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

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Showing 24 posts from March 2015.

Morris James Launches Data Privacy and Information Governance Group

Posted In News

Morris James LLP has formed a Data Privacy and Information Governance Group. The Data Privacy and Information Governance Group is an interdisciplinary team of corporate and fiduciary duty attorneys, attorneys well-versed in electronic data storage and discovery, attorneys with bankruptcy and insurance-related backgrounds, and non-attorney IT staff knowledgeable about trends in data security and technology. Together, the group advises boards of directors and officers in assessing and managing risk and defending claims for alleged breach of fiduciary duty arising from data breaches. More ›

Court Of Chancery Issues Mother Of All In Pari Delicto Decisions

Posted In Business Torts

The Honorable Karen Weldin Stewart v. Wilmington Trust SP Services, Inc., C.A. 9306-VCP (March 26, 2015) This and the AIG decisions are the leading decisions on when the in pari delicto defense works. The Court carefully summarizes the 3 exceptions to when in pari delecto bars a recovery: (1) the adverse interest exception, (2) the fiduciary duty exception, and (3) the public policy exception such as in the case of the federal securities laws.  Of these, the "greatest of all" is the fiduciary duty exception that even permits aiding and abetting clams to proceed.

Superior Court Upholds Multimillion Dollar Verdict

Posted In Business Torts

Professional Investigating & Consulting Agency, Inc. v. Hewlett-Packard Company Del Super. No. 12C-06-196 MMJ CCLD (March 23, 2015) This decision upholds a rare multimillion dollar jury verdict for interference with the plaintiff's business, including a $5,500,000 damage award for "humiliation" damages.  The Court also awards attorney fees to the successful plaintiff. The opinion is an excellent review of when a jury verdict may be set aside by the Court.

Court Of Chancery Explains How Hard It Is To Appeal Arbitration Order

Posted In Arbitration

3850 & 3860 Colonial Blvd. LLC v. Griffin, C.A. 9575-VCN (March 30, 2015) This decision explains how hard it is to appeal an order staying litigation in favor of arbitration.  Even when there are some good arguments over whether the dispute is subject to arbitration, the Supreme Court precedent strongly disfavors an interlocutory appeal.

Supreme Court Explains Again The Limits Of The Fair Dealing Covenant

Nationwide Emerging Managers LLC v. Northpointe Holdings LLC, No. 441, 2014 (March 18,2015) This is yet another Supreme Court decision marking the bounds of the covenant  of good faith and fair dealing. The covenant is not to be used to modify the terms of a contract, to add terms the parties chose to not include or to provide a remedy that the parties never intended would apply in the event of a breach. While Delaware courts try to reach a "fair" result, that will not warrant letting a party alter what it bargained for after the fact.

CorpCast Episode 2: Advancement 101

Posted In Podcast

We’re back with the second episode of CorpCast, Morris James LLP’s podcast discussing Delaware corporate and commercial law and practice.  In “Advancement 101,” we discuss the fundamentals of advancement actions in Delaware’s Court of Chancery, distinguish advancement rights from indemnification rights, and provide frameworks for thinking about advancement both from the perspective of a director or officer seeking advancement and from the perspective of a company facing an advancement demand.  We will also touch on some of the common practice pitfalls in this area of the law and consider several reasons why Delaware may be the best venue to bring an advancement action. More ›

Stating Proper Purpose Doesn't Guarantee Books-and-Records Entitlement

It is well settled that stockholders of Delaware companies generally have the right to inspect the company's books and records upon the showing of a proper purpose. However, as demonstrated in the Court of Chancery's decision in Fuchs Family Trust v. Parker Drilling, C.A. No. 9986-VCN (Del. Ch. Mar. 4, 2015), that right is not absolute. Even where a proper purpose exists, the demand is properly denied where the requested books and records would not advance that purpose. More ›

Court Of Chancery Explains Notice Required For Moot Claims

Swomley v. Schlecht, C.A. 9355-VCL (March 12. 2015) This decision explains what notice is required when a representative litigation is to be dismissed as moot and a fee paid to the plaintiff's attorneys.  Notice should be given to the class or the other stockholders in the way and form spelled out in this case. Further, the case may be re-filed by another stockholder who has the right to claim it was not moot.  No hearing is required before the case is dismissed after the notice is given.

Delaware Supreme Court Leaves Open The Question Of Whether Breach Of Contract Is A Business Judgment

Friedman v. Khosrowshahi, No. 442,2014 (March 6, 2015) In this interesting order affirming a Chancery decision, the Supreme Court went out of its way to make a point.  A stockholder suit alleging that the board breached a stock option plan may state a claim for breach of contract that does not necessarily involve a business judgment rule analysis but instead may involve a breach of the duty of loyalty. If so, then it may not be easily dismissed under a Rule 23.1 motion.

Court Of Chancery Interprets Forum Selection Clause

Posted In Jurisdiction

Wilmington Savings Fund Society, FSB v. Caesars Entertainment Corporation, C.A. 10004-VCG (March 18, 2015) This is an interesting decision because it holds that a forum selection clause must be "clear and unambiguous" before it will be held to provide an exclusive forum for all disputes. Clauses that just refer to specific types of disputes, such as contract disputes, will then not control where other disputes may be filed.

Court of Chancery Addresses Application of Fee-Shifting Bylaw

The Rites of Spring are upon us: budding flowers, warmer temperatures, and a Delaware court issuing an important decision just before the annual Tulane Corporate Law Institute begins. This year the honor of issuing that decision fell to Chancellor Bouchard who issued his opinion in Strougo v. Hollander, C.A. No. 9770-CB (Del. Ch.) on March 16, 2015. The opinion addressed plaintiff’s motion for partial judgment on the pleadings that a fee-shifting bylaw adopted after the challenged transaction did not apply to him. The Court found that the fee-shifting bylaw did not apply to the plaintiff in this case, and in reaching this conclusion, made some interesting comments that will undoubtedly further the debate over the proposed legislation to eliminate fee-shifting bylaws and regulate forum selection bylaws. More ›

Chancery Enjoins Board in Potential Stockholder Dilution Scheme

Directors and officers of struggling corporations seeking capital or startups willing to trade equity for cash should read the Delaware Court of Chancery's recent transcript ruling in Elite Horse Investments Ltd. v. T3 Motion, C.A. No. 10550-CB (Del. Ch. Jan. 23, 2015), carefully and consider it a cautionary tale. If control of a business can be purchased, sitting directors and officers should not be surprised when the new controlling stockholder or control group installs their own directors and replaces management. Moreover, directors and officers should think long and hard before attempting defensive measures aimed at protecting their positions or other entrenchment motives. As discussed below, the Court of Chancery will not hesitate in enjoining such conduct. More ›

CorpCast Episode 1: Sections, 204, 205 and In re Numoda

Posted In Podcast

We’re trying something new, and we hope you’ll like it.  Morris James LLP’s Corporate and Fiduciary Litigation Group introduces CorpCast, a podcast discussing Delaware corporateand commercial law and practice.  In this first episode, we discuss In re Numoda Corporation S’holders Litig., C.A. No. 9163-VCN (Del. Ch. Jan. 30, 2015), the first written opinion from the Court of Chancery to apply recently amended sections 204 and 205 of the Delaware General Corporation Law.   More ›

Delaware Prepares To Eliminate Fee-Shifting Bylaws And Charters

The Delaware State Bar Association is submitting new legislation that will prohibit the use of fee-shifting bylaws or corporate charters for litigation involving "intracorporate" disputes.  A copy of the proposed bill with commentary is available here.  The result would be to limit the Delaware Supreme Court's decision in ATP Tour Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014) to its facts involving non-stock corporations.

New Arbitration Act Prepared

Posted In Arbitration

The Delaware State Bar Association has prepared a new "Delaware Rapid Arbitration Act."  A copy with commentary is available here. The DRAA is designed to address the current problems with costs and delays that infect many arbitrations. It sets strict  limits on how long the arbitration should take and penalizes arbitrators who fail to act within those limits. It is expected that the DRAA will also avoid the extensive e-discovery that has more recently been permitted in arbitrations that are now closer to full-scale litigation. Arbitrator selection will also be streamlined. The DRAA requires that only parties who have signed an agreement to use its terms are subject to the DRAA. Hence, these arbitrations will not be available to cover stockholder or other representative litigation.

Court Of Chancery Explains When Inspection Is Warranted

Fuchs Family Trust v. Parker Drilling Company, C.A. 9986-VCN (March 4, 2015) Everyone knows that a proper purpose is needed to justify inspection of a company's records and that investigating wrongdoing is such a proper purpose. But is it enough to just allege that alone, even when there is sufficient evidence that there was wrongdoing?  As this decision explains, it is also necessary that the inspection may lead to some sort of action. Here the wronging had already been addressed by a new board and further inspection of the company's records did not seem necessary.  Hence, inspection was denied.

Derivative Action Stayed Pending $228.9M Appeal

When a company receives an adverse judgment holding it responsible for hundreds of millions in damages, shareholder derivative suits often follow. A typical claim is that had the board exercised proper oversight, the company and its stockholders would not have suffered such severe monetary losses. When a stockholder makes a demand on a board that it take action against the officers and directors allegedly responsible for the company's losses, the board is obligated to take a position on the demand following appropriate investigation. When and for how long the company is entitled to investigate depends upon the context. If, for example, a stockholder receives no response from a company for six or more months after delivery of a demand, the stockholder can file a derivative action and claim that the board's refusal to investigate is wrongful. Where the factual predicate underlying the claimed injury is not finally determined, however, as when a judgment for monetary liability is on appeal or the claimed losses are the subject of ongoing securities claims, the Delaware Court of Chancery typically will stay the derivative action. The Court of Chancery's well-reasoned transcript decision in Hays v. Dvorak, C.A. No. 9768-CB (December 15, 2014), illustrates the practical approach that guides the court's resolution of a motion to stay when the underlying factual predicate for the plaintiff's claim of injury may be reversed or substantially modified on appeal. More ›

The Office Of The Child Advocate Recognizes Lewis H. Lazarus for Ten Years of Pro Bono Service

Posted In News
The Office Of The Child Advocate has recognized Lewis Lazarus with “deep appreciation” for ten years of pro bono service as an attorney guardian ad litem. The Office Of The Child Advocate noted that Mr. Lazarus “has made a difference in the lives of children and has enabled OCA to make great strides in the improvement of Delaware’s child welfare system.” The mission of the Office Of The Child Advocate is to safeguard the welfare of Delaware's children through educational advocacy, system reform, public awareness, training and legal representation; it succeeds on behalf of Delaware's children due to the tireless hours of volunteers. If you or someone you know is interested in volunteering, please visit their website here.

Court Of Chancery Upholds Privilege For Funding Agreement

Posted In Discovery
Carlyle Investment Management Company L.L.C. v. Moonmouth Company S.A., C.A. No. 7841-VCP (February 24, 2015) Applying the Delaware "because of" test to determine what is covered by the work product privilege, this decision prohibits discovery of the funding agreement between a litigation funding firm and one of the parties to the litigation. This is the first time that issue has been decided by a Delaware court.

Court Of Chancery Requires Individuals To Provide Expert Testimony

Posted In Discovery
In Re Dole Food Co. Inc. Stockholder Litigation, C.A. Nos. 8703-VCL and 9079-VCL (February 27, 2015) In this case of first impression, the Court held that a corporation could not be designated as the "expert" to testify on a party's behalf.

Court Of Chancery Upholds Time For Charging Lien

Sutherland v. Sutherland, C.A. 9575-VCN (February 26, 2015) An attorney charging lien may be filed late when the parties agree to that time to file.

Court Of Chancery Limits Drag-Along Rights

Posted In Appraisal
Halpin v. Riverstone National Inc., C.A. 9796-VCG (February 26, 2015) Whether drag-along rights can preclude an appraisal action for common stock has not been decided in Delaware.  Here, because the merger was completed before the drag-along rights were asserted, the Court did not have to decide that issue and instead just held the right was asserted too late.

Court Of Chancery Upholds Arbitration Clause In LLC Agreement After Conversion

Posted In Arbitration
3850 & 3860 Colonial Blvd LLC v. Griffin, C.A. 9575-VCN (February 26, 2015) This is an interesting decision because it deals with whether an LLC agreement requiring arbitration may be enforced even after the LLC was converted into a corporation that lacks such an arbitration clause.  The Court upheld the agreement to arbitrate.

Master Denies Limits On Trading Following Inspection

Southpaw Credit Opportunity Master Fund LP v. Advanced Battery Technologies Inc,. C.A. 9542-ML (February 26, 2015) A Master holds that the Court should not impose trading restrictions after a books and records inspection but should impose a confidentiality provision. Also interesting, the Master rejected the claim that China law prohibited inspection of a Delaware corporation's records.