Delaware Business Litigation Report

Blue Bell Creameries: Chancery Finds Zapata Committee to Address Derivative Claims is not Available to Conflicted General Partner

Wenske v. Blue Bell Creameries, Inc., C. A. No. 2017-0699-JRS (Del. Ch. Aug. 28, 2019).

In Zapata v. Maldonado, 430 A.2d 779 (Del. 1981), the Delaware Supreme Court established that, even where a derivative plaintiff adequately pleads demand futility, a corporation may retain control over derivative claims by delegating authority to a committee of independent directors.  In this recent decision, the Court of Chancery applied principles of agency law to hold that, at least without prior authorization in a limited partnership agreement, a conflicted corporate general partner generally may not make a similar delegation, because the general partner is a “principal” who inherently retains control over its committee, the “agent.” More ›

Chancery Sustains Claims Against Special Committee Members Concerning Stock Incentive Plan

Reith v. Lichtenstein, C.A. No. 2018-0277-MTZ (Del. Ch. June 28, 2019).

As Reith explains, directors may lose the protections of the business judgment rule and expose themselves to liability if they knowingly or deliberately fail to adhere to the terms of a stock incentive plan, such as by violating a clear and unambiguous provision.  And, as Reith illustrates, Delaware courts may consider a company’s prior public disclosures about a plan’s terms in addressing that issue. More ›

Chancery Addresses Pre-Suit Demand Refusal Standard for Special Committees

City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, C.A. No. 2017-0341-KSJM (Del. Ch. Feb. 12, 2019).

Under Delaware law, stockholders who wish to pursue a derivative claim on the corporation’s behalf face an important decision—whether to make a pre-suit demand on the board to handle the suit itself, or bring the suit oneself and plead that the board cannot disinterestedly and independently consider a pre-suit demand under the circumstances. Neither path is easy.  More ›

Court Of Chancery Requires SLC Member Be A “Director”

Obeid v. Hogan, C.A. 11900-VCL (June 10, 2016)

Under the famous Zapata decision, a board of directors may take control of a derivative case, provided it meets the test set out in that opinion. But may such a board, or the managers in an LLC, delegate that authority to a non-member? This decision says that delegation is not appropriate for an LLC with a management structure similar to a corporation or in an LLC that limits the delegation authority of it member-managers.

Court Of Chancery Enforces Nearly Ironclad Safe Harbor For Conflict Transactions Involving Alternative Entity

Employee Retirement Systems of the City of St. Louis v. TC Pipelines GP Inc., C.A. 11603-VCG (May 11, 2016)

This is an important decision because it enforces a nearly ironclad protection against any attack on the decision of a special committee to approve a conflict transaction for a LLP and an LLC. More ›

Court Of Chancery Rejects SLC Report

London v Tyrrell, C.A. 3321-CC (March 11, 2010)

When should the recommendations of a SLC to not pursue a derivative suit be accepted? As this opinion points out, certainly not when the defendants appoint their relative to the SCL and those that are indebted to them. Nor will the SCL be respected when its members approach their investigation with views fixed before their investigation was performed and when their non-Delaware counsel does not understand Delaware law.

This decision summarizes the Zapata principles for examining the report of a SLC, including a good summary of prior case law.  Apart from the basic rules it sets down on burden of proof, independence and the scope of any SLC investigation [all of which alone are worth reading], the decision's analysis of the internal logic of the SLC report is critical. Put simply, the Court wants the report to make sense under an objective review and when it does not, trouble will follow.

Court of Chancery Explains Role of Special Committee

Louisiana Municipal Police Employees' Retirement System v. Fertitta, C.A. 4339-VCL (July 28, 2009).

This is a major decision with implications for all special committees. The Court denied a motion to dismiss, because the special committee did not stand up to the controlling stockholder. That much is not news. But the decision goes on to at least suggest that a special committee may have more than just the duty to say "no." In addition, a special committee needs to act affirmatively to make the controlling stockholder follow his fiduciary duties.

The decision is very fact specific, and the Court makes it clear that the context of a motion to dismiss strongly affected its analysis. However, it is also clear that those who predicted that  Lyondell v.  Chemical Co v. Ryan, 970 A2d 235 (Del. 2009)  marked a lessening of scrutiny of board action may be wrong.

Court of Chancery Again Rejects a One Person Special Litigation Committee

Sutherland v. Sutherland, C.A. 2399-VCL (Del. Ch. May 5, 2008)

Once again, the Court of Chancery has shot down a motion to dismiss a derivative suit based on the work of a one person SLC. This time while finding the SLC was independent, the Court felt its work was not adequate because of a lack of effort in reviewing accounting records.

The opinion is a useful collection of SLC law, particularly what not to do if you are going to use a SLC.

Court of Chancery Permits Special Committee Discovery

Young v. Klaassan, C.A. 2770-VCL (Del. Ch. April 25, 2008)

The use of a special committee of the board to avoid derivative suits over allegations of breach of duty is well recognized. What is less well known is how to use the work of such a committee. Here the defendants improperly argued that a derivative suit should be dismissed because of the conclusions of a special committee formed after the complaint was filed. That use of information not alleged in the complaint converted the motion to dismiss into a motion for summary judgment and thereby permitted discovery into the work of the special committee.

The opinion also notes the "unusual" nature of the special committee in this case. The committee did not issue a report, barely had its existence disclosed, and otherwise proceeded irregularly. One has to wonder why it was even formed if it was to act so poorly.

SLC Formed After Demand Excused is Not "Too Late"

In re infoUSA, Inc. Shareholders Litigation, Consol. C.A. No. 1956-CC (March 17, 2008).

A special litigation committee was formed by the board of infoUSA, Inc. at the end of December, after a motion to dismiss derivative litigation had been denied and after a finding had been made by the Court of Chancery that demand was excused.   The SLC moved to stay the ongoing derivative litigation in January, seeking a period of 150 days in which it could investigate the substance of the claims in the action.  The plaintiffs opposed such a stay, asserting that the SLC was formed "too late" and should not be allowed to derail the ongoing litigation.

The Court of Chancery rejected this position:  "The fact that I have already determined that demand is excused demonstrates why the board must act by means of a special committee; it does not in any way explain why it cannot act through an SLC."  Consequently, the requested stay was granted.  The Court also rejected as premature any challenge to the independence of the SLC, finding it serves the purposes of judicial economy to do so after the SLC issues its report.  The letter opinion can be viewed here.

Court of Chancery Requires Disclosure By Special Committee

Ryan v. Gifford, C.A. No. 2213-CC (January 2, 2008).

This is an interesting decision because it points out how to do almost everything wrong in using a special committee to investigate accusations of misconduct. The result is that any privilege from disclosure that the work of the special committee may have enjoyed was completely lost and all of its extensive efforts were ordered to be turned over to the plaintiffs in the underlying litigation.

The decision also points out the limits on what its holding may have been in other contexts where the special committee's work was properly used and its privileges maintained.

Court of Chancery Upholds Special Committee Action

Perelegos v. Atmel Corporation, C.A. No. 2320-N (February 8, 2007) The actions of special committees of  a board are often questioned, but this decision strongly affirmed the power of a properly organized and functioning  special committee. Indeed, given that the committee here removed the corporation's founder as its CEO, there can be few corporate actions more important than the act upheld here. There are still limits on that power, however, as the Court of Chancery also held that the board could not cancel the special stockholders' meeting called by the fired chairman to review the acts of the Special Committee. This reflects the strong Delaware respect for the rights of stockholders to vote on who should be on the board. More ›

Court of Chancery Awards Attorneys' Fees Only for Work Devoted to Meritorious Claims

In re Triarc Companies, Inc. S'holders Litig., C.A. No. 16700, 2006 WL 903338 (Del. Ch. Mar. 29, 2006). After the voluntary dismissal of a class action, plaintiffs petitioned the Court of Chancery for attorneys' fees and expenses. The court found that plaintiffs' counsel was entitled to fees for the preparation of the amended complaint and litigation efforts undertaken before the action that caused the voluntary dismissal. Plaintiffs' counsel was not entitled to fees for their work in connection with the original complaint nor for their work performed after the claims in the amended complaint were mooted. More ›

Partial Summary Judgment Denied by Court Of Chancery On "Entire Fairness" And Disclosure Grounds

In re Tele-Communications Inc. Shareholders Litig., C.A. No. 16470, 2005 WL 3547674 (Del. Ch. Dec. 21, 2005), opinion revised and superseded by No. CIV. A. 16470, 2005 WL 3642727 (Del. Ch. Dec. 21, 2005), (revised Jan. 10, 2006)(Westlaw citation not available). This summary judgment action originates from a Consolidated Amended Complaint that alleged nondisclosure of material information <and a lack of fairness of the impugned merger transaction. More ›

Court of Chancery Grants Summary Judgment In Favor Of Defendants Alleged To Have Breached Their Fiduciary Duties By Approving Asset Sale Likely To Result In Zero Value To Equity Owners

Blackmore Partners, L.P. v. Link Energy LLC, C.A. No. 454-N, 2005 WL 2709639 (Del. Ch. Oct. 14, 2005). Plaintiff Blackmore Partners L.P. instituted cause of action against Defendant Link Energy LLC and its directors, alleging breaches of fiduciary duty in connection with the sale of Link's assets for a price likely to leave zero value to Link's equity investors. Defendants moved for summary judgment. More ›