Posts from 2014

Court Of Chancery Sanctions

James v. National Financial LLC, C.A. 8931-VCL (December 5, 2014) This decision deserves immediate attention by Delaware lawyers for it sets out their responsibilities to see that discovery, particularly discovery of ESI, is done correctly. It also is a good listing of the level of sanction that may be applied for not fulfilling those responsibilities. Share

Allergan Stockholders' Board-Removal Contest Was Not Ripe

Authored By Albert H. Manwaring, IV This article was originally published in the Delaware Business Court Insider | December 3, 2014 Delaware courts have consistently recognized that disputes challenging corporate defensive measures are ripe for review when the defensive measures have a substantial deterrent effect on the ability of stockholders to exercise their rights. For example, in Moran v. Household International, 490 A.2d 1059, 1072 (Del. Ch. 1985), a corporation's implementation of a shareholder rights plan, which deterred the ability of stockholders to receive takeover proposals and engage in a proxy fight for control of the corporation, was ripe for review. Similarly, in KLM Royal Dutch Airlines v. Checchi, 698 A.2d 380, 384 (Del. Ch. 1997), a corporation's implementation of a shareholder rights plan or poison pill, which interfered with a stockholder's contractual right to exercise a stock option, was ripe for review. More recently, in Pontiac General Employees Retirement System v. Ballantine, C.A. No. 9789-VCL, at *72-77 (Del. Ch. October 14, 2014) (Transcript Op.) (Laster, V.C.), the board's implementation of a proxy put, which gave noteholders a right to accelerate payment of their debt if stockholders removed and replaced the majority of the corporation's board, had a deterrent effect on the stockholders' ability to conduct a proxy contest, and was thus ripe for review. In each of these cases, the key factor that the challenge was ripe for review was the "deterrent effect" of the defensive measure on the ability of stockholders to exercise their rights. More › Share

Court Of Chancery Explains How To Implicate The M&F Worldwide Decision

In Re Zhongpin Inc. Stockholders Litigation, C.A. 7393-VCN (November 26, 2014) To obtain business judgment review for a transaction with a controlling stockholder, the M&F Worldwide decision requires an independent committee and a majority-of-the-minority stockholder vote. This decision holds that those provisions must be part of the deal from the outset and adding a stockholder vote by the minority after the merger deal is signed comes too late to invoke the Worldwide case. The decision is also useful in explaining when even a 17% stockholder may be a controller because of his power over the entity. Share

Court Of Chancery Invalidates Deal Protections

In re Comverge Inc. Shareholder Litigation, C.A. 7368-VCP (November 25, 2014) Numerous Delaware decisions have upheld deal protection provisions in merger agreements. But, as this decision shows, it is still possible to go too far. When a combination of a termination fee, an expense reimbursement provision, and a convertible note amount to a 13% fee for ending the deal, that is too much protection and unfairly discourages a competing bid. The decision is also very good at explaining when a buyer may be charged with aiding and abetting liability. Just being a hard negotiator is not enough. Share

Court Of Chancery Explains Remedies Under An Agreement Of Sale

Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I LLLP, C.A. 7906-VCG (November 26, 2014) This is an interesting decision because it explains the pleading rules for a fraud claim and how such a claim relates to other possible causes of action such as unjust enrichment. Share

Court Of Chancery Invalidates Indemnification Requirement In A Merger

Cigna Health And Life Insurance Company v. Audax Health Solutions Inc., C.A. 9405-VCP (November 26, 2014) Escrow provisions are common in merger deals, particularly those involving private equity. Here, however, the parties went a different route and tried to require the selling stockholders to agree to indemnify the buyer for various possible events. The Court stressed that its opinion was limited to invalidating such arrangements when the indemnification was unlimited in time and scope. The opinion also invalidates the use of a clawback provision in a transmittal letter used to obtain the merger consideration when tendering the stock bought in the merger. Share

Court Of Chancery Affirms Arbitration Award

Roncone v. Phoenix Payment Systems Inc., C.A. 8895-VCN (November 26, 2014) This decision illustrates how hard it is to have the Court set aside an arbitration award. The grounds to do so are very limited and the court is not inclined to extend them Share

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 ›

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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. Share

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. Share

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.

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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. Share

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. Share

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. Share

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 › Share