Court Of Chancery Rejects Appraisal Claim
Krieger v. Wesco Financial Corp., C.A.6176-VCP (October 13, 2011)
Some corporate mergers give stockholders of the acquired company an option to take cash or the stock of the acquiror. If the stockholder fails to chose, then she typically gets the cash. The appraisal statute only provides for an appraisal claim when the stockholder is required to take cash and not publicly traded stock. Here the plaintiff who had not made the election to take stock and so got cash argued she was forced to take cash and hence was entitled to appraisal of her shares.
The Court said "no," reasoning that so long as she had a choice she was not forced to take the cash. Risking the wrath of some members of Congress, the Court cited to a famous French philosopher on why you still have a choice even when you do not decide to act. That too is your choice.
ShareTraps for the Unwary -- The Potential Consequences of Agreements to Negotiate in Good Faith
Co-Authored by Katherine J. Neikirk and Edward M. McNally Originally published in the Delaware Business Court Insider l October 12, 2011 Agreements to negotiate in good faith can create issues for the unwary. The potential traps of such an agreement appear in the Court of Chancery's Sept. 22 decision in PharmAthene Inc. v. SIGA Technologies Inc. The PharmAthene case arose from a dispute between two companies over the development of a smallpox drug. Defendant SIGA Technologies Inc. was developing the drug, but ran into financial difficulties. Plaintiff PharmAthene Inc. and SIGA discussed collaborating to develop the drug. Because the parties had previously engaged in unsuccessful merger negotiations and SIGA felt PharmAthene backed out of a merger because of cold feet, SIGA insisted on working out a licensing agreement before engaging in more merger discussions. More › ShareCourt Of Chancery Upholds The Business Judgment Rule Again
In re The Goldman Sachs Group Inc. Shareholders Litigation, C.A. 5215-VCG (October 12, 2011)
Every so often, a corporation acts so badly that a plaintiff decides to take a run at attacking the business judgment rule and sues the corporation's directors alleging their decisions have been too stupid to be protected by that rule of Delaware law. That was true in the famous Disney case and this is another example of such a suit. After all, who could stand up for Goldman Sachs these days?
Well, showing that the business judgment rule is alive and well, the newest member of the Court of Chancery in this decision reaffirms that hindsight alone does not support a good claim. The decision is noteworthy because Vice Chancellor Glasscock exhibits the same care and scholarship as his predecessors in his opinion dismissing the complaint.
ShareCommon Pleas Court's New 'Rocket Docket' May Offer Advantages in Business Litigation
Authored by Edward M. McNally
Originally published in the Delaware Business Court Insider l October 5, 2011
The Delaware Court of Common Pleas recently adopted new procedures that will make this often-overlooked court much more attractive to both businesses and lawyers. Historically, the Court of Common Pleas has not been used to resolve many business disputes because its jurisdiction is limited to claims not exceeding $50,000. However, its new procedures will speed up litigation, cut down on litigation costs and provide some added benefits to law firms.
Called the "SPEED" docket - the name is an acronym for Special Election and Expedited Docket - it should be used more often for several good reasons. First, businesses often must deal with smaller disputes that may have serious implications. If a business does not act to enforce its rights in small matters because it wants to avoid litigation costs, it risks being known as a mark for the unscrupulous. Businesses need to stand up for their rights to preserve their reputations. The SPEED docket will help them do so because it will reduce litigation costs.
Second, law firms need to serve their business clients or those clients may go elsewhere. The firm that refuses to help a client with a dispute that "is too small for us to handle" risks another law firm taking its place. Often, law firms solved this problem by cutting their fees for small matters to please the client. But that means losing the value of the time spent on that matter and is hardly a good solution. Again, the SPEED docket will help cut the time needed to handle a small dispute, helping both the firm and its client.
Third, law firms need trials to train inexperienced associates how to try a case. That does not work well in the "big" case where there is too much at risk to let the inexperienced lawyer handle significant parts of the trial. The smaller cases handled by the Court of Common Pleas provide an opportunity to let a newer lawyer try a case with less risk of a significant loss to the client. Even apart from trying a case, the SPEED docket will teach lawyers how to manage their time. They will have little choice but to focus on getting the job done when the trial schedule does not permit procrastination. That is good training. More ›
ShareCourt Of Chancery Suggests The Disclosure Of Free Cash Flows
Gaines v. Narachi, C.A. 6784-VCN (October 6, 2011)
What should be disclosed in a proxy is not always clear. This decision notes the reasons and the precedent to disclose free cash flows used to do a discounted cash flow analysis by an investment bank giving the fairness opinion.
ShareCuring Incivility: How and When Should Judges Act?
Authored by Edward M. McNally
Originally published in the Delaware Law Weekly l September 28, 2011
A recent letter from a Delaware Superior Court judge gained national attention for its criticism of the lawyers involved in pending cases before it and particularly for the court’s novel remedy — a mandatory Sunday session in civility.
While I have no opinion on whether the judge’s reprimand was deserved or not, her attempt to call attention to what she saw as incivility points out the need to address incivility in civil litigation. Lawyer squabbling and other ill-mannered acts only breed disrespect for the law.
After all, the rule of law is supposed to be a step up from the use of force to settle disputes. But if the lawyers seem to be acting to avoid resolutions based on merit in favor of who has the most abusive advocate, then the law is no better than “might makes right.” We cannot let that happen. More ›
Court Of Chancery Explains Domination Law
New Jersey Carpenters Pension Fund v. Infogroup, Inc., C.A. 5344-VCN (September 30, 2011)
To decide whether a derivative suit may proceed without first asking the Board of Directors to bring the suit, one test that is applied is whether the Board is "dominated or controlled" by an alleged wrongdoer. For if the Board is so dominated, then it cannot be expected to independently decide if the suit should proceed. Some cases under this rule are easy to decide, such as when there is a parent-child relationship involved. [Those of us who have had teenagers might wonder why this is so.]
There are harder cases and this is one. Here the Court decided that the threats of a dominant stockholder and board member had so affected the rest of the Board that the other directors could not be expected to independently decide if the dominating board member should be sued. Hence, it permitted the suit to proceed without a demand on the rest of the Board.
The obvious lesson here is not to be a bully.
ShareCourt Of Chancery Upholds Reliance On Banker To Show Good Faith
Brinckerhoff v. Enbridge Energy Company Inc., C.A. 5526-VCN (September 30, 2011)
This is a significant decision for 2 reasons. First, it confirms the widely-held belief that the Tooley test to determine if a complaint is direct or derivative applies to limited partnerships.
Second, it interprets language in the LLP agreement permitting the general partner to rely on the advice of an investment banker as constituting proof of "good faith" in deciding to do a deal with an affiliate of that general partner. This is important because while Delaware law permits LLP agreements to waive many duties owed by a GP, the duty to act in "good faith" cannot be waived. Hence, the ability to effectively define in the LLP agreement what will constitute good faith is another way to limit claims against the GP even for self-dealing.
This decision was affirmed on MAy 28, 2013.
ShareCourt Of Chancery Refuses Any "Pass" For Small Companies
In Re Openlane Inc. Shareholders Litigation, C.A. 6849-VCN (September 30, 2011)
Some believe that the board of directors of a small company does not have as strict fiduciary duties to the minority stockholders as do boards of publicly traded companies. This decision reiterates that under Delaware law those duties apply to the small and the large equally.
The opinion is also noteworthy as another example of the Court of Chancery's inclination to limit the Omnicare decision to its facts.
ShareCourt of Chancery Arbitration Likely to Become More Prevalent
Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | September 28, 2011
In 2009, Delaware's General Assembly passed and Gov. Jack Markell signed legislation enabling arbitration in the Court of Chancery. In 2010, the Court of Chancery adopted rules governing arbitration. As the statutes — 10 Del. C. §§ 349 and 351 — and rules — Court of Chancery Rules 96-98 (Arbitration Rules) — are new and arbitration requires mutual agreement, arbitration may become a more prevalent means of resolving disputes as deal lawyers increasingly require Court of Chancery arbitration for disputes arising out of merger and other agreements.
Reportedly, the current dispute between Skyworks Solutions and Advanced Analogic Technologies contains a dispute resolution clause mandating arbitration in the Court of Chancery. It is thus appropriate to review why Chancery Court arbitration is likely to become an increasingly preferred method of dispute resolution.
First, the arbitration rules permit resolution of disputes by decision-makers with the knowledge and experience of the chancellor and vice-chancellors. To be eligible for Court of Chancery arbitration, the dispute must involve at least one party that is a Delaware entity; both parties must agree to arbitration; and if the dispute is solely about monetary damages, the amount in controversy must exceed $1 million. The procedure is not available for consumer disputes. Previously, disputes solely for monetary damages were not amenable to subject matter jurisdiction in the Court of Chancery.
Second, the members of the Court of Chancery are used to resolving matters on an expedited basis. The arbitration rules contemplate that generally an arbitration hearing will be scheduled within 90 days of the filing of the petition. However, they also allow for modification of the schedule with the consent of the parties and approval of the arbitrator. The arbitration rules thus permit flexibility for the parties and arbitrator to structure the dispute resolution on a schedule that makes sense.
Third, Chancery Court arbitration proceedings are confidential. The filing of a petition for arbitration is not included on the court's docket system. The petition and all supporting documents are by rule considered confidential and not of the public record, unless there is an appeal.
Fourth, Section 351 of Title 10 expressly authorizes parties to stipulate that an arbitration award shall be final, binding and non-appealable. As the synopsis to the legislation explains, "In many matters parties desire an answer and their dispute is narrow enough that even if they cannot settle, they are willing to agree in advance to live with the outcome rendered ... ." The new statutes permit that voluntary option.
Fifth, any appeals go to the Delaware Supreme Court, a decision-making body equally acclaimed for its knowledge and experience in the prompt resolution of significant business disputes.
Sixth, for parties in disputes with foreign entities, the new statutes and arbitration rules may provide greater comfort that the arbitration award will be enforceable against a foreign entity on its home turf under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Finally, the price is right compared to private arbitration. The filing fee is $12,000, to be equally divided by the parties. For each day or partial day that the vice chancellor or master engages in arbitration after the first day of arbitration, there is a $6,000 fee, also to be equally divided by the parties.
Efficiency, confidentiality, first-rate decision-makers experienced in resolving complex business disputes — for these reasons deal lawyers should consider the benefits of Chancery Court arbitration. And as they counsel their clients to specify Chancery Court arbitration in their agreements, we can expect that it will be an increasingly utilized tool for dispute resolution.
ShareCourt Of Chancery Invalidates Vote Blocking Device
Johnston v. Pedersen, C.A. 6567-VCL (September 23, 2011)
This is a good discussion of the "enhanced scrutiny" that the Court of Chancery applies to board action that affects the right to vote. Such action must have a "compelling justification" and the simple desire to avoid being thrown out of office, even by scalawags, is not enough. Hence, here the Court invalidated the provisions of a specially issued series of preferred stock that had the right to block the removal of the board of directors.
ShareCourt Of Chancery Uses Computer Records To Unravel Facts
Phillips v. Hove, C.A. 3644-VCL (September 22, 2011)
This is an interesting decision for its very entertaining explanation of the facts and how the Court decided what was true in the face of false testimony. Using the computer records to verify when documents were generated, the Court determined which story was most believable.
There are also some key legal determinations, although nothing really new. For example, even though the LLC Agreement had provisions for dissolution, the Court, having concluded those would not work, ordered dissolution.
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Court Of Chancery Fashions Remedy For Failure To Negotiate
PharmAthene Inc. v. SIGA Technologies Inc., C.A. 2627-VCP (September 22, 2011)
This is an important decision for 2 reasons. First, it clarifies the extent of a duty to negotiate in good faith. Second, it crafts a remedy for a breach of that duty. This is important because deal term sheets often provide for further "good faith" negotiations and what that means has been unclear in the past. Further, it is also common for the mediation of commercial disputes to end with the basic terms set out in a memorandum of understanding with the details to be "negotiated in good faith."
First, it is important to understand when there is a binding obligation to negotiate in good faith. In this case, 2 formal contracts between the parties required they have such further negotiations. Without a binding contract to do so, it remains doubtful that just a simple agreement to continue discussions binds anyone.
Second, when the duty to negotiate does arise, what constitutes good faith is hard to define in the abstract. This decision points out, however, that a refusal to continue to honor past agreements is "bad faith." In short, you cannot go back on terms already agreed to as a way to get other concessions.
Third, when the duty to negotiate is violated, the remedy is critical. As this decision points out, specific performance and a damage award of what one side says were its expectation damages may not be available for a variety of reasons. Here, the Court provided a remedy that gave the non-breaching party what the Court felt were the benefits that the parties had agreed on generally, even if the details were not finalized. This highlights the importance of reviewing the history of their negotiations to determine what is likely to have been the outcome had they fairly negotiated.
ShareCourt Of Chancery Enjoins Suit In Another Jurisdiction
Frequently a contract will have a provision selecting Delaware as the forum to litigate any dispute. What happens then when a case is filed elsewhere and one party seeks to enforce the forum selection clause by an injunction in Delaware against the prosecution of the other litigation? Well, this decision tells us the result and resolves possible conflicting holdings in other courts including the Delaware Supreme Court. Briefly:
1. The Court of Chancery will grant the injunction if the forum selection clause properly confers jurisdiction in Delaware courts. Note that this means that selecting the Court of Chancery may not work if the dispute is not subject to equitable jurisdiction in that court. Better to select "any" court with jurisdiction in Delaware over the subject matter of the dispute.
2. The forum selection clause must be broad enough to include any dispute "arising out of" or "related" to the dispute. A narrower clause may not work.
SharePoison Pill Limbo: How Low Can It Go?
by Peter B. Ladig
Published in the Delaware Business Court Insider | September 07, 2011
A few months ago the pop culture writer Chuck Klosterman published a short article addressing a question I have pondered myself, although far less articulately than Klosterman discussed it: Is there a speed at which the human body cannot run any faster?
Put another way: Is there a point at which the record for the 100 meter dash is so low that it cannot be broken because the human body simply cannot exceed it, or could the record always be lowered? The general consensus was that there probably is a limit, but no one knows what the limit is, and a sprinter's belief in his ability to continually break the record generated better performances.
The limits of the human body are, of course, a long way from the poison pill jurisprudence of the Delaware courts, but a question with a similar genesis can be asked: Is there a lower limit for poison pill triggers? In 2010, the Delaware Supreme Court in Versata Enterprises Inc. v. Selectica Inc. affirmed the decision of the Court of Chancery upholding the adoption of a poison pill with a 5 percent holding trigger.
Indeed, the Supreme Court upheld the adoption of the poison pill, the dilution below 5 percent of the stockholder that intentionally triggered the pill, and the adoption of a second poison pill, again with a 5 percent holding trigger. In reaching this conclusion, the Supreme Court found that despite the low trigger point for the poison pill, the pill was not preclusive because it was not "realistically unattainable" for an insurgent to wage a successful proxy contest with a 5 percent trigger. The Supreme Court added that the shareholder advisory firm RiskMetrics Group supports rights plans with a trigger below 5 percent on a case by case basis if adopted for the purpose of preserving net operating losses, as was the case in Selectica. More ›
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