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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Once again, there are demands to reform corporate litigation. (See, e.g., Kevin LaCroix, “Time for Another Round of Securities Class Action Litigation Reform,” The D&O Diary, Oct. 23, 2018.) But once again, the Delaware courts are leading the way to cure the problems that litigation critics complain of most. Recent Delaware Court of Chancery decisions are yet another example of that leadership. We begin to show how that is being done, by outlining the perceived problems.
The critics focus on two types of corporation litigation they claim are serious problems: so-called merger objection lawsuits; and event-driven securities litigation. The principal objection to merger objection lawsuits is that they only allege a proposed merger is improper because the proxy statement asking for stockholders’ approval is inadequate, the alleged problem is then “cured” by defendants’ immaterial supplemental disclosures and the case is dismissed after the plaintiffs lawyers are paid off with a substantial fee. That seems to be tolerating a strike lawsuit that really accomplished nothing but a fee for the lawyers.
The principal objection to event-driven securities litigation is that they are based on a failure to disclose that the company was subject to a serious risk that eventually occurred, depressing the company’s stock price. The critics argue these suits are based on a risk the company did not anticipate and thus could not have disclosed. Thus, such claims lack proof of scienter and again are just lawyer-driven fee generators with fees paid to avoid the costs of defense. More ›
Appraisal litigation is unique under Delaware law. In almost every instance you can think of, once an event provides a right to recover damages (such as a fire caused by negligence), what happens later is relevant to determining the amount of damages. For example, the actual future earnings of a business is relevant to a claim for lost profits. But, that is not always so in an appraisal case. There the valuation of the company involved is determined as of “the point just before the merger transaction ‘on the date of the merger,’” see Merion Capital v. Lender Processing Services, (Del. Ch. Dec. 16, 2016). More ›
Brett Fallon and Brenna Dolphin Author Article on Sanctions Published by the American Bankruptcy Institute
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.
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 ›
Self-Dealing Conduct Supporting Fiduciary-Duty Claims Was Covered by Contractual Duties Imposed in the LLC Agreement
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. The act permits parties to eliminate common-law fiduciary duties, and replace them with contractual duties that are often more limited in scope than default common-law fiduciary duties. While parties may not eliminate the implied covenant of good faith and fair dealing in an operating agreement, the implied covenant only operates to imply terms essential to fill gaps necessary to meet the reasonable expectations of the parties as reflected in the express terms of the operating agreement. More ›
Delaware Rejects Adequate Alternative Forum as an Independent Threshold Consideration for Forum Non Conveniens Applications
The Delaware Supreme Court recently issued an important decision clarifying Delaware’s forum non conveniens FNC law in Hupan v. Philip Morris USA, Consol. No. 526, 2016 (Del. 3/22/2018). Delaware FNC law has long permitted defendants otherwise subject to jurisdiction to seek dismissal of an action if defending it in Delaware would result in an “overwhelming hardship.” In Hupan, the court declined the plaintiffs invitation to adopt the rule followed by the federal courts and a majority of state courts, which requires the court to determine first, as a threshold consideration, that an available alternative forum exists. Instead, the court ruled that the availability of an alternative forum should be considered as part of the FNC analysis, but not as outcome determinative if such a forum is lacking. Although the court’s ruling allows for the possibility of an FNC dismissal even when the plaintiff lacks an alternative forum, the decision affords Delaware control over the use of its limited judicial resources and protection of its citizens from overwhelming hardship when the disputes and litigants have no meaningful contact with Delaware. More ›
On April 6, the Delaware Corporation Law Section of the Delaware Bar Association proposed some major and minor amendments to the Delaware Limited Liability Company Act. If introduced in and approved by the Delaware General Assembly and the governor, one of the most significant changes will involve the provisions of the act dealing with series limited liability companies (series LLCs). The proposed amendments are intended to clarify the characteristics of series LLCs and further facilitate their use. More ›
Parties who form Delaware limited liability companies to organize their business affairs do so to structure their relationships contractually. This enables them to organize the governance and economic rights in a manner tailored to the enterprise they are establishing. They do so secure in the knowledge that the Delaware Limited Liability Company Act expressly provides that it is the policy of the Delaware act “to give maximum effect to the principle of freedom of contract and to the enforcement of limited liability company agreements.” If the parties ever have a dispute over their internal affairs, then a Delaware court will apply well-settled principles of contract interpretation to resolve it. The recent decision of Capone v. LDH Management Holdings, C.A. No. 11687-VCG (Del. Ch. Apr. 25, 2018), illustrates the court’s application of contract law principles to determine that two Delaware LLCs’ affairs were not wound up in compliance with the Delaware LLC Act resulting in the nullification of prior-filed certificates of cancellation. More ›
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 ›
A series of recent Delaware court decisions have caused some plaintiffs law firms to decide stockholder litigation should no longer be filed in the Delaware courts. This article will first explain the background to their views and then discuss whether they are right to be concerned about the future of stockholder litigation under Delaware corporate law. We first wrote about these developments in our April 22, 2017 article, available on our blog. This is an update.
The concern arises out of three developments in Delaware corporate litigation. First, in In re Trulia Stockholders Litigation, 129 A.3d 884 (Del. Ch. 2016), the Delaware Court of Chancery discouraged the filing of so-called “merger objection” suits that attacked almost every merger under Delaware law. The court refused to approve “disclosure-only” settlements of those suits that provide handsome fees to the plaintiffs lawyers in return for modest supplemental proxy disclosures. As a result, the plaintiffs bar largely stopped filing those suits in Delaware state courts and instead filed them in various federal courts alleging securities law violations. That trend has continued, even though the Trulia rationale has been increasingly followed by other courts. More ›
In Arch Insurance v. Murdock, (Del. Ch. Mar. 1, 2018), a D&O insurance coverage dispute, the state Superior Court’s complex commercial litigation division reasoned broadly to hold that, absent a contrary choice of law clause, Delaware law applies to Delaware corporations’ D&O insurance policies, and that Delaware public policy does not prohibit insuring losses from insureds’ breaching the fiduciary duty of loyalty through fraudulent conduct. More ›
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 ›
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 ›
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 ›
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 ›