Delaware Business Litigation Report

Court Of Chancery Orders Discovery On Notarization

Bessenyei v. Vermillion Inc., C.A. 7572-VCN (July 19, 2012)

All Court of Chancery complaints must be verified by each plaintiff.  Most of us take it for granted when the client returns a notarized verification.  But should we?  In this case the transcript includes an order granting discovery of a notary to see if the plaintiff actually appeared before that notary to sign his verification.  The Court suggests that if he did not do so then he has committed a fraud on the Court.  That is perhaps not the best way to start litigation.

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Supreme Court Determines What Constitutes Wrongful Interference With Contract

WaveDivision Holdings LLC v. Highland Capital Management L..P. , No. 649, 2011 (July 19, 2012)

This decision establishes Delaware law on what constitutes a wrongful interference with another's contract.  Thus, it resolves several unsettled questions, such as concluding that a proper motive trumps an improper motive to interfere with a contract's performance.

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Court Of Chancery Holds Individual Buyers Liable For "Corporate" Debt

Envo Inc v. Walters,  C.A. 4156-VCP (July 18, 2012)

In this unusual case, the Court of Chancery held individuals liable on a contract that was signed by a corporation.  Why?  The corporation did not exist.  Apparently, the buyers intended to form the entity, but had a fight with their lawyer and never got around to doing the incorporation.  While they argued that they had expressly refused to guarantee the contract, the Court held they could not both take the benefits of the deal themselves and then not pay for it.  Big surprise!

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Court Of Chancery Allocates Value For Preferred Stcok

In Re: Appraisal Of The Orchard Enterprises Inc., C.A. 5713-CS (July 18, 2012)

One of the more difficult issues in appraisal litigation is how to allocate value between common and preferred stock.  Here the preferred stock was entitled to dividends on an as-converted basis and the Court used that forrmula to allocate the enterprise's value between the preferred and common stock.

The decision is also a primer on how to do a discounted cash flow valuation.

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When May Directors Vote Themselves Bonuses?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | July 18, 2012

Executive compensation is a hot topic. Congress entered the fray with the Dodd-Frank Act's "say-on-pay" requirements and with Section 162 of the Internal Revenue Code's limits on deductions for some executive compensation payments.

Yet, neither of those measures actually limits what companies may pay their top executives. To do so, stockholders have filed suits arguing it is a breach of fiduciary duty to not follow stockholder votes on say-on-pay resolutions or to not meet Section 162's requirements to obtain a deduction for executive pay.

Those suits have been notably unsuccessful. Indeed, these so-called "Section 162 claims" rarely get beyond the pleading stage, where they are regularly dismissed. The business judgment rule usually insulates from attack the directors' decisions on executive compensation. For example, the Delaware Supreme Court's 2005 opinion in In re The Walt Disney Co. Derivative Litigation, 906 A2d 27 (Del. Sup. 2006), upheld a board decision to pay a $130 million severance package to a single individual. Just a few weeks ago, the Court of Chancery dismissed a similar claim alleging excess compensation in Zucker v. Andreessen, C.A. 6014-VCP (June 21, 2012). More ›

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Court Of Chancery Explains Limits Of Jurisdictional Discovery

Picard v. Wood, C.A. 6526-VCG (July 12, 2012)

A plaintiff must offer some basis to believe the defendant is subject to the Court's jurisdiction before he will be permitted to take jurisdictional discovery.  Owning an interest in a Delaware LLC is not enough.

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Court Of Chancery Upholds Power To Enjoin Employment

NuVasive Inc. v. Lanx, Inc.,  C. A. 7266-VCG (July 11, 2012)

Litigation to restrain the employment of former employees is often complicated by jurisdictional issues. This decision resolves some of those issues by holding that a Delaware court may restrain a Delaware corporation from employing a former employee of the plaintiff even when that employee is not himself subject to the jurisdiction of the Delaware courts.

This decision, coupled with the enforcement of the choice of Delaware law clauses in other employment decisions, means that Delaware is a preferred forum for such litigation.

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Delaware's Anonymity? A Response to The New York Times

 Authored by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider | July 11, 2012

Recently, The New York Times published an article alleging that Delaware is, among other things, a potential haven for forming entities involved in criminal activities ("How Delaware Thrives as a Corporate Tax Haven," June 30, http://nyti.ms/M9fhFy). The article also criticized Delaware’s role in tax avoidance, but responding to that argument is beyond my knowledge. The article implied that Delaware is attractive to criminal activities because the state has virtually no means of determining who incorporates entities in Delaware.

In support of this contention, the article quotes a registration agent stating that Delaware requires the least amount of information in order to form a corporation under its laws. While a detailed response to this type of criticism would be beyond the scope of this article, the record should be set straight on what Delaware does require, and how the disclosure required by Delaware differs from the disclosure requirements in other states, because the article itself never discusses that. More ›

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Court Of Chancery Resolves Allocation Issue

ASB Allegiance Real Estate Fund v. Scion Breckenidge Managing Member LLC,  C.A. 5843-VCL (July 9, 2012)

Allocating a fee claim between various losing parties in the case that you won is difficult most of the time.  This decision shows that when all the claims are sufficiently related, you may not need to do so.  The defendants are then jointly and severally liable.

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Court Of Chancery Awards Fees For Defending Fee Request

Coughlin v. South Canaan Cellular Investments, C.A. 7202-VCL (July 6, 2012)

In a "man bites dog" case, the Court of Chancery awards attorney fees for opposing a Rule 11 claim for fees.  This illustrates that the Court really does not like Rule 11 motions and those need to be made only after careful thought.

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Court Of Chancery Upholds Compensation Claim In Derivative Suit

Seinfeld v. Slager, C.A. 6462-VCG (June 29, 2012)

Derivative suits alleging excess compensation are hard to plead.  To avoid dismissal, the plaintiffs must show the directors were interested in the compensation awarded and their customary director fees do not count.  Indeed, even bonus awards to themselves are not enough when the bonuses are approved by a stockholder vote.  But this decisions shows why there is an exception to this general rule.

Here the bonus plan did not contain any limit on the board's discretion, except for a cap on the total awarded.  Finding that this made the awards free from any real stockholder control, the Court held the complaint stated a valid derivative claim.  The lesson then is to put some guidance on the awards into the plan when it is submitted for the stockholders' approval.

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Court Of Chancery Rejects Compensation Claim

Zucker v. Andreessen, C.A. 6014-VCP (June 21, 2012)

This is a run -of -the mill dismissal of a derivative suit for failure to justify the lack of demand on the board, but with a twist.  For the decision highlights just how hard it is to show that a board is liable for paying an executive too much.  Hence, curbs on compensation are left to the stockholders' vote to control.

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Court Of Chancery Stays Section 273 Case

McElroy v Schornstein, C.A. 7233-CS (June 6, 2012)

It is often said that the Court of Chancery will not stay or dismiss an action filed under one of the statutory provisions for summary adjudication of a claim, such as to decide a proxy contest,  because there is prior litigation filed elsewhere.  That is generally true, but not always and this decision involves 1 of the rare exceptions.  Here the plaintiff sought a decree of dissolution by his complaint filed several months after a similar claim was filed by the other side in New Jersey. Noting that any decision by it would impact a preliminary ruling by the New Jersey court, the Court of Chancery dismissed its case to avoid such a conflict.

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Delaware Court of Chancery Sets New Rules for Derivative Claims

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | June 20, 2012

The Delaware Court of Chancery just issued possibly the most important decision in the last 10 years on derivative claims. In Louisiana Municipal Police Employees' Retirement System v. Pyott, Del. Ch. Ct. 5795-VCL (June 11, 2012), the court clarified when a previously dismissed derivative suit may be refiled and what plaintiffs should do to properly satisfy the requirement that individual stockholder plaintiffs adequately allege why they, rather than a corporation's board of directors, should control derivative claims brought on behalf of the corporation. Because derivative litigation is a principal tool to ensure proper corporate governance, this decision has large implications. More ›

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State Supreme Court Reaffirms Strict Procedural Requirements for Inspection of Books and Records

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 13, 2012

Cases brought under Section 220 of the Delaware General Corporation Law reflect the Delaware General Assembly's effort to balance the stockholder's important right to seek inspection of books and records to investigate wrongdoing with the directors' right to manage the business and affairs of the entity without undue interference from stockholders. In 2003, the Delaware General Assembly extended the right to demand inspection from stockholders of record to beneficial stockholders, but only if the beneficial holder states under oath with the demand that he or she is a beneficial holder, provides documentary evidence of beneficial ownership of the stock and states that such evidence is a true and correct copy of what it purports to be. More ›

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