Delaware Business Litigation Report

Court Of Chancery Examines "Don't Ask, Don't Waive" Clause

In re Complete Genomics Inc. Shareholder Litigation,  C.A. 7888-VCL (November 27, 2012)

This transcript has an excellent review of the case law on deal protection clauses that limit what a Board can do upon receiving a possible better offer.  The Court enjoined compliance with a "don't ask, don't waive" clause in such circumstances.

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Supreme Court Affirms Chancery's Ruling That Managing Member Violated Fiduciary Duties

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | November 21, 2012

In transactions where a majority of directors or a controlling stockholder stands on both sides, the Delaware courts apply the entire fairness standard of review. That standard also applies in the limited liability company or limited partnership context where the parties adopt that standard by contract. While the two prongs of this nonbifurcated standard are well known — fair dealing and fair price — not that many cases have been tried and resulted in a Court of Chancery opinion that is then subject to review by the Delaware Supreme Court.

Gatz Properties v. Auriga Capital, No. 148, 2012 (Del. Supr. Nov. 7, 2012), is the most recent post-trial entire fairness decision by the Delaware Supreme Court. The court's affirmance that the contract at issue adopted the entire fairness standard for affiliated transactions, that fiduciary duties had been breached, that the limited liability company agreement provided no exculpation and that the lower court properly determined damages provides important guidance to practitioners for transactions subject to entire fairness review. More ›

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Supreme Court Reinvigorates Istituto Bancario

Matthew v. Flakt Woods Group SA, No. 150, 2012 ( November 20, 2012)

For some time the conspiracy theory of jurisdiction, first set out in the famous Istituto Bancario decision, has had little success in conferring jurisdiction over foreign entities.  With this new decision by the Delaware Supreme Court, that trend may be reversed.  The key holding is that the defendant should have known that it was involved with a Delaware corporation and  the dissolution of that company as part of the alleged conspiracy was enough to give jurisdiction over the non-US defendant.  While the parameters of this possible extension of jurisdiction are to be determined later, it may be very broad.

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Court Of Chancery Dismisses Improperly Notarized Complaint

Bessenyei v. Vermillion, Inc., C.A. 7572-VCN (November 16, 2012)

This is a troubling decision.  One plaintiff, through the efforts of the other plaintiff who is a lawyer, used a false verification when the complaint was filed. The Court of Chancery requires all complaints be verified.  As a result, the Court dismissed the complaint under the rule of Parfi where the dismissal is on the merits.

Seems right so what is troubling?  Delaware lawyers typically believe their clients when they are sent a verification that the client did what the verification says, appeared before a notary to sign it. This is an odd case because there was some indication that was not being done. Still, how far should we  go?  The short answer is that we need to ask the client: "Did you get this signed in front of a notary like it says"?

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Court of Chancery Dismisses Limited Liability Partnership Act Suit

New Media Holding Company LLC v. Brown,  C.A. 7516-CS (November 14, 2012)

This decision deals with a hole in Delaware jurisprudence.  Generally, the statutes authorizing each form of Delaware entity contain a provision whereby the managers of that entity submit themselves to the jurisdiction of the Delaware courts for acts in their managerial capacity.  But, as this decision points out in dismissing the complaint for want of personal jurisdiction over the defendants, that is not the case under the Delaware limited liability partnership statute.  This seldom used act may need to be amended as a result.

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Court Of Chancery Explains Scope Of Section 225 Case

T.R. Investors, LLC v. Genger, C.A. 3994-CS (November 9, 2012)

 A Section 225 action is supposed to be limited to the narrow question of the composition of a corporation's board of directors.  Subsidiary questions, such as who owns what stock, may be resolved as well but are generally not binding on persons who are not parties to the litigation.  However, as this decision points out, if you are a party and consent to the Court deciding stock ownership in a Section 225 action, you are stuck with the judgment.

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Supreme Court Cautions Whether LLC Managers Have Fiduciary Duties

Gatz Properties LLC v. Auriga Capital Corporation, C. A. 148, 2012 (November 7, 2012)

In the absence of a provision that excludes fiduciary duties, do the managers of a Delaware LLC have those duties?  The Court of Chancery has long said "yes" but this decision of the Delaware Supreme Court says "not so fast."  Instead, the Supreme Court held that the terms of the LLC agreement in this case imposed fiduciary duties on the manager in a self-dealing transaction. Thus, the Court held, it was premature to also hold, as the Court of Chancery did, that under the LLC statute such fiduciary duties existed absent a renunciation of those duties in the agreement.

Will the Supreme Court ever decide that issue and if it does, how will it come out?  Is it time for the Delaware General Assembly to resolve this issue?  If LLCs are ever to be used for more publicly traded entities, their managers will need to have a fiduciary duty.  Trusting to the LLC agreement to protect investors is to ask too much of drafters of such agreements who cannot anticipate every circumstance that may occur.  That calls for the legislature to act.

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Delaware Supreme Court Settles Attorney Sanction Rules

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | November 7, 2012

The Delaware Supreme Court on October 22 decided when and how Delaware lawyers may be sanctioned for the way they conduct litigation. For the first time, that court firmly held that the so-called "objective test" applies in Delaware to determine if a lawyer's conduct is sanctionable under Rule 11. Second, the court held that an attorney is entitled to a hearing where he is able to defend himself before a sanction is imposed. Because the lawyer conduct involved did not violate the objective test, the trial court's sanction was vacated. The decision in Crumplar v. Delaware Superior Court has important implications for the practice of law in Delaware's courts. More ›

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Court Of Chancery Discusses Special Conflict Committees

Allen v El Paso Pipeline GP Company LLC , C.A. 7520-CS (November 5, 2012)

This transcript is noteworthy for 2 reasons.  First, it reflects the Court's view that a conflict committee in an LLC must examine all the important aspects of a proposed transaction before a motion to dismiss will be granted based on the committee's approval of the deal under attack.  Second, the transcript shows the Court's respect for the NYSE definition of when a director is "independent."

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Court Of Chancery Clarifies Discovery Obligations

Senior Housing Capital LLC v. SHP Senior Housing Fund LLC, C.A. 4586-CS (November 2, 2012)

This decision in a bench ruling has some interesting issues on what should be disclosed in discovery.  First, it is important to not fail to list the witnesses that you will call at trial when answering interrogatories.  Hanging back to the last minute may mean the witness will be barred from testifying.  There was more to this than just delay but that is still a point worth remembering.

Second, the scope of expert discovery may well include notes and work papers of everyone who is on the team assisting the expert witness and will certainly include prior studies the expert has done on the same subject matter for other clients. This points out the need to be careful in setting up the expert's team and in selecting the expert.

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Court Of Chancery Imposes Attorney Fees For Bad Faith

Soterion Corporation v. Soteria Mezzanine Corporation, C.A. 6158-VCN (October 31, 2012)

Too often a plaintiff will file suit just to put pressure on the other side to get a settlement of a business dispute.  In this decision, after finding that the complaint included knowingly false factual allegations, the Court imposed attorneys' fees on the plaintiff for suing when it had decided "not to bring his claim to definitive adjudication."  This illustrates the Court of Chancery's understandable lack of tolerance for litigants who waste its time and the other side's money.

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Reports of Industrywide Investigation and Prior Settled Lawsuits Don't Make a Claim Real

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | October 24, 2012

In light of the dismissal risk to plaintiffs who do not use the tools at hand to inspect books and records prior to bringing a claim for management failure to oversee a corporation's business and affairs, guidance regarding the standard necessary to support a demand for inspection is important. The recent decision of Louisiana Municipal Police Employees' Retirement System v. Lennar, 2012 WL 4760881 (Del. Ch. Oct. 5, 2012), indicates that newspaper articles reflecting an industrywide government investigation of compliance with the Fair Labor Standards Act and prior lawsuits alleging violations of the FLSA will not suffice.

The plaintiff's demand for books and records pursuant to Section 220 of the Delaware General Corporation Law followed publication in The Wall Street Journal of articles describing an investigation by the U.S. Department of Labor, the IRS and state regulators into compliance by large homebuilders with the FLSA and state law. The defendant's 2011 10-K acknowledged that failure by its employees or subcontractors to comply with state or federal labor law could cause financial and reputational harm to the company. The plaintiff demanded documents, including board minutes, relating to the company and its subcontractors' compliance with federal and state labor, tax and immigration laws. The defendant declined to provide any documents on the ground that the evidence relied upon by the plaintiff — solely the newspaper articles — did not reflect "a credible basis for thinking there has been wrongdoing." The plaintiff sued, claiming that the newspaper articles and the prior lawsuits provided sufficient credible evidence of wrongdoing. More ›

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Court Of Chancery Permits Interested Manager Vote

Feeley v. NHAOCG LLC, C.A. 7304-VCL (October 12, 2012)

At common law, a director who was interested in the outcome of a board of directors vote simply could not vote on the issue before the board.  Her vote was literally void.  That old law was changed by statute in Delaware, under Section 144 of the DGCL.  This decision holds that even absent a similar statute in the LLC Act, a manager may vote on a transaction that he is interested in, absent some restriction in the LLC Operating Agreement.  Of course, merely having the power to vote does not make any vote the right thing to do.

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Court Of Chancery Explains Scope Of Inspection

Rock Solid Gelt, Ltd. v. The SmartPill Corporation,  C.A. 7100-VCN (October 10, 2012) This decision addresses one of the more perplexing problems of book and records litigation - what exactly is the plaintiff entitled to review? The Court of Chancery expects plaintiffs to limit their demands to what is really necessary and to explain to the Court, sometimes with witnesses, exactly what should be inspected to meet the proper purpose established at trial.  A blunderbuss approach is likely to irritate the Court and get you less than you really want.  This decision spells out the sort of evidence that should be presented to inspect specific records. Share

Court Of Chancery Upholds Waiver Of Fiduciary Duties

Hite Hedge LP v. El Paso Corporation, C.A. 7117-VCG (October 9, 2012)

This simple decision is still important because it contains the contract language that effectively waives any fiduciary duty to the limited partners in a Delaware LLP.  This has been a source of confusion in the past where the language was less clear and complete.  For example, there are Delaware decisions that find that efforts to waive fiduciary duties did not extend to the duties owed to minority owners.

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