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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Showing 23 posts from June 2018.

Does Delaware Insist on “Controller” Accountability?

Once again, the Delaware courts are being accused of improperly favoring management in stockholder litigation.  Those accusations have periodically surfaced over at least the last 45 years, since Professor Cary’s famous (or infamous”) “race to the bottom” article in the Yale Law Journal.  The recent claims of bias might be dismissed as just the rantings of disgruntled plaintiffs’ attorneys.  But, there are better rebuttals to those accusations than the all-too-common name calling that seems so popular lately.

Here is just one reason why the Delaware courts continue to fulfill their role of monitoring the management of Delaware corporations.  In a series of recent decisions, the Court of Chancery has held that even a less-than-50% stockholder may be deemed to control a corporation.  As a result, such a “controller” must prove any self-dealing transaction is entirely fair to the company.  This exacting standard of review by the court involves just the kind of close scrutiny the critics of Delaware argue is appropriate to protect stockholders. More ›

Court of Chancery Awards Damages for Breach of a Director’s Duty of Loyalty

When friends go into business, their ties may fray if the business experiences difficulty and the parties have different views of how to proceed and who is responsible. If the principals are directors of a Delaware corporation, however, their duty of loyalty requires them to eschew self-interest and to do what is best for the corporation and its stakeholders. Moreover, when conflict arises, vague promises among friends do not supplant the requirements for binding agreements. More ›

Court Of Chancery Explains When Claim Is Direct And Survives A Merger

Posted In Fiduciary Duty

In re Straight Path Communications Inc. Consolidated Stockholder Litigation, C.A. No. 2017-0486-SG (Del. Ch. June 25, 2018)

When a merger closes, stockholders of the acquired company generally lose standing to pursue claims, other than direct claims attacking the validity or fairness of the merger itself. Derivative claims, as chose in actions, pass to the purchaser. This is an important decision because it reconciles prior case law regarding when a claim is direct and not derivative and thus survives a merger. More ›

Court Of Chancery Enforces Agreement To Waive Corporate Opportunity Claims

Posted In Fiduciary Duty

Alarm.Com Holdings Inc. v. ABS Capital Partners Inc., C.A. 2017-0583-JTL (June 15, 2018)

Under 8 Del C. Section 122(17) a corporation may waive any claim that a corporate opportunity was wrongfully taken by a fiduciary. Private equity firms frequently invest in companies in the same line of business. When that investor also puts a director on the board of its investment, a potential conflict of interest may arises when that director obtains confidential information that may be useful to the other company the investor has invested in the same line of business. This decision holds that a trade secret claim under the Delaware Uniform Trade Secret Act is precluded by the type of waiver permitted by Section 122(17). Thus, investors may invest in competing companies if they get the protection provided by this section of the Delaware General Corporation Law.

Court Of Chancery Explains Who Is A Controller

Posted In Fiduciary Duty

In Re Hansen Medical Inc. Stockholders Litigation, C.A. 12316-VCMR (June 18, 2018)

This is another decision in a series of recent decisions where the Court of Chancery had to decide if a less-than-50% stockholder controlled the corporation. This is an important issue because a controller has fiduciary duties to the other stockholders and the intrinsic fairness test apples to the review of any transaction involving that controller. Here the longstanding close relationship of two stockholders who together owned more than 50% of the entity was enough for the complaint alleging they controlled the entity to survive a motion to dismiss. While all the facts alleged in the complaint on that issue are important to the analysis, perhaps the key fact was that the two stockholders in the past had acted together to get a benefit from the corporation that only they received compared to the other stockholders. That showed their strong influence over the corporation.

When Is a Seller's Word His Bond?

Every transaction to some extent is based on trust. At least a buyer trusts that a seller is not actively trying to defraud him. But, when is that trust reasonable? That question is important because a buyer claiming fraud must, among other facts, show that it was reasonable for him to rely upon the representations he claims misled him. The recent decision in Edinburgh Holdings v. Education Affiliates, Del. Ch. C. A. 2017-0500-JRS (June 6, 2018), illustrates the importance of pleading facts that support a claim of reasonable reliance on a seller’s representations. More ›

Lewis Lazarus and Albert Manwaring Speak at DSBA Corporate Law Update

Morris James partners Lewis H. Lazarus and Albert H. Manwaring IV participated in a panel discussion titled, Corwin, Appraisal and Alternative Entity Developments: Updates That Transactional Lawyers and Litigators Need To Know, A View From the Bench and Bar" at the annual corporate law CLE sponsored by the Corporation Law Council of the DSBA on June 6th. More ›

Court of Chancery Finds Breach of Fiduciary Duty By Director Selfishly Opposing Cure of Defective Corporate Acts

Posted In Fiduciary Duty

CertiSign Holding Inc. v. Kulikovsky / Kulikovsky v. CertiSign Holding Inc., C.A. No. 12055-VCS (Del. Ch. June 7, 2018) 

When a corporation accidentally issues defective stock or takes some other defective corporate act, Delaware law offers avenues to cure under the right set of circumstances.  See 8 Del. C. §§ 204, 205.  As this decision shows, a director who self-interestedly stands in the way of that cure by attempting to impose selfish conditions breaches his fiduciary duty of loyalty and may be liable for damages.  Even if the director later comes around, extra costs incurred from his obstinacy may be charged to him.

Court of Chancery Awards Fees Under the Corporate Benefit Doctrine in Director Qualifications Bylaw Dispute

Full Value Partners L.P. v. Swiss Helvetia Fund Inc., C.A. No. 2017-0303-AGB (Del. Ch. June 7, 2018)

A representative plaintiff who confers a non-monetary benefit on the represented class will be entitled to an award of attorneys’ fees and expenses under the right set of circumstances.  Delaware does not follow the frequently-adopted lodestar method.  Rather, it employs a more flexible approach known as the Sugarland factors, which may or may not result in a market hourly-rate.  In this decision, the plaintiff conferred such a benefit and earned a handsome reward under the circumstances.  Where the company allegedly was selectively enforcing its director qualifications bylaw, the plaintiff was able to seat a director that the board originally opposed and effectively prevented the company from using the bylaw improperly going forward in one respect.  For this preservation of shareholder voting rights, the Court entered a fee award of $300,000, equating to a roughly $1,500 hourly-rate.

Meghan A. Adams - Certified Mediator by the DSBA and the Superior Court of Delaware

Morris James is pleased to announce Meghan A. Adams has completed the Delaware State Bar Association’s Advanced Mediation Training and is now a Certified Mediator by the DSBA and the Superior Court of Delaware.  

Meghan A. Adams is a member of the firm's Business Litigation group and focuses her practice on Corporate and Commercial Litigation. She represents clients in a wide variety of matters in the Delaware Court of Chancery, Delaware Superior Court, Supreme Court of Delaware and the District of Delaware, including in the areas of corporate governance, complex commercial litigation, stockholder litigation, fiduciary duties, limited liability company and limited partnership disputes, officer and director indemnity and breach of contract.  More ›

Jeffrey R. Waxman, Counsel to the Alleged Victims of Harvey Weinstein, was Quoted in Law360, Bloomberg and Variety Magazine

During the hearing in Wilmington, Delaware, the Weinstein Co. lost its fight to keep Harvey Weinstein’s employment contract secret. That document shows that Harvey Weinstein's actions were facilitated by the company, Jeffrey Waxman, a Morris James partner and bankruptcy lawyer for the alleged victims, said in court. Click on the links below for the full articles.

Variety Magazine - Judge Orders Release of Harvey Weinstein’s Employment Contract

Law360Weinstein Co. Must Face Sexual Assault Victims' NY Suit

BloombergWeinstein Co. Must Face Sexual Harassment Suit, Judge Rules

Brett Fallon and Brenna Dolphin Author Article on Sanctions Published by the American Bankruptcy Institute

Posted In Articles, Bankruptcy

Let’s Ask for Sanctions! (But What Kind?)
Originally published by the American Bankruptcy Institute 2018.

Courts might issue sanctions pursuant to statute,rule of procedure or inherent power, but keep in mind the American Rule: Each party bears its own attorneys’ fees and litigation expenses, and attorneys’ fees are not ordinarily among the costs that a prevailing party might recover. Courts employ narrow exceptions when imposing sanctions, which might properly have a punitive aspect
and compensatory effect. This article will review 28 U.S.C. § 1927, Rule 9011 of the Federal Rules of Bankruptcy Procedure, the inherent-power doctrine and 11 U.S.C. § 105.  Read more.

Court of Chancery Enforces Broad Director-Like Books and Records Rights in the LLC Context

Obeid v. Gemini Real Estate Advisors LLC, C.A. No. 2017-0510-JTL (Del. Ch. June 5, 2018)

To facilitate the proper exercise of one’s fiduciary duties, the right of directors to inspect a corporation’s books and records is broad, often referred to as unfettered.  The right of managers to inspect an LLC’s books and records generally is equivalent, subject to modification in the LLC agreement.  A significant showing is required to avoid a fiduciary’s inspection on the basis that is not for a proper purpose, i.e., any purpose reasonably related to the inspector’s fiduciary status.  The company must put forward concrete evidence that the fiduciary will violate duties and use the information to harm it.  Without such a showing, the Court generally does not assume the role of questioning the fiduciary’s business judgment about the records he needs to do his job.  This decision is an example of the LLC failing to prove the manager lacked a proper purpose for his inspection, with the backdrop of much friction and other litigation among the LLC’s several managers.

Court of Chancery Explains Contract, Fraud, and Fiduciary Duty Standards in Contingent Deal Price Dispute

Edinburgh Holdings Inc. v. Education Affiliates Inc., C.A. No. 2017-0500-JRS (Del. Ch. June 6, 2018)

It is common for parties to an acquisition to structure some portion of the purchase price as contingent on the acquired company’s post-close performance. With some frequency, a party dissatisfied with the resulting payment sues for breach of contract and may point the finger at those in charge during the relevant period for measurement. Out of this particular example comes reminders on well-settled standards for breach of the implied covenant of good faith and fair dealing, fraudulent inducement, and breach of fiduciary duty.  For instance, the implied covenant may be deployed as a defense to a breach of contract claim based on one party preventing the other’s performance, but it may not be used as an affirmative claim to override a contract’s express terms.  Further, Delaware law does not permit bootstrapping fraudulent inducement claims onto contract claims by alleging that a party never intended to perform its obligations.  Additionally, predictions about future performance generally cannot be the basis for fraud.  Finally, Delaware courts will dismiss a breach of fiduciary duty claim that is entirely duplicative of a breach of contract claim.

Delaware Superior Court Explains Statute Of Frauds

World Class Wholesale LLC v. Star Industries Inc., C.A. N17C-05-093 MMJ (May 22,2018)

This decision explains that when a contract may be validly terminated in less than a year the statute of frauds does not apply.

Delaware Superior Court Explains When Statute Of Limitations Accrues

Black Diamond Hope House Inc. v. U&I Investments LLC, C.A. K15C-12-034 JJC (May 22, 2018)

If a contract spells out when the time to sue under it starts to run, the time of discovery rule does not apply. Instead, the contract provision for accrual of a claim governs.

Delaware Superior Court Requires Contract Claim Be Plead For Prejudgment Interest To Start To Accrue

Viking Pump Inc. v. Century Indemnity Company, C.A. N10C-06-141 PRW CCLD (May 23, 2018)

This decision has an important warning. A complaint for a declaratory judgment does not alone entitle a plaintiff to a monetary judgment when its interpretation of a contract is upheld and the contract has been breached. Thus when the defendant then pays what is due and thereby negates the plaintiff’s ability to file a breach of contract case, the court will not award prejudgment interest even if the payment is years overdue. In short, add a breach of contract claim to any declaratory judgment complaint.

Chancery Court Declines Stockholder Invitations to Expand Transactions Subject to Appraisal Rights

Posted In Articles

Appraisal rights have been the subject of increased focus in the current, post-Corwinenvironment, in which a fully-informed noncoerced stockholder vote suffices to dispose of most M&A challenges. In two recent decisions, the Delaware Court of Chancery considered attempts by stockholder-plaintiffs to expand the scope of transactions subject to appraisal rights.  In both cases, the court reinforced that appraisal rights are not available in transactions that do not satisfy 8 Del. C. Section 262’s express criteria. In doing so, the court rejected stockholder-plaintiffs’ arguments that appraisal rights should be available in the circumstances.

Akile v. Rite Aid, C.A. No. 2018-0305-AGB (Del. Ch. May 9, 2018) (Transcript).

In early May, the Court of Chancery declined to expedite an M&A challenge premised upon Rite Aid Corp.’s (Rite Aid) alleged failure to disclose that its proposed acquisition by Albertsons Companies, Inc. (Albertsons) triggered appraisal rights.

The acquisition at issue is to be effected by a merger between Rite Aid and a wholly owned subsidiary of Albertsons. Under the merger agreement, each share of Rite Aid stock will be exchanged for a partial share of Albertsons common stock, plus (either an additional fractional share of Albertsons stock or cash, at the election of each stockholder. More ›

Court Of Chancery Explains Contract Reformation Law In Earn-Out Context

Glidepath Limited v. Beumer Corporation, C.A. No. 1220-VCL (Del. Ch. June 4, 2018)

This decision addresses two contracting parties’ divergent expectations relating to whether a delayed closing affected the agreement’s earn-out period.  The parties failed to alter the contract to adjust the earn-out period after a delayed closing had the effect of starting the period prior to closing.  The negatively-affected party argued in favor of reforming the earn-out period to take into account the delayed closing.  As the Court explains, however, reformation under Delaware law requires clear and convincing proof of a mutual mistake in drafting a document or unilateral mistake that is known to the other party who remains silent.  Both circumstances were absent here.

Court Of Chancery Holds That Dr. Pepper And Keurig Reverse Triangular Merger Does Not Trigger Appraisal Rights

Posted In Appraisal

City Of North Miami Beach General Employees’ Retirement Plan v. Dr. Pepper Snapple Group Inc., C.A. No. 2018-0227-AGB (Del. Ch. June 1, 2018)

In a reverse triangular merger, a parent company uses a subsidiary to acquire a target, with that subsidiary then being absorbed by the target.  That is how the Dr. Pepper and Keurig companies structured their deal.  Dr. Pepper would be the resulting parent company, with Dr. Pepper’s stockholders gaining cash but retaining their stock, and with Keurig’s stockholders gaining a controlling interest in Dr. Pepper.  Certain Dr. Pepper stockholders sued claiming that they had appraisal rights to a judicially-determined fair value in connection with the transaction under Section 262 of the DGCL, which were being violated.  More ›

Court Of Chancery Dismisses Derivative Complaint Alleging Disclosure Violations

Steinberg v. Bearden, C.A. No. 2017-0286-AGB (Del. Ch. May 30, 2018)

This is an interesting decision for its discussion of when pre-suit demand on the board is not excused for a derivative complaint alleging the directors made improper disclosures to stockholders.  Applying the well-known Rales test for demand futility, the Court’s focus here was on the absence of particularized allegations from which it was reasonable to infer that a majority of the directors deliberately caused the corporation to issue certain allegedly misleading statements.  When that is the case in a suit relying on a bad faith claim, the board doesn’t face a substantial threat of personal liability capable of excusing demand.

Court Of Chancery Denies Post-Affirmance Request To Increase Fee Award

The Marilyn Abrams Living Trust v. Pope Investments LLC, C.A. No. 12829-VCL (Del. Ch. May 29, 2018)

When a party wins an attorneys’ fee award under the bad faith exception to the American Rule, and the final award is affirmed on appeal, may it also seek fees for successfully defending the appeal back in the trial court?  May the same party seek to increase the original award back in the trial court when it inadvertently omitted some trial-court fees the first time around? More ›

Supreme Court Adopts Rules To Determine If Contract Was Formed

Eagle Force Holdings LLC v. Campbell,  No. 399, 2017 (Del. May 24, 2018)

When have the parties actually formed a contract? In this decision the Supreme Court adopts the Osborn decision as the analytical framework to determine if they manifested agreement, if the essential terms were adopted and so on.