Delaware Business Litigation Report

Court Of Chancery Explains Sufficient Basis For Inspection

Louisiana Municipal Police Employees' Retirement System v. Lennar Corporation, C.A. 7314-VCG (October 5, 2012)

To inspect corporate records to see if there has been "wrongdoing,"  a stockholder has to have a basis to suspect that wrongdoing has occurred. The evidence needed has been described as the lowest level possible if there is to be any standard at all.  This decision illustrates that a standard does exist.  Past lawsuits that have been settled are not sufficient to show present wrongdoing. General news articles about an industry-wide investigation are not sufficient.  Both together do not get there either and the suit was dismissed.

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Court Of Chancery Explains Non-Profit Corporate Law

Hockessin Community Center Inc. v. Swift , C.A. 7789-VCL (October 5, 2012)

Delaware does not have a separate corporate statute dealing with non-profit corporations. Hence, the non-stock sections of the DGCL usually apply to such entities.  It is sometimes hard to decide what parts of the DGCL do apply, however, as the integration of stock with non-stock provisions is less than clear.  This decision helpfully explains how to decide what parts of the DGCL to apply to non-stock entities

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Court Of Chancery Explains How To Calculate Award In Non-Monetary CAse

Dias v. Purches, C.A. 7199-VCG (October 1, 2012)

This is a classic example of what not to say in an argument unless you want to get the Court mad. In addition, this decision again explains how to calculate a fee award when the corporate benefit achieved is non-monetary.

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Court Of Chancery Explains A Director's Duty Of Loyalty While Objecting To Policy

Shocking Technologies Inc v. Michael,  C.A. 7164-VCP (September 28, 2012, revised October 1, 2012)

Everyone agrees that a director should speak up even if he disagrees with the rest of the board of directors.  But when does a director go too far in his opposition to policies he wants to change?  In this decision, the Court wrestled with this question and decided that leaking confidential corporate information to pressure the company went too far.  Significantly, the information was not about any wrongdoing.  Hence, the finding of a breach of the duty of loyalty only goes so far as a precedent.

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Court Of Chancery Explains Evidence Needed For Reformation

CC Financial LLC v. Wireless Properties LLC,  C.A. 5927-VCN (October 1, 2012)

This decision establishes that "clear and convincing" evidence is needed to warrant reformation of a contract for mutual mistake or unilateral mistake coupled with knowing silence.

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Court Of Chancery Upholds Duty To Arbitrate Of Alter Ego

Legend National Gas II Holdings LP v. Hargis, C.A. 7213-VCP (September 28, 2012)

When a non-party to a contract is still bound by its arbitration provision is surprisingly often litigated. This decision reviews the past law and reiterates that a non-party may need to arbitrate when it is the alter ego of the a party that agreed to the arbitration clause, such as a successor partnership.

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Court Of Chancery Declines To Restrict Access To Documents

Czarninski Baier de Adler v. Upper New York Investment Company LLC,  C.A. 6896-VCN (September 28, 2012)

This decision illustrates the Court's reluctance to permit protective orders to limit access to documents. The Court permitted the plaintiff's husband and non-US attorneys access to the documents that would otherwise have been confidential under a protective  order.

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Court Of Chancery Interprets Preferred Stock Rights

Greenmont Capital Partners I LP v. Mary's Gone Crackers Inc., C.A. 7265-VCP (September 28, 2012)

This is a useful, if not surprising, example of how the Court will interpret a corporate charter regarding the rights of preferred stock.  It is also an example of the principle that if you want a veto power in the charter,  you had better be clear and complete or the charter will be changed to your detriment.

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Court Of Chancery Requires Effective Pre-Suit Investigation

South v. Baker, C.A. 7294-VCL (September 25, 2012)

Many lawyers believe that it may be okay to file suit and do an investigation of the facts later through discovery. Not so in some derivative litigation. This decision explains what pre-suit investigation is required to sustain a derivative suit alleging a Caremark claim.  It is required reading for its detailed review of the current law.

Briefly, at least when a Caremark claim is asserted, it is almost mandatory that a Section 220 action to inspect the corporation's records be done before filing suit.  Absent that inspection, a plaintiff better have a very good factual basis to allege that the directors violated their duty to oversee their company's compliance with the law.

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The Court of Chancery Speaks by Transcript

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | September 12, 2012

Once again, the Internet is changing how Delaware law is made. Those who are not aware of this change will be at a significant disadvantage in litigation in the Court of Chancery. But before describing this change, some background is in order.

In the "good old days" of the 1970s, some important Delaware corporate law was contained in unreported decisions of the Court of Chancery. The court sometimes would decide a major corporate law issue but not submit its decision to the official reporters for publication in the Atlantic Reporter. Usually, this happened when the author of the opinion was pressed for time and did not feel the decision represented his or her best written work. Nonetheless, some of these unpublished opinions went on to become established precedents, at least in Delaware. More ›

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Court of Chancery Explains Why Not All Sale Processes Require Entire Fairness or Revlon Review

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | September 5, 2012

Since Kahn v. Lynch in 1994, the Delaware Supreme Court has subjected cash-out merger transactions proposed by controlling stockholders to a higher level of entire fairness scrutiny than the more deferential business judgment review, regardless of whether disinterested directors negotiated the transaction or a majority of the disinterested minority stockholders approved the transaction. Even in a third-party transaction where a controlling stockholder is not on both sides, courts have applied the test of entire fairness where stockholders can allege that a controlling party used its power to cause the company to enter into a transaction that diverted proceeds unfairly to the controlling stockholder at the expense and to the detriment of the minority stockholders. Likewise, since the landmark Revlon decision in 1986, the Delaware Supreme Court in sale-of-control transactions has required defendant directors to prove they followed a reasonable decision-making process and acted reasonably in light of the available information. Because in any of these circumstances the standard of review is less deferential, a minority stockholder attacking a transaction materially increases the prospects of surviving a motion to dismiss if able to plead facts that demonstrate that either entire fairness or intermediate Revlon-level scrutiny applies. In In re Synthes Shareholders Litigation, C.A. No. 6452, 2012 WL 3641014 (Aug. 17, 2012), the Court of Chancery dismissed a complaint attacking a sale transaction in an opinion that demonstrates that mere conclusory allegations that a controlling stockholder favored a sale transaction will not suffice to trigger a higher level of judicial scrutiny where the plaintiff cannot allege a genuine conflict of interest. More ›

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Court Of Chancery Clarifies Ultra Vires Statute

Southeastern Pennsylvania Transportation Authority v. Volgenau,  C.A. 6354-VCN (August 31, 2012)

Section 124 of the Delaware General Corporation Code sets out the Delaware limits on the common law doctrine of ultra vires.  This decision holds that Section 124 does not limit suits for breach of fiduciary duty, but does protect corporate transactions that have closed from some attacks alleging a lack of power to do the transaction.

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Court Of Chancery Explains Post-Closing Notice Requirements

Impact Investments Colorado II LLC v. Impact Holding Inc., C.A. 4323-VCP (August 31, 2012)

Acquisition agreements often have provisions for post-closing adjustments to the purchase price. How to invoke the right to such an adjustment is set out in the agreement.  This decision deals with such a notice provision requiring "reasonable particularity" for the claimed adjustment.  While the Court reserved for trial the decision on whether that standard was met, the discussion of the notice provision is an excellent guideline on how to draft and interpret notice provisions.

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Court Of Chancery Nails Down "Good Faith" By A Conflicts Committee

In re: Encore Energy Partners LP Unitholder Litigation, C.A. 6347-VCP (August 31, 2012)

Delaware limited partnership agreements frequently have provisions governing how to deal with conflict of interests between the GP, the limited partners and the owners of the GP.  This decision sets out the language needed to protect the GP and its owners from attacks in conflict transactions when the deal is approved by a conflicts committee.  If the committee acts in the subjective good faith belief the transaction is in the best interests of its constituency, an attack alleging objective unfairness will be dismissed.

This then may be the definitive guide to drafting limited partnership agreements.  And while the Court recognizes that the decision offers little protection for limited partners, it points out that is part of the risk they bear when they invest in such LPs.

This decision was affirmed on July 22, 2013.

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Court Of Chancery Limits Revisions To An Expert's report

IQ Holdings Inc. v. American Commercial Lines Inc.,  C.A. 6369-VCL (August 30, 2012)

When may an expert change his mind after he has provided his report under a court-ordered deadline?  This decision answers that question.  Briefly, absent agreement between all the parties, once the report is served, it may not be materially changed.  Of course, this just makes common sense if scheduling orders are to have any force.

What the expert is then to do when he realizes he has erred is a tough question.  Confession is said to be good for the soul and that probably applies here as well.  But the opposing party needs to be cautious as well, for nothing in this ruling bars a surprise during cross examination of its expert, who absent a correction by the opposing expert, may not be as prepared as he might have been with that disclosure.

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