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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 7 posts from October 2018.
In 2014, the Delaware Supreme Court in Kahn v. MFW held that the business judgment standard could apply to review of a controlling stockholder merger if at the outset the controlling stockholder conditioned the squeeze-out transaction on negotiation and approval by a committee of independent and disinterested directors and the informed, uncoerced approval of a majority of the minority stockholders (dual stage approvals). The Delaware Supreme Court later affirmed a Delaware Court of Chancery transcript opinion holding that MFW could apply to a pleadings-stage dismissal where the controlling stockholder did not condition its initial proposal on the dual stage approvals, at least where the board, with the majority stockholder’s participation, did so in a resolution establishing a special committee to negotiate prior to any substantive negotiations. The question remained, however, how much latitude the court would afford a controlling stockholder who did not ab initio condition its merger transaction on the requisite dual stage approvals. In Flood v. Synutra International, C. A. No. 101, 2018 (Del. Oct. 9, 2018), the Supreme Court in a majority opinion provided additional guidance, holding that the MFW standard of review could apply to a transaction where the controlling stockholder did not from the beginning condition its transaction on the requisite dual stage approvals, as long as those conditions were established prior to any substantive economic negotiations. The court’s holding and its reasoning provide important guidance to transactional planners and litigators assessing whether to challenge a controlling stockholder merger transaction. More ›
Superior Court of Delaware CCLD Finds 6 Del. C. 1-308 Permits Parties to Reserve Their Rights Without Pleading Duress
In this decision by the Complex Commercial Litigation Division, the Court held, for the first time, that under 6 Del. C. 1-308, a party may make a payment with a reservation of rights under without having to plead duress. The Court held that this section was designed to permit parties to a contract – like the plaintiff here – to continue performance even while a dispute between parties is unresolved. In doing so, the Court held that Section 1-308 superseded the Supreme Court’s decision in Western Natural Gas Company v. Cities Service Gas Company, 201 A.2d 164 (Del. 1964) in that respect.
Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), commonly referred to as MFW, a controller may gain the benefit of business judgment review when it conditions a transaction—from the outset (i.e., ab initio)—on two procedural protections. Those involve approval by (i) an independent special committee and (ii) a majority of the minority stockholders. The point of the timing requirement is that the controller disables its influence from the beginning, instead of using the option as a bargaining chip when negotiating economic terms. More ›
This decision provides an excellent summary on Delaware law concerning when the Court will enjoin litigation in another jurisdiction to enforce a contract’s forum selection clause, as the Court did in this case. It also notes a potential trap for the unwary in situations where the clause selects only a court lacking jurisdiction to hear the dispute, rendering the forum selection invalid. That may occur for Delaware forum selection clauses when the Court of Chancery is the sole selected forum but cannot hear the dispute because of its limited subject matter jurisdiction. To avoid that problem, it would be best to identify an alternative within the jurisdiction, or accept any court within the jurisdiction.
This is a good decision for its explanation of when a non-compete agreement will be enforced when it does not have a geographical limit. If the agreement speaks to not engaging “in competition with” the former employer, that provides a limit based on what customers the old employer had and is enforceable as a result.
Delaware will enforce non-compete agreements against former employees, but generally California law bars such agreements. This decision explains how to determine which state’s law applies by looking to how important is the public policy of each state on the issue before the Court. Because California does enforce a choice of Delaware law when that choice is the subject of negotiation, not coercion, the Delaware choice of law was upheld. Note that under a different California statue then in force, a contrary result was reached in the Ascension Insurance Holdings v.Underwood case.
When something bad occurs in a business, it now seems inevitable that the directors may be sued. The most popular form of suit now seems to be a securities claim based on a failure to have disclosed the danger the entity faced that has now come home to do it harm. This decision shows why securities claims are in fashion for those events. For as it points out, there is not liability under Delaware corporate law for simply failing to prevent harm to the corporation. Something more is needed to show the directors acted in bad faith, such as a red flag warning of the need to act to prevent the harm. Thus, the decision dismissed a complaint that only alleged the directors did not do as much as might have been done to prevent the bad events from harming their entity.