Delaware Business Litigation Report

Morris James LLP Welcomes New Attorney Meghan A. Adams

Morris James LLP is pleased to announce that Meghan A. Adams has joined the Firm’s Wilmington office as an associate in its Business Litigation Group. Her practice will focus on Corporate and Commercial Litigation. Ms. Adams’ experience includes stockholder litigation, corporate governance, officer and director fiduciary obligations and the resolution of limited partnership and limited liability disputes. During law school, she served as a Judicial Extern to the Honorable Myron T. Steele, then Chief Justice of the Supreme Court of Delaware. Managing Partner, David Williams, said of Meghan, “We are thrilled to bring such a capable lawyer to our Business Litigation group. Her experience in both the Delaware Court of Chancery and the Delaware Superior Court makes her a great addition to our firm.” Ms. Adams graduated from Widener University School of Law in 2007, ranking in the top 10% of her class and receiving the Dean Santoro Scholarship and Outstanding Service Award. She served as the Articles Editor for The Delaware Journal of Corporate Law at Widener. Meghan received her B.S. in Business Administration from the University of North Carolina at Chapel Hill in 2003, which she attended on a golf scholarship while serving as captain of the women’s varsity golf team. She is admitted to practice law in Delaware and the United States District Court for the District of Delaware. Share

Chancellor Explains When Demand Is Required For Compensation Claim

Friedman v. Khosrowshahi, C.A. 9161-CB (July 16, 2014) Recently derivative suits claim that there is no need to make a pre-suit demand on the board because that board violated the terms of an incentive compensation plan and is thus disqualified from considering a demand it file suit.  As this decision by the new Chancellor points out, the prior case law that excused demand turned on the alleged fact that the incentive plan was clearly violated by the board.  Here, in contrast, the plan might reasonably be interpreted to permit just what the board was accused of doing when it amended the plan to grant the extra incentive the complaint alleged was wrong.  Hence, the board was not disqualified out of fear the members would be held liable for doing what they did to intentionally violate their duties. Share

Stockholder Derivative Actions With Pending Federal Securities Actions

Authored By Albert Manwaring This article was originally published in the Delaware Business Court Insider | July 9, 2014 While not adhering to the first-to-file rule, Delaware courts have long recognized that a stay of an action in favor of another action may be appropriate in the interests of comity and judicial efficiency when there is identity of the parties and issues in the two actions. The Court of Chancery has frequently stayed derivative actions (in favor of federal securities fraud actions) where the derivative action simultaneously seeks to prosecute fiduciary-duty claims based on similar facts and claims for misrepresentations and insider trading, or seeks indemnification from the directors based on a company's potential liability in the federal securities action. In these circumstances, the court has recognized a company may be unfairly prejudiced if forced to adopt conflicting positions and litigation strategies where the company is simultaneously a defendant in the federal securities action and a nominal plaintiff in the stockholder derivative action. Indeed, a company faces an inherent litigation conflict if forced to simultaneously defend against allegations that the directors and the company lacked knowledge of purported wrongdoing in a federal securities action while at the same time, a stockholder asserts derivative claims, on behalf of the same company, against the directors, alleging that they had knowledge of the wrongdoing. More › Share

District Court Explains Class Certification Issues

Skeway v. China National Gas Inc., No. 10-728-RGA (June 18, 2014) This is a useful opinion dealing with when a securities action should be certified as a class action. Share

District Court Reviews Website As Basis For Jurisdiction

Inno360, Inc. v. Zakta, LLC, No. 13-1790-SLR (June 19, 2014) This decision has a good review of when just posting a web page is enough to support jurisdiction over the posting party. Share

Court Of Chancery Explains Member Fiduciary Duty

Xcell Energy and Coal Company LLC v. Energy Investment Group LLC, C.A. No. 8652-VCN (June 30, 2014) The question of whether the members of an LLC owe fiduciary duties to the other members  is dependent on the terms of the LLC agreement. When there is a manager designated by the LLC agreement, the members as members will not ordinarily have fiduciary duties. Share

Court Of Chancery Dismisses Merger Case

Dent v. Ramtron International Corporation, C.A. 7950-VCP (June 30, 2014) There is a general sense that it is hard to have the Court of Chancery grant a motion to dismiss litigation attacking a proposed merger. While that may be true when the merger involves insiders, this decision demonstrates that an arms length transaction subject to typical deal protection provisions is not easily attacked absent some hard facts supporting the claim. Without those well-pleaded facts, the Court will dismiss the suit. Share

Court Of Chancery Upholds Right To Indemnifcation In Face Of Bylaw Amendment

Branin v. Stein Roe Investment Counsel LLC, C.A. No. 8481-VCN (June 30, 2014) Can a company defeat a former officer's claim for indemnification by simply amending its bylaws?  If the right to indemnification has already accrued, such as by the filng of a suit against that director, the short answer is "no." Share

Chancery Court Rejects Trading Restriction as Condition of Receipt

This article was originally published in the Under 8 Del. C. Section 220, stockholders of Delaware companies are entitled to inspect certain books and records of the company upon stating a proper purpose. A long-recognized proper purpose for a books-and-records demand is an interest in valuing one's stock. In The Ravenswood Investment L.P. v. Winmill & Co., C.A. No. 7048-VCN (Del. Ch. May 30, 2014), the Court of Chancery decided the "novel" issue of whether a company, in response to a books-and-records demand, may condition the provision of nonpublic financial information on a trading restriction. Finding that the trading restriction would "inappropriately frustrate a fundamental stockholder right" to value its stock, the court held that the company could not require an agreement on the part of the requesting stockholder not to trade its stock for a certain period of time after receipt of the requested information. More ›

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Court Of Chancery Determines Reasonable Fees

Wayman Fire Protection Inc. v. Premium Fire & Security, C.A. No. 7866-VCP (June 27, 2014) This is the first decision interpreting the "reasonable fee" remedy under the Delaware Computer Misuse Act.  The fee must be in proportion to the results achieved.  A small win leads to a smaller fee. Share

Court Of Chancery Interprets Preferred Stock Rights

Brevan Howard Credit Catalyst Master Fund Limited v. Spanish Broadcasting System Inc., C.A. No. 9209-VCG (June 27, 2014) This is another in line of cases dealing with the statutory limit of using only "legally available funds" to redeem preferred stock.  Recognizing this limit, preferred stock provisions are evolving by adding additional requirement that make the company try harder to find those funds when a redemption right accrues.  Here the Court denied a motion to dismiss when it was not clear the company had done what it committed to do to generate legally available funds. Share

Court Of Chancery Explains Interest Requirement In Demand Test

Cambridge Retirement System v. James, C.A. No. 9178-CB (June 28, 2014) One way to meet the demand excuse requirement to bring a derivative suit is to show that a majority of the board of directors had a personal interest in the transaction under attack.  But does that interest have to be material to their financial position?  This decision clearly explains that a showing of materiality is NOT required when the directors engaged in self dealing.  On the other hand, such a showing of materiality is required when the transaction is with a third party and does not involve a direct benefit to the directors. Share

District Court Explains Scope Of Trade Secret Act

Osco Motors Company LLC v. Marine Acquisition Corp., No. 13-868-RGA/MPT (June 24, 2014) Whether the Uniform Trade Secret Act precludes other claims for the same conduct is an often ignored question by plaintiffs who file multi-count complaints that include a claim under that Act. This decision answers that question by examining the factual basis  for the various claims to see if they substantially overlap. Share

Is the Court of Chancery Reforming Stockholder Litigation?

A real change is going on in stockholder litigation in Delaware. Yet it is largely unnoticed because of the uproar over what will someday be seen as just a Supreme Court decision that did not have a lasting impact. We need a longer perspective to appreciate what is happening. First, however, we need to understand the recent problems in stockholder litigation that have provoked such ire. For several years now, almost every significant corporate merger of public companies has attracted litigation. Lawyers for small stockholders file these suits as soon as a possible deal is announced and even before the details are established. Compounding the costs of this litigation, these suits are often filed in several jurisdictions, forcing companies to defend themselves against the same allegations in multiple forums. The speed with which these suits are filed must mean that little, if any, real factual investigation is done before allegations of wrongdoing are made. It is no wonder corporate defendants find this litigation vexatious. More › Share

Court Of Chancery Explains Covenant Application In LLC Agreement

Allen v. El Paso Pipeline GP Company LLC, C.A. No. 7520-VCL (June 20, 2014) One of the more difficult tasks a court faces is the determination of what complicated LLC agreements mean in terms of dealing with conflict of interest issues.  Considering that LLCs and LLPs are used in large part to permit such conflict deals that might not pass muster in a corporate form, this is a common issue.  First, the Court needs to deal with the form of conflict resolution provided for by the governing agreement. Here, that as not too difficult given the broad discretion given to the conflict committee involved. More difficult, however, is considering if the covenant of good faith and fair dealing is involved to invoke some right the plaintiff can use to assert a claim.  That decision boils down to seeing if there is some gap the covenant might fill in terms of what the operating agreement provides. Here, the Court found that the agreement clearly covered the transaction involved and left no room for some covenant duties to be asserted.  The analysis is a model for others to follow and illustrates how narrow the covenant really is. Share