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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 293 posts by Albert J. Carroll.
Delaware Superior Court Addresses Choice of Law Issues in the D&O Insurance Context and Requires Carriers to Cover Pfizer’s Litigation Costs
Pfizer Inc. v. Arch Insurance Co., C.A. No. N18C-01-310 PRW CCLD (Del. Super. July 23, 2019).
This case from the Delaware Superior Court discusses important D&O coverage exclusion issues that frequently arise during securities litigation. Pfizer sought coverage from its insurers in connection with the defense and settlement of a securities action in the Southern District of New York. Defendants, the excess insurers, denied coverage based on “related wrongful acts” exclusions in the policies. They argued that the action “arose out of” or “shared a common nexus” with another action in the District of New Jersey such that the D&O policies’ exclusion provisions precluded coverage. Noting that the contract interpretation result would likely be different if applying New York law rather than Delaware law, and that the policies lacked a controlling choice of law provision, the Superior Court first applied the Restatement’s “most significant relationship” test to determine which state law should apply. Although some of the Restatement Section 188 factors tipped in favor of New York, the Court ruled that application of Delaware law was most consistent with the parties’ reasonable expectations at the time of contracting and with the Delaware choice of law precedent for D&O policies. For such policies, under Delaware law, the state of incorporation, rather than the state where the corporation is headquartered, has the most significant relationship. This also was consistent with the parties’ choice of Delaware law in the policies to govern arbitration or mediation of their disputes. Applying well-settled Delaware law to the interpretation of the policy provisions, the Court found the two actions were not “fundamentally identical.” Thus, the exclusion did not apply and the insurers were obligated to cover the costs. More ›
Chancery Offers Guidance on When the Limitations Periods Begin to Run For Claims Concerning Breaches of Representations and Warranties and Related Indemnification
Delaware law provides for a default three-year statute of limitations period for breaches of contract, generally applicable to claims for breaches of representation and warranties and related claims for indemnification concerning stock purchase agreements or assets sales. More ›
As this Court of Chancery decision explains, the Delaware standard for imposing oversight liability on a board of directors under a Caremark theory is “exacting” and requires evidence of bad faith. Combined with the heightened “particularized” pleading requirements of Court of Chancery Rule 23.1, stockholders face an uphill battle when pursuing an oversight theory as the basis for liability and for excusing a pre-suit demand on the board. More ›
Chancery Decides Questions of First Impression Regarding Statutory Claims for Unlawful Dividends and Fraudulent Transfers
Enforcement mechanisms available to creditors of Delaware corporations may include, inter alia, claims against directors to recover unlawful dividends under Section 174 of the Delaware General Corporation Law (8 Del. C. Section 174), and fraudulent transfer claims against the corporation and transferees including, where Delaware law applies, under Delaware’s Uniform Fraudulent Transfer Act, referred to as DUFTA (6 Del. C. Section 1301). In JPMorgan Chase Bank v. Ballard, C.A. No. 2018-0274-AGB (Del. Ch. July 11, 2019), Chancellor Andre G. Bouchard of the Delaware Court of Chancery addressed three important questions of first impression concerning standing and limitations periods issues under these statutes. More ›
Chancery Dismisses Merger Challenge Concerning Board’s Delegation of Merger Negotiations and Management’s Undisclosed Compensation Discussions
The ultimate responsibility for considering a merger falls on the board to carry out consistent with each director's fiduciary duties. But management usually takes the lead role in negotiating with the counterparty. It is not uncommon for stockholder plaintiffs to make hay out of a board allowing potentially conflicted members of management to pick up that mantle. Sometimes those circumstances support a claim for breach of fiduciary duty and sometimes they do not. This motion to dismiss decision addresses claims in that context, with the Court of Chancery finding the case falls in the latter category. More ›
Chancery Rejects Second Plaintiff’s Attempt to Correct Pleading Deficiencies Following Dismissal of Aiding and Abetting Claim
Under Delaware law, stating a claim for aiding and abetting a breach of fiduciary duty requires sufficiently alleging knowing participation by the non-fiduciary. That is not an insignificant pleading standard, as this letter opinion illustrates in rejecting a second bite at the apple by a different plaintiff. More ›
As Reith explains, directors may lose the protections of the business judgment rule and expose themselves to liability if they knowingly or deliberately fail to adhere to the terms of a stock incentive plan, such as by violating a clear and unambiguous provision. And, as Reith illustrates, Delaware courts may consider a company’s prior public disclosures about a plan’s terms in addressing that issue. More ›
Citing Trulia and Walgreens Decisions, Federal District Court Orders Plaintiffs’ Counsel to Return Agreed-Upon Mootness Fee
Disclosure-only settlements of stockholder class actions have received increased scrutiny following the Delaware Court of Chancery’s Trulia decision in 2016 and the Seventh Circuit Court of Appeals’ Walgreens decision later that year. Those decisions observed the problem of M&A strike suits, expressed disfavor of disclosure-only settlements in M&A class actions, and significantly raised the bar for getting the required court approval of such settlements. One consequence has been many M&A suits migrating from the Delaware Court of Chancery to federal courts around the country. Another has been defendants more frequently acting to voluntarily moot the claimed disclosure violations through supplemental disclosures. In that instance, the parties then face the choice of either litigating the appropriate mootness fee award to plaintiffs’ counsel for the supplemental disclosures prompted by their claims or, alternatively, privately negotiating the mootness fee award and thus avoiding the judicial process, provided no other stockholders object to the negotiated award. More ›
Plaintiff was assigned a membership interest in the defendant, a Delaware limited liability company, and sought to exercise books and records inspection rights. But the LLC’s operating agreement circumscribed its members’ ability to transfer their interests, stating that any disposition without prior written consent of all members was “null and void,” and otherwise authorized only members to inspect books and records. According to the Court of Chancery, because the transferor never received prior written consent for the transfer to plaintiff, the transfer was void under the LLC agreement, plaintiff was not a member of the LLC, and plaintiff had no right to inspect the LLC’s books and records. In addition, the Court relied on the Delaware Supreme Court’s decision in CompoSecure, L.L.C. v. CardUX, LLC to find that the plaintiff could not rely on equitable theories to validate the transfer. According to the Court, equity can only validate voidable acts, not void acts. And the LLC agreement’s plain language in this case rendered the attempted transfer void, even if it would have been only voidable under common law.
A recent Delaware Supreme Court Order emphasizes the risks associated with the presumptions of public access to court filings and the requirements of Court of Chancery Rule 5.1, which governs the sealing of documents filed with the Court. Rule 5.1 requires a public version of any document filed under seal, with asserted confidential information redacted, to be filed within a certain number of days. At the trial court level, after ruling that the complaint must be unsealed because the parties’ initial completely-redacted public version failed to comply with Rule 5.1, the Vice Chancellor invited the parties to file a motion for reargument with a revised redacted version of the complaint for his consideration. Instead of moving for reargument, defendants filed an application for certification of an interlocutory appeal to the Delaware Supreme Court on the ground that the complaint was subject to confidential arbitration. In accord with the Court of Chancery, the Delaware Supreme Court denied the interlocutory appeal request, ruling that the issue did not meet the standards for certification because the sole issue on appeal was the parties’ compliance with Rule 5.1, and not whether the complaint was subject to confidential arbitration. The Supreme Court noted that the parties potentially could have avoided the claimed irreparable harm caused by unsealing the complaint if they had moved for reargument with a revised redacted version of the complaint that complied with Rule 5.1.
Chancery Denies Corwin Defense Based on Proxy Omissions and Sustains Claims Against Financial Advisor
Under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), Delaware courts generally will dismiss post-closing fiduciary duty claims arising out of M&A deals when the challenged transaction was approved by a fully-informed and uncoerced majority of the company’s disinterested stockholders. Several decisions since Corwin, including this one, have denied motions to dismiss under Corwin, finding the doctrine’s prerequisites were not satisfied. This decision also is notable for sustaining a bad faith claim against directors and claims against the investment bank Jefferies. More ›
Recently, the Delaware Supreme Court held in In re Investors Bancorp, Inc. Stockholder Litigation, 177 A.3d 1208 (Del. 2017) that stockholder approval of director self-compensation plans will shift the standard of review from entire fairness to business judgment only where the stockholders approve a plan that does not involve future director discretion in setting the compensation amounts. In Stein, the Court of Chancery applies Investors Bancorp and declines to dismiss a disloyal compensation claim, notwithstanding that the terms of the challenged compensation plans sought to absolve the directors of self-dealing claims and even though the plaintiff attacked only the compensation amount, not the process by which it was determined. More ›
Delaware Supreme Court Revives Fiduciary Duty Claims in Derivative Lawsuit Concerning Blue Bell’s Listeria Outbreak
As this decision illustrates, while Delaware law imposes a high bar for pleading demand futility and fiduciary oversight claims under what is known as a Caremark theory, the standards are not insurmountable. After Blue Bell Creameries faced a deadly listeria outbreak, recall, and temporary shutdown a few years ago, a stockholder plaintiff sued in the Delaware Court of Chancery alleging breaches of fiduciary duties by two key executives and its board of directors. The stockholder’s derivative claims concerned management’s alleged failure to respond appropriately to food safety issues and the board’s alleged failure to implement any food safety reporting system or to inform itself about the company’s food safety compliance. More ›
Delaware courts construe advance notice by-laws against the drafter in favor of stockholder electoral rights. In this case, the defendants had advance notice by-laws that permitted the company to request additional information for certain purposes after receiving notice of a dissident slate of directors, and required a response within 5 days. Pursuant to that by-law, defendants had sent a questionnaire with over 90 questions to the dissident slate. When the dissidents did not supply the requested information within 5 days, defendants advised that their failure to comply resulted in their nominations being defective. The stockholder supporting the dissident slate sued and asked the Court of Chancery to find the nominations complied with the advance notice by-law and to require that the dissidents be freely presented and votes for them counted. Construing the by-law at issue, the Court held that the plaintiff had established that a portion of questions asked exceeded the permissible scope of information requests under the by-laws. Thus, the failure to answer them was not a basis for finding the nominations invalid. The Court therefore ordered that the nominations be presented and that defendants count votes cast for the dissident slate.
Addressing an issue for which there is a split in authority, the Delaware Superior Court held that a Civil Investigative Demand (“CID”) initiated by government authorities will trigger an insurer’s duty to defend and indemnify an insured. After plaintiff Conduent State Healthcare came under investigation for Medicaid fraud, defendant AIG declined to advance defense costs, arguing that the investigation, by itself, did not constitute an insurable claim under plaintiff’s policy. The Superior Court held that the policy language providing coverage for a “Claim alleging a Wrongful Act” extended to the CID. The Court rejected the argument that “investigating an unlawful act by the insured, is different from alleging an unlawful act,” finding that to be a distinction without a difference. The Court relied upon insurance contract interpretation principles and construed the policy against its drafter, holding that the duty to defend and indemnify should be interpreted broadly in favor of coverage.