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

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Showing 161 posts in Derivative Claims.

Court Of Chancery Dismisses Complaint Alleging Aiding and Abetting Claim

Posted In Derivative Claims

Tilden v. Cunningham, C.A. 2017-0837-JRS (October 26, 2018)

This is an interesting decision for many reasons. It includes a comprehensive analysis of when demand on a board is not excused, when ignoring a forum selection clause constitutes prejudice sufficient to invoke a laches defense and why a named plaintiff cannot also be the attorney on the complaint. Perhaps its more lasting impact will be its holding that when directors are exculpated by a 102(b)(7) defense there cannot be an aiding and abetting claim against a third party who facilitated the actions alleged to be a breach of fiduciary duty.

Delaware District Court Applies Delaware Demand Standards

Posted In Derivative Claims

Butorin v. Blount, C.A. No. 15-283-LPS (D. Del. September 30, 2018)

In this decision, the Delaware Federal District Court applied the Delaware tests for deciding if demand is excused by the facts alleged in a derivative complaint. In dismissing the complaint, the Court held that simply pleading the Board should have known of business problems is not enough to excuse demand. The decision also notes several other defects in the complaint.

Court Of Chancery Declines To Approve Derivative Settlement

Posted In Derivative Claims, Settlements

Stein v. Blankfein, C.A. 2017-0354-SG (October 23, 2018)

This is the rare decision that declines to approve the settlement of a derivative suit. The Court rejected the settlement because the proposed terms required the corporation, as a nominal defendant, to release breach of fiduciary duty claims against the director defendants in return for which those directors would agree to make disclosures already required by law. The Court viewed that agreeing to do what you had to do anyway as providing no real consideration for the release of the claims. This result illustrates the scrutiny the Court of Chancery applies to such settlements that affect corporate and stockholder rights.

Court Of Chancery Explains Limits On Duty To Know

Posted In Derivative Claims

Marchland v. Barnhill, C.A. 2017-0586-JRS (September 27, 2018)

When something bad occurs in a business, it now seems inevitable that the directors may be sued. The most popular form of suit now seems to be a securities claim based on a failure to have disclosed the danger the entity faced that has now come home to do it harm. This decision shows why securities claims are in fashion for those events. For as it points out, there is not liability under Delaware corporate law for simply failing to prevent harm to the corporation. Something more is needed to show the directors acted in bad faith, such as a red flag warning of the need to act to prevent the harm. Thus, the decision dismissed a complaint that only alleged the directors did not do as much as might have been done to prevent the bad events from harming their entity.

Court of Chancery Clarifies Nature of Dilution Claims in Charter-Liberty Broadband Equity Issuance and Allows Derivative Challenge to Proceed

Posted In Derivative Claims

Sciabacucchi v. Liberty Broadband Corporation, C.A. No. 11418-VCG (Del. Ch. July 26, 2018)

This is the second notable decision arising out of litigation involving Charter Communication’s equity issuance to its largest stockholder, Liberty Broadband, in connection with other transactions. More ›

Delaware District Court Stays Twitter Derivative Case Pending Securities Action

Posted In Derivative Claims

In re Twitter Inc. Shareholder Derivative Litigation, C.A. No. 18-62-VAC-MPT (D. Del. July 23, 2018)

Several Court of Chancery decisions discuss the appropriateness of staying a derivative action pending a related securities laws action.  Doing so relieves a company from the tension of having to defend against allegations of wrongdoing carried out by its directors or officers while at the same time a stockholder is seeking to prove those same claims against its directors and officers on its behalf.  A stay also has the advantage of allowing the existence and size of any damages to be firmly established.  This is another decision to add to that line of authority.

Court of Chancery Requires Bad Faith Disclosure Violations for Demand Futility

Posted In Derivative Claims

Ellis v. Gonzalez, C.A. No. 2017-0342-SG (Del. Ch. July 10, 2018)

The pre-suit demand on the board requirement for derivative litigation usually is not excused solely by a sufficiently pled disclosure violation.  Rather, as held in this decision and recently in Steinberg v. Bearden, 2018 WL 2434558 (Del. Ch. May 30, 2018), to excuse demand on an independent, disinterested, and duty-of-care-exculpated board on the basis that the directors face a substantial risk of liability for a disclosure violation, the complaint must sufficiently plead the disclosure violation was the product of bad faith.  Absent sufficient non-conclusory facts on this point, the complaint will be dismissed.

Court Of Chancery Dismisses Derivative Complaint Alleging Disclosure Violations

Posted In Derivative Claims

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 Explains When Directors Lack Independence To Consider Pre-Suit Demand

Posted In Derivative Claims

In Re Oracle Corporation Derivative Litigation, C.A. No. 2017-037-SG (Del. Ch. Mar. 19, 2018)

Delaware law requires a derivative plaintiff to make a pre-suit demand on the board unless excused as futile.  Because some level of social and business ties are common among the director-class and because such ties to an interested party is one potential path to successfully alleging a director lacks independence to impartially consider a pre-suit demand, such relationships are an oft litigated topic in the demand context.  Frequently, such connections even when considered collectively are found not to rise to a level negating a director’s ability to consider a demand.  But, as this decision explains, sometimes they are.  While each director-by-director assessment is a highly-factual question, this case is a worthwhile read to understand the type and magnitude of relationships that might call into doubt one’s independence.

Court Of Chancery Holds Demand Is Not Excused When Only Best Practices Were Not Followed

Posted In Derivative Claims

Wilkin v. Narachi, C.A. 12412-VCMR (February 28, 2018)

Demand on directors is not required when it is alleged that they have violated a statute or rule. But when the claim is only that they violated the "best practices” suggested by an agency, that is not enough to excuse demand on the board.

Delaware Supreme Court Gives Preclusive Affect To Prior Dismissal In Wal-Mart Derivative Litigation

Posted In Derivative Claims

California State Teachers Retirement System v. Alvarez, No. 295, 2016 (Del. Jan. 25, 2018)

This is an important decision clarifying the rules regarding the preclusive effect a dismissal of a derivative suit may have on a similar suit pending or brought later in Delaware.  This litigation saga involving a bribery scandal at Wal-Mart took some interesting turns, ping-ponging between the Delaware Court of Chancery and the Delaware Supreme Court.  More ›

Delaware Supreme Court Explains When Derivative Case May Be Dismissed

Posted In Derivative Claims

City of Birmingham Retirement and Relief System v. Good, No. 16, 2017 (December 15, 2017)

This decision explains again that actual or constructive knowledge of persistent corporate wrongdoing is needed before there is a substantial likelihood the directors may be liable and thus demand is excused. The Chief Justice's modest dissent points out that the facts are not fully developed at the motion to dismiss stage and he thought the complaint was good enough to warrant further discovery. This points out a potential problem in Delaware law. It will be a rare case where the board of director minutes provide clear notice of bad corporate conduct without some sort of corrective measure also promised. How sincere those promises are is hard to gauge just based on the minutes. Hence, pleading a case good enough to survive a motion to dismiss is getting harder.

Court Of Chancery Explains Caremark Claims

Posted In Derivative Claims, Fiduciary Duty

Oklahoma Firefighters Pension & Retirement System v. Corbett, C.A. 12151-VCG (December 18, 2017)

This decision is an exhaustive review of what constitutes a Caremark claim. It makes it clear that merely because the directors were aware of red flags and the corporation later suffered harm that is not enough to support a Caremark case. Instead, the facts must show scienter deliberate violation of the law or a conscious indifference to wrongdoing. What this may mean in practice is that if the board minutes show some effort to correct corporate problems, that may negate a finding of the necessary scienter. More ›

Court Of Chancery Issues A Definitive Opinion on Aronson

Posted In Derivative Claims

Lenois v. Lawal, C.A. No. 11963-VCMR (Nov. 7, 2017)

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.  

Court Of Chancery Explains Demand Excusal Based On Knowing Violations Of Law

Posted In Derivative Claims

Kandell v. NIV, C.A. No. 11812-VCG (Sept. 29, 2017)

Derivative plaintiffs alleging that directors allowed the corporation they serve to violate the law typically face dismissal for failure to make pre-suit demand on the board unless they allege a bad faith breach of the fiduciary duty of loyalty. To survive dismissal, plaintiffs need to sufficiently allege the directors knowingly cause the violation or knowingly failed to act—a very high bar. This decision explains that a knowing violation may be found, as it was here (at the motion to dismiss stage), when the law in question is clear and the illegal corporate practice in question is well known to the board.