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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Dismissal of Shareholder Derivative Action on Rule 23.1 Grounds Precludes Relitigation of Different Del. Plaintiffs
The Delaware Supreme Court recently issued an important corporate law decision addressing issue preclusion in the context of multiple shareholder derivative actions. The court ruled in California State Teachers’ Retirement System v. Alvarez, No. 295, 2016 (Del. Jan. 25), that an Arkansas federal court’s dismissal of a shareholder derivative suit for failure to plead adequately demand futility precluded Walmart stockholders from attempting to prosecute derivative claims in Delaware arising from the same misconduct. The court rejected the argument that the failure of the Arkansas plaintiffs to have used books-and-records discovery under Section 220 to assemble their complaint rendered their representation inadequate, or that applying issue preclusion in this context violated the stockholders’ due process rights. Although Delaware strongly encourages plaintiffs to use books-and-records requests to prepare a shareholder derivative complaint, the court concluded that Delaware’s substantial interest in governing the internal affairs of Delaware corporations must yield to the stronger national interests that all state and federal courts have in respecting each other’s judgments. More ›
Morris James LLP has chosen Patricia A. Winston to be a member of the 2018 class of Fellows, participating in a landmark program created by the Leadership Council on Legal Diversity (LCLD) to identify, train, and advance the next generation of leaders in the legal profession.
“This is a singular honor for Patricia Winston,” said Keith Donovan, Managing Partner. “She joins a select group of experienced attorneys from diverse backgrounds who have been recognized for their potential as leaders in their organizations.” More ›
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 – 2017. 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 appraisal rights, duties in the master limited partnership context, director compensation awards, and preclusion in shareholder derivative litigation. Continue reading for the full article. More ›
Most of this decision deals with when a contract is void or voidable. If the signing is in violation of mandatory provisions in the entity’s governing instrument, it is void, but if it only was signed without the needed formality it is voidable. But more interesting, the decision also awards attorney fees under an indemnification provision in a contract that, as the Court noted, may only really apply to third-party claims. The scope of such provision thus remains unclear under conflicting Delaware decisions.
This decision resolves the tricky issue of when the provisions of an LLC agreement do not allow “gap filling” so as to permit a claim for violation of the covenant to act in good faith and fairly. Briefly, when the LLC agreement permits the governing body of an LLC to act in its “sole” discretion and otherwise has an effective limit on the exercise of that discretion [such as permitting deals only with outsiders] then there is no reason to limit the discretion by imposing a duty to act in good faith. Of course, that may also require a waiver of fiduciary duties in the LLC agreement.
When stock is issued in violation of a stockholder agreement, the issuance is “void.” This has great significance because the issuance than cannot be ratified.
HOMF II Investment Corp v. Altenberg, C.A.2017-0293-JTL (Transcript December 13, 2017)
A provision in an LLC agreement that provides for “indemnification" “as incurred” does not provide for advancement. This illustrates that the confusion between advancement and indemnification still exists. If you want advancement, you had better say “advancement.”
The facts underlying this summary judgment decision are rather remarkable. The case is long-pending, and involved years of jurisdictional discovery granted for the purpose of allowing the plaintiff to explore its pleading-stage theory of personal jurisdiction under the so-called conspiracy theory. The gist of that theory is that a Delaware court can exercise personal jurisdiction over all co-conspirators when one commits an act in the State that is central to carrying out the conspiracy. It is a theory oft-invoked but rarely satisfied. And, as this decision demonstrates, it is a theory that could be subject to some abuse by a clever litigant. In this case, the evidence ultimately showed that the plaintiff misled the Court by claiming to be the victim of a Delaware-based conspiracy, when, in fact, the plaintiff was the architect of the very wrongdoing used to advance his conspiracy theory. Thus, some ten years into the litigation, the non-resident defendant was dismissed from the case based on a lack of personal jurisdiction.
Where does your company want to be sued? Of course, the obvious answer is “nowhere.” But in this litigious country that is not realistic. However, to a large extent, companies can chose the forum to decide claims made against them. The choice is not necessarily an easy one, given competing considerations that this article reviews. More ›
This is an important decision clarifying the rules regarding the preclusive effect a dismissal of a derivative suit may have on a similar suit pending or brought later in Delaware. This litigation saga involving a bribery scandal at Wal-Mart took some interesting turns, ping-ponging between the Delaware Court of Chancery and the Delaware Supreme Court. More ›
Stockholder M&A challenges in the Delaware Court of Chancery have declined in the wake of the well-known Trulia (and its federal corollary Walgreens) and Corwin decisions, which respectively reduced incentives for pre-closing M&A challenges by outlining a strict standard of review for disclosure-only settlements; and confirmed that, regardless of whether the process at issue complied with Revlon, transactions approved by an informed and uncoerced stockholder vote are subject to the protections of the business judgment rule. Against this backdrop, the Court’s year-end decision in Lavin v. West Corp., C.A. No. 2017-0547-JRS, 2017 WL 6728702 (Del. Ch. Dec. 29, 2017), is of note, as it endorses the use of books and records demands to help stockholders meet Corwin’s pleading demands. More ›
This books and records decision addresses inspection rights granted under an LLC agreement. It also is useful as a reminder that a mere decline in an entity’s performance is not a sufficient proper purpose supporting inspection. While the “credible basis” standard for suspecting mismanagement is low, it is not that low.
It is often said that a mere prediction of some future event cannot be misleading because such predictions are speculations that cannot be relied upon. However, as this decision points out, stating something is “possible” when it is impossible is misleading and actionable as a disclosure violation.
In one of the most anticipated opinions of 2017, Delaware’s Supreme Court reversed the Court of Chancery’s appraisal decision valuing Dell, Inc.’s shares after its management-led buyout in 2013. In its unanimous en banc decision, the Supreme Court ruled that the Court of Chancery abused its discretion by relying exclusively on its own discounted cash flow (DCF) analysis while affording no weight to the transaction price when valuing the company’s shares at the time of its 2013 going-private merger. So, consistent with its recent decision in DFC Global v. Muirfield Value Partners, the Supreme Court provided context where a deal price should represent strong evidence of fair value. More ›