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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 Explains Contract Interpretation Rules

United Rentals Inc v. RAM Holdings Inc. C.A. No. 3360-CC (December 12 and 21, 2007)

In these two decisions the Court of Chancery sets out how it will interpret a contract. Following the objective theory of contract interpretation, the court searches for the "common understanding" of the parties. It will not hear evidence of a party's subjective mental impressions or unilateral understandings.

However, the court will apply the "Forthright Negotiator Principle" when a contract is ambiguous. Under that approach, a reasonable interpretation of contract language of one of the parties will be binding on the other party to the contract if he knew or should have known of the other party's understanding and did not object to it when the contract was signed. Silence then may be fatal.


Court of Chancery Holds Board Meeting Is Void

Posted In Directors

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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