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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 11 posts in Chancery.
Shareholders of a Delaware corporation have a qualified right to access corporate books and records for a “proper purpose.” One such proper purpose is to investigate potential mismanagement or fiduciary wrongdoing. Indeed, Delaware law encourages shareholders to use this “tool at hand” prior to bringing a derivative action. But this type of inspection has an important precondition: the shareholder must advance some evidence to suggest a “credible basis” from which the Court can infer actionable wrongdoing. As this decision involving Facebook illustrates, the credible basis standard is lenient but not meaningless, and may turn on, among other things, the potential for monetary damages arising out of the alleged wrongdoing. After a trial on a paper record, the Court of Chancery denied an attempt by two stockholders of defendant Facebook, Inc. to obtain additional documents related to the company’s executive compensation practices. More ›
Chancery Enters Sanctions in TransPerfect Litigation for Violating Exclusive Jurisdiction Provision in Court Order
This decision arose out of the dispute between once deadlocked co-owners of TransPerfect Global that played out in the Delaware courts over several years. That heavily-litigated controversy resulted in the appointment of a Custodian by the Court of Chancery and a forced sale of the company as part of a Final Order, with one of the co-owners, Phil Shawe, prevailing as the buyer. More ›
Chancery Finds Safe Harbor Conflicts Committee Not Validly Constituted in Master Limited Partnership Dispute
The Dieckman v. Regency GP LP matter has been in the Delaware courts for several years. The Court of Chancery originally dismissed the complaint attacking a conflicted merger transaction primarily on the ground that plaintiff had failed to plead that a unitholder approval safe harbor provision contained in the limited partnership agreement was inapplicable. The Delaware Supreme Court reversed, holding that plaintiff had adequately pleaded that unitholder approval was secured by false and misleading information and, further, that approval by a Conflicts Committee was tainted by conflicts involving its members. Plaintiff amended his complaint and, following briefing on a motion to dismiss, the Court of Chancery sustained plaintiff’s claim that the General Partner had approved the transaction even though members of its board did not believe that the transaction was in the best interests of the limited partnership. More ›
Chancery Finds “Constellation” of Personal and Professional Relations Between Directors and Controlling Stockholder Excuses Demand
A stockholder plaintiff seeking to bring a derivative claim on behalf of a corporation must first demand authorization from the board of directors or allege why making such a demand would be futile due to the board’s assumed partiality under the alleged facts and circumstances. One way of establishing demand futility is alleging with particularity significant personal or professional ties to an interested party, like a conflicted controlling stockholder. BGC Partners illustrates the type and degree of relationships that may excuse the pre-suit demand requirement and overcome a motion to dismiss under Court of Chancery Rule 23.1. This is a developing area of Delaware law, arguably involving a heightened sensitivity to the significance of personal relationships. As BGC Partners observes, the Delaware Supreme Court has reversed Court of Chancery findings of director independence in the demand futility context three times in the past four years. More ›
Chancery Construes LLC Agreement as Imposing Only the Managerial Duty to Act in Good Faith and Dismisses Claims for Failure to Plead Bad Faith
Under Delaware law, the managers of a limited liability company owe the entity and its members the traditional common law fiduciary duties of care and loyalty. But parties may eliminate or modify those duties under the LLC’s operating agreement and impose contractual duties instead. When they do so, Delaware courts will analyze any challenged conduct of the manager against those contractual duties. Here, the Court of Chancery found the managers’ contractual duty to be a narrow one: act with a good faith belief that their conduct was in or not opposed to the LLC’s best interests. More ›
Chancery Upholds Caremark Claim Based on Alleged Failure to Adequately Monitor Biopharmaceutical Company’s Clinical Trials
The Delaware courts have observed that a Caremark claim for failure of oversight against a board is among the most difficult to sustain. Nonetheless, a set of particularized allegations showing serious oversight shortcomings regarding a mission-critical topic will succeed, as illustrated by the Delaware Supreme Court’s recent decision in Marchand v. Barnhill, 212 A. 3d 805 (Del. 2019). Clovis is the latest example. More ›
The Court of Chancery in several recent decisions has addressed the limited circumstances in which it may have jurisdiction to enjoin future speech. See, e.g., Perlman v. Vox Media, Inc., 2019 WL 2647520 (Del. Ch. Jun. 27, 2019); Organovo Hldgs., Inc. v. Dimitrov, 162 A. 3d 102 (Del. Ch. 2017). Here, Vice Chancellor Glasscock explains the maxim “[e]quity will not enjoin a libel” and the limited potential exceptions. In particular, and subject to constitutional free speech limitations, Chancery may enjoin future speech in the nature of “trade libel” as a remedy for a separate “non-speech” business tort over which it has jurisdiction. More ›
Chancery Denies Director Access to Privileged Materials Involving Counsel to Preferred-Appointed Directors
As several Delaware decisions teach, each director, as a member of the larger deliberative body that is the board, has a fundamental right to access corporate information to carry out his or her fiduciary duties. Thus, as a general rule, a Delaware corporation “cannot assert the privilege to deny a director access to legal advice furnished to the board during the director’s tenure.” There are several exceptions to this rule. More ›
The Court of Chancery is a court of limited jurisdiction. It maintains subject matter jurisdiction only for (i) equitable claims, (ii) when equitable relief is sought and no adequate remedy is available at law, or (iii) where a statute confers jurisdiction. Applying well-recognized equitable jurisdiction principles, the Court dismissed this breach of contract action. Although Plaintiffs sought equitable relief in the form of specific performance and an injunction, their request for equitable relief was merely a “formulaic incantation” rather than substantive. Applying a realistic assessment of the nature of the wrong alleged and the remedy available at law, the Court concluded that a legal remedy for the breach of contract claim was available in the form of a declaratory judgment and damages, and fully adequate. Normally when a court issues a declaratory judgment establishing the parties’ respective contract rights, the court will not presume that the defendant will fail to abide by the court’s ruling in the future requiring an injunction to secure performance. A real threat of continuing injury must be shown, which was absent here. More ›
Unlike most U.S. states and the federal legal system, Delaware retains the historic distinction between courts of law and courts of equity. In the absence of a statute granting it jurisdiction over specific claims, the Delaware Court of Chancery has subject matter jurisdiction only where a complaint (i) states an equitable claim, or (ii) seeks an equitable remedy in circumstances where there is no adequate remedy at law. Here, the Court of Chancery held that it lacks subject matter jurisdiction to adjudicate defamation claims. Specifically, entrepreneur and inventor Stephen G. Perlman and his companies asserted claims of defamation against Vox Media, Inc., and requested relief that included a mandatory injunction requiring the removal of the offending articles from Vox’s websites, a public retraction, and compensatory damages. In response to Vox’s motion for summary judgment, the Court followed its recent decision in Organovo Hlds., Inc. v. Dimitrov, 162 A.3d 102 (Del. Ch. 2017) (Laster, V.C.) and concluded that “in connection with a claim for defamation, the Court of Chancery, in all instances, lacks subject matter jurisdiction to adjudicate the questions of whether a defendant made a false statement about the plaintiff and whether it did so with actual malice.” (emphasis added). Organovo explained that these factual questions have historically been reserved for juries rather than judges, and these determinations are best suited for adjudication by a court of law. Plaintiffs’ effort to couple their defamation claims with requests for equitable relief in the form of an injunction directed at past defamatory statements did not confer equitable jurisdiction, because declaratory relief and money damages generally are adequate remedies at law for defamation claims. The Court explained that equity will intervene to provide injunctive relief only in situations where the defamation claim has been adjudicated in a court of law and legal relief has failed to preclude ongoing publication or is otherwise inadequate. Accordingly, because it lacked subject matter jurisdiction, the Court dismissed the plaintiffs’ claims, but gave the plaintiffs the option to transfer the case to Delaware’s Superior Court, a court of 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.