Delaware Business Litigation Report

Court Of Chancery Resolves Demand Requirement For Statutory Trust

Hartsel v. The Vanguard Group Inc.,  C.A. 5394-VCP ( June 15, 2011)

Recently Delaware enacted a statute to authorize business trusts, such as used in the mutual fund industry, the Delaware Statutory Trust Act.  This decision establishes that the normal rules for derivative litigation apply in actions brought by trust interestholders.  For example, whether the action is direct or derivative and when demand is excused will be decided applying established Delaware law.

The decision also squarely establishes that the alleged mismanagement of investments by a mutual fund manager is a derivative claim.

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Court Of Chancery Denies Expedited Scheduling

In Re K-Sea Transpotation Partners L.P. Unitholders Litigation, C.A. 6301-VCP (June 10, 2011)

This decision on a motion to expedite the scheduling of a challenge to a merger is interesting for its extensive treatment of the merits of the complaint.  In the past, the Court of Chancery has treated motions to expedite more summarily.  Perhaps this indicates a greater focus on the burdens of expedition on the Court and others and a desire to limit expedition to those instances where otherwise a plaintiff would have no real remedy.

The opinion discussed in some detail when the possibility that a monetary judgment will be uncollectable is adequate to warrant expedition.  A real showing that is the case is required, not just speculation.

The opinion's other major holding is that a limited partnership agreement may effectively limit the amount of disclosures that must be given prior to a vote on a proposed merger.

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Why Do We Care About 'Poison Pills'?

This article was originally published in the Delaware Business Court Insider | June 08, 2011
 
Why do so many people care about whether the Delaware courts will continue to uphold the "poison pill" defense to a hostile takeover?  After all, comparatively few lawyers practice merger and acquisition law. Few companies are subject to hostile takeover threats, especially in recent years.  And who really stays up at night worrying about the fight between the two largely unknown companies that were the participants in Delaware's latest hostile takeover battle and the weapon of choice among defenders in such battles, the poison pill?

Yet, since the Feb.15 Court of Chancery decision in the Air Products case, there have been almost too-many-to-count blog postings, journal articles and symposia about that decision and its upholding of a poison pill. Who cares?
  More ›

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Court Of Chancery Upholds LLP Dissolution Procedures

In re Cencom Cable Income Partners L.P. Litigation, C.A. 14634-VCN (June 3, 2011, revised June 6, 2011)

In this case the limited partnership agreement had a detailed method for dissolving the entity and paying the proceeds to the limited partners, including how to set the sale price if its assets were sold to a related party.  The General Partner approved such a sale and followed the prescribed method.  When the plaintiff argued the result was less than optimal, the Court held that was too bad when the partnership agreement was followed.  In short, the "contract" among the partners was again enforced.

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Court Of Chancery Explains When Staggered Board Elections Must Occur

Goggin v. Vermillion Inc., C.A. 6465-VCN (June 3, 2011)

The Delaware Supreme Court has held that when there are staggered terms for the members of a board of directors that the annual stockholders meetings must be about 1 year apart.  In this case, the next board meeting was set for June, 2011 or 6 months after the last meeting.  The Court held that was acceptable because the directors whose terms would expire at the new board meeting were elected 3 years ago.  Of course that left open whether continuing the new meeting date in 2012 might cut short the tems of other directors.  The Court declined to resolve that issue until the next meeting date was actually set.

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Superior Court Upholds Jurisdiction After Merger

Universal Capital Management Inc. v. Micco World Inc., C.A. 10C-07-039 RRC (June 2, 2011)

This is a useful case because it covers just about every basis to assert jurisdiction over non-Delaware residents for their actions in Delaware.  It also upholds jurisdiction over a former Delaware corporation that merged out of Delaware.

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Court Of Chancery Explains Need To Plead Unfairness Of Conflicted Deal

The Ravenswood Investment Company LP v. Winmill, C.A. 3730-VCN (May 31, 2011)

Some may think that all you need to state a claim for breach of fiduciary duty is to allege the action under attack involved a conflicted board.  Not so.  At the very least, a plaintiff also needs to allege facts that show the deal was unfair to the company.  Once that is pled, then the burden does shift to the conflicted board to justify the transaction.

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Court Of Chancery Explains How To Value A Derivative Claim In Merger

In re Massey Energy Company Derivative and Class Action Litigation, C.A. 5430-VCS (May 31, 2011)

When a company that is subject to derivative litigation is sold in a merger, the value of the derivative claim may be significant.  After all, in most cases, that claim passes to the buyer who arguably should pay something for it.  Here the Court carefully evaluated a derivative claim that it found would survive a motion to dismiss and explains why, in the circumstances of this case, that claim and its possible value did not mean the merger consideration was inadequate.

The way the Court does the analysis here is an excellent example of the way to value such a claim in the merger context.

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Court Of Chancery Explains Lead Counsel Selection Process

Nierenberg v CKx, Inc., C.A. 5545-CC (May 27, 2011)

This decision involves the application of the familiar standards governing the appointment of lead counsel, but with a twist.  When multiple suits are filed over the same alleged misdeed, the Court of Chancery has encouraged the litigants to file a so-called "Savitt Motion."  That motion asks the various courts involved to confer as to which case should go forward while the others are stayed. Here, when the New York court decided the Delaware case should be the one to proceed, the lead lawyer in New York agreed to drop his suit and go to Delaware with his claim. That drew praise from the Delaware court and may have tipped the balance in having that lawyer appointed lead counsel.

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Court Of Chancery Explains Class Certification Rules

In re Lawson Software Inc. Shareholder Litigation, C.A. 6443-VCN (May 27, 2011)

This decision explains in a clear way how the class certification process is to work and when the members of the class should receive more direct notice of the class action.

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Chancery Decisions Highlight Importance of Independent and Disinterested Directors in Company Sale Transactions

Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | May 25, 2011
 
Two recent decisions from the Court of Chancery — In re Orchid Cellmark Inc. Shareholders Litigation and In re Answers Corp. Shareholders Litigation — illustrate how parties may reduce deal risk by ensuring that the directors responsible for managing a sale process are disinterested and independent.  At the same time, while the court in both cases rejected challenges to the transactions based on allegedly excessive deal protection terms, the court also signaled that providing much more than the parties did in Orchid may break the court’s proverbial back.

Independence and Disinterest

The court decided each of these cases following an expedited preliminary injunction hearing at which the plaintiffs sought to enjoin the transactions based in part on an allegedly inadequate sales process.  In this Revlon Inc. v. MacAndrews & Forbes Holdings Inc. context, the court is called upon "to assess carefully the adequacy of the sales process employed by a board of directors."  A primary inquiry in assessing a transaction is whether the directors responsible for the negotiations are independent and disinterested.

In Orchid, the court noted that five out of the six directors were independent. Its board formed a special committee to negotiate the transaction.  That committee included two independent directors and a third newly elected director who had been nominated by the company’s largest shareholder.  In addition to the independence of the special committee, the court also found no reason to doubt the independence or credentials of the special committee’s financial adviser.

Likewise, in Answers, although the plaintiffs raised questions about the independence of two of the directors, the court found that those directors did not lead the negotiations.  Moreover, four out of the seven directors who approved the transaction were disinterested and independent.  Finally, the court held that the company’s financial adviser’s independence and qualifications were not seriously challenged.  The independence of the directors and their advisers were significant factors in the court’s decision in both cases to uphold the reasonableness of the boards’ decision making.

Deal Protection Terms

The court noted that deal protection terms such as termination fees, expense reimbursements, and no-talk and no solicitation clauses are standard.  The issue is whether cumulatively they are impermissibly coercive or preclusive of alternative transactions.  In Answers, the court observed that the break-up fee of 4.4 percent of equity value was at the upper end of the "conventionally accepted" range.

However, the court stated that this is not atypical in a smaller transaction.  The court also rejected the plaintiffs’ challenge that the court should measure the break-up fee in reference to enterprise value on the ground that "Our law has evolved by relating the break-up fee to equity value."

In Orchid, the parties' deal protection included not only standard no-shop and termination provisions, but also a top-up option, matching rights and an agreement to pull the company’s poison pill, but only as to the buyer.  The court held that top-up options are standard in two-step tender offer deals.  As to the termination fee, the court found it appropriate in reference to the equity value of the target and again rejected the plaintiffs' effort to measure the termination fee in reference to enterprise value.  The court also recognized that the matching and informational rights might have a deterrent effect on a hypothetical bidder, but it found those provided in the merger documents would not preclude a serious bidder from stepping forward.

The court also found that the selective pulling of the pill was not impermissibly preclusive of alternative bids.  The court reasoned that the merger agreement enables the board to redeem the pill if it terminates the merger agreement.  Termination is permitted if the board receives a superior offer and withdraws its recommendation that the stockholders tender their shares.  The court observed that the termination fee that would be owed if the board terminates the merger agreement for a bidder who makes a superior offer and then pulls the pill would be no greater than if the company accepts a superior offer or terminates the merger agreement for some other reason.

Finally, because "a sophisticated and serious bidder would understand that the board would likely eventually be required by Delaware law to pull the pill in response to a Superior Offer," the court ruled that the deterrent effect of these provisions likely was minimal.

In so holding, the court stated that deal protection measures evolve and cautioned that at some point incremental protection may prove too much:

"Deal protection measures evolve.  Not surprisingly, we do not have a bright line test to help us all understand when too much is recognized as too much.  Moreover, it is not merely a matter of measuring one deal protection device; one must address the sum of all devices.  Because of that, one of these days some judge is going to say 'no more' and when the drafting lawyer looks back, she will be challenged to figure out how or why the incremental change mattered.  It will be yet another instance of the straw and the poor camel's back.  At some point, aggressive deal protection devices — amalgamated as they are — run the risk of being deemed so burdensome and costly as to render the 'fiduciary out' illusory."

Together, these two cases demonstrate the value of a disinterested and independent decision-making body running a sale process.  Also, while the court rejected claims that the deal protection at issue was preclusive or coercive, the court also cautioned that counsel must be careful not to make an alternative transaction too burdensome or costly, lest any fiduciary out be deemed illusory.  Counsel should carefully evaluate the context of each transaction in determining appropriate deal protection, lest an added straw of protection is found to be the one that breaks the court’s proverbial back.

Lewis H. Lazarus (llazarus@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group.  His practice is primarily in the Delaware Court of Chancery in disputes, often expedited, involving managers and stakeholders of Delaware business organizations.  The views expressed herein are his alone and not those of his firm or any of the firm's clients.
 

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Court Of Chancery Explains Revlon Application In Mixed Consideration Offers

In re Smurfit-Stone Container Corp. Shareholder Litigation, C.A. 6164-VCP (May 20, 2011, revised May 24, 2011)

When does the Revlon doctrine apply when a takeover offer involves a mix of cash and stock?  After all, at least one Supreme Court decision suggests that if the stockholders will continue as part of a mix of all minority stockholders in the acquiring company, they may still be able to get a control premimum later and so Revlon does not apply.  This decision explains that even when the stockholders are being asked to take stock for some but not all of their shares that they still will lose the ability to get a control premimum for those shares to the extent they are sold for cash. Hence, Revlon applies and the board is required to get the best price possible for the stockholders in that transaction.

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Delaware's Complex Civil Litigation Court: One Year Later

Edward M. McNally
This article was originally published in the Delaware Business Court Insider | May 18, 2011

On May 1, 2010, the Delaware Superior Court established a specialized "division" within that court to handle business disputes, known as the "Complex Civil Litigation Division" (or "CCLD"). The CCLD complements the Court of Chancery by offering a specialized business court to handle cases for monetary damages where jurisdiction would not exist in the Court of Chancery. Three specially assigned judges handle the cases assigned to the CCLD. Now that a year has passed, it is time to review the work of the CCLD and to assess its future. The CCLD is off to a good start, but remains an underutilized resource for businesses faced with civil litigation.

For a number of years, civil litigation involving business disputes has been plagued by inefficiency, escalating costs and delay. Three areas in particular caused much of the trouble with business litigation. First, discovery of electronically stored information caused litigation costs to escalate even beyond the amounts in dispute. Second, delays from crowded court dockets frustrated businesses with a problem to resolve. Third, discovery disputes over privileged communications and the testimony of expert witnesses that are often involved in business disputes also increased litigation costs and delays.

The CCLD addresses each of these areas of concern. It utilizes judges experienced in business disputes who, by a Case Management Order ("CMO") entered at the outset of litigation, keep the litigation on track to a fixed trial date. The CMO also controls the discovery process and the collateral disputes that otherwise often derail a case. Discovery of electronically stored information ("e-discovery") is subject to a set of guidelines that require litigants to cooperate in e-discovery and to reduce its costs. Other protocols are imposed to limit disputes over the discovery of privileged communications and expert witnesses, with the goal of further reducing litigation costs.

None of these special aspects of the CCLD are groundbreaking innovations. The Federal Rules of Civil Procedure, for example, require case management conferences and court orders establishing pretrial and trial schedules. Those rules also were recently amended to better control e-discovery and expert witness discovery. Federal Rule of Evidence 502 also was added to better control attorney-client privilege disputes. The CCLD has freely borrowed from these innovations of the federal courts.

Moreover, the CCLD for the most part has chosen to characterize its special procedures as guidelines for litigants to adopt or modify as they choose by their own agreements. Thus, the parties may opt out of the expert witness, e-discovery and privileged communication guidelines of the CCLD if they wish. The court has made it clear that it will accept any reasonable proposal the parties choose.

Now that the CCLD has been in place for one year, it makes sense to see if its new procedures for Delaware’s Superior Court have succeeded in resolving the problems confronting business litigation.

As the awareness of the CCLD has grown, business for the CCLD has picked up speed. To date, 49 substantial business disputes have been assigned to the CCLD and its three judges. Our review of the dockets of those 49 cases (together with our direct participation in 25 percent of these cases) leads us to conclude the CCLD is making progress, but is still an underutilized resource.

The 49 cases fall into four categories: (1) those matters diverted from the CCLD by voluntary settlement, bankruptcy stays or removal to federal court; (2) those matters just recently filed whose history is too short to be analyzed; (3) those matters subject to motions to dismiss; and (4) those matters being actually litigated. In our experience this breakdown is typical of business litigation. For example, the CCLD attracts many insurance coverage disputes that are usually resolved by determinations of the scope of an insurance policy, often in the context of a motion to dismiss. Full litigation including discovery is not common in those cases.

Of the cases actually going forward in the full litigation process, the large majority are subject to some form of CMO, including protocols on expert and privileged document discovery. Delays caused by discovery disputes seem to have been avoided, with savings in time and expense. Thus, as to those cases, the CCLD is working out as planned. Of course, a more complete review of how CCLD is working must await a significant number of CCLD cases going to trial or at least going through the full litigation process.

The mere existence of the CCLD protocols as guidelines also may be having a positive effect even if the parties to the litigation do not choose to explicitly adopt them. E-discovery is an example. The CCLD has a detailed set of "E-Discovery Plan Guidelines." Those guidelines require that the parties submit an "e-discovery" plan to the court, unless "the parties otherwise agree." The parties are reaching agreements on e-discovery and thus the guidelines are having their intended effect of reducing e-discovery costs.

Of course, as with anything new, there are some problems that the CCLD is working to address. Motions to dismiss a complaint sometimes delay assignment of a matter to the CCLD. If it was a defendant who requested assignment to the CCLD, that assignment was planned to occur after an answer to a complaint was filed. If there was no answer but instead a motion to dismiss, assignment was delayed in these cases. Motions to dismiss have also delayed entry of a CMO. That is understandable given that granting such a motion will save the court from entering a useless CMO. Such a delay in ultimate case disposition when a motion to dismiss is eventually denied is a problem in all civil litigation. The CCLD is expected to address these issues shortly.

Finally, the CCLD appears to be an underutilized resource as it passes its first-year anniversary. We are told that the CCLD judges are able to go to trial on almost any schedule the parties choose. While that capacity may not last forever, it is a big advantage to litigants. Given Delaware’s predominance as a corporate domicile where jurisdiction over Delaware entities is established, companies interested in efficient resolution of business disputes before specially-focused judges should more frequently file their claims in the CCLD. If businesses are serious about improving the efficiency and predictability of business litigation, they will choose the Delaware Superior Court’s CCLD more frequently. We are confident that as the CCLD’s reputation grows, its docket will grow as well.

Edward M. McNally (emcnally@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He practices primarily in the Delaware Superior Court and Court of Chancery handling disputes involving contracts, business torts and managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and not those of his firm or any of the firm’s clients.
 

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Court Of Chancery Denies Fruitless Inspection

Graulich v. Dell Inc., C.A. 5846-CC (May 16, 2011)

The Court denied a petition to inspect corporate records for the purpose of determining if a suit should be filed against the Board when the plaintiff lacked standing to file such a suit, the statute of limitations barred the claim, and the potential claim was already the subject of a settlement of a prior suit.  One has to wonder why this petition was ever filed.

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Court Of Chancery Accepts Deal Protection Terms

In re Orchid Cellmark Inc. Shareholders Litigation, C.A. 6373-VCN (May 12, 2011)

In another decision reviewing whether deal protection agreements are impermissibly preclusive, the Court noted: " one of these days some judge is going to say "no more"..."   This decision and its recent companion decision,  In Re Answers Corporation Shareholders Litigation, C.A. 6170-VCN (April 11, 2011),  list many deal protection measures that the Court has accepted.

Since the Delaware Supreme Court's split decision in Omnicare, Inc. v. NCS Healthcare Inc., 818 A.2d 914 (Del. 2003) rejecting a lock up agreement with the majority owner, the Delaware courts have not overturned such deal protection measures in merger agreements.  Maybe this decision is a warning.   After all, the Chancellor's recent decision in Air Products and Chemicals Inc. v. Airgas Inc., 16 A.3d 48 (Del. Ch. 2011)  also expressed some doubts that Delaware should be so protective of a Board's power to block a takeover.  We shall see.

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