Posts from 2014

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 › Share

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. Share

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 ›

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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.

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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. Share

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 › Share

Court Of Chancery Denies Fee Request for Lack Of Causation

In re TPC Group Inc. Shareholders Litigation, C.A. 7865-VCN (October 29, 2014) This is the latest in a series of decisions dealing with the claims of plaintiff stockholders for an attorneys' fee based on improved consideration received in a merger after the stockholders filed suit.  The argument is that the pendency of the suit contributed to upping the merger price. While the burden of proving there was no connection between the suit and the bump up is on the company, here that burden was met and the fee petition was denied. Share

An Ounce of Preservation Is Worth a Pound of Argument

Authored By Peter B. Ladig This article was originally published in the Delaware Business Court Insider | October 29, 2014 Because the Delaware Supreme Court decides so few cases, it is not uncommon to believe it will jump at the chance to decide an issue it has not seen before. Two recent decisions from the court, however, highlight the important procedural limitations imposed by Supreme Court Rule 8 on the court's ability to decide issues before it, even the novel or interesting ones. In both of these decisions, the Supreme Court declined to address unsettled questions of Delaware law because the appellant failed to raise the argument made on appeal to the Delaware Court of Chancery. More importantly, the Supreme Court also revealed that it looks at the "interests of justice" exception to Rule 8 more narrowly in a corporate or commercial case, making it more important that all of the relevant arguments are presented to the trial court or well planned on appeal. More › Share

Court Of Chancery Explains When Entire Fairness Review Applies

In re Crimson Exploration Stockholder Litigation, C.A. 8541-VCP (October 24, 2014) This is an important decision for 2 reasons. First, it collects the prior decisions that determine when a less-than-50% owner is considered a controlling stockholder so as to potentially invoke entire fairness review.  Second, it then reviews the prior decisions that hold when a controller is competing with the minority stockholders, even when the controller is not on both sides of the deal. That may occur, for example, when the controller receives special treatment in the transaction. Share

Court Of Chancery Explains Claim For Merger Consideration

Mehta v. Smurfit-Stone Container Corporation, C.A. 6891-VCL (October 20, 2014) This decision explains the rights of a dissenting stockholder who demands appraisal and then withdraws that demand. She is entitled to damages if she does not then receive the merger consideration. Share

Claims Challenging Stock Issuance Validity Subject to Stay

Authored By Albert H. Manwaring, IV This article was originally published in the Delaware Business Court Insider | October 22, 2014 The 2013 amendments to the Delaware General Corporation Law (DGCL) added new Sections 204 and 205, which set forth self-help procedures for a corporation to ratify, and vest the Court of Chancery with jurisdiction to validate, defective corporate acts, including the invalid issuance of stock, that might otherwise be void or voidable due to noncompliance with the DGCL or a corporation's organizational documents. These new sections were enacted in response and to overturn Delaware case law that held unauthorized corporate acts were void or voidable despite equitable considerations. (See, e.g., STAAR Surgical v. Waggoner, 588 A.2d 1130 (Del. 1991).) New Section 205 confers jurisdiction on the Court of Chancery to determine the validity of any corporate act or transaction, any stock, or right or option to acquire stock. Sections 204 and 205 became effective April 1. More › Share

Morris James Leads Delaware Today "Top Lawyers" Edition with 25 Recognitions

Morris James LLP is pleased to congratulate the lawyers listed below, who were most recommended by their professional peers in a survey of Delaware attorneys conducted by Delaware Today magazine. Morris James received more "top lawyer" peer recognitions and had more "top vote-getters" than any other law firm. Top vote-getters are listed in bold below and a number following a name indicates the number of recognitions this year. More ›

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Company Ordered to Produce Records Related to Subsidiaries

This article was originally published in the  In Oklahoma Firefighters Pension & Retirement System v. Citigroup, C.A. No. 9587-ML (Del. Ch. Aug. 13, 2014), a stockholder sought books and records related to a company's board of directors and senior management regarding certain public investigations of two of the company's wholly owned subsidiaries. Citigroup Inc. argued that the stockholder failed to demonstrate a nexus between the subsidiaries' wrongdoing and the board or senior management, and therefore failed to show a credible basis to infer possible mismanagement or wrongdoing. The master in chancery disagreed with the company's argument and recommended the court find that the stockholder stated a proper purpose for the inspection. More ›

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Court Of Chancery Explains Effect Of Stockholder Vote In Non-Controlling Stockholder Case

In re KKR Financial Holdings LLC Shareholder Litigation, C.A. 9210-CB (October 14, 2014) This important decision addresses two tricky questions of Delaware corporate law. First, it clarifies that the informed vote of a majority of the disinterested stockholders will invoke the business judgment rule when there is no controlling stockholder pushing the transaction. Second, it makes it clear that stockholder approval may ratify director actions even when the stockholder vote is not required to implement that action. The decision carefully reviews prior cases in reaching these conclusions and for that reason alone is worth a reading. Share

Court Of Chancery Allocates Fault In Breach Of Loyalty Case

In re Rural/Metro Corporation Stockholders Litigation, C.A. 6350-VCL (October 10, 2014) In a precedent-setting opinion, the Court of Chancery has allocated damages among some directors and one of their advisers in a breach of fiduciary duty case. This decision has big implications on how breach of duty cases are tried in the Court of Chancery. First, the Court held that a contribution claim by one defendant against other defendants requires joint liability, not just joint culpability. Hence, if some directors are exculpated by a Section 102(b)(7) clause, they cannot be held to contribute to a damages award even if they are negligent. Conversely, if they violated their duty of loyalty (a claim outside of 102(b)(7) protection), they may be held liable to contribute. Second, the Court held that an unclean hands defense may also bar a contribution claim under the right circumstances. While there are many other aspects of this decision that warrant close reading, it will affect most directly how defenses line up in cases going to trial. Share