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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 10 posts from January 2017.
Delaware Supreme Court Signals Due Process Might Prevent Dismissal Based On Demand Futility Issue Preclusion
When a derivative suit is dismissed for the failure to plead demand futility, does that also mean that any other pending derivative suit based on the same facts must be dismissed because the shareholders are precluded from relitigating the issue of demand futility? This is a particularly important question because the Delaware Court of Chancery has held that that issue preclusion applies and dismissal is required. Hence, defense counsel may well seek to obtain a fast dismissal in a favorable jurisdiction when the plaintiffs’ bar rashly files suit outside of Delaware. This Order by the Delaware Supreme Court, which remands such a dismissal for consideration of a Due Process argument, signals that issue preclusion might be inappropriate at the motion to dismiss stage under the circumstances.
At first look, this decision seems to involve just another unsuccessful failure of oversight Caremark claim against directors. But it is worth reading because it outlines the various theories of a Caremark case and then explains when inferences of utterly ignoring one’s fiduciary duty may be inferred from otherwise neutral facts. The decision makes it clear that the Court will not infer the directors were told of wrongdoing just because wrongdoing occurred, and that once proper safeguards are put in place to avoid illegal actions, there is usually no duty to monitor the monitors without reason to suspect they are not working.
Agreements for publicly-traded limited partnerships often disclaim any fiduciary duties and provide safe harbors for transactions involving a conflict for the controller. The safe harbor provisions frequently contain minimal disclosure requirements for any minority unitholder approval. All that is fine under Delaware law. However, when the controller asks the minority unitholders to approve a transaction under the safe harbor provision and does so in a fulsome proxy statement containing more than the minimal required disclosures, the controller must act fairly. As the Court finds here, the safe harbor provisions of the agreement necessarily imply an obligation to be honest with the investors. That is a classic example of when the covenant of good faith and fair dealing applies.
This decision examines when pre-suit demand may be excused because the board who refused the demand declines to disclose the report of its investigation when responding. In this case, the board’s unwillingness to disclose the report was not sufficient, standing alone, to show the necessary gross negligence or bad faith in the board’s demand refusal, particularly when the plaintiff has not made a formal request for the report using its books and records rights under Section 220.
The decision is also a good review of what circumstances otherwise might be sufficient to show a board’s demand refusal was in bad faith. In short, where the board’s justifications for refusing the demand falls within the bounds of reasonable judgment, the refusal is not in bad faith.
Morris James attorneys Lewis Lazarus, Albert Manwaring and Albert Carroll authored an article published in Transaction Advisors titled Delaware Corporate and Commercial Case Law Year in Review – 2016. The article summarizes ten significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past year, including matters such as disclosure-only settlements, appraisal rights, books and records inspections, and the standards of review in shareholder litigation. Continue reading for the full article. More ›
Under the Delaware Limited Liability Company Act, a non-Delaware resident may be deemed to have consented to being sued in Delaware if she is a “manager” of the LLC. But who, exactly, is such a manager? That question is answered by the recent decision in In re Dissolution of Arctic Ease, C.A. No. 8932-VCMR (Del. Ch. Dec. 9, 2016). As that decision points out, all who manage are not “managers” under the Delaware LLC Act. More ›
It is well understood that minority stockholders have limited rights to object to a short-form merger under Delaware law. This decision affirms that minority stockholders cannot challenge the merger on fairness grounds alone, but must seek appraisal as the remedy for an inadequate price. However, since the stockholders are faced with the decision of whether to accept the deal price or seek appraisal, the duty of disclosure still applies. This decision is helpful for its in-depth analysis of the many disclosure allegations.
The well-known Corwin decision requires that the Court of Chancery apply the deferential business judgment rule to attacks on a merger approved by a majority of the disinterested stockholders who had all the material information. The current plaintiff strategy is to plead that the stockholders were not fully informed such that the vote should not have a cleansing effect. Most notably, this decision addresses who has the burdens of pleading and proof regarding the sufficiency of the disclosures for a Corwin defense. As the Court explains, the plaintiff must first sufficiently plead one or more disclosure violations, and only then will the burden shift to the defendants to show that the stockholders were fully informed. The decision also explains that Corwin did not change the disclosure standard—directors are only obligated to disclose material information to satisfy Corwin.
This decision explains the extent of an attorney fee lien in Delaware. The lien extends to the entire fee when the fee is based on hourly rates, regardless of whether all the time spent was necessary for the recovery. In other words, the lien is for unsuccessful efforts as well as those that resulted in the actual recovery.
Morris James LLP is pleased to announce that Patricia A. Winston and James J. Gallagher, II have been elected partners effective January 1, 2017. More ›