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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 10 posts from April 2018.
Ryan T. Keating was quoted in the Bloomberg Law article, "Delaware Ramps Up Data Breach Compliance Mandates," regarding the impact of the new statute.
"The most significant change in the new statute, which updates the state’s 2005 data breach notification law, is that companies are required to “implement and maintain reasonable procedures and practices” to prevent data breaches, Ryan Keating, a member of Wilmington, Del.-based Morris James LLP’s data privacy and information governance group, told Bloomberg Law.
The amended statute does not offer guidance on what constitutes “reasonable” security, so companies developing security programs “would be wise to consider security standards published by NIST and other organizations,” Keating said, referring to the Commerce Department’s National Institute of Standards and Technology."
Under the LLC Act, as with the DGCL, an entity planning to dissolve and distribute its assets is required to set aside some reserve of assets to pay all known claims. Failure to set aside sufficient assets may result in revocation of the entity’s certificate of cancellation, thereby reviving the entity, as happened in this case. This decision explains when claims are “known” by the entity (i.e., the entity has actual knowledge of the claims) and how the entity may value those claims for purposes of retaining sufficient assets to potentially satisfy them. Importantly, the reserve need not match all potential damages dollar-for-dollar. The value of claims may be discounted based on their lack of merit, for example.
In Feuer v. Redstone, (Del. Ch. Apr. 19, 2018), the Delaware Court of Chancery considered a motion to dismiss derivative claims challenging compensation CBS Corp. paid to nonagenarian Sumner Redstone after he allegedly became physically and mentally incapacitated and ceased rendering meaningful services. Based on the “extreme factual scenario” alleged, the court declined to dismiss certain claims stemming from CBS’s board of directors’ alleged failure to consider terminating Redstone’s “at will” employment, resulting in his continued receipt of millions of dollars in salary payments. More ›
This decision clarifies that negligent representation claims can only be brought in the Delaware Court of Chancery. The opinion is also a useful review of the law on when opinions and projections may be used as the basis for a fraud claim. The short answer is that mere opinions and projections disclosed as just that are not generally sufficient to show fraud.
This decision holds that a case will not be dismissed on forum grounds just because it involves the interpretation of another state's law. Note that it is a different situation when the case involves the law of another country.
This decision holds that a contractual provision adopting Delaware law will generally be upheld. However, when applying Delaware law will violate the public policy of another state whose law would have applied but for the contractual choice of law, Delaware will not enforce that choice of law. This distinguishes the Ascension case that declined to apply Delaware law to a non-compete contract that violated California law.
This is an important decision because it points out that the breach of a contract does not always mean damages will be awarded. For example, an investor's right to consent to certain transactions or to receive a payment absent that consent does not mean that the failure to get his consent must entitle him to that payment. Rather if the contract does not provide for a measure of damages for its breach, the plaintiff must prove the breach harmed him. Here the transaction in question actually benefitted the plaintiff so that he would have consented to it had he been asked. While the no damages result may seem counterintuitive at first, the result makes sense.
This decision involves the rare case where a waste claim is well plead. As a result, the directors who gave away company money are sufficiently exposed to liability that demand upon them to bring the suit is excused.
This is an interesting decision for two reasons. First, it distinguishes between classic self-dealing claims and tag-along challenges to business decisions. Just because a plaintiff successfully pleads that a controller is looting a company in some respects, does not mean all allegedly-related challenges will survive dismissal. Second, it explores when an alternative theory of secondary liability or a claim for unjust enrichment may accompany a sufficiently plead breach of fiduciary duty.
Under Delaware law, a controlling stockholder need not be a majority stockholder. Rather, a controlling stockholder might be a group of aligned stockholders who together hold a majority. Or, as in this case, it might be a minority but substantial stockholder who practically has and exercises board-level control with respect to the challenged transaction. The presence of a controller is an important factor in litigation, including because, as here, it might prevent defendants from achieving a prompt dismissal of a post-closing fiduciary duty action based on stockholder approval under the well-known Corwin decision. In this case, the factors relevant to finding control by the roughly 22% minority stockholder (i.e., Elon Musk) at the motion to dismiss stage included: (1) the individual’s history of eliminating opposition; (2) the board’s lack of safeguards to prevent his control over the company’s consideration and negotiation of the self-interested transaction; (3) a board packed with members interested in the transaction or beholden to him; and (4) public disclosures portraying him as in control.