 7866-VCP (June 27, 2014) This is the first decision interpreting the "reasonable fee" remedy under the Delaware Computer Misuse Act.  The fee must be in proportion to the results achieved.  A small win leads to a smaller fee.

Court Of Chancery Interprets Preferred Stock Rights

Brevan Howard Credit Catalyst Master Fund Limited v. Spanish Broadcasting System Inc., C.A. No. 9209-VCG (June 27, 2014) This is another in line of cases dealing with the statutory limit of using only "legally available funds" to redeem preferred stock.  Recognizing this limit, preferred stock provisions are evolving by adding additional requirement that make the company try harder to find those funds when a redemption right accrues.  Here the Court denied a motion to dismiss when it was not clear the company had done what it committed to do to generate legally available funds.

Court Of Chancery Explains Interest Requirement In Demand Test

Cambridge Retirement System v. James, C.A. No. 9178-CB (June 28, 2014) One way to meet the demand excuse requirement to bring a derivative suit is to show that a majority of the board of directors had a personal interest in the transaction under attack.  But does that interest have to be material to their financial position?  This decision clearly explains that a showing of materiality is NOT required when the directors engaged in self dealing.  On the other hand, such a showing of materiality is required when the transaction is with a third party and does not involve a direct benefit to the directors.

District Court Explains Scope Of Trade Secret Act

Posted In Business Torts
Osco Motors Company LLC v. Marine Acquisition Corp., No. 13-868-RGA/MPT (June 24, 2014) Whether the Uniform Trade Secret Act precludes other claims for the same conduct is an often ignored question by plaintiffs who file multi-count complaints that include a claim under that Act. This decision answers that question by examining the factual basis  for the various claims to see if they substantially overlap.

Is the Court of Chancery Reforming Stockholder Litigation?

Posted In Case Summaries
A real change is going on in stockholder litigation in Delaware. Yet it is largely unnoticed because of the uproar over what will someday be seen as just a Supreme Court decision that did not have a lasting impact. We need a longer perspective to appreciate what is happening. First, however, we need to understand the recent problems in stockholder litigation that have provoked such ire. For several years now, almost every significant corporate merger of public companies has attracted litigation. Lawyers for small stockholders file these suits as soon as a possible deal is announced and even before the details are established. Compounding the costs of this litigation, these suits are often filed in several jurisdictions, forcing companies to defend themselves against the same allegations in multiple forums. The speed with which these suits are filed must mean that little, if any, real factual investigation is done before allegations of wrongdoing are made. It is no wonder corporate defendants find this litigation vexatious. More ›

Court Of Chancery Explains Covenant Application In LLC Agreement

Posted In LLC Agreements
Allen v. El Paso Pipeline GP Company LLC, C.A. No. 7520-VCL (June 20, 2014) One of the more difficult tasks a court faces is the determination of what complicated LLC agreements mean in terms of dealing with conflict of interest issues.  Considering that LLCs and LLPs are used in large part to permit such conflict deals that might not pass muster in a corporate form, this is a common issue.  First, the Court needs to deal with the form of conflict resolution provided for by the governing agreement. Here, that as not too difficult given the broad discretion given to the conflict committee involved. More difficult, however, is considering if the covenant of good faith and fair dealing is involved to invoke some right the plaintiff can use to assert a claim.  That decision boils down to seeing if there is some gap the covenant might fill in terms of what the operating agreement provides. Here, the Court found that the agreement clearly covered the transaction involved and left no room for some covenant duties to be asserted.  The analysis is a model for others to follow and illustrates how narrow the covenant really is.

Court Of Chancery Clarifies Fee For "Volunteer"

Raul v. Astoria Financial Corporation, C.A. No. 9169-VCG (June 20, 2014) Delaware has long recognized that a stockholder may earn an attorney fee for asserting a valid claim on his corporation's behalf, even if that claim does no go into litigation.  But is there a limit on that law?  This decision explains that a mere "volunteer" who points out how her corporation might benefit from some action does not thereby have her attorney fees paid.  Only a valid "claim" merits a fee award.  A "claim" must assert some actionable wrong doing, not just a way to do business better.

Court Of Chancery Explains Basis To Expedite

Posted In Injunctions
In Re TriQuint Semiconductor Inc. Stockholder Litigation, C.A. No. 9415-VCN (June 13, 2014) This decision explains when the Court of Chancery will expedite an action attacking a proposed merger.  At least a colorable claim must be alleged and in particular a showing of some disqualification on the part of the directors who approved the merger is almost a prerequisite.

Supreme Court Upholds Oral Resignation

Posted In LP Agreements
Biolase v. Oracle Partners L.P., No. 270, 2014 (June 12, 2014) This decision holds that a member of a board may resign orally and no writing is required to do so.

Avoiding the Entire-Fairness Standard of Review

Posted In Case Summaries
Authored by Lewis Lazarus This article was originally published in the Delaware Business Court Insider June 18, 2014 The Delaware Supreme Court's recent affirmance in Kahn v. M&F Worldwide, No. 334, 2013 (Del. Mar. 14, 2014),referred to as MFW,allows controlling stockholders to avoid the entire fairness standard of review if at the outset of a self-dealing transaction the controlling stockholder effectively relinquishes control over the outcome to an independent committee of disinterested directors and a nonwaivable, fully informed vote of a majority of the minority stockholders. In that circumstance, reasoned the Supreme Court, the transaction would reflect arm's-length bargaining and afford an independent majority of the stockholders the opportunity to decide for themselves whether to approve the transaction. More ›

Court Of Chancery Establishes Post-Judgment Interest Rate

Posted In Business Torts

Sequoia Presidential Yacht Group LLC v. FE Partners LLC, C.A. 8270-VCG (June 12, 2014)

What is the post-judgment rate of interest when there is a contract rate?  This decision holds that the contract rate applies, at least in matters over $100,000.

Court Of Chancery Explains How To Decide If The Implied Covenant Applies

Posted In LP Agreements
In re: El Paso Pipeline Partners L.P. Derivative Litigation, C.A. 7141-VCL (June 12, 2014) This is an important decision because it explains when to fill any contractual gaps with the duties imposed by the implied covenant to act in good faith and to deal fairly.  Of course, the short answer is the covenant rarely applies, but that does not explain how to figure out when it does. This decision looks to what the parties agreed to otherwise in analogous situations to see if the so-called gap should be filed by the covenant.  The basic question was did the GP have a duty to disclose material facts to a conflict committee absent any provision for that disclosure.  Reasoning in part that the LP agreement eliminated fiduciary duties that would have imposed such an obligation, the Court held there was no reason to add those duties back in by filling any "gap" that existed in the LP agreement as to such a duty.

Court Of Chancery Grants Reformation

Posted In Business Torts

Miller v. National Land Partners LLC, C.A. 7977-VCG (June 11, 2014)

Rare is it that a party convinces a court to grant it reformation of a contract.  This is that case.  The result was made easier when both parties to the contract agreed it omitted key language that warranted reformation.  The plaintiff, an outsider to the contract but who was hurt by its reformation, had those bad facts to overcome.

District Court Considers Status Of Disclosure Claims

In re Caterpillar Inc. Derivative Litigation, No. 12-1076-LPS-CJB (June 10, 2014)

This comprehensive decision is particularly interesting because it considers whether a disclosure claim is subject to the normal Rule 23.1 demand rules.  Normally, disclosure claims are thought of as direct claims based on the violation of the stockholder's right to cast an informed vote.  But when, as here, the plaintiff chooses to assert a derivative claim for an alleged disclosure claim, he must also meet the normal demand rules.  The plaintiff argued that there was no business judgment involved in making the disclosures at issue and, hence, the demand rules should not apply.  The federal court rejected that argument, relying largely on non-Delaware cases.

Supreme Court Bars Fees For Dismissed Case

Crothall v. Zimmerman, No. 608, 2013 (June 9, 2014)

In what the Court itself characterized as an unusual case, the Supreme Court denied a fee to the lawyers for a plaintiff who won a small victory for their plaintiff stockholder.  Unfortunately for the lawyers, their client sold his holdings and thereby lost any standing to pursue the case, making it moot.  The Court held that when it is the plaintiff who moots his own case, the lawyers do not get a fee even for success.  Of course, the facts are truly odd in that the plaintiff victory was indeed very small and he lost most of the rest of his claims as well.  But the point remains that if your client bails out on you, the fee you want may not be what you get.

Standard to Allege Mismanagement in Motion to Dismiss Section 220 Complaint

Posted In Case Summaries

 Authored by Albert H. Manwaring, IV
This article was originally published in the Delaware Business Court Insider | June 4, 2014 

Section 220 of the Delaware General Corporation Law permits a stockholder to inspect the books and records of a corporation, provided that the demand for inspection meets certain form and manner requirements, and the inspection is sought for a proper purpose—e.g., one reasonably related to the interests of stockholders. It is well established that the investigation of corporate mismanagement or wrongdoing is a proper purpose under DGCL Section 220. But, to state a proper purpose to investigate mismanagement or wrongdoing of a corporation, a stockholder must allege a "credible basis" to infer "possible" mismanagement or wrongdoing. The Court of Chancery has noted that the "credible basis" standard has, however, the lowest possible burden of proof under Delaware law.  More ›