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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 177 posts by Albert J. Carroll.
This books and records decision addresses inspection rights granted under an LLC agreement. It also is useful as a reminder that a mere decline in an entity’s performance is not a sufficient proper purpose supporting inspection. While the “credible basis” standard for suspecting mismanagement is low, it is not that low.
It is often said that a mere prediction of some future event cannot be misleading because such predictions are speculations that cannot be relied upon. However, as this decision points out, stating something is “possible” when it is impossible is misleading and actionable as a disclosure violation.
Briefly, under Corwin, the informed vote of a majority of the disinterested stockholders subjects a transaction to the business judgment rule when the deal does not involve a conflicted controlling stockholder. Additionally, a “controller” may be a group of stockholders when that group acts together in a way that is not just a concurrence of the members’ self-interest. This decision examines both issues. Further, as this decision explains, pleading around Corwin by adequately alleging a disclosure violation is not enough to sustain a complaint—the stockholder still needs to state a non-exculpated claim in order to pursue a damages action.
Court Of Chancery Determines When A Proxy Is Irrevocable And When It Has Jurisdiction To Decide Equitable Ownership In A Section 225 Case
This is an important decision for two reasons. First, it determines when a proxy is irrevocable under Delaware law. To be irrevocable under Section 212 of the DGCL, the proxy must be coupled with an interest. While the “interest” requirement is quite broad, the “coupled” requirement is more strict. The “interest” involved must be held by the person or entity receiving the proxy in order to be “coupled.” Thus, when the proxy is in favor of “X”, but the “interest” supporting the grant of the proxy is for “Y”, the proxy is not irrevocable. This prevents a proxy holder from voting in a way that may be inconsistent with the proxy’s purpose. More ›
This decision has potential far-reaching consequences for shareholder-plaintiff litigation. As is well known, some entrepreneurial plaintiff-side corporate law firms advertise that they are “investigating” matters following a corporation’s report of some misfortune. That is done to attract a stockholder as a potential client. They then use that client’s status as a stockholder of the corporation to bring suit or, often, to demand an inspection under Section 220 of the DGCL of the books and records they need to support a well-pled complaint. This decision holds that when the demand is really generated by the law firm, and not the client, inspection will be denied for failure of an actual “proper purpose.” The case turned on its facts showing that the client had no real interest in what the law firm wanted to investigate. While some will argue that problem may be cured by a better “informed” client, that perhaps is too cynical. We shall see if this decision makes it harder for such plaintiff-side firms to bring such cases in the future.
Some assume that a statute of limitations will not apply in the Court of Chancery. But as this decision illustrates, that is an oversimplification. The Court of Chancery may well use the same statute of limitations period applicable in an action at law, by analogy, under the equitable doctrine of laches. This is especially true when the claim is a legal one seeking legal relief. This decision also illustrates an important point regarding claim accrual. When a claim arises out of an obligation to make a series of payments over time, it is possible the Court will start to run the laches period from the first non-payment. In other words, subsequent non-payments might not constitute a new claim with a new limitations period or otherwise lengthen the time period to sue.
This case illustrates the power of well-functioning special committee to diffuse the potentially corruptive influence of a self-interested controller on a transaction. The result of a well-functioning special committee in this case was that the derivative plaintiff was unable to get around the pre-suit demand on the board requirement. Applying the second prong of the Aronson test for demand futility, the Court interpreted that portion of the test to require the plaintiff sufficiently allege that a majority of the board faces a substantial likelihood of liability for non-exculpated claims. In other words, that a non-exculpated claim may be brought against less than a majority of the board or some other individual at the company, or that the board committed exculpated duty of care violations, will not alone prove demand futility.
With every contract under Delaware law comes the obligation to not act so as to deprive the counter party of the benefit of its bargain. This implied obligation plays a limited role, however, and does not trump the contract’s plain terms. This decision addresses this principle in an earn-out dispute surrounding terms about profits and taxes.
This decision resolves a unique dilemma: what to do when the contracting parties agree to an arbitration clause designating a specific arbitrator (the former mediator in the case) to resolve disputes, but, it turns out, he will not serve in that capacity and the parties cannot agree on a replacement. Under the facts of this case, which involve the JAMS rules, the Court enforces the arbitration clause so that the chosen but unavailable arbitrator can decide whether he should pick his successor as a matter of procedural (as opposed to substantive) arbitrability.
Delaware Supreme Court Sets A New Standard And Clarifies The Spectrum Of Forum Non Conveniens Standards
Under the Cryo-Maid factors, a Delaware court may dismiss a suit on forum non conveniens grounds only after the defendant shows that litigating in Delaware would impose overwhelming hardship. Under the McWane doctrine, when a Delaware action is not the first-filed suit on the subject matter because there is a prior pending suit elsewhere, however, a Delaware court has discretion to dismiss or stay the later-filed suit whether or not the defendant faces overwhelming hardship. This decision deals with a particular convergence of these two doctrines, answering the question: when a first-filed suit elsewhere is procedurally dismissed and thus no longer pending, is a motion to dismiss for forum non conveniens in a later-filed Delaware suit still subject to the more plaintiff-friendly overwhelming hardship standard? The short answer is no. But that doesn’t mean the suit should be subject to the more defendant-friendly McWane standard instead. Rather, as the Court holds here, there is a middle ground, tilted to neither plaintiff nor defendant. The Court rules that the Cryo-Maid factors relevant to a showing of overwhelming hardship control the analysis, but requires only that the factors favor dismissal, rather than establish overwhelming hardship.
This is an important decision became it sets out the most recent rules for determining when a class may be certified. Briefly, the class members claims must be capable of resolution on a class-based basis and not by looking at each class member’s circumstance. While easy to say, that is harder to actually do and this decision explains the reasoning that should be used.
This is an interesting decision for two reasons. First, it settles the choice of law in a coverage case for a nationwide set of claims. The principal place of business for the insured is the law to apply. More ›
Under the Papendick v. Bosch decision, incorporating an entity in Delaware may give rise to long-arm jurisdiction over the entity’s parent, even a foreign one with no other contacts with the State of Delaware. The act of incorporating in Delaware, however, must be an “integral component” of the alleged wrongdoing. This decision explains how to meet that test, which is heightened slightly after the plaintiff conducts jurisdictional discovery. The test was satisfied in this case based on allegations that the defendant, desiring to enter the U.S. market, misappropriated the plaintiff’s trade secrets and incorporated a Delaware entity to profit from the misappropriation.
American courts have long recognized that the public enjoys a First Amendment right of access to judicial proceedings and records. While forceful, the right is only presumptive, and the public’s interest in access may be overcome with an adequate showing of need. More ›