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

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Showing 148 posts in Derivative Claims.

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.

Court Of Chancery Upholds Duty Of Care and Loyalty Claims

Posted In Derivative Claims

H&N Management Group Inc. v Couch, C.A. No. 12847-VCMR (Del. Ch. Aug. 1, 2017)

This is a rare case involving apparent lack of care in approving a conflicted transaction and a failure to employ almost any safeguards to ensure fairness. It is worth reading just to see what not to do, particularly when dealing with a very significant business decision to the particular company.

Court of Chancery Advocates New Test Governing Preclusion in Derivative Litigation

Posted In Derivative Claims

In re Wal-Mart Stores Inc. Delaware Derivative Litig., C.A. No. 7455-CB (Del. Ch. July 25, 2017)

This is an important decision holding that just because one derivative litigation was dismissed for failure to overcome the requirement of pre-suit demand on the board, it does not mean a similar derivative suit must be dismissed on the same grounds. Instead, under the rule advocated for in this decision, an earlier dismissal only affects the second suit if the first suit was dismissed after the plaintiff survived a demand futility motion or the board conceded that demand is excused. It is at that point which the plaintiff in the first suit was acting on the company’s behalf and its actions may bind other plaintiffs. Originally stated as dicta in the EZCORP decision, this rule, among other things, prevents ill-prepared and typically rushed derivative complaints from cutting off better prepared complaints. Previously, before a remand in this action, the Court had applied a rule that examined the “adequacy of representation” provided by the plaintiffs in the first suit. This “grossly deficient” representation standard generally favored defendants and made dismissal likely in the second suit. It remains to be seen whether the Delaware Supreme Court will adopt the EZCORP rule as endorsed by Wal-Mart.

Court Of Chancery Declines To Hold Unocal Claim Automatically Excuses Demand

Posted In Derivative Claims

Ryan v Armstrong, C.A. No. 12717-VCG (May 15, 2017)

A derivative plaintiff who fails to make a pre-suit demand on the board must show why demand is excused using particularized facts.  Here, the plaintiff argued that demand was automatically excused by sufficiently pleading a Unocal claim.  Some prior case law supports that argument, but the Court in this case rejected an automatic demand excused rule.  Instead, the Court used the more traditional analysis that required either allegations of self-interest or sufficiently egregious conduct that showed bad faith.  Allegations that the board was motivated by a desire to maintain their positions were not sufficient where the complaint lacked facts showing that keeping their jobs was material to each of them.  Similarly, a decision to adopt an entrenchment device is not alone bad faith.

Court Of Chancery Explains Limits Of The Dual Claims Rule

Posted In Derivative Claims

Dietrichson v. Knott, C.A. 11965-VCMR (April 19, 2017)

Under the well-known Brinckerhoff decision, a claim may be both a direct claim and a derivative claim. When that occurs the complaint need not comply with Rule 32.1 demand requirements. This decision points out that Brinckerhoff is very limited and only claims that involve a dilution of voting rights may be considered dual claims.

Court Of Chancery Rejects Vague Demand Excusal Allegations

Posted In Derivative Claims

LVI Group Investment LLC v. NCM Group Holdings LLC, C.A. 12067-VCG (March 29, 2017)

This is an interesting decision because it applies the rules for determining when a derivative plaintiff, in the LLC context, has sufficiently alleged that pre-suit demand on the board would have been futile.   More ›

Court Of Chancery Limits Cost Recovery Following Successful Appeal

Posted In Derivative Claims

In Re: El Paso Pipeline Derivative Litigation, C.A. 7141-VCL (February 16, 2017)

This decision explains what “costs” are recoverable under Court of Chancery Rule 54 following a successful appeal. While the amounts involved normally do not merit much discussion, the cost of bond for an appeal can be significant when the court below awards a large judgment, like in this case.  As this decision points out, the circumstances surrounding the posting of the bond may determine whether or not it was a “necessary” and therefore recoverable cost.

Delaware Supreme Court Signals Due Process Might Prevent Dismissal Based On Demand Futility Issue Preclusion

Posted In Derivative Claims

California State Teachers Retirement System v. Alvarez, No. 295, 2016 (January 18, 2017)

When a derivative suit is dismissed for the failure to plead demand futility, does that also mean that any other pending derivative suit based on the same facts must be dismissed because the shareholders are precluded from relitigating the issue of demand futility? This is a particularly important question because the Delaware Court of Chancery has held that that issue preclusion applies and dismissal is required. Hence, defense counsel may well seek to obtain a fast dismissal in a favorable jurisdiction when the plaintiffs’ bar rashly files suit outside of Delaware. This Order by the Delaware Supreme Court, which remands such a dismissal for consideration of a Due Process argument, signals that issue preclusion might be inappropriate at the motion to dismiss stage under the circumstances.

Court Of Chancery Explains Pleading Rules For A Caremark Claim

Posted In Derivative Claims

Horman v. Abney, C.A. 12290-VCS (January 19, 2017)

At first look, this decision seems to involve just another unsuccessful failure of oversight Caremark claim against directors. But it is worth reading because it outlines the various theories of a Caremark case and then explains when inferences of utterly ignoring one’s fiduciary duty may be inferred from otherwise neutral facts. The decision makes it clear that the Court will not infer the directors were told of wrongdoing just because wrongdoing occurred, and that once proper safeguards are put in place to avoid illegal actions, there is usually no duty to monitor the monitors without reason to suspect they are not working.

Court of Chancery Explains Role of Records Demand in Alleging Wrongful Pre-Suit Demand Refusal

Posted In Derivative Claims

Andersen v. Mattel, Inc., C.A. 11816-VCMR (January 19, 2017)

This decision examines when pre-suit demand may be excused because the board who refused the demand declines to disclose the report of its investigation when responding. In this case, the board’s unwillingness to disclose the report was not sufficient, standing alone, to show the necessary gross negligence or bad faith in the board’s demand refusal, particularly when the plaintiff has not made a formal request for the report using its books and records rights under Section 220.

The decision is also a good review of what circumstances otherwise might be sufficient to show a board’s demand refusal was in bad faith. In short, where the board’s justifications for refusing the demand falls within the bounds of reasonable judgment, the refusal is not in bad faith.

Del. Supreme Court Finds Demand Excused and Revives 'Zynga' Derivative Claim

Posted In Derivative Claims

Background

The derivative complaint alleged that Zynga's CEO, Chairman and controlling stockholder Mark Pincus, along with certain other top managers and directors were given an exception from the company's standing rule preventing insider sales until three days after an earnings announcement. The exception permitted the insiders to sell 20.3 million shares of stock for $236 million as part of a secondary offering. The insiders sold their shares for $12/share. Following the earnings announcement the market price dropped to $8.52 and following more negative news three months later dropped to $3.18, a 75 percent decrease from the offering price. The complaint alleged wrongdoing by the directors who approved the exception and those who participated in the sales. Of the company's nine directors, the Court of Chancery found that only the two directors who participated in the sale, Pincus & Hoffman, were interested and therefore could not impartially consider a demand. The Chancery Court rejected the argument that the facts alleged in the complaint were sufficient to create a reasonable doubt about the independence of director Siminoff because of an allegation that she was a "close family friend" of Pincus and had a business relationship with Pincus as co-owners of a private plane. The Chancery Court also rejected the argument that directors Doerr and Gordon lacked independence because of investment relationships they had with Zynga and Hoffman and Pincus. More ›

Supreme Court Chips Away at Concept of Direct And Derivative Claims

Posted In Derivative Claims

Just in time for Christmas, on December 20, 2016, the Delaware Supreme Court issued a Christmas present – or lump of coal, depending on your view – in its opinion in El Paso Pipeline GP Company LLC v. Brinckerhoff.  In this opinion, the Supreme Court reversed the Court of Chancery’s opinion holding that claims of a limited partner challenging a drop down transaction between the general partner’s parent and the partnership as a breach of the limited partnership agreement were direct, and therefore survived the merger of the limited partnership after trial with a third party.  The Court of Chancery had awarded $171 million in damages for the breach.  The general partner had argued that the merger extinguished the limited partners’ claims. More ›

Court Of Chancery Examines Whether Derivative Demand Was Wrongfully Refused

Posted In Derivative Claims

Zucker v. Hassell, C.A. 11625-VCG (November 30, 2016) and Kops v. Hassell, C.A. 11982-VCG (November 30, 2016)

Even after a board rejects a plaintiff-stockholder’s demand to bring a derivative litigation, the plaintiff may proceed to bring that derivative action if the plaintiff can show the refusal was “wrongful.”  Having conceded that the directors were not “interested” in the subject of the demand by making the demand rather than suing and trying to allege demand futility, the plaintiff must show that the decision to refuse the demand was a bad faith breach of the duty of loyalty, or a grossly negligent breach of the duty of care.  These two related decisions examine whether plaintiffs met the high bar of sufficiently alleging wrongful refusal.  They illustrate, for instance, how it might not be enough that an investigation proved wrong, or that the company subsequently agreed to a large settlement arising out of the investigated events.

Delaware Supreme Court Finds Pre-Suit Demand Was Excused

Posted In Derivative Claims

Sandys v. Pincus, No. 157, 2016 (December 5, 2016)

When a stockholder files a derivative suit she can avoid dismissal under Rule 23.1’s pre-suit demand-on-the-board requirement by showing that a majority of the directors were not independent enough to fairly consider her demand that the corporation itself file the suit.  This decision clarifies how to decide if a board member is sufficiently independent to fairly consider such a demand.  Briefly, at least two factors will be relevant: close social connections to the target of the suit, and disqualification under the NASDAQ tests for independence. There is no single test that controls, although either one of the aforementioned relationships may be disqualifying under the right circumstances, as the Court found them to be in this case.