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Delaware Corporate and Commercial Case Law Year In Review – 2016

Morris James attorneys Lewis Lazarus, Albert Manwaring and Albert Carroll authored an article published in Transaction Advisors titled Delaware Corporate and Commercial Case Law Year in Review – 2016. The article summarizes ten significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past year, including matters such as disclosure-only settlements, appraisal rights, books and records inspections, and the standards of review in shareholder litigation.  Continue reading for the full article. More ›

Morris James Receives Top Legal Rankings in Chambers USA 2014

Posted In News

Thirteen Lawyers and Four Practices Recognized as Top-Tier in Delaware

Morris James LLP is pleased to announce that thirteen attorneys in five separate practice areas have been top ranked among the leading Delaware lawyers in the 2014 edition of Chambers USA: America's Leading Lawyers for Business.  Chambers also ranked four of its practice areas as among the top practices in Delaware including Bankruptcy/Restructuring, Chancery, Intellectual Property and Labor & Employment.  Read more.

Court Of Chancery Explains "Acquiescence"

Posted In Class Actions, M&A

In re Celera Corporation Shareholder Litigation, C.A. 6304-VCP (March 23, 2012)

This is an important decision because it clarifies when a stockholder will be deemed to have acquiesced to a merger, thereby losing her right to continue to litigate.  In short, voting for the merger or accepting a tender offer is acquiescence.  Accepting the merger consideration when the merger is inevitable is not acquiescence.

This decision is also useful for its explanation of how the Court will calculate the fees to be awarded.

Court Of Chancery Resolves Who May Bring Derivative Claims After Dissolution

Matthew v. Laudamiel, C.A. 5957-VCN (February 21, 2012) This decision resolves who may bring a derivative claim after an LLC has been dissolved.  The argument made by 1 of the parties was that after dissolution, any member may bring a derivative claim directly.  The Court rejected that argument and concluded that the claim still must be brought in the name of the LLC and that a petition might also be filed to have the entity restored to bring such a claim or for a trustee to be appointed to do so. This decision also dealt with an important jurisdictional issue under the so-called conspiracy theory.  It holds that the alleged conspirator must be aware that the conspiracy involves an action in Delaware in furtherance of the conspiracy, before the conspiracy is completed and the harm done.

Delaware Federal District Court Adopts ESI Discovery Guidelines

Posted In Discovery
By Edward M. McNally
This article was originally published in the Delaware Business Court Insider   l   January 11, 2012
 
Litigation now costs too much. Pretrial discovery of electronically stored information (known as ESI) is a major cause of this litigation cost escalation. E-mail alone has greatly increased the recording of what used to be private conversations that largely escaped discovery or human memory and facilitated communication that in the past would not have been sent if only because it was too much trouble to write a letter. This trend has only accelerated with the rise of social media. Is all this ESI worth the cost to uncover?

The U.S. District Court for the District of Delaware has now taken a bold step to address the cost of civil litigation due to ESI discovery. The court recently adopted its "Default Standard for Discovery, Including Discovery of Electronically Stored Information." These new standards expand the court's previous ESI standards, first adopted in 2004 and later amended in 2007. As was the case with the 2007 standards, the parties are still free "to reach [their own, different] agreements cooperatively on how to conduct discovery." While the parties to litigation have frequently done just that and crafted their own ESI discovery procedures, the 2007 standards successfully prodded parties to reach agreements and provided useful guidelines to do so. These new standards will have a similar, laudatory effect.
More ›

Morris James Welcomes Bryan Townsend as an Associate in its Corporate and Fiduciary Litigation Group

Mr. Townsend focuses his practice on litigation involving complex corporate, commercial and fiduciary matters. He clerked for Chancellor William B. Chandler III in the Delaware Court of Chancery from 2009-2010 after graduating from Yale Law School in 2009, where he served as Co-Editor-In-Chief for the Yale Journal on Regulation. Mr. Townsend earned an M.Phil. in Chinese Studies from the University of Cambridge in 2006 after attending Peking University (Beijing Daxue) in 2005, where he studied Chinese language, economics, and politics. He received three degrees from the University of Delaware: an Honors B.A. with Distinction in Philosophy and Biology in 2004, and an M.A. and Honors B.S. in Economics in 2003.

Mr. Townsend is a volunteer attorney for the Delaware Office of the Child Advocate, Delaware Volunteer Legal Services, and Widener Law School’s Veterans Law Clinic. He is a director on the board of the University of Delaware Alumni Association and served from 2004-2005 on the University’s Board of Trustees. Mr. Townsend is an ardent supporter of Special Olympics Delaware and is a volunteer Big Brother with Big Brothers Big Sisters of Delaware. For his commitment to leadership in the public service, Mr. Townsend was selected as a 2003 Harry S. Truman Scholar, one of seventy-six individuals nationwide to receive the honor. He is a member of the bars of Delaware (2010) and the United States District Court, District of Delaware (2011).

Jason C. Jowers and James H. McMackin III Become Partners

Morris James LLP is pleased to announce that Jason C. Jowers and James H. McMackin, III became partners, effective January 1, 2012.  David H. Williams, the firm’s Managing Partner, made the announcement and stated “the elections will expand and strengthen several of the firm’s practice groups.”

Jason C. Jowers joined Morris James LLP in 2003 and is a member of the firm’s Corporate and Fiduciary Litigation Group.  He primarily focuses on corporate, alternative entity, and commercial litigation in the Delaware Court of Chancery and the Delaware Superior Court.  Mr. Jowers has litigated matters involving a variety of substantive issues, including:  LLC governance; fiduciary duties of officers and directors of corporations; inspection of books and records of corporations and LLCs; complex contracts; director and officer liability insurance coverage; trade secret misappropriation; and covenants not to compete.  In addition to his corporate and fiduciary litigation practice, he regularly handles pro bono cases before the U.S. District Court for the District of Delaware as a member of the Federal Civil Panel.  Mr. Jowers also serves as Chair of the Delaware High School Mock Trial Competition, and is a member of the Board of the Delaware Law Related Education Center.  He is admitted in Delaware, Pennsylvania, Tennessee, the U.S. District Court of Delaware and the U.S. Court of Appeals, Third Circuit.  Mr. Jowers received his B.A., cum laude, With Honors, in 2000 from Rhodes College and his J.D., in 2003, from The George Washington University Law School.  While in law school, he was the Regional Champion and National Quarterfinalist in the Association of Trial Lawyers of America's Student Trial Advocacy Competition in 2003.

James H. McMackin, III joined Morris James LLP in 2004.  In his employment, education and governmental relations law practice, he appears before the Delaware courts, arbitrators and administrative bodies. Mr. McMackin frequently counsels and represents clients on matters involving non-compete agreements, suits alleging discrimination and retaliation, and contractual obligations.  He serves as counsel in negotiating and drafting contracts and complying with Delaware education laws.  Mr. McMackin is a former chair of the Labor and Employment Section of the Delaware State Bar Association and a frequent panelist and presenter on employment and education law topics.  Mr. McMackin received his B.A. in 1996 from Muhlenberg College and his J.D., cum laude, in 2002 from Widener University School of Law.  He was an Intern for The Honorable Jane R. Roth, U.S. Court of Appeals, Third Circuit.  Mr. McMackin was a Honey F. Colby Memorial Scholarship recipient and a member of the Moot Court Honor Society, Phi Delta Phi Society and the Phi Kappa Phi Society.  Mr. McMackin is admitted in Delaware, the U.S. District Court, District of Delaware and the U.S. Court of Appeals, Third Circuit. 

Poison Pill Limbo: How Low Can It Go?

by Peter B. Ladig
Published in the Delaware Business Court Insider | September 07, 2011

A few months ago the pop culture writer Chuck Klosterman published a short article addressing a question I have pondered myself, although far less articulately than Klosterman discussed it: Is there a speed at which the human body cannot run any faster?

Put another way: Is there a point at which the record for the 100 meter dash is so low that it cannot be broken because the human body simply cannot exceed it, or could the record always be lowered? The general consensus was that there probably is a limit, but no one knows what the limit is, and a sprinter's belief in his ability to continually break the record generated better performances.

The limits of the human body are, of course, a long way from the poison pill jurisprudence of the Delaware courts, but a question with a similar genesis can be asked: Is there a lower limit for poison pill triggers? In 2010, the Delaware Supreme Court in Versata Enterprises Inc. v. Selectica Inc. affirmed the decision of the Court of Chancery upholding the adoption of a poison pill with a 5 percent holding trigger.

Indeed, the Supreme Court upheld the adoption of the poison pill, the dilution below 5 percent of the stockholder that intentionally triggered the pill, and the adoption of a second poison pill, again with a 5 percent holding trigger. In reaching this conclusion, the Supreme Court found that despite the low trigger point for the poison pill, the pill was not preclusive because it was not "realistically unattainable" for an insurgent to wage a successful proxy contest with a 5 percent trigger. The Supreme Court added that the shareholder advisory firm RiskMetrics Group supports rights plans with a trigger below 5 percent on a case by case basis if adopted for the purpose of preserving net operating losses, as was the case in Selectica. More ›

Intersection Between Fiduciary Duties and Contract Rights May Be Headed For a Showdown

Posted In Fiduciary Duty

by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider l 08.17.2011

In recent years, the tension between fiduciary duty principles and contract rights, particularly with respect to fiduciary duties in unincorporated entities, has received a great deal of attention from the members of the Delaware judiciary in their written opinions and in extrajudicial commentary.

On the one hand, many decisions of the Court of Chancery have held that fiduciary duties apply in unincorporated entities unless specific language eliminates those duties. On the other, Chief Justice Myron T. Steele wrote an article in the 2009 American Business Law Journal that stated, "Delaware courts should not apply default fiduciary duties even if the parties have not specifically provided for the elimination of fiduciary duties."

Although the Delaware Supreme Court has not yet directly addressed whether fiduciary duties apply to unincorporated entities by default, it has held — in the 2010 case Nemec v. Shrader — that the exercise of contractual rights is not subject to fiduciary duties.

The tension between fiduciary duties and contract principles in unincorporated entities was visited again in the Court of Chancery's recent opinion in Paige Capital Management LLC v. Lerner Master Fund LLC. Although the court's opinion addressed many factual and legal issues, the facts of Paige as they relate to fiduciary duty issues are straightforward.

Michele and Christopher Paige, wife and husband, sought to enter the world of hedge fund management. They recruited Lerner Master Fund LLC, the investment arm of the Lerner family, founders of MBNA and current owners of the NFL's Cleveland Browns and English Premier League's Aston Villa Football Club, to provide the hedge fund with $40 million in "seed money" so that the Paiges could use the Lerners' investment to attract other qualified investors. The Lerner group became a limited partner of the hedge fund, but also signed a separate agreement with additional terms and conditions that were applicable to the Lerners' investment. Pursuant to this side agreement, the Lerners were not permitted to remove their investment from the hedge fund for three years, unless, among other things, the Paige entities breached the contract or a fiduciary duty. In exchange, the Lerners received reduced management fees, incentive payments and other benefits.

  More ›

17 Morris James Attorneys Named In Best Lawyers in America® 2012 in 20 Practice Areas

Posted In News

Seventeen Morris James attorneys are listed as being among the most elite lawyers in their practices in The Best Lawyers in America® 2012.

The Best Lawyers in America® has become universally regarded as the definitive guide to legal excellence. Their rigorous research is based on an exhaustive peer-review where leading attorneys cast votes on the legal abilities of other lawyers in their practice areas.

The Morris James attorneys listed in the 18th edition of the guide and the areas of law in which they are recognized include:

Richard P. Beck

Litigation – Real Estate (1983)

Real Estate Law (1983)

John M. Bloxom IV

Real Estate Law (2010)

P. Clarkson Collins, Jr.

Corporate Law (2005)

Litigation – Mergers and Acquisitions (2005)

Mary M. Culley

Elder Law (2008)

Keith E. Donovan

Personal Injury Litigation (2009)

Dennis D. Ferri

Medical Malpractice Law (2007)

Personal Injury Litigation – Defendants (2007)

Richard Galperin

Personal Injury Litigation – Defendants (2005)

Richard K. Herrmann

Information Technology Law (2003)

Technology Law (2003)

Francis J. Jones, Jr.

Personal Injury Litigation – Defendants (2008)

Personal Injury Litigation – Plaintiffs (2008)

Gretchen S. Knight

Family Law (2007)

Lewis H. Lazarus

Commercial Litigation (2006)

Corporate Law (2006)

Litigation – Mergers and Acquisitions (2006)

Mary B. Matterer

Litigation – Intellectual Property (2009)

Edward M. McNally

Corporate Law (2005)

Litigation – Mergers and Acquisitions (2005)

Mark D. Olson

Tax Law (2011)

Bruce W. Tigani

Tax Law (2011)

David H. Williams

Education Law (2007)

Employment Law – Management (2007)

Labor Law – Management (2007)

Litigation – Labor and Employment (2007)

(Year indicates first year listed in practice area)

17 Morris James Attorneys Named In Best Lawyers in America® 2012 in 20 Practice Areas

Posted In News

Seventeen Morris James attorneys are listed as being among the most elite lawyers in their practices in The Best Lawyers in America® 2012.

The Best Lawyers in America® has become universally regarded as the definitive guide to legal excellence. Their rigorous research is based on an exhaustive peer-review where leading attorneys cast votes on the legal abilities of other lawyers in their practice areas.

The Morris James attorneys listed in the 18th edition of the guide and the areas of law in which they are recognized include:

Richard P. Beck
Litigation – Real Estate (1983)
Real Estate Law (1983)

John M. Bloxom IV
Real Estate Law (2010)

P. Clarkson Collins, Jr.
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)

Mary M. Culley
Elder Law (2008)

Keith E. Donovan
Personal Injury Litigation (2009)

Dennis D. Ferri
Medical Malpractice Law (2007)
Personal Injury Litigation – Defendants (2007)

Richard Galperin
Personal Injury Litigation – Defendants (2005)

Richard K. Herrmann
Information Technology Law (2003)
Technology Law (2003)

Francis J. Jones, Jr.
Personal Injury Litigation – Defendants (2008)
Personal Injury Litigation – Plaintiffs (2008)

Gretchen S. Knight
Family Law (2007)

Lewis H. Lazarus
Commercial Litigation (2006)
Corporate Law (2006)
Litigation – Mergers and Acquisitions (2006)

Mary B. Matterer
Litigation – Intellectual Property (2009)

Edward M. McNally
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)

Mark D. Olson
Tax Law (2011)

James W. Semple
Commercial Litigation (2009)

Bruce W. Tigani
Tax Law (2011)

David H. Williams
Education Law (2007)
Employment Law – Management (2007)
Labor Law – Management (2007)
Litigation – Labor and Employment (2007)

(Year indicates first year listed in practice area)

Unliquidated Derivative Claims Continue to Have Little Value

This article was original published in The Delaware Business Court Insider | 2011-07-06

On May 31, Vice Chancellor Leo E. Strine Jr. issued an opinion denying a motion for preliminary injunction to halt a merger between Massey Energy Company and an affiliate of Alpha Natural Resources Inc. One of the critical issues in the opinion was the value of the derivative claims Massey had against certain current and former directors and officers arising out of Massey's compliance with federal mining safety regulations.

Massey's attitude toward federal mining safety regulations arguably manifested itself in the Upper Big Branch mine disaster, which resulted in the loss of 29 lives. In his opinion, Strine found that the plaintiffs had probably stated a Caremark claim against the directors of Massey and criticized the board of Massey for failing to assess the value of the derivative claims but ultimately refused to enjoin the merger, concluding that the derivative claims did not have the value plaintiffs believed.

While this result has received some negative commentary, is it really a surprise? In fact, the court's analysis is consistent with prior analyses addressing the value of derivative claims in the context of a merger. The fact that the party here is more infamous than many others did not change the analysis under Delaware law.

The plaintiffs valued the derivative claims based on the "aggregate negative financial effect on Massey that the Upper Big Branch Disaster and its Fall-Out has caused." According to the plaintiffs' expert, these damages range from at least $900 million to $1.4 billion. The court, however, rejected this theory, in large part because the computation of the value of the derivative claims was far more complicated than the plaintiffs' theory.

First, even though the plaintiffs had stated a viable Caremark claim against the directors, because of the business judgment rule and the exculpatory provisions in Massey's certificate of incorporation, in order to obtain a monetary judgment against the directors, they would have to prove that the directors acted with scienter — a difficult standard to meet, particularly with independent directors.

Second, the court also found that even as to the autocratic former leader of Massey, Don Blankenship, who was arguably responsible for Massey's approach to mining safety, meeting this standard would be difficult. The court noted that there is a large gap between pushing the limits of federal regulations while accepting minimal loss of life and knowingly endangering the mine itself by putting its very operations at risk. Moreover, Blankenship was not directly in charge of any specific mine, and tying his policies directly to any disaster would be challenging.

Third, proving that the directors acted with scienter may entitle the corporation to a monetary judgment from the directors, but it would simultaneously expose the company to third-party civil liability and potential criminal liability, and potentially deprive the directors of the ability to rely on insurance coverage, all of which would harm the company.

Fourth, after the merger, Alpha will continue to have to address direct claims against Massey from its lost and injured miners, regulatory consequences of the company's mining safety approach, and other elements of the "Disaster Fall-Out." To the extent possible, Alpha will have every incentive to shift that liability to the former directors.

Fifth, it is impossible to determine the potential derivative liability of the directors until Massey's direct liability is determined. Indeed, it is not even in the interest of Massey's stockholders to press their claims of derivative liability now, before third-party civil and criminal adjudication, lest the plaintiffs expose the company to additional liability.

Sixth, the plaintiffs' expert put no value on the ability of the company or its stockholders to collect on a potential $1 billion judgment. The company's insurance policy, even assuming it is available to cover claims against the former directors, is only $95 million. While this is no small amount, it is, as the court put it, "not material in the context of an $8.5 billion merger."

While the vice chancellor was quick to note that the Massey board's approach to valuation of the derivative claims was less than ideal, because of the factors noted above, he found that the plaintiffs had not persuaded him that the merger was unfairly priced because of the failure to value separately the derivative claims. Was this conclusion so unprecedented, however, to justify criticism of the valuation?

Delaware courts previously have been asked to consider the value of unliquidated, contingent claims belonging to the company in the valuation context. These courts have never valued derivative claims at the full value of all potential damages, but instead have considered many of the factors Strine addressed in Massey.

For instance, in Onti Inc. v. Integra Bank Inc., petitioners in an appraisal action argued that their derivative claims should have been valued as an asset of the company in the appraisal proceeding. The stockholders' expert valued the claims at more than $19 million, while the company's expert valued the claims at negative $2.5 million. The court determined that the claims had no value. In reaching that conclusion, the court adopted the theory advanced by the company's expert, that all litigation factors should be considered, including the likelihood of success on the merits, the attorney fees necessary to obtain that result and any indemnification that the company would owe to its directors. Citing to prior precedent, the court noted that "there would be strong logic in including the net settlement value of such claims as an asset of the corporation for appraisal purposes."

Later that same year, the court took a similar approach in Bomarko Inc. v. International Telecharge Inc. The court valued the claim in that case by multiplying the probability of success by the likely amount of recovery while subtracting costs incurred to obtain that result.

More recently, in Arkansas Teacher Retirement System v. Caiafa, the Court of Chancery overruled an objection to a settlement that released claims that the board failed to ascribe any value to federal derivative claims in a merger. After noting that there is no case law supporting the proposition that the board was required to undertake a separate and discrete valuation of the derivative claims pending at the time of the challenged merger, the court reached the same result as Strine did in Massey, albeit with less analysis. That is, the court noted that the claims asserted in the federal action were difficult to win, and even those that had a higher probability of success could not have the $2 billion value the objectors claimed they did. On appeal, the Delaware Supreme Court affirmed the Court of Chancery's decision to overrule the objection for the reasons set forth in the Court of Chancery's opinion.

Given these precedents, is the result in Massey all that surprising? While some contingent claims have been given value, it is the exception, and not the rule, to assign material value to contingent derivative claims. Moreover, in the context of a merger worth billions of dollars, the likelihood is low that derivative claims have material value, particularly when reasonable defenses can be interposed.

But does this decision mean that boards can just eschew any analysis of the value of a derivative claim in the context of a merger? Probably not. The Court of Chancery certainly did not condone the practice, and had the court not been persuaded that the board otherwise acted properly, the failure to do so could have had more importance.

Further, because the exception to the derivative standing rule that entering into a merger for the purpose of extinguishing derivative claims remains viable, particularly in light of the Supreme Court's opinion in Caiafa, failure to value the claims could support the conclusion that a merger was negotiated simply to avoid liability. Finally, not all derivative claims are equal in this context. As Strine noted in Massey, if Massey had a liquidated claim against a former fiduciary reduced to a judgment but failed to get any value for this claim, he could see the substantial unfairness in failing to obtain value for that claim in a merger. Alternatively, if recovery on any derivative claim after a cash-out merger would inure solely to the benefit of the acquirer, then perhaps there would be value to the buyer in obtaining that claim.

Put simply, as with many issues of fiduciary law, the context of the situation is important. What is fairly clear, however, is that unliquidated contingent derivative claims are not ascribed much value, if any, in a merger context, unless a party can demonstrate a reasonable likelihood that the net value of the claim to the company is material.

Peter B. Ladig (pladig@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He represents both stockholders and directors in corporate litigation. The majority of his practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions. The views expressed herein are his alone and do not necessarily reflect the firm or any of the firm's clients.
 

Will Delaware Survive Without A William In Charge?

Posted In News

This article was originally published in the Delaware Business Court Insider | June 29, 2011

There is trouble in Delaware.  For over 40 years the esteemed Delaware Court of Chancery has been almost always headed by a Chancellor named “William.”  From William Duffy, to William Marvel to William Quillen to William Allen and last in the line, William Chandler, the Court has been well served by its Williams.  Now that Leo Strine is about to become the rare Chancellor not named William, concern abounds over his name.  Of course, a past great Chancellor was named Grover, as in Grover Brown, but that was the exception that proves the rule.  Apart from their common name, what made all these Williams special?  That answer can be seen in looking at the characteristics of the last William, Chancellor Chandler who has just retired.

First of all, William Chandler was an honest man in an age when intellectual honesty is not common.  By honesty, of course, I do not refer to financial integrity.  All Delaware judges have had that in recent memory.  Instead, honesty means following binding precedent even when you think it is wrong.  Here, Chancellor Chandler always said what he thought and never hid his reasoning, but followed precedent even if he disagreed with the Delaware Supreme Court.

A great judge has intelligence.  The scholarship of so many Chandler opinions is astonishing for a busy judge.  Just look at the hundreds of footnotes in his recent Air Products decision issued soon after the last hearing and you must wonder how did he find the time.  Intellectual ability made the difference.  Past Chancellors such as William Allen have lasting reputations for their scholarship.  So too will this Chancellor Chandler.

A great judge has energy.  Being a judge requires paying attention to witnesses and lawyers droning on and on and then writing an opinion that decides a complicated case.  That takes stamina.  Chancellor Chandler’s frequent jogging kept him in shape and that was reflected in the energy he brought to the job.

A great judge is a good administrator.  The Court of Chancery under this Chancellor was free from internal squabbling, had a hard working staff of reporters and administrators and consistently provided great service.  While that is a tribute to that staff, it also reflects well on the person in charge – the Chancellor.  This aspect of the job is often overlooked because it is not done in public or with great fanfare.  Yet, it is vital to an effective court.  Moreover, Chancellor Chandler has a great interest in technology.  That has led the Court to be up-to-date not just with electronic fillings but with other innovations such as easy rapid transcription of hearings. 

A great judge has patience.  Chancellor Chandler is among the most patient of human beings.  He was patient with wandering lawyers, pro se litigants, impossible deadlines and constant demands on his time with rarely a complaint.  This characteristic is much more appreciated than some judges might think.  Chancellor Duffy was a small man in stature, but had total command of the Courtroom through his calm, patient demeanor.  Not for him was the sarcastic remark to put down the wrongheaded lawyer.  Chancellor Duffy instead would gently show the errors of that lawyer’s position by his patient explanations.  That is not easy and is often not acknowledged, but is important.  Chancellor Chandler had a similar quiet but effective command of his courtroom.

A great judge is a good listener.  This is more than just being patient.  It is the knack of making the person talking to you feel that you are hearing and considering every word they say.  Chancellor Chandler was the best listener I have ever seen.  He made you feel that you were the only one in the room.  On occasion at some Bar or judicial event, the Chancellor would need to participate in a conference call.  When he did, the telephone literally seemed to be part of his anatomy and even if a streaker ran by he would not blink so intent was his concentration.

A great judge is a faithful public servant.  The Court of Chancery did not need to volunteer to hold mediations and now arbitrations of business disputes in addition to its regular, full docket.  But to keep Delaware as a leader in resolving business disputes, this Chancellor was an early advocate of these additional services to business litigants.  That is a burden that he and the Court took on and that is all done in private without any public appreciation for that extra effort.  That is real public service.

Finally, a great judge enjoys his job.  The constant clamor of litigants and the demands of always being “fair” can make any judge irritable.  That never happened with Chancellor Chandler.  Sure he always ruled his courtroom and could be stern when that was needed.  But day in and day out he was good to be with even in the toughest trial.  Just the joy he took in the new courthouse in Georgetown was a pleasure to see, including giving tours of that courthouse when it first opened.

So what about the nominee to be Chancellor?  Even though he is named “Leo” he is well-suited for this job as Chancellor.  While not as patient as Chancellor Chandler (who is anyway?), Chancellor Strine has the intellectual honesty, intelligence, energy, administrative skills, and commitment to public service of the Williams who preceded him.  The Delaware Bar expects that he will fulfill his promise.
 

Lewis Lazarus Authors Article on Plaintiffs' Pleading Burden in the Court of Chancery

Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 15, 2011

A plaintiff who pleads successfully that a transaction under attack is governed by the entire fairness standard of review instead of business judgment generally stands a good chance of defeating the defendant's motion to dismiss.  That is because when a transaction is reviewed for entire fairness, defendants bear the burden in the first instance of proving at trial the fairness of the process and price.

In two recent cases - Ravenswood Investment Co. v. Winmill and Monroe County Employees' Retirement System v. Carlson - the Court of Chancery clarifies that a plaintiff must still make well-pleaded allegations that a transaction is unfair as to process and price if its complaint is to survive dismissal at the pleadings stage.

Ravenswood involved claims that defendant directors' adoption of a performance equity plan violated fiduciary duties by seeking to dilute the minority stockholders' percentage interest in non-voting Class A shares (only Class B shares had voting rights).  The court noted that the entire fairness standard applied because "where the individuals comprising the board and the company's management are the same, the board bears the burden of proving that the salary and bonuses they pay themselves as officers are entirely fair to the company unless the board employs an independent compensation committee or submits the compensation plan to shareholders for approval."

Because the directors employed no such protective measures, the court held that the entire fairness standard of review applied.  Still, citing Monroe County, the court held that the plaintiff "bears the burden of alleging facts that suggest the absence of fairness."

The court dismissed the plaintiff's complaint because it found he had failed to make well-pleaded allegations that the defendant directors' adoption of the performance equity plan was unfair.  Critical to the court's reasoning was that dilution occurs upon the adoption of any options plan; the question is whether the manner in which the options were issued unfairly diluted the stockholders.

As the defendants in their motion to dismiss did not challenge the plaintiff's claim for unfair issuance of the options, the court found that the plaintiff's allegation of dilution did not suffice to state a claim for unfairness in the adoption of the performance equity plan.

This was so because the plaintiff alleged that "(1) the Performance Equity Plan only authorizes the Board to grant stock options with an exercise price not lower than the market value as of that event, (2) the Defendants already control all of the Company's voting rights through their ownership of its Class B shares, and (3) even if all options authorized under the plan were to be granted to the Defendants they would not obtain a majority interest in the Class A shares... ."

The court noted that although it was true that the Class A shares could vote to approve a merger, the plaintiff made no allegation in his complaint that the adoption of the performance equity plan impaired those voting rights.  The court declined to comment on whether such an allegation may have sufficed to sustain this claim.

The Ravenswood court relied upon the court's holding in Monroe County.  That case involved a challenge to an intercompany agreement that required the plaintiff's company to purchase services and equipment from its controlling shareholder on terms in conformity with (for services) or the same as (for equipment) what the controlling shareholder charged its other affiliates.  The parties agreed that the arrangement the plaintiff attacked was governed by the entire fairness standard of review.

They disagreed as to whether the plaintiff's pleading sufficed to survive a motion to dismiss.

As summarized by the court: "Delaware law is clear that even where a transaction between the controlling shareholder and the company is involved such that entire fairness review is in play, plaintiff must make factual allegations about the transaction in the complaint that demonstrate the absence of fairness. (citations omitted).  Simply put, a plaintiff who fails to do this has not stated a claim.  Transactions between a controlling shareholder and the company are not per se invalid under Delaware law. (citation omitted).  Such transactions are perfectly acceptable if they are entirely fair, and so plaintiff must allege facts that demonstrate a lack of fairness."

In reviewing the complaint, the court found no allegations that the price at which the controlling stockholder provided the services and equipment was unfair.  Instead, the court found that plaintiff's allegations addressed only alleged unfair dealing.

In the absence of an allegation that the company could have obtained the services or equipment on better terms from a third party or any specific allegation of the worth of the services or equipment relative to what the company paid, the court found that the complaint did not make sufficient factual allegations that the intercompany agreement transactions were unfair.  Because the plaintiff chose to stand on its complaint in response to the defendants' motions to dismiss rather than to amend, the court dismissed plaintiff's complaint with prejudice under Court of Chancery Rule 15(aaa).

Together, these two cases clarify that a plaintiff cannot survive a motion to dismiss simply by alleging that a transaction involving a controlling stockholder is unfair.  A plaintiff instead must make particular factual allegations suggesting why the transaction was unfair.  A plaintiff who cannot make such allegations and who stands on a conclusory complaint, as in Ravenswood, may find that its claims are dismissed with prejudice.

Lewis H. Lazarus (llazarus@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group.  His practice is primarily in the Delaware Court of Chancery in disputes, often expedited, involving managers and stakeholders of Delaware business organizations.  The views expressed herein are his alone and do not necessarily reflect the firm or any of the firm's clients.
 

Why Do We Care About 'Poison Pills'?

Posted In M&A, News

This article was originally published in the Delaware Business Court Insider | June 08, 2011
 
Why do so many people care about whether the Delaware courts will continue to uphold the "poison pill" defense to a hostile takeover?  After all, comparatively few lawyers practice merger and acquisition law. Few companies are subject to hostile takeover threats, especially in recent years.  And who really stays up at night worrying about the fight between the two largely unknown companies that were the participants in Delaware's latest hostile takeover battle and the weapon of choice among defenders in such battles, the poison pill?

Yet, since the Feb.15 Court of Chancery decision in the Air Products case, there have been almost too-many-to-count blog postings, journal articles and symposia about that decision and its upholding of a poison pill. Who cares?
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