Posts tagged Articles

Section 220 Complaint Dismissed Pursuant to Rule 12(b)(6)

Authored by Albert H. Manwaring, IV
This article was originally published in the Delaware Business Court Insider | January 15, 2014

Section 220 of the Delaware General Corporation Law permits a stockholder to inspect the books and records of a corporation, provided that the demand for inspection meets certain form and manner requirements, and the inspection is sought for a proper purpose—one reasonably related to the interests of stockholders. The Delaware Supreme Court and the Court of Chancery have firmly established that investigation of corporate mismanagement or wrongdoing is a proper purpose under Section 220. To state a proper purpose to investigate mismanagement or wrongdoing of a corporation, a stockholder must, however, allege a "credible basis" to infer possible mismanagement or wrongdoing. The "credible basis" standard has been described as having the "lowest possible burden of proof under Delaware law." Before filing a derivative action, the Supreme Court and the Court of Chancery have encouraged stockholders to use the tools at hand by first seeking inspection of a corporation's books and records in order to successfully plead derivative claims under Court of Chancery Rule 23.1. Further, a Section 220 action for books and records is a summary proceeding, for which the Court of Chancery counsels against moving to dismiss based on its expedited nature and the attendant limited time to adjudicate a dispositive motion before trial. More ›

Share

Chancery Awards Advancement to Officer Accused of Self-Dealing

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | December 25, 2013   

Delaware entities generally provide broad advancement and indemnification rights to encourage directors and officers to serve. Absent such protection, managers bear the costs of defense for claims against them arising out of acts they perform in carrying out their company duties. Qualified officers and directors likely would be reluctant to serve or too risk-averse if every official act they performed were subject to litigation that the manager had to pay personally to defend. More ›

Share

An Evolving Approach to Multijurisdictional Litigation

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | December 11, 2013

The Delaware Court of Chancery continues to evolve its approach to multijurisdictional litigation. Exactly what that court will do next is uncertain. Its most recent decisions seem to rebut the prediction it would enjoin forum-shopping plaintiffs to prevent them from abusing the legal system by filing suits in multiple jurisdictions over the same controversy to try to pressure corporate defendants. More ›

Share

Rule 5.1 Gets Its First Major Test

Authored by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider | July 11, 2012

When the Delaware Court of Chancery adopted Rule 5.1 in late 2012, the court took great pains to inform the public that Rule 5.1 represented a significant departure from the practices under former Rule 5(g). Notwithstanding this admonition from the court, until the court issued opinions addressing the new aspects of Rule 5.1, particularly what type of information met the "good cause" standard articulated in the rule, there was little guidance to flesh out exactly how the court would apply the new rule. More ›

Share

Section 225 Order Stayed Pending Expedited Appeal

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | September 25, 2013 

If there is a dispute over the identity of the directors of a Delaware corporation, the corporation, its stakeholders and those with whom it does business require prompt certainty as to who is in charge. For that reason, Section 225 of the Delaware General Corporation Law provides for a summary proceeding to determine who rightfully comprises the board and officers of a Delaware corporation. While there is a rich body of Section 225 case law, there are few decisions addressing whether the party who loses at the trial court level is entitled to a stay of the court's order pending an appeal. The Court of Chancery recently addressed this issue in Klaassen v. Allegro Development, C. A. No. 8626-VCL (Del. Ch. November 7, 2013), known as Klaassen II, and partially stayed its post-trial order to allow the losing CEO to pursue an expedited appeal. In this decision, the court provided guidance on how it may limit the conduct of a judicially sanctioned board while a party challenges that outcome on appeal. The court also identified a significant issue that, once resolved by the Delaware Supreme Court, likely will affect how parties resolve leadership transitions when they are at odds over how to manage the company's business and affairs. More ›

Share

Must Board Elections Be Fair?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | November 6, 2013

Proxy contests can be as contentious as political elections. Fight letters inundate stockholders. Charges and countercharges abound. But does all this fighting need to follow any rules? In its Oct. 23 decision in Red Oak Fund L.P. v. Digirad, Del. Ch. C.A. 8559-VCN, the Delaware Court of Chancery attempted to answer that question.

Briefly, Red Oak lost its attempt to oust the board of Digirad by a proxy contest. Red Oak then filed suit complaining that the election was conducted unfairly. It claimed Digirad had: (1) leaked false preliminary proxy results, (2) postponed unfavorable quarterly financial results until after the election, and (3) failed to disclose a plan to safeguard valuable net operating losses. More ›

Share

Supreme Court Applies 'Reasonable Conceivability' Test

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | October 23, 2013

Two important aspects of merger agreements are the price and the nature of the post-closing obligations of the sellers to defend or indemnify the buyer for claims arising out of presale conduct. As to the former, parties to merger transactions often bridge valuation gaps with earn-outs.

The selling stockholders receive a cash payment at closing and an additional contingent right to receive a specified amount of future payments depending on how well the business performs. Exactly how much is a function of the parties' written agreement. Similarly, the parties typically negotiate over the nature of the post-closing obligations of the seller to indemnify or defend. When disputes arise, parties calculate the likelihood of success in surviving a motion to dismiss for which the court's standard of review is critical. In the recent case of Winshall v. Viacom International, No. 39, 2012 (Del. Oct. 8, 2013), the Delaware Supreme Court addressed the standard on a motion to dismiss and also contractual provisions in a merger agreement regarding earn-out and indemnification provisions. Its opinion provides guidance to practitioners concerning how to draft provisions that carry out their intent on these points. More ›

Share

Chancery Closing the Door to Multidistrict Litigation

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | October 9, 2013 

There is much agitation over multiforum litigation. Both the typical defendants in such cases, corporations involved in a merger, and the courts decry what they see as duplicative suits over the same dispute in two or more jurisdictions. The past legal rules that might have resolved the issue of what case goes forward no longer seem to work. The Delaware Court of Chancery is now moving forward to develop new approaches to resolve the problems presented by multiforum litigation over the same basic dispute. More ›

Share

Watch Out When Waiving Privilege

 Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | October 2, 2013 

A recent master's opinion in the Delaware Court of Chancery may expand the scope of a waiver of the attorney-client privilege. While not without precedent, the ruling may come as a surprise to some. It warrants caution by all who consider waiving a privileged communication.

Mennen v. Wilmington Trust, Del. Ch. C.A. 8432-ML (September 18, 2013), involved an unusual situation. The defendant, Wilmington Trust, was accused of mismanaging the investments of a large trust. One of Wilmington Trust's defenses was that it was required to follow the investment decisions of an individual co-trustee and the co-trustee was responsible for the allegedly poor investment decisions. That issue turned on the meaning of the so-called "powers and responsibilities" clause of the trust instrument that dealt with the respective roles of Wilmington Trust and the individual co-trustee. Wilmington Trust argued that the trust gave it immunity when it acted on the advice of counsel that the meaning of the powers and responsibilities clause required Wilmington Trust to do what the co-trustee directed. Hence, advice of counsel was central to Wilmington Trust's defense. More ›

Share

Supreme Court Reaffirms Fraud Exception's Narrow Scope

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | September 25, 2013  

More › Share

Are Preferred Stockholders Second-Class Citizens?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | September 4, 2013  

A recent decision of the Delaware Court of Chancery significantly affects the ability of preferred stockholders to cash out their investment in a Delaware corporation. Preferred stockholders need to take notice if they are to realize their investment expectations. The decision in In re Trados Shareholder Litigation, C.A. 1512-VCL (Del. Ch. Aug. 16, 2013), holds that directors elected by the preferred stockholders must protect the interests of the common stock or face potential liability if they favor the interests of the preferred stockholders. More ›

Share

Chancery Court Reaffirms Entire-Fairness Application

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | August 28, 2013 

The standard of review for a transaction involving a controlling stockholder may determine whether the proponents can expect a Delaware court to approve a contested transaction without a trial. If the controlling stockholder is on both sides of a self-dealing transaction, entire fairness is the standard of review and defendants likely cannot avoid a trial because the question of the fairness of the process and price normally raises a triable issue of fact under Kahn v. Lynch Communication Systems, 638 A.2d 1110 (Del., 1994), and its progeny. The Court of Chancery's recent decision in In re MFW Shareholders Litigation, C.A. No. 6566-CS, which is on appeal to the Delaware Supreme Court, provides an exception if the controlling stockholder at the outset of a going-private transaction conditions consummation on negotiation and approval by a fully-informed special committee of disinterested and independent directors and a nonwaivable vote by a majority of the minority stockholders, and forgoes coercive measures that would prevent arm's-length bargaining. More ›

Share

Is Duty of Good Faith and Fair Dealing Still Alive in Del.?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | August 14, 2013 

The Delaware Supreme Court recently issued several decisions that some argue go a long way toward eliminating any duty by controllers of limited partnerships or limited liability companies to act in good faith and to deal fairly. In Norton v. K-Sea Transportation Partners L.P., 67 A.3d 354 (Del. 2013), and Brinckerhoff v. Enbridge Energy, 67 A.3d 69 (Del. 2013), both issued the same day, the court held that a limited partnership agreement effectively exculpated managers of limited partnerships in conflicted transactions. More ›

Share

The Other 'Nessie': An Order Vacating an Arbitral Decision

Authored by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider | July 31, 2013

In Steiner v. Meyerson, 1995 Del. Ch. LEXIS 95 (Aug. 16, 1995), former Delaware Court of Chancery Chancellor William T. Allen famously described claims of corporate waste as "rarest of all — and indeed, like Nessie, possibly non-existent." Perhaps equally rare are decisions vacating an arbitral award. Both the Federal Arbitration Act and the Delaware Uniform Arbitration Act provide for limited judicial review of arbitral decisions and awards, leaving the losing party to an arbitration very little room to argue the award should be vacated. One of the grounds often cited by disgruntled parties as a reason for vacating an award is that the arbitrator exceeded or imperfectly executed his or her powers by issuing an incorrect decision. In keeping with the public policy of limiting judicial review of arbitral awards, however, courts have construed those grounds narrowly, requiring more than a mere disagreement with the arbitrator's interpretation of the law. Instead, courts have uniformly held that to exceed or imperfectly execute his or her powers, the arbitrator must act with "manifest disregard" for the law. As such, most petitions to vacate an arbitral award relying on an arbitrator "imperfectly executing his powers" will fail, and it is the rare case in which an arbitral award is vacated because of manifest disregard for the law. More ›

Share

Are Appraisal Cases Coming Back?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | July 17, 2013

Recently, several stock appraisal cases have turned out well for those stockholders persistent enough to see their claims through a trial. Does this mean that more stockholders will demand that the Delaware Court of Chancery ask that court to determine the value of their shares when they are cashed out in the merger? While it is too early to tell, there are several good reasons to believe that more appraisal cases will be filed.

Before reviewing the recent decisions, however, it is useful to recall why there generally have been so few appraisal cases filed compared to the hundreds of mergers that cashed out stockholders against their will. First, appraisal actions need seriously motivated plaintiffs. Unlike a traditional class action, each stockholder whose stock is to be appraised must actually demand appraisal. You cannot simply go along with the other stockholders as part of a class led by a class representative who may have been solicited by a plaintiffs law firm. At least to date, the plaintiffs bar has not shown much interest in motivating stockholders to join together by individually asking for their appraisal rights. More ›

Share