Posts in Directors

Court of Chancery Holds Board Meeting Is Void

Fogel v. U.S. Energy Systems, Inc., C.A. No. 3271-CC (December 13, 2007).

Directors often think that if they get together that is a real board of directors'  meeting. Not so. As this decision holds, a board meeting is a formal event that must be preceded by the appropriate notice, be conducted by voting on the issues and otherwise be properly called and conducted. Gatherings of even all the directors that do not meet these tests are void.

Moreover, the consequence of holding a meeting void is that actions taken cannot be ratified later. Thus, even when all but one of the company's directors wanted to fire the CEO, their attempt to do so at a haste gathering of all the directors was ineffective.

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District Court Applies Delaware Statute of Limitations Carve Out For Fiduciary Claims, Denies Summary Judgment

Norman v. Elkin, 2007 WL 2822798 (D.Del. Sept. 26, 2007)

In this action the District Court evaluated the application of the statute of limitations to claims that a corporate fiduciary engaged in self-dealing at the corporation’s expense. Plaintiff was a 25% shareholder in a closely-held Delaware corporation with Pennsylvania headquarters, formed to participate in the wireless communications industry. Defendant #1 owned the remaining shares of the corporation, and also served as its President and sole director. Plaintiff alleged that Defendant #1 breached his duties to the corporation when he personally obtained newly-issued communications licenses from the FCC, then sold them along with the corporation’s pre-existing licenses to a third party, keeping the proceeds of the sale himself. Plaintiff further alleged that Defendant #1 took the action without notifying Plaintiff in his capacity as a shareholder, without holding an annual meeting, and without making any disclosure of the sale. Plaintiff sued Defendant #1, along with his wholly owned corporation and another corporate officer, in the Delaware Court of Chancery for breach of contract, unjust enrichment, declaratory relief, and breach of various fiduciary duties. Defendants removed the action to District Court based on diverse citizenship and moved for summary judgment, arguing that all claims were time-barred. More ›

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Court of Chancery Permits Security For Advancement

Thompson v. The Williams Companies, Inc., C.A. No. 2716-VCS (July 31, 2007).

Companies often find that they are required to provide advancement of attorney fees to former directors or others when the company really does not want to do so because of the conduct involved. Here, in a case involving an employee with an advancement  right, the Court held that requiring security for the amounts advanced is appropriate to insure repayment.

Note, however, that this discretion to require security was based on the terms of the provisions providing for advancement. Without that language in a mandatory advancement provision, it is doubtful that a company might require more than the usual and customary undertaking to repay.

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District Court Declines to Exercise Supplemental Jurisdiction Over Fiduciary Duty Claims, Grants Motion to Dismiss

Lemon Bay Partners LLP v. Hammonds, C.A. No. 05-327 (D.Del. June 26, 2007)

 

In this shareholder derivative action for breach of fiduciary duties against various corporate defendants, the Court held that the state law claims asserted so predominated the lone federal claim that exercise of supplemental jurisdiction was inappropriate. Plaintiffs, former shareholders of MBNA Corporation, asserted various claims against the defendants based on breach of fiduciary duties in connection with earnings reports and the merger of MBNA with Bank of America. Defendants moved to dismiss based on lack of subject matter jurisdiction, arguing that the Plaintiffs’ sole claim that rested on federal jurisdiction was so predominated by the state law claims as to make the exercise of the Court’s supplemental jurisdiction inappropriate. The Court concurred with the defendants, concluding that Plaintiffs’ federal law claim bore only a tangential relationship to the rest of the claims. The Court therefore granted Defendants’ motion to dismiss for lack of subject matter jurisdiction.  More ›

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Court of Chancery Upholds Advance Notice Bylaw

Openwave Systems Inc. v. Harbinger Capital  Partners Master Fund I, Ltd., C.A. No. 2690-VCL (May 18, 2007).

Corporate bylaws sometimes require that the company be given advance notice of the intent to nominate anyone for election to the board. When those provisions are not clear, they will be interpreted in the way that expands stockholder rights. However, when the provisions are clear enough to give notice of their minimum requirements, then they will be enforced. That is what occurred here where the winning candidate was disqualified for his failure to comply with a reasonably clear advanced-notice bylaw.

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District Court Applies SEC Rules Amendments to Transaction, Grants Summary Judgment

Levy v. Sterling Holding Co., LLC, 2007 WL 582555 (D.Del. Feb. 13, 2007).

In this shareholder derivative action, the plaintiff shareholder sued two defendants, both of whom occupied board positions with the corporation, for allegedly purchasing stock in the corporation and then selling it at a profit within six months, in violation of Section 16(b) of the Securities and Exchange Act of 1934. After each side filed cross-motions for summary judgment, the SEC adopted Amendments to SEC Rules 16b-3 and 16b-7, which exempt certain transactions from the prohibitions of Section 16(b). Defendants argued that the transaction that formed the basis of Plaintiff’s complaint, whereby Defendant’s preferred stock in the corporation was “automatically” converted to common stock upon completion of an IPO, was an exempt “reclassification” transaction under the SEC Rules. Conversely, Plaintiff argued that the exemption did not apply. The Court found that the SEC had acted within its power in exempting reclassification transactions from Section 16(b), and that as a result of that exemption, Defendants were entitled to judgment as a matter of law.  More ›

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Court of Chancery Voids Bonus Payments

Valeant Pharmaceuticals International v. Jerney, C.A. No. 19947 (Del. Ch. March 1, 2007).

Payment of bonuses to officers and directors often seems so routine that extra care is not required to be sure they are fair. This case shows what can go wrong when fair process and fair amounts are not properly considered.

Because each member of the board was to receive a bonus under the plan in issue, the bonuses were subject to the rigorous entire fairness review by the Court. That involves testing to see if the process used to approve the bonuses was fair in the sense of using appropriate safeguards to protect the corporation's interests and fair in the sense that the amounts involved were within a range of reasonableness. These bonuses failed on both counts.

To begin with, the committee to whom the bonus plan was referred consisted of persons who would receive a bonus and a majority of the committee were closely allied with the CEO who was targeted for a $30 Million bonus under the plan. The consultant they hired came in after the plan was set up and was really only asked to justify the amounts involved.

Second, the amounts were extremely high compared to other bonuses and were for work that had not just been done already before the plan was announced but that had in a sense already been  the subject of prior bonuses. All in all, this was just too much and the Court voided the bonuses. More ›

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Court of Chancery Finds Directors Liable for Inaction

ATR-Kim Eng Financial Corp. v. Araneta, C.A. No. 489-N (Del. Ch. December 21, 2006).

Commentators sometimes wonder when director inattention will ever be so bad so as to warrant finding directors liable in the absence of self-dealing. This was just such a case. Briefly, the board consisted of a majority owner who picked a relative and an employee to constitute the other members of the board of directors. The Court concluded that the two non-controlling directors basically did nothing to carry out their duties to the entity and just accepted at face value everything they were told by the controlling stockholder. As a result, the Court found all the directors liable when the controlling stockholder looted the entity.

The decision is particularly interesting in that it may be an extension of the Delaware Caremark decision to no longer require a "red flag' to hold directors liable for failure to oversee the corporate entity's operations. That extension would apply when there was especially bad conduct and an utter failure by the board to meet or in any way supervise the management of the entity. More ›

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Court of Chancery Grants Limited Inspection Rights

Shamrock Activist Value Fund LP v. iPass Inc., C.A. No. 2462-N (Del. Ch. December 12, 2006).

When seeking to inspect corporate records, the stockholder needs to have a reasonable purpose for doing so. If the stated purpose is to investigate wrongdoing, there must be a real basis to suspect wrongdoing or the demand will be denied. Here the demand was at least partially deficient because allegations of improper conduct seemed to be little more than that the company had not met its predicted financial results. The plaintiff escaped dismissal of its suit on narrow grounds that there were also allegations of a failure to carry out a plan that was more definite than just a prediction,  something closer to a promise that was broken.

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Court of Chancery Resolves Conflict With SEC Rule

Esopus Creek Value LP v. Hauf, C.A. No. 2487-N (Del. Ch. November 29, 2006).

Delaware law requires an annual stockholder meeting. The SEC rules prohibit calling a stockholder meeting when the company is delinquent in its SEC filings. In this case and in its decision in Newcastle Partners LP v. Vesta Insurance Group, Inc., 887 A.2d 975 (Del. Ch. 2005), aff'd., 906 A.2d 807 (Del. Ch. 2005) the Delaware Court of Chancery has resolved this apparent conflict. Here, the Court held that a stockholder meeting should go forward with adequate disclosures to the stockholders entitled to vote on the proposed sale of substantially all of the company's assets. The Court ordered the company to apply to the SEC for an exemption from the rules prohibiting the calling of a meeting. More ›

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Court of Chancery Explains When Directors Are Interested In The Deal

In Re Primedia Inc. Derivative Litigation, C.A. No. 1808-N (Del. Ch. November 15, 2006).

This case dealt with when directors would be considered interested in a deal so as to preclude the application of the business judgment rule and permit the suit to proceed.  Many of the directors were affiliated with the controlling stockholder who had purchased the corporation's preferred stock at a deep discount just before the board voted to redeem that stock at its face value. That decision was justified, it was argued, because the coupon rate on the stock was higher than market rate. The Court held that might well be so, but at the pleading stage it was too soon to accept that as a justification for the purchase that gave the controlling stockholder a big gain. The decision is particularly interesting for its discussion of when directors are considered sufficiently connected to a controlling stockholder so as to preclude application of the business judgment rule. More ›

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Federal Court Permits Motion To Transfer Using Multi-Factor Balancing Test

Weisler v. Barrows, C.A. No. 06-362 GMS, 2006 WL 3201882 (D. Del. Nov. 6, 2006).

Plaintiff, a shareholder of Sycamore Networks, Inc. (“Sycamore”), a Delaware corporation with its principal place of business in Massachusetts, brought this derivative action against several of its directors and officers, including its chairman, CEO and CFO. The complaint alleged six counts: (1) a count against each director for section 14(a) violations of the Securities and Exchange Act of 1934 (“Exchange Act”); (2) one count of disgorgement against four directors under section 304 of the Sarbanes-Oxley Act of 2002 (“Oxley Act”); (3) one count of breach of fiduciary duty against all directors; (4) one count of unjust enrichment against five directors; (5) one count of gross mismanagement against all defendants; and (6) one count of waste of corporate assets against all defendants.

The defendants moved to transfer the matter pursuant to 28 U.S.C. § 1404(a) and the Court granted the motion because it would convenience the parties and witnesses and serve the interests of justice.

The plaintiff alleged that the defendants had jointly and severally breached their fiduciary duties of care, loyalty, good faith, and candor by failing to: (1) discover or prevent the intentional manipulation of stock option grants between 1999 and 2004; (2) prevent the misreporting of earnings that was caused by the manipulation of the option grants; (3) oversee the administration of Sycamore’s stock-based compensation plans; (4) ensure Sycamore operated in compliance with applicable state and federal laws pertaining to dissemination of financial statements; (5) ensure the company did not engage in any improper or illegal practices; and (6) ensure that the company’s financial statements were compliant with GAAP. The conduct is alleged to have violated section 14(a) of the Exchange Act and section 304 of the Oxley Act.

The Court permitted the transfer of the matter on its individualized consideration of the motion under section 1404(a) and on whether it would convenience the parties and witnesses and serve the interests of justice. The Court also held that it was the defendants’ burden to establish the need for transfer. The Court observed that the standard for transfer did not demand a demonstration of compelling circumstances; rather, the defendants only needed to show that the case would be better off if transferred to the other jurisdiction. That inquiry required a “multi-factor balancing test” that consisted of not only the convenience of the parties and the witnesses but also the examination of certain public and private interests. The Court listed the private interests as: (1) a plaintiff’s choice of forum; (2) the defendant’s preference; (3) where the claim arose; (4) the convenience of the parties and witnesses; and (5) the location of the books and records. The Court listed the public interests as: (1) the judgment’s enforceability; (2) practical trial considerations making it easy, expeditious or inexpensive; (3) the administrative difficulty presented in the two fora; (4) local interest in deciding the controversy at home; and (5) the public policies of the fora under consideration. The Court found that the private and public factors weighed in favor of transfer and therefore permitted the defendants’ motion.

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Supreme Court Interprets The "Duty" To Act In Good Faith

Stone v. Ritter,  C.A. No. 93, 2006 (Del. Supr. November 6, 2006).

The Supreme Court has issued the latest Delaware decision to interpret the duty to act in good faith. Indeed, it is possible to read Stone as holding there is no separate duty of directors to act in good faith. While that would be a mistake, the implications of this decision may be far reaching. At the very least, Stone upholds the conventional wisdom in Delaware that under Caremark the directors' duty to act is most easily triggered when there are red flags indicating something is wrong with the way the entity is being operated. A complaint that fails to plead those red flags has a good chance of being dismissed. More ›

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Court of Chancery Interprets Common Merger Clause

ATS, Inc. v. Bachmann, C.A. No. 2374-N (Del. Ch. October 11, 2006). Delaware corporations frequently ask the Court of Chancery to decide if a proposed course of action is appropriate, particularly when the board of directors' fiduciary duties are implicated. In this decision the Court focused primarily on when the Court may provide that guidance and when the matter is not ripe for judicial action. The Court has rejected becoming involved in hypothetical issues not framed by a real world transaction, but more of a "what if" set of questions. Here, the Court accepted one question for its review and rejected others, thereby illustrating how it will deal with those situations. More › Share

Superior Court Grants Defendant Insurers' Motion to Dismiss Because Employees who Served as Directors and Officers Suffered No Loss to which D&O Insurance Coverage Applies

AT&T Corp. v. Clarendon America Insurance, C.A. No. 04C-11-167, 2006 WL 2685081 (Del. Super. Ct. Sept. 18, 2006). This case is part of a larger insurance coverage dispute involving Directors and Officers and Company Liability ("D&O") coverage purchased from certain of the defendants by plaintiff AT&T Corp. ("AT&T") and the company of which AT&T was the majority stockholder, the now-bankrupt At Home Corporation ("At Home"). AT&T sought D&O coverage in connection with several underlying shareholder suits brought against it and certain directors and officers of AT & T and At Home. The court previously decided the potential coverage liability under the AT&T D&O policies but not the At Home policies. See AT & T Corp. v. Clarendon America Ins. Co., C.A. No. 04C-11-167 (JRJ), 2006 WL 1382268 (Del. Super. Ct. Apr. 13, 2006, amended Apr. 25, 2006). At issue in this case are the D&O policies issued by the five defendant insurers to At Home, including the primary insurer and the four excess insurers (collectively, the "At Home Insurers"). The At Home Insurers moved to dismiss AT&T's complaint. More › Share