Complex Commercial Litigation

When our client, a large manufacturer of semiconductor chips, was faced with a multi-million dollar claim for breach of a purchase option under an equipment lease, Morris James employed a cost-effective strategy that allowed for a prompt favorable resolution.

Near the end of a master lease on December 31, 2015, our client (“Lessee”) exercised its option to buy leased equipment from its Lessor. The equipment’s purchase price was set and paid by Lessee on February 17, 2016. By the end of the lease, Lessee had paid nearly $65 million to lease the equipment for three-and-a-half years. 

Lessor nevertheless filed an action in Delaware, seeking over $3.5 million from Lessee (or nearly 73% of the equipment’s purchase price) based on Lessee’s alleged 45-day delay in paying the purchase price. Lessor sought liquidated damages for double the rent, late-charge interest on the alleged past-due purchase price, return of the equipment, and attorneys’ fees. 

When a lessee exercises a purchase option in an equipment lease, the terms of the purchase control the parties’ relationship. The former lessor becomes a seller of the equipment, the former lessee becomes the buyer, and as such the seller no longer has rights as a lessor to charge rent for the buyer’s continuing possession of the previously-leased equipment or demand the equipment’s return due to a late payment of the purchase price. The only exception to this rule is an agreement in which the terms governing the purchase option expressly provide for a right to charge rent or the equipment’s return in connection with any period between the expiration of the lease and payment of the purchase price. Absent such an express term, if the payment of the purchase price is untimely or past due, awarding interest on the purchase price fully compensates a seller who awaited payment.

Lessee believed that Lessor’s action was governed by these established legal principles, and presented a discrete legal question: since Lessee timely elected to purchase the equipment, could Lessor still recover rent and enforce other remedies related to the lease of the equipment if Lessee’s payment of the purchase price was past due, or instead, was Lessor limited to seeking an award of interest if the payment of the purchase price was past due?     

To obtain a prompt answer, and to avoid the costs of discovery and unnecessary attorneys’ fees, Morris James proposed to both Lessor’s counsel and the Complex Commercial Litigation Division of the Superior Court to cross-move for partial summary judgment. Morris James posited that the Superior Court’s answer to this discrete question would narrow Lessor’s potential damages from millions of dollars related to the lease of the equipment, to thousands in interest for any past-due payment of the purchase price. This answer would in turn compel a resolution of Lessor’s action. The Superior Court and Lessor agreed to Morris James’ proposal.  

On December 22, 2016, the Superior Court granted Lessee summary judgment that the lease was extinguished and a sales contract to purchase the equipment arose. Thus, Lessor was not entitled to rent or repossession of the equipment under the purchase option in the lease. Instead, if Lessee’s payment of the purchase price was late, Lessor was limited to damages equal to late-charge interest and attorneys’ fees solely for prosecution of its late-charge interest claims.           

As expected, faced with the economic constraints of discovery or an interlocutory appeal and a well-reasoned decision that limited recovery to thousands of dollars, not millions, Lessor opted to settle for a de minimis amount. Our client was grateful not only for this result, but also for Morris James’ cost-effective strategy which brought this action to a quick and favorable resolution.    

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Morris James represented a former executive in an AAA Commercial Arbitration governed by the Large, Complex Commercial Case Rules. The former executive claimed the company breached a series of LLC and LP agreements that provided incentive compensation to him in the form of carried interest. Following expedited electronic discovery, Morris James attorneys handled a two-week arbitration in New York, NY before a three-member panel. As reported on respondent’s public filings, the arbitration panel awarded the former executive approximately $10.5 million in damages and retained rights to certain future profit interest from the entities. The client appreciated the diligence and focus that generated this outstanding result, including how Morris James’ Tax and Business counsel was able to strategically tax-plan the arbitration award into an effective recovery of nearly twice the award amount. 

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Paramount is one of the key recent Court of Chancery M&A decisions primarily relying on Corwin to dismiss post-closing fiduciary duty claims against the merger target’s directors. The Delaware Supreme Court’s decision in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) reaffirmed the power of disinterested, uncoerced, and fully-informed stockholder approval to invoke the business judgment rule and immunize M&A transactions from breach of fiduciary duty claims. In Paramount, while finding that the stockholder vote was fully-informed and uncoerced, the Court of Chancery flagged one of the last remaining wrinkles under Corwin – the “apparent tension” between Corwin and In re Santa Fe Pacific Corporation Shareholder Litigation, 669 A.2d 59 (Del. 1985), which engaged in Unocal review of deal protection measures despite stockholder approval. After observing that the Delaware Supreme Court “did not discuss or expressly overrule” Santa Fe in Corwin, the Paramount decision found it unnecessary to resolve “the apparent tension” between Corwin and Santa Fe because the alleged deal protection measures at issue satisfied Unocal enhanced scrutiny in any event.  In re Paramount Gold and Silver Corp. S’holder Litig., 2017 WL 1372659 (Del. Ch. April 13, 2017) (Bouchard, C.).

 In sum, Delaware courts have applied Corwin to dismiss a number of post-closing challenges to mergers in 2017 and Paramount represents one of the key decisions that illustrates the significance and scope of the protection that stockholder approval affords M&A transactions under Delaware law.

Morris James LLP served as primary counsel to Paramount Gold and Silver Corporation and its former Board Member Defendants Christopher Crupi, John Carden, Michel Stinglhamber, Robert Dinning, Eliseo Gonzalez-Urien, Christopher Reynolds, and Shawn Kennedy.

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When a dispute arises over an attempt to remove directors and officers, the Delaware Court of Chancery can decide the matter promptly. Morris James’ attorneys are experienced in efficiently resolving such disputes, providing certainty to directors and other stakeholders. 

In Schroeder v. Buhannic, Del. Ch. C.A. No. 2017-0746-JTL, 2018 WL 376385 (Jan. 10, 2018), Morris James represented certain directors of TradingScreen Inc. (the “Company”) whom common stockholders purported to remove via written consent. Among other things, the stockholders purported to remove the Company’s Chief Executive Officer from that position and from the board of directors and appoint a new CEO in his place. In response, Morris James brought suit and obtained an expedited adjudication that the removal attempt was invalid in light of the Company’s governing documents, including its certificate of incorporation, bylaws, and a Stockholders Agreement binding all of the Company’s stockholders.  

The stockholders making the removal attempt pointed to language in the Stockholders Agreement providing that stockholders could designate certain directors for election, “one of whom shall be the Chief Executive Officer” of the Company. They claimed this entitled them to choose the CEO. Morris James’ clients argued, by contrast, that this language required the stockholders to maintain the incumbent CEO as a director. The Court of Chancery reasoned that, when “[r]ead in isolation,” both sides’ competing interpretations were reasonable. The Court continued to reason, however, that the common stockholders’ reading was inconsistent with the Company’s other governing documents. As is common, the bylaws provided that the board of directors had sole authority to hire and fire officers. This comports with bedrock Delaware law, which recognizes that appointing, monitoring and replacing a company’s chief executive are among directors’ most important responsibilities. The Court also agreed with Morris James’ clients that, under the Delaware General Corporation Law (“DGCL”), appointing the CEO is “a core board function that only can be limited in the certificate of incorporation (pursuant to Section 141(a) of the DGCL) or bylaws (pursuant to Section 142(b) of the DGCL).” The Court read the Stockholders Agreement in harmony with these core tenets, and reasoned that any attempt to restrict the board’s authority to remove and replace the CEO via such an agreement would be invalid under Delaware law. The Court accordingly entered judgment in favor of Morris James’ clients. 

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