Posts from February 2018

Court of Chancery Explains DGCL Section 141

Cummings v. Eden, C.A. 13007-VCS (February 20, 2018)

This decision is particularly helpful in clarifying the effect of Section 141 of the DGCL. A transaction that is passed by the vote of even a single disinterested director is not void because of the language of Section 141. However, that does not mean that the transaction also is then subject to the business judgment standard of review. If the other directors are interested in the transaction, then the entire fairness standard will apply. More ›

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Supreme Court Clarifies Need To Disclose A Director’s Opinions

Appel v. Berkman, No. 316, 2017 (February 20, 2018)

When seeking stockholder votes it is not always clear when the company must disclose an opinion of an individual director on the merits of the proposed transaction. This decision reviews the Delaware law and concludes that at least when the director involved is a founder and chairman and voices an opinion that the transaction is not good for the company, that opinion must be disclosed.

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Court Of Chancery Discusses How To Plead A Lack Of Good Faith

Dieckman v. Regency GP LP, C.A. 11130-CB (ORDER) (February 20, 2018)

This Order is helpful in setting out how to plead that a board decision subject to a “good faith” test in an LP agreement did not meet that standard.

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Court Of Chancery Imposes Sanctions For Failing To Comply With A Scheduling Order

In RE Examworks Group Inc. Stockholder Appraisal Litigation, C.A. 12688-VCL (February 21, 2018)

As this decision again points out, a scheduling order is a court order that must be followed or sanctions will be imposed. Late production of documents is just such a sanctionable event.

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Court Of Chancery Explains Proper Purpose Analysis

KT4 Partners LLC v. Palantir Technologies Inc., C.A. 2017-0177-JRS (February 22, 2018)

When a demand to inspect corporate records states a purpose other than to value the corporation’s stock, it is often difficult to determine if the basis for the demand is properly supported by the facts in the petition. The petition must state a credible basis to investigate any alleged wrongdoing. This decision is an excellent summary of what facts are sufficient to support such a demand and the analysis the Court will use to decide that issue.

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Court Of Chancery Interprets Dell In An Appraisal Case

In RE Appraisal Of AOL Inc., C.A. 11204-VCG (February 23, 2018)

This is an important case for its comments on the Dell decision of the Delaware Supreme Court. The Court declined to use the deal price as evidence of the fair value despite the favorable comments on the use of deal price in Dell. Hence, this may mean that some commentators are wrong in their views that deal price is conclusive in valuation cases in the Delaware courts. Note, however, that again the fair value determined by the Court is less than the deal price, a loss for petitioners.  More ›

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Guidance Provided to Evaluate the Implied Covenant of Good Faith and Fair Dealing

The Delaware Limited Liability Company Act’s policy is to give the maximum effect to the principle of freedom of contract in LLC operating agreements. While the act permits parties to eliminate fiduciary duties that members or managers would otherwise owe to one another, an operating agreement may not eliminate the implied covenant of good faith and fair dealing that inheres in every LLC operating agreement under Delaware law. The implied covenant operates to imply terms to address developments or contractual gaps that neither party anticipated in the operating agreement, but which are necessary to fill gaps essential to meeting the reasonable expectations of the parties as reflected in the express terms of the operating agreement. More ›

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Court Of Chancery Adopts Market Price In Appraisal Valuation

Verition Partners Master Fund Ltd. V. Aruba Networks Inc., C.A. 11448-VCL (February 15, 2018)

This appraisal case adopts the target’s market price as its fair value. This confirms that the Court of Chancery may well interpret Dell and related decisions as strongly favoring market price, at least when the market is deemed efficient and unaffected by the deal. Is this then the end of appraisal arbitrage?

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Court Of Chancery Provides Definitive Guidelines On Judicial Sale Process

In re: TransPerfect Global Inc., C.A. 9700-CB (February 15, 2018)

In what it is hoped is the final act in the TransPerfect case, this decision upholds the sale process used by the Custodian to sell TransPerfect. While certainly a unique case, the decision does provide guidance on the discretion of a Court-appointed custodian in selling a deadlocked corporation.

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Court Of Chancery Applies The Covenant Of Good Faith And Fair Dealing To Fill A Gap

In re Oxbow Carbon LLC Unitholder Litigation, C.A. 12447-VCL (February 12, 2018)

This may be the definitive decision on when and how to apply the covenant in every LLC agreement to act in good faith and deal fairly. Here the “gap” the parties did not address in their LLC agreement concerns the rights of newly admitted LLC members to block a forced sale of the entity.  While that right was addressed in the initial LLC agreement, the terms on which new members were admitted years later were not addressed at that time. The decision is also noteworthy in how it decides to fill the gap the parties left, by deciding what they would have done had they thought about it.

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Court Of Chancery Resolves Allocation Issues In Advancement Case

Weil v. Vereit Operating Partnership LP, C.A. 2017-0613-JTL (February 13, 2018)

This decision clearly sets out how to allocate fees for claims subject to advancement of attorney fees from those that are not covered by an advancement obligation. In particular it details how allocation questions should be answered  and how disputes over the amounts to be paid should be resolved. More ›

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Dismissal of Shareholder Derivative Action on Rule 23.1 Grounds Precludes Relitigation of Different Del. Plaintiffs

The Delaware Supreme Court recently issued an important corporate law decision addressing issue preclusion in the context of multiple shareholder derivative actions. The court ruled in California State Teachers’ Retirement System v. Alvarez, No. 295, 2016 (Del. Jan. 25), that an Arkansas federal court’s dismissal of a shareholder derivative suit for failure to plead adequately demand futility precluded Walmart stockholders from attempting to prosecute derivative claims in Delaware arising from the same misconduct. The court rejected the argument that the failure of the Arkansas plaintiffs to have used books-and-records discovery under Section 220 to assemble their complaint rendered their representation inadequate, or that applying issue preclusion in this context violated the stockholders’ due process rights. Although Delaware strongly encourages plaintiffs to use books-and-records requests to prepare a shareholder derivative complaint, the court concluded that Delaware’s substantial interest in governing the internal affairs of Delaware corporations must yield to the stronger national interests that all state and federal courts have in respecting each other’s judgments. More ›

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Morris James LLP Names Patricia A. Winston as Leadership Council on Legal Diversity Fellow

Morris James LLP has chosen Patricia A. Winston to be a member of the 2018 class of Fellows, participating in a landmark program created by the Leadership Council on Legal Diversity (LCLD) to identify, train, and advance the next generation of leaders in the legal profession.

“This is a singular honor for Patricia Winston,” said Keith Donovan, Managing Partner.  “She joins a select group of experienced attorneys from diverse backgrounds who have been recognized for their potential as leaders in their organizations.” More ›

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Delaware Corporate and Commercial Case Law Year In Review – 2017

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 – 2017. 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 appraisal rights, duties in the master limited partnership context, director compensation awards, and preclusion in shareholder derivative litigation.  Continue reading for the full article. More ›

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Court Of Chancery Awards Fees Under Indemnification Provision

Composecure LLC v. Cardux LLC, C.A. 12524-VCL (Feb. 1, 2018, corrected Feb. 12, 2018)

Most of this decision deals with when a contract is void or voidable. If the signing is in violation of mandatory provisions in the entity’s governing instrument, it is void, but if it only was signed without the needed formality it is voidable. But more interesting, the decision also awards attorney fees under an indemnification provision in a contract that, as the Court noted, may only really apply to third-party claims. The scope of such provision thus remains unclear under conflicting Delaware decisions.

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Court Of Chancery Resolves Good Faith Claim In LLC Context

Miller v. HCP & Company, C.A. 2017-0291-SG (February 1, 2018)

This decision resolves the tricky issue of when the provisions of an LLC agreement do not allow “gap filling” so as to permit a claim for violation of the covenant to act in good faith and fairly. Briefly, when the LLC agreement permits the governing body of an LLC to act in its “sole” discretion and otherwise has an effective limit on the exercise of that discretion [such as permitting deals only with outsiders] then there is no reason to limit the discretion by imposing a duty to act in good faith. Of course, that may also require a waiver of fiduciary duties in the LLC agreement.

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Court Of Chancery Holds Stock Issuance Void

Southpaw Credit Opportunity Master Fund LP v. Roma Restaurant Holdings Inc., C.A. 2017-0059-TMR (February 1, 2018)

When stock is issued in violation of a stockholder agreement, the issuance is “void.” This has great significance because the issuance than cannot be ratified.

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Court Of Chancery Denies Advancement “As Incurred”

HOMF II Investment Corp v. Altenberg, C.A.2017-0293-JTL (Transcript December 13, 2017)

A provision in an LLC agreement that provides for “indemnification" “as incurred” does not provide for advancement. This illustrates that the confusion between advancement and indemnification still exists. If you want advancement, you had better say “advancement.”

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Court of Chancery Rejects Conspiracy Theory of Jurisdiction At Summary Judgment Stage

Reid v. Siniscalchi, C.A. No. 2874-VCS (January 30, 2018)

The facts underlying this summary judgment decision are rather remarkable.  The case is long-pending, and involved years of jurisdictional discovery granted for the purpose of allowing the plaintiff to explore its pleading-stage theory of personal jurisdiction under the so-called conspiracy theory.  The gist of that theory is that a Delaware court can exercise personal jurisdiction over all co-conspirators when one commits an act in the State that is central to carrying out the conspiracy.  It is a theory oft-invoked but rarely satisfied.  And, as this decision demonstrates, it is a theory that could be subject to some abuse by a clever litigant.  In this case, the evidence ultimately showed that the plaintiff misled the Court by claiming to be the victim of a Delaware-based conspiracy, when, in fact, the plaintiff was the architect of the very wrongdoing used to advance his conspiracy theory.  Thus, some ten years into the litigation, the non-resident defendant was dismissed from the case based on a lack of personal jurisdiction.   

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Where Do You Want to Be Sued?

Where does your company want to be sued? Of course, the obvious answer is “nowhere.” But in this litigious country that is not realistic. However, to a large extent, companies can chose the forum to decide claims made against them. The choice is not necessarily an easy one, given competing considerations that this article reviews. More ›

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