Delaware Business Litigation Report

Court Of Chancery Explains Dissolution Statute

Techmer Accel Holdings LLC v. Amer,  C.A. 4903-VCN (December 29, 2010)

This decision explains when Section 17-804 of the Delaware Limited Partnership Act comes into play.  That may have important consequences as it is under that statute governing dissolutions that the Court may control distributions to partners that might hurt its creditors.  But as this decision points out,  if that statute is not in play,  the distributions are controlled by a different statute that lacks judicial enforcement provisions and might leave creditors to their own devices.

Court of Chancery Discusses Rule 11 Sanctions

Katzman v. Comprehensive Care Corp., C. A. No. 5892-VCL (December 28, 2010)

In addition to providing a useful overview of advancement and indemnification, including the significant difference between these principles, this transcript offers useful guidance on when counsel should move for sanctions.  Vice Chancellor Laster strongly urged parties to think "twice, three times, four times" before moving for sanctions or fees under bad faith exceptions because such motions are inflammatory and make it difficult for counsel to litigate a case.  While acknowledging that his statements seemed inconsistent with statements he had made in prior cases where he referred to Rule 11 or shifted fees, Vice Chancellor Laster stated that a judge bringing up such matters has a less inflammatory effect on litigation and counsel's relations than when parties brought motions for sanctions.  He also noted that the type of conduct meriting sanctions was usually obvious from briefing on other issues, making it unnecessary for parties to bring motions.  A possible exception to this would be out of view discovery misconduct that parties would need to bring to the Court's attention.  In this case, however, the motion for sanctions was based on a party supposedly filing frivolous claims in an improper forum.  The Court denied the motion for sanctions and awarded fees to the party opposing the motion for sanctions.

Court Of Chancery Permits Discovery On Offer Strategy

Air Products & Chemicals, Inc. v. Airgas, Inc., C.A. 5249-CC (December 23, 2010)

In this latest chapter of the Airgas takeover saga, the bidder may have bitten off more than it wanted.  In the past, the Court of Chancery has recognized an immunity from having to disclose a party's strategy in an on-going takeover fight.  Known as the "business strategy" privilege, the idea is that litigation should not be used to gain a negotiating advantage.  Here the bidder asked for sensitive discovery and the Court, while granting that request, also permitted discovery on whether the bidder's self-proclaimed "best and final" offer was in fact the best it would do to acquire Airgas.

Given that the bidder had told the Court its offer was its best and final, it had better be true.

Superior Court CCLD Guidelines On EDiscovery

This post was written by Edward M. McNally and Christopher J. Spizzirri.

At the recently concluded Georgetown Advanced eDiscovery Institute on November 1, 2010,  Judge Joseph Slights commented on the expectations of the judges assigned to the new Complex Civil Litigation Division of the Delaware Superior Court.  Briefly, Judge Slights noted:  (1) Ediscovery arguments should be broken down to their simplest components, (2) the parties should be prepared at the initial scheduling conference to defend their scope of preservation based on proportionality,  (3) he looks to the Sedona Conference for guidance, and (4) he will always sign stipulations for party-paid special discovery masters.

Judeg Slights is 1 of the 3 Superior Court judges assigned to the CCLD.

Court of Chancery Upholds Right To Change Your Mind

Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings Inc., C.A. 5745-VCS (December 17, 2010)

This decision holds that a stockholder who surenders his shares and is sent a check for the merger consideration may still demand appraisal if he returns the check and makes his demand in time.  Thus, he can change his mind if he does it fast enough.

Delaware Complex Commercial Litigation Division Off To A Strong Start

In May 2010, the Delaware Superior Court established its Complex Commercial Litigation Division  ( the "CCLD") in response to the growing need for more efficient treatment of complicated commercial litigation.  The Division has special procedures designed to move litigation forward, deal with the problem of electronically stored information and otherwise address issues that have come to plague civil litigation in recent years.  At a seminar on December 7, 2010, one of the judges appointed to the new CCLD, Jan Jurden, reported on its progress.

The CCLD is off to a good start. To date, 30 cases have been filed or transferred to the CCLD and at least 1 trial has been held already.  Judge Jurden confirmed that:

1. The CCLD is prepared to go to trial at almost any time the parties want, even as short as a few months;
2. The Judges assigned to the CCLD are willing to adopt whatever scheduling orders, e-discovery procedures and other case management orders that the parties agree upon to modify the forms of orders that the CCLD would otherwise implement to move matters along efficiently, and
3. The Judges will actively manage cases at a party's request to resolve discovery and other disputes promptly.

In short, the CCLD is well positioned to rival the Delaware Court of Chancery in its ability to provide prompt justice to litigants.

Court of Chancery Explains When It Will Appoint A Receiver

Pope Investments LLC v. Benda Pharmaceutical Inc. ,C.A. 5171-VCP ( December 15, 2010)

When a Delaware corporation becomes insolvent, it is possible to have the Court of Chancery appoint a receiver to take over its management.  Possible, but not easy as this decision shows.  Assuming that insolvency is proved, a receiver will be appointed when it will serve a "beneficial purpose".  What that translates into is when there is no real alternative to protect creditors effectively.

When it is possible to use the usual methods of enforcing a judgment or there are other, less dramatic remedies available, a receiver is not warranted.  For example, if the plaintiff has the right to appoint directors, then it should use the statutory remedy to force a stockholder meeting and the election of those directors.

Finally, to the extent the plainitff's case is based on what it alleges to be corporate abuses by current management, it needs to first prove those abuses before the court will appoint a receiver. After all, the extent of the abuse has to be determined before the remedy may be crafted.

Behind all this cautionary approach is the natural reluctance of any court to be dragged into the everyday management of a business.  For once a receiver is appointed, the court knows that every dispute over what the receiver does is probably going to end up before the court for resolution.  That is not fun.

Court Of Chancery Establishes Law On Double Derivative Litigation

Hamilton Partners LP v.  Englard, C.A. 4476-VCL ( December 15, 2010)

This is an important decision dealing with the often confusing law on double derivative suits. Briefly, the decision holds:  (1) there is no need for there to be jurisdiction over a parent in a double derivative suit when there is jurisdiction over the Delaware subsidiary;  (2) demand futility is measured at the parent level and (3) there is a derivative claim for the breach of duties owed to the subsidiary.  This last point is worth closer examination as the board of a subsidiary may act at the direction of its parent without liability.   Here some very odd facts lead to this result.

Ed McNally to Serve as Panelist for Webinar on LLC Operating Agreements on December 15, 2010

Ed McNally will be a panel member for a live 90-minute webinar program entitled LLC Operating Agreements - Crafting Provisions on Fiduciary Duties, Indemnification and Exculpation to Minimize Business  Disputes  on  Wednesday,  December 15, 2010 at 1:00 p.m. Eastern Time.  Sponsored by the Legal Publishing Group of Strafford Publications, the webinar will include an interactive Q&A session.  More ›

Delaware Supreme Court Affirms Forum Selection Clause

Ingres Corporation v CA Inc. , C.A. 105, 2010 (December 1, 2010)

This decision strongly affirms that a forum selection clause that picks Delaware is going to be enforced in Delaware.  That is true even when there is prior litigation elsewhere.

Court Of Chancery Holds Post Merger Dispute Resolution Procedure Is An Arbirtation

SRG Global Inc. v. Robert Family Holdings Inc., C.A. 5314-VCP (November 30, 2010)

Merger agreements or asset purchase agreements frequently include provisions for resolving post merger disputes.  This is particularly true when there is an escrow to cover contingent claims. In this decision, the Court holds that an agreement to submit such a dispute to an "expert " to resolve is the same thing as agreeing to arbitrate the dispute.  As a result, all the law governing what the arbitrator is to decide applies, including what facts he may consider in rendering his decision.

Court Of Chancery Explains When A Non Party May Be Made To Arbitrate

Kuroda v. SPJS Holdings, L.L.C. , C.A. 4030-CC (November 30, 2010)

Of course the parties to an agreement may be compelled to arbitrate any dispute if that is what their agreement provides.  But when may a non-party to an agreement with an arbitration clause also be made to arbitrate a dispute with one of the parties?   The short answer is not too often.

This decision carefully explains the exceptions to the rule that only the parties to the arbitration agreement may be made to go to arbitration. The exceptions are: (1) incorporation by reference, (2) assumption, (3) agency, (4) veil piercing/alter ego, (5) third-party beneficiary and (6) equitable estoppel.

Supreme Court Approves Move Of Annual Meeting

Airgas Inc . v.  Air Products and Chemicals Inc., C.A. 649,2010 (November 23, 2010)

In this decision, the Delaware Supreme Court reversed a decision by the Court of Chancery and held that in a staggered board, directors must serve the 3 year term to which  they were elected. Hence a Chancery decision permitting the meeting date to be moved up to replace directors sooner than a full 3 year term was invalid.

Court Of Chancery Explains Essentials Of An Enforceable Contract

Pharmathene Inc. v. SIGA Technologies Inc.,  C.A. 2627-VCP (November 23, 2010)

When is a letter of intent or term sheet an enforceable contract?  Delaware says it is enforceable when the parties intend to be bound and when the agreement contains "all essential terms." Exactly what all that means is often disputed.  This decision summarizes case law in a manner that will help to resolve this important question.

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