Delaware Business Litigation Report

Court Of Chancery Adopts New Fee Setting Procedures

Danenberg v. Fitracks, Inc., C.A. 6454-VCL ( March 5, 20120)

Among the more vexing tasks of a Court is setting the fees to be awarded in an advancement case. If left to itself, this can become a monthly job as the parties endlessly quarrel over how much is to be paid. The Court of Chancery has tried several approaches to  avoid getting stuck in this endless quagmire.  Here is a new one.  The Court is charging the senior Delaware lawyers for each party with the duty to resolve any difference through a detailed process including monthly meet and confer sessions.  That may be enough to interject some sanity into these disputes.

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Court Of Chancery Applies Corporate Law Principles To LLC Dispute

Zimmerman v Crothall, C.A. 6001-VCP (March 5, 2012)

This is an interesting application of corporate law principles to an LLC dispute where the LLC operating agreement defined the managers' duties by language closely following common law duties for directors. Thus, the analysis included determining if they acted with gross negligence, were interested in 2 transactions to invoke the entire fairness test, etc.

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Court Of Chancery Declines Injunction Despite Probabililty Of Success

In re El Paso Corp. Shareholder Litigation,  C.A. 6949-CS (February 29, 2012)

This is the now-famous decision finding several breaches of fiduciary duties by the negotiators of a merger, but declining to kill the deal that would have given stockholders a large premium.  The opinion is, as usual for its author, entertaining to read.  More importantly, however, it is once again proof that money may deaden any sense of fiduciary duty, particularly any sense of when there is a conflict of interest.

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Court Of Chancery Instructs What Deal Protection Provisions Are Acceptable

In re Micromet Inc. Shareholders Litigation, C.A. 7197-VCP (February 29, 2012)

This is an excellent primer on what deal protection provisions are acceptable, particularly when the board must have the right to change its recommendation to stockholders when a superior proposal surfaces.  It is permissible to require a board to wait a short time before changing its recommendation to allow the first acquiror to match a new proposal.  However, once that matching right period passes, the board must be free to act promptly.

This opinion also provides a good analysis of the scope of any pre-deal market check and the board's role in limiting the scope of any effort to shop a deal.

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Court Of Chancery Resolves Who May Bring Derivative Claims After Dissolution

Matthew v. Laudamiel, C.A. 5957-VCN (February 21, 2012) This decision resolves who may bring a derivative claim after an LLC has been dissolved.  The argument made by 1 of the parties was that after dissolution, any member may bring a derivative claim directly.  The Court rejected that argument and concluded that the claim still must be brought in the name of the LLC and that a petition might also be filed to have the entity restored to bring such a claim or for a trustee to be appointed to do so. This decision also dealt with an important jurisdictional issue under the so-called conspiracy theory.  It holds that the alleged conspirator must be aware that the conspiracy involves an action in Delaware in furtherance of the conspiracy, before the conspiracy is completed and the harm done. Share

Court Of Chancery Restricts Transfer Of LLP Interest

In re Estate of Everett T. Conaway, C.A. 6056-VCG (February 15, 2012)

This decision upholds transfer restrictions in a limited partnership agreement.

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Chancery Court Allows Evidence in Appraisal Trial of Mandatory Redemption

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | February 15, 2011

When a dissatisfied stockholder petitions the Court of Chancery for an appraisal of shares extinguished in a merger, the petitioner will have the burden of persuading the court of the fair value of those shares. When the holder owns preferred stock, valuation issues arise that do not pertain to the holders of common stock. That is because, unlike for common stockholders, preferred stockholders' rights, including to redemption and sometimes to valuation in the event of a merger, are spelled out contractually. More ›

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Court Of Chancery Appoints Books And Records Receiver

Jagodzinski v. Silicon Valley Innovation Company LLC, C.A. 6203-VCP  (February 14, 2012)

This is an interesting decision because the Court appointed a receiver to enforce its orders granting a right to inspect an LLC's records when the LLC management did not comply with those past orders.  How far that receiver might go in his inspection is not clear but given that the receiver is the plaintiff's own agent, pretty far seems likely.

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Court of Chancery Stays Tag-Along Litigation

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | February 8, 2012

Litigation in multiple courts over the same basic claim continues to be a serious problem for corporate defendants. Indeed, some commentators argue the problem is getting worse. It is now almost certain that any merger or going-private transaction involving a publicly traded company will generate multiple suits. In fact, even the suits themselves now generate tag-along litigation. More ›

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Court Of Chancery Explains How To Apply Hirt

In re Delhi Financial Group Shareholder Litigation,  C.A. 7144-VCG (February 7, 2012) This decision teaches how to apply the so-called Hirt facts to select lead counsel in a class action. Most notably, it holds that filing first is not as important as filing the best complaint and that co-lead counsel may work in some cases. Share

Court Of Chancery Explains How To Establish "Good Faith" In Indemnification Case

Marc S. Hermelin v. K-V Pharmaceutical Company,  C.A. 6936-VCG (February 7, 2012)

This is the leading decision on how to establish the "good faith" requirement for permissive indemnification after the indemnitee has lost his case.  As the opinion notes, that may require a mini-trial when the good faith of the indemnitee has not been settled in the underlying action.

The opinion is also helpful in setting out what constitutes and how to prove "successful on the merits or otherwise,"  the usual test both under the statute and most bylaws for mandatory indemnification.

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Court Of Chancery Limits Inspection When Prior Case Filed

Amalgamated Bank v. NetApp Inc., C.A. 6772-VCG (February 6, 2012)

The interaction between two cases in two jurisdictions is again examined in this decision. The court held that a Section 220 books and records case may not be pursued to provide discovery to support the amendment of a complaint in a case pending elsewhere when the time to amend that complaint has passed.  The mere possibility that the time to amend may be extended is not enough to get under the rule in the King decision that permitted a books and records action to proceed when the right to amend a complaint was still present.

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Court Of Chancery Repeats What Interrogatory Answer Must State

Grunstein v. Silva, C.A. 3932-VCN (January 26, 2012)

When answering an interrogatory asking about the documents a litigant relies upon, it is not enough to just refer to the documents produced.  Instead, the specific documents must be identified, such as by bates numbers.

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Court Of Chancery Explains Role Of Fiduciary Duties

Auriga Capital Corporation v. Gatz Properties LLC, C.A. 4390-CS (January 27, 2012)

It is often the case that a controlling owner wants to eliminate the minority interests.  How to do so and abide by his fiduciary duties is the stuff that makes for litigation.  This is an example.  This decision is particularly important for 2 reasons.  First, it makes clear that even a controlling owner who does not really want to be a seller must consider going through a validly conducted sale process to show that he has been entirely fair with the minority.

Second, it explains the role of fiduciary duties in LLCs, including those LLC agreements that try to modify or eliminate those duties. That is possible to do but needs to be done very explicitly.

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Court of Chancery Comes Down Hard on Trading by Plaintiffs in Representative Litigation

Authored by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider | January 25, 2012

Defendants in class and derivative litigation often view the plaintiffs in those cases, especially the repeat players whose names are familiar to devoted readers of Court of Chancery opinions, as minor investors with little directly at stake in the litigation. Sometimes, however, the plaintiffs have significant equity stakes in the companies whose transactions they seek to enjoin. In those cases, the plaintiffs may be sharp investors who value the investment more than the principle at stake. What happens, then, to these investors when they see the chances at success in litigation passing them by? In any other circumstance, they might be inclined to trade out of their position or arbitrage the risk appropriately. When, however, these investors have chosen to be the plaintiff in a case seeking to halt the challenged transaction, the ability to act like an ordinary investor is severely restricted. More ›

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