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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 18 posts from December 2016.
This is an important decision because it limits the use of the typical fraud exclusion in a D&O policy to avoid liability to the insured. The insured David Murdoch was found to have breached his fiduciary duty to Dole Foods resulting in a damage opinion awarding over $148,000,000. He soon settled the case by paying the damages and the suit was dismissed prior to the entry of a final judgment. He then sought to be reimbursed by the Dole D&O carriers. The insurers defended on the basis that the policy excluded coverage for litigation over a director’s personal gains obtained by fraud. However, the policy also required that the adjudication of wrongful conduct be reflected in a final judgment. The court held that even though there was a Court of Chancery opinion finding Murdock liable there was no final judgment and thus the exclusion for fraud did not apply. Further, the Court held that the insurers could not be subrogated in a suit against Murdock. While the case is not yet over, this result is probably upsetting to most insurers who do not expect to have to cover their insured’s frauds. But as the Superior Court correctly pointed out, there is precedent for this result. Hence, it can be said the insurers were on notice this might occur. Of course, the answer to this problem is to change the policy wording to not require a final adjudication when a case is settled.
After the enactment of Section 109(b) of the Delaware General Corporation Law, one would have thought that fee-shifting bylaws were invalid. However, this decision deals with another attempt to shift fees, this time when a stockholder violates the company’s exclusive forum bylaw. Nice try, but the Court holds the bylaw is invalid.
The derivative complaint alleged that Zynga's CEO, Chairman and controlling stockholder Mark Pincus, along with certain other top managers and directors were given an exception from the company's standing rule preventing insider sales until three days after an earnings announcement. The exception permitted the insiders to sell 20.3 million shares of stock for $236 million as part of a secondary offering. The insiders sold their shares for $12/share. Following the earnings announcement the market price dropped to $8.52 and following more negative news three months later dropped to $3.18, a 75 percent decrease from the offering price. The complaint alleged wrongdoing by the directors who approved the exception and those who participated in the sales. Of the company's nine directors, the Court of Chancery found that only the two directors who participated in the sale, Pincus & Hoffman, were interested and therefore could not impartially consider a demand. The Chancery Court rejected the argument that the facts alleged in the complaint were sufficient to create a reasonable doubt about the independence of director Siminoff because of an allegation that she was a "close family friend" of Pincus and had a business relationship with Pincus as co-owners of a private plane. The Chancery Court also rejected the argument that directors Doerr and Gordon lacked independence because of investment relationships they had with Zynga and Hoffman and Pincus. More ›
Buyers unhappy with the performance of a company or assets purchased frequently assert claims that the seller fraudulently induced the purchase by providing false information of the value of the company or assets in the sale process.
The Delaware Court of Chancery has often addressed whether the language in a disclaimer of extra-contractual representations in a purchase agreement is sufficient to shield a seller from liability for fraud. In these decisions, the court has provided guidance for the language in disclaimers or anti-reliance clauses necessary to avoid claims of fraud based on extra-contractual representations.
To start in Abry Partners V. v. F&W Acquisition, 891 A.2d 1032, 1059 (Del. Ch. 2006), the court ruled that a standard integration clause, barring contract claims based on prior written agreements, and prior or contemporaneous oral agreements, but without explicit anti-reliance language disclaiming reliance on extra-contractual representations, will not shield the seller from liability for fraud.
Further, in FdG Logistics v. A&R Holdings, 131 A.3d 842, 860 (Del. Ch. 2016), the court ruled that a disclaimer must come from the aggrieved party, meaning the buyer who asserts the fraud. Thus, a seller's disclaimer of what it did or did not represent is insufficient by itself to bar a fraud claim based on extra-contractual representations. Lastly, in Praire Capital v. Double E Holding, 132 A.3d 35, 51 (Del. Ch. 2015), the court ruled that to disclaim reliance does not require any "magic words," or even that a disclaimer or anti-reliance clause be styled negatively to deny reliance on extra-contractual representations. More ›
This is another decision in the continuing development of Delaware law on how to determine the acquired company’s fair value in an appraisal action. The decision carefully reviews the more recent opinions on whether the merger price constitutes fair value, concluding that, in this case, it did. Factors considered in weighing the use of the merger price included: meaningful competition during the pre-signing phase, that adequate and reliable information was provided to all parties during the pre-signing phase, and the lack of collusion or unjustified favoritism towards particular bidders. In addition, because fair value is determined at closing, evidence from the post-signing period may also be relevant, such as the absence of a topping bid, and the company’s post-signing performance. The decision is also useful for seeing how the Court will work carefully through the parties’ competing expert reports.
Just in time for Christmas, on December 20, 2016, the Delaware Supreme Court issued a Christmas present – or lump of coal, depending on your view – in its opinion in El Paso Pipeline GP Company LLC v. Brinckerhoff. In this opinion, the Supreme Court reversed the Court of Chancery’s opinion holding that claims of a limited partner challenging a drop down transaction between the general partner’s parent and the partnership as a breach of the limited partnership agreement were direct, and therefore survived the merger of the limited partnership after trial with a third party. The Court of Chancery had awarded $171 million in damages for the breach. The general partner had argued that the merger extinguished the limited partners’ claims. More ›
Partner Charles H. Toliver, IV Receives the Delaware State Bar Association Outstanding Service to the Courts Award
The Delaware State Bar Association has selected Morris James LLP partner Charles H. Toliver, IV as the 2016 recipient of the Award for Outstanding Service to the Courts and the Bar. Established in 1999, the award is presented to a Delaware attorney or judge who has substantially assisted the Courts and the Bar and has strengthened public trust and confidence in the courts in the state of Delaware and the administration of justice. More ›
Parties typically seek to narrow the scope of potentially responsive documents by meeting and conferring and reaching agreement on appropriate search terms. The parties next run those search terms against the data collected from the relevant custodians and review the resulting information for responsiveness. This method of identifying responsive electronic data has more or less become the norm in cases involving large data collection efforts. Occasionally, however, search terms miss the mark and fail to capture the information the opposing party is entitled to receive. The Delaware Court of Chancery recently addressed this and other related issues in deciding motions to compel filed by the defendant in BTG International v. Wellstat Therapeutics, No. 12562-VCL (Oct. 4). More ›
Partner P. Clarkson Collins, Jr. Receives the Delaware State Bar Association Daniel L. Herrmann Professional Conduct Award
The Delaware State Bar Association has selected Morris James LLP partner P. Clarkson Collins, Jr. as the 2016 recipient of the Daniel L. Herrmann Professional Conduct Award. The award is presented to a member of the Delaware Bar who has demonstrated those qualities of courtesy and civility which, together with high ability and distinguished service, exemplifies the Delaware lawyer. More ›
Appraisal petitioners normally agree to consolidate their actions, on which law firm(s) will represent them, and on how their common objectives will be carried out. That did not happen in this case: the petitioners disputed whose attorneys should take the lead counsel role. Significantly, the Court found it had the authority to choose one of the two competing law firms to lead on behalf of all petitioners despite one petitioner’s objection. The Court also observed, however, that there may be instances in which each petitioner should be allowed to chart its own course without consolidation or coordination.
This is an important decision because it clarifies when a stockholder loses standing to bring a fiduciary duty case because he sold his stock. Briefly, breach of fiduciary duty claims may be direct (belonging to the individual stockholder), derivative (belonging to the corporation generally), or dual-natured (partially direct, partially derivative). Direct/individual claims for breach of fiduciary duty may also be personal (belonging to the individual) or non-personal (attaching to the stock). As explained by In re Activision Blizzard, Inc. Stockholder Litigation, 124 A.3d 1025 (Del. Ch. 2015), a stockholder selling his stock gives up all but direct claims that are personal in nature—the non-personal rights otherwise travel with the shares to the new owner. More ›
The Delaware LLC Act provides for personal jurisdiction in Delaware over those who manage a Delaware LLC—i.e., those who are named as managers in the LLC agreement, and those who participate materially in the LLC’s management. This decision explains what it means to participate materially in the LLC’s management by a thorough analysis of the precedents. In effect, it means the person must have the management role usually undertaken by a corporate director—a control or decision-making role. Just acting as an officer is not enough when that person is subject to the control of others.
“Directors’ Decisions Must Be Reasonable, not Perfect” Home Depot’s Shareholder Derivative Litigation Arising from Data Breach Dismissed; Demand Was Not Excused Under Delaware Law
On November 30, 2016, a federal district court dismissed a shareholder derivative complaint against various current and former directors of Home Depot arising from the well-publicized data breach the company suffered between April and September 2014. In re The Home Depot, Inc. Shareholder Derivative Litigation, Civil Action No. 15-CV-2999-TWT (N.D. Ga. Nov. 30, 2016). The complaint asserted claims against the directors for breach of the fiduciary duty of loyalty and corporate waste under state law, and a federal law securities claim under Section 14(a) of the Securities Exchange Act. The decision illustrates important principles of corporate law reflected in Rule 23.1 (under both state and federal law), governing when a plaintiff can bypass the board of directors to assert a derivative claim for injury to the company on the company’s behalf, rather than deferring to the board’s judgment about asserting such a claim, and how these principles may affect litigation arising out of data breaches and alleged failures of director oversight. More ›
In GAMCO Asset Management v. iHeartMedia, Delaware's Court of Chancery considered claims that a controlling stockholder's liquidity needs created conflicts in otherwise arm's-length transactions with third parties. As demonstrated in New Jersey Carpenters Pension Fund v. infoGROUP, a controlling stockholder that receives the same financial benefit as the minority stockholders must also receive a "unique benefit" for the challenged transaction to be subjected to the entire fairness standard of review. Circumstances like infoGROUP, however, represent extreme cases. As discussed below, the plaintiff in iHeartMedia was unable to persuade the court that infoGROUP-like circumstances existed in its case. More ›
Even after a board rejects a plaintiff-stockholder’s demand to bring a derivative litigation, the plaintiff may proceed to bring that derivative action if the plaintiff can show the refusal was “wrongful.” Having conceded that the directors were not “interested” in the subject of the demand by making the demand rather than suing and trying to allege demand futility, the plaintiff must show that the decision to refuse the demand was a bad faith breach of the duty of loyalty, or a grossly negligent breach of the duty of care. These two related decisions examine whether plaintiffs met the high bar of sufficiently alleging wrongful refusal. They illustrate, for instance, how it might not be enough that an investigation proved wrong, or that the company subsequently agreed to a large settlement arising out of the investigated events.
Many contracts for the sale of a company have a provision addressing how the parties should resolve disagreements concerning post-closing adjustments to the sale price. Exactly who is to resolve those disputes (be it an accountant, an arbitrator or the court), and the scope of their authority is sometimes unclear. This decision tracks some precedents and explains when the contract may be interpreted to permit an accountant to decide what adjustments are required by GAAP.
When a stockholder files a derivative suit she can avoid dismissal under Rule 23.1’s pre-suit demand-on-the-board requirement by showing that a majority of the directors were not independent enough to fairly consider her demand that the corporation itself file the suit. This decision clarifies how to decide if a board member is sufficiently independent to fairly consider such a demand. Briefly, at least two factors will be relevant: close social connections to the target of the suit, and disqualification under the NASDAQ tests for independence. There is no single test that controls, although either one of the aforementioned relationships may be disqualifying under the right circumstances, as the Court found them to be in this case.
Large commercial contracts frequently try to limit a buyer’s remedies for any extra-contractual misrepresentations by the seller. Many Delaware decisions deal with disclaimers of extra-contractual representations and this decision does a nice job of summarizing some of that existing law. For example, it notes that a statement from the seller that it has not made any extra-contractual representations may not suffice, while a statement of non-reliance from the buyer should do the trick.