About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 10 posts from November 2016.
Zebala v. Aminopterin LLC, C.A. No. 12186-VCS (September 28, 2016) (TRANSCRIPT)
An issue of some debate is whether a non-Delaware court has the power to dissolve a Delaware entity. Here, the Court of Chancery was asked to dismiss a later-filed dissolution action in Delaware based on a California forum selection clause in the parties’ LLC agreement, and in deference to a long-pending first-filed action in California where the court had already issued an injunction restricting the LLC’s assets that the Court of Chancery was being asked to wind up. The Court thus had the opportunity to address the important power to dissolve question, but under the circumstances found it appropriate to defer to the California court relying on principles of comity and a McWane analysis to dismiss the dissolution action. In other words, the Court of Chancery would not step on the California court’s toes under the circumstances, and the California court could decide for itself if it has the power to dissolve a Delaware entity should the parties present that issue there.
The Delaware courts encourage plaintiffs who bring derivative claims in Delaware without making demand on the board of directors to seek books and records under Section 220 of the Delaware General Corporation Law so as to be able to plead facts sufficient to demonstrate that demand is excused. Many claims have been dismissed under Delaware Court of Chancery Rule 23.1 because a plaintiff failed to utilize the "tools at hand" to obtain relevant books and records. When a plaintiff grounds its claim on directors' alleged failure to exercise oversight, however, even receipt of books and records may not enable a plaintiff to plead facts sufficient to demonstrate that the directors knowingly ignored their duties so as to have acted in bad faith. That high standard as articulated by the Delaware Supreme Court in Stone v. Ritter makes a Caremark claim for breach of directors' oversight duties as among the most difficult in corporate law. The Court of Chancery's recent decision in Reiter v. Fairbank, C.A. No. 11693-CB (Del. Ch. Oct. 18), demonstrates that, regardless of the injury allegedly sustained by the subject company, a pleading based on books and records obtained from the company that at best reflects awareness of "yellow flags" is not sufficient to call into question the directors' good faith and hence to excuse demand, thus requiring dismissal of the plaintiff's derivative claim. More ›
Delaware strongly protects a party’s right to advancement of attorney’s fees. This decision holds that a claim of fraudulent inducement cannot be asserted as a defense in a contractual advancement case even when the fraud is alleged to have induced the advancing party into signing the contract. Rather than use the alleged fraud as a defense to providing advancement, the advancing party must satisfy its advancement obligations and then assert its plenary claim for fraud in a separate proceeding where it can recoup the allegedly wrongfully advanced funds.
This decision holds that a general obligation to indemnify another party to a contract applies only to claims filed by a third party and not to claims between the parties to the contract itself. Hence, if you want to cover inter-party claims, you need to say so explicitly.
This decision explains the difference between a defendant’s right of setoff and recoupment. The key difference is that the right of setoff arises out of an independent transaction, while recoupment must be based on the same facts that support the main claim. Another difference concerns the statute of limitations. Setoff is subject to a three-year statute of limitations, while time-barred claims can be considered for recoupment when they arise out of the same factually-related transaction as the plaintiff’s claim.
This is an interesting decision in a small case. The Court granted the request to dissolve a Delaware entity in deadlock, but conditioned that dissolution on an agreement not to use the fact of dissolution in another proceeding between the parties to defeat a party’s standing. What other conditions might be imposed in other cases remains to be seen.
D&O policies often attempt to exclude from coverage sums paid to disgorge unlawful profits. The underlying theory is that the company did not suffer a true loss when it has to give back something that it never should have had in the first place. This decision tackles the hard problem of applying that theory in specific circumstances. The Court held that when a company settles a claim without admitting it has made an unlawful profit then the insurer has to prove the sums paid were in fact a return of an illegal profit. Merely settling a claim for some amount does not establish disgorgement occurred, even when the claim itself may have made that allegation. In particular, when the actual settlement agreement does not refer to a return of an illegal gain, there is no tie to actual disgorgement and the exclusion may not apply. Hence, when settling a claim it is important to consider how the settlement agreement should read.
Vice Chancellor Joseph R. Slights III's decision In re OM Group Stockholders Litigation, Consol. C.A. No. 11216-VCS (Oct. 12, 2016), represents the latest Delaware Court of Chancery decision to apply Corwin v. KKR Financial Holdings, 125 A.3d 312-314 (Del. 2015), and rely on the business judgment standard of review to dismiss a Revlon challenge to a cash-out merger. More ›
This decision addresses issues that may arise when there are successive arbitrations involving the same basic set of facts, if different parties. It concludes that when engaging in the limited judicial review which asks whether an arbitrator exceeded its authority, the issue of whether the first arbitration’s findings are preclusive in the second arbitration is for the second arbitrator to decide, not the Court.
In a stockholder challenge to a going-private merger by a controlling stockholder to buy out minority stockholders, the operative standard of review is ordinarily the most rigorous judicial review, entire fairness. To obtain the most deferential judicial review, business judgment, in a challenge to a squeeze-out merger, the controlling stockholder may, however, structure the merger to satisfy the MFW framework approved by the Delaware Supreme Court in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014). The MFW framework requires that the controlling stockholder condition the merger on both approval of an independent, adequately empowered special committee of the board that fulfills its duty of care in negotiating a fair merger price, and the uncoerced, informed vote of a majority of the minority disinterested, independent stockholders. If the MFW requirements are satisfied, the business judgment rule applies, and the Delaware Court of Chancery will dismiss the stockholder challenge to the squeeze-out merger unless the merger somehow constitutes waste—which is logically impossible to prove after the fully informed, uncoerced, independent stockholders ratify the merger by their vote. More ›