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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 12 posts from December 2018.
Court of Chancery Addresses the Scope of Summary Control Disputes and Effectiveness of Written Consents
Control disputes, like those under Section 225 of the DGCL, are summary, narrow proceedings limited to the issues regarding title to office. The Court of Chancery will not hear or decide “collateral” matters. Whether something is collateral turns on whether it is necessary to decide it to resolve the claim to office. That, in turn, depends on the particular facts and claims of the case. All this is due to the jurisdictional limitations of statutory control disputes as well as the policy of securing prompt resolutions. In this summary judgment ruling, the Court declines to deem certain defenses collateral that related to the validity of a stockholder consent under equitable principles. The ruling also addresses when a consent is treated as technically effective under Delaware law, i.e., usually upon delivery.
Delaware law permits a Delaware corporation to include a forum-selection provision in its certificate of incorporation governing all “internal affairs” claims by its stockholders. There is much national debate on the topic of forum-selection provisions in charters governing securities claims, such as whether a corporation can require arbitration. This decision wades into that debate by addressing a charter provision mandating a federal forum for securities claims. In it, the Court of Chancery holds that the Delaware General Corporation Law (the DGCL) does not authorize a Delaware corporation to include a forum-selection provision in its charter governing claims under the 1933 Act. The Court reasons that claims under the Act are external to the corporation—they do not “turn on the rights, powers, or preferences of the shares, language in the corporation’s charter or bylaws, a provision in the DGCL, or the equitable relationships that flow from the internal structure of the corporation.” Because the claim exists outside of the contract between the corporation and its stockholders and does not relate to the corporation’s internal affairs, it is beyond the power of state corporate law to regulate.
Under the Delaware Supreme Court’s Gentile decision, a claim may be dual-natured, meaning partially derivative on behalf of the corporation and partially direct on behalf of the stockholder. One allure for plaintiffs of successfully pleading a dual-natured claim is avoiding the pre-suit demand-on-the-board requirements for purely derivative claims. So it is not uncommon for plaintiffs to try to plead and argue into Gentile. But Gentile has been limited to claims involving deals with a controlling stockholder that unfairly dilute the other stockholders of both economic and voting rights. The Delaware Supreme Court recently clarified that in its El Paso decision. And Delaware courts have been cautious in applying Gentile of late. More ›
Delaware law recognizes a claim for breach of fiduciary duty based on insider trading under the Brophy decision. This is an important opinion because it recognizes an extension of potential liability under Brophy for trades made, not by the insider himself, but by an entity he or she controls. It is a natural extension that furthers the important policy of preventing insiders from profiting based on non-public information. The opinion also addresses demand futility principles under Braddock. That decision deals with how to conduct a demand futility analysis on an amended complaint after changes in the board’s composition.
Lately, the Delaware Supreme Court has given great weight to the deal price in appraisal cases. As a result, plaintiffs have put a greater focus on showing that the process leading to the merger makes that price unreliable, potentially because of breaches of fiduciary duty. One strategy for recovery is to file a breach of fiduciary case after obtaining valuable discovery in the appraisal case. This decision explains when such a fiduciary duty case can go forward notwithstanding the appraisal proceeding seeking to recover for the same loss. More ›
The Court of Chancery respects zealous advocacy, but demands professionalism and degrees of civility, among counsel and the parties. Every few years a non-Delaware attorney admitted pro hac vice goes too far in aggressively representing his or her client in a Delaware litigation. This decision discusses boundaries that should not be crossed, especially in a deposition. Name calling, sarcasm, aggressive behavior, and other forms of bullying are not permitted and may result in the loss of the right to practice before the Court.
This decision has two helpful analyses. First, it addresses the conspiracy theory of jurisdiction under the well-known Instituto Bancario decision, which permits a Delaware court to exercise jurisdiction over a defendant based on the Delaware acts of its co-conspirators. Notably, the plaintiff in this case was a Delaware entity with its principal place of business in the State, providing a jurisdictional hook for that theory. Second, it explains when a plaintiff is on inquiry notice so as to end any tolling period and start the statute of limitations clock.
Chancery Finds Inadequate Disclosure in Connection With a Tender Offer Prevents Dismissal of a Class Action Complaint
The Corwin doctrine provides substantial protection to directors of companies engaged in a sale process. Once a transaction closes, if a stockholder cannot allege that a majority stockholder vote approving a transaction was uninformed or coerced, then the court will dismiss a complaint attacking the fairness of the transaction under the business judgment standard of review. The rationale is that majority disinterested stockholder approval via a vote or a majority tender cleanses the transaction unless plaintiff can meet the high burden of pleading waste. Directors are also protected if a company’s charter contains protections under Section 102(b)(7) of the Delaware General Corporation Law (DGCL) and a plaintiff cannot allege that a majority of the directors acted disloyally or in bad faith. The Court of Chancery’s well-reasoned decision in In re Tangoe Stockholders Litigation, Cons. C. A. No. 2017-0650-JRS (Del. Ch. November 20, 2018), provides important guidance for directors seeking protection under either Corwin or Section 102(b)(7) when a board of a publicly traded company runs a sale process while it is attempting to restate its financials, its stock has been de-listed, and the Securities and Exchange Commission is threatening de-registration. More ›
This is an interesting decision because it deals with the rare instance when a party can prove a mutual mistake as to a contract’s terms so as to avoid having to comply with those terms. Here both a borrower and a loan officer clearly agreed a loan could be repaid without penalty. The actual loan documents had a prepayment penalty that the borrower did not read before signing. The Court held the borrower was excused from catching that penalty clause given the assurance he had there was no prepayment penalty.
Under Section 18-802 of the Delaware LLC Act, the Court of Chancery may dissolve an LLC when it is “not reasonably practical” for it to carry on its business in conformity with its LLC agreement. This decision explains when that might occur, such as when the defined purpose becomes impossible to fulfill.
The Court of Chancery has long demanded that litigants abide by the discovery rules and respect scheduling orders. This is an excellent summary of Delaware discovery obligations and a good list of many ways a litigant can go wrong in responding to discovery. More ›
D & O insurance covers actions taken by a director. However, when a director acts on behalf of another entity in dealing with the insured company, it is not always easy to decide if the claim against him arises out of his role as a company director. This decision applies a “but for” test in this way. If the claim would not exist “but for” the conduct on behalf of the other, non-insured entity, then the claim is not based on the director’s conduct as a director of the insured entity and the "capacity” exclusion applies to deny coverage. This result turns in part on the specific language of the policy that insured against conduct “solely” taken as a director.