Supreme Court On Tortious Interference With Contract
ASDI, Inc. v. Beard Research, Inc., C.A. Nos. 296/301/308, 2010 (November 23, 2010)
In this decision, the Supreme Court held the Court of Chancery erred in holding plaintiffs had failed to establish a tortious interference with contract claim where a third party had lawfully terminated the contract with plaintiffs. According to the Supreme Court, the focus of a tortious interference claim is whether the defendant wrongfully induced contractual termination, not whether the termination was legal. While an unlawful termination will support a tortious interference claim, a plaintiff can also state a tortious interference claim when the defendant's tortious conduct causes a third party to terminate a contract lawfully.
ShareCourt Of Chancery Requires Strict Adherence To DGCL To Split Stock
Blades v. Wisehart , C.A. 5317-VCS (November 17, 2010)
Stock splits have often been a problem, especially for non-Delaware lawyers who somehow think that all they need to do is have the Board decide to split the company's stock. Not so. This decision sets out the 3 essential steps to follow. Moreover, pleas to the Court's equitable powers to uphold what parties intended to do, even if they messed up the formalities, are not going to work. For as the Court held, in the area of a Delaware corporation's capital structure, formalities must be followed to achieve certainty. Hence, in this area at least, "law trumps equity".
ShareCourt Of Chancery Explains Equitable Remedy Carve Out
GTSI Corp. v. Eyak Technology LLC, C.A. 5815-VCL (November 15, 2010)
There seems to be one constant issue in decisions dealing with motions to stay court proceedings in favor of arbitration -- who decides if the claims are subject to arbitration, the court or the arbitrators. Under Delaware law, absent an express provision directly dealing with that question, a reference in the parties' agreement to arbitration rules that provided the arbitrator decides that issue will be upheld.
Sometime litigants try to get around that result by pointing to provisions in their agreement that leave certain disputes to the courts to decide and then argue the claims in dispute fall within that exception. One such frequent carve out is the Equitable Remedy Provision. That sort of provision permits a court to grant an injunction to avoid harm while the dispute is in arbitration. This decision holds that carve out does not swallow the whole, at least in this case. As a result, the court granted the stay.
ShareCourt Of Chancery Upholds Limits On Redemption Right
SV Investment Partners, LLC v. Thoughtworks, Inc., C.A. 2724-VCL (November 10, 2010)
Private equity investors often want to use preferred stock to invest in a company. In doing so the investors expect to be cashed out at some defined point. They frequently provide for that by having the certificate of incorporation require mandatory redemption of the preferred stock. One customary limit on those redemption rights is that only "funds legally available" be used for the redemption. Investors may assume that means that if the company's assets exceed its liabilities that redemption is required at least to the extent of the excess.
Well if they think that they are wrong. This decision holds that the "funds" available refers to the company's cash and that cash may only be used if to do so will not impair the company's ability to pay its creditors in due course. As a result, what seemed like mandatory redemption may instead be put off indefinitely.
This is not just a simple matter to cure by drafting, however. While it is true, as the decision points out, that all sorts of investment vehicles exist to permit an investor to demand and get back its investment, those may not always be appropriate. Preferred stock has the advantage of being treated as equity on a balance sheet. Other investment vehicles may not have that advantage.
The real issue is who calls the shots once the mandatory redemption deadline passes without redemption. If the investors want to do so, then they need to bargain for that power when they make their investment.
This decision was affirmed by the Supreme Court on November 15, 2011.
ShareCourt Of Chancery Again Sets Procedures For Advancement
Fuhlendorf v. Isilon Systems Inc., C.A. 5772-VCN (November 9, 2010)
Once the right to fee advancement has been determined, there remains the potentially vexing question of how to determine if the fees on any given statement are reasonable. The last thing the Court wants to do is become the monthly fee arbitrator for a case. Hence, the Court has now several times established the procedures to follow including certification that any question or objection to a request is in good faith, payment of undisputed amounts and the use of special masters to resolve any remaining disputed fee issues.
Now all the Court has to do is get someone to sit between 2 lawyers arguing over fees and to resolve the fees of the special masters.
ShareCourt Of Chancery Explains Conversion Cap
ION Geophysical Corporation v. Fletcher International Ltd., C.A. No. 5050-VCP (November 5, 2010)
This decision explains how a 'conversion cap' works to prevent the holders of convertible securities from converting those securities to common stock. These provisions thereby avoid running afoul of the SEC rules on registering ownership of stock.
ShareTranscript of Panel Including Current and Former Members of Delaware Judiciary on Corporate Governance after Financial Crisis
The latest issue of the New York University Journal of Law & Business contains an interesting transcript of a January 22, 2010 symposium panel addressing Corporate Governance After the Financial Crisis. Members of the panel included Justice Jacobs, former Chancellor Allen and then-Vice Chancellor Lamb. The panel covered a variety of current corporate governance topics, including whether corporate governance played any significant role in the crisis, the role of shareholders in the crisis, director independence and the changing make-up of corporate boards and say on pay.
Morris James LLP Receives "Award of Excellence" From The Marvin S. Gilman Superstars in Business Awards Sponsored by the DSCC
We are very pleased to receive this honor from the Delaware State Chamber of Commerce," said David H. Williams, Managing Partner of Morris James LLP, "Our firm is deeply rooted in Delaware and we are committed to providing our community with top-tier legal services.”
The Marvin S. Gilman Superstars in Business Award, named for one of Delaware’s leading small business entrepreneurs, honors businesses and non-profit corporations for their outstanding achievements and model approaches to business and management. The awards are presented to companies that have been in business for at least three years, are small businesses based on number of employees, and are members of the Delaware State Chamber of Commerce. Awards of Excellence are also granted to deserving companies. More ›
ShareFour Morris James Attorneys Selected By Their Peers As "Top Lawyers" In Delaware Today Magazine
Morris James is pleased to congratulate the lawyers listed below who were the most recommended by their professional peers, as determined by a Delaware Today survey of Delaware attorneys.
Gretchen S. Knight
Divorce
Family Law
Mary M. Culley
Elder Law
Keith E. Donovan
Personal Injury
(Dover Office)
Jill S. Di Sciullo
Family Law
To view the entire list of "Top Lawyers", please click here.
Court Of Chancery Holds Creditors Lack Standing
CML V, LLC v. Bax, C.A. 5373-VCL (November 3, 2010)
Creditors of a Delaware corporation have standing to sue derivatively when the corporation is insolvent. However, this decision holds that creditors of an LLC [and presumably an LLP] lack standing to sue derivatively. The difference is that the LLC statute expressly says who has standing to bring a derivative suit and does not mention creditors. In contrast, the corporate code only says when stockholders have standing and does not then actually define who else may have standing.
As the Court rightly points out, the solution to this problem is for creditors to have any rights they want set out in the LLC agreement before they invest. This again highlights the Delaware law that LLCs and LLPs are creatures of contract, not of judge-made fiduciary duties. Buyer beware.
ShareCourt Of Chancery Interprets LLP Exculpation Clause
In re Inergy L.P. Unitholder Litigation ,C.A. 5816-VCP (October 29, 2010)
Delaware has consistently recognized that an LLP agreement may define the measure of the duties owed to limited partners by the general partner and those who control the GP. While the duty to act in good faith always remains, fiduciary duties may be disclaimed. The problem is how to do so and still be left with a clear standard to apply. Again and again the Court has had to interpret complicated and usually conflicting language in limited partnership or LLC agreements. If it takes a long opinion to explain what these provisions mean, then how clear can they be in the first place.
In this case, the Court concludes that the agreement applies a subjective test of whether the transaction is fair in the view of the general partner. Of course, that still means the decision has to be made on good faith. Indeed, the decision also holds that if the manager relies on the advice of competent counsel, then good faith may be presumed if that is what the partnership agreement provides [and take it from me it always does]. That is good news for us lawyers whose place at the table is now assured.
Finally, it needs to be said once again that the Court issued a 51 page opinion in a very complicated case in just 7 days. Only in Delaware do you get that level of service, consistently.
ShareCourt of Chancery Interprets Conflict of Interest Provision of LLC Agreement
In re Atlas Energy Resources, LLC Unitholder Litigation, C.A. No. 4589-VCN (October 28, 2010)
This case is another example of the care practitioners must take in drafting LLC agreements. In this decision, Vice Chancellor Noble applied the Kahn v. Lynch entire fairness standard of review to a merger between a publicly traded LLC and its controlling unitholder. Plaintiffs, LLC unitholders, alleged the controlling unitholder breached its fiduciary duties to minority unitholders by negotiating an unfair merger through an unfair process. Plaintiffs also alleged that the directors and officers of the LLC breached their fiduciary duties by agreeing to the merger.
The controlling unitholder argued that it was not liable for breach of fiduciary duty because the LLC Agreement provided that if a conflict of interest arose between the LLC and controlling unitholder, it could be resolved by certain actions that had occurred here. Plaintiffs argued that the conflict of interest at issue was between the controlling stockholder and minority unitholders and thus the LLC Agreement conflict of interest provision was inapplicable. The Court agreed and found the merger between the LLC and its controlling unit holder subject to the entire fairness standard of review. In the absence of anything in the LLC Agreement addressing a conflict of interest between the controlling unitholders and minority unitholders, the Court saw no reason not to apply the reasoning of Kahn v. Lynch. As is typical in cases where the entire fairness standard of review applies, the Court denied the controlling unitholder's motion to dismiss.
The Court did, however, grant the motion to dismiss of the LLC directors and officers. The LLC Agreement provided that the directors and officers did not owe fiduciary duties to the LLC or its members. Thus, unlike the provision governing conflicts of interest, this provision of the LLC Agreement expressly eliminated fiduciary duties of directors and officers to members. Under the LLC Agreement, the officers and directors were subject to a subjective good faith standard. This standard of good faith is narrower than the good faith standard under Delaware law. Applying this subjective standard of good faith, the Court found that Plaintiffs had failed to state a claim that the directors and officers believed they were acting against the best interests of the LLC's unitholders in negotiating the merger.
ShareCourt Of Chancery Awards Large Fees In Intangible Benefit CAse
San Antonio Fire & Police Pension Fund v. Bradbury, C.A. 4446-VCN (October 28, 2010)
For all the occasional griping the plaintiffs' bar does over how it is sometimes treated in the Court of Chancery, this is a good example that a large fee award may be justly earned. The decision is particularly interesting in that the benefit conferred was intangible, a fact that usually has led to smaller awards. Here the benefit was to enhance or preserve voting rights, a sacred right under Delaware corporate law.
ShareCourt Of Chancery Explains Effect Of Fiduciary Duty Waiver
Lonergan v. EPE Holdings LLC, C.A. 5856-VCL (October 11, 2010)
Delaware law permits an LLC or an LLP agreement to eliminate fiduciary duties of managers or members. In addition, it is common in such agreements to provide for a "Special Approval " committee to permit self-dealing transactions by management. The duty of good faith and fair dealing remains in such circumstances but exactly how that applies is often unclear. This decision helps explain how all this works.
Briefly, the duty to act in good faith and to deal fairly operates as a sort of reverse business judgment rule. If the transaction is so bad that no one could approve it in good faith, then the duty to act in good faith has been violated. No Special Approval Committee can validly approve such a deal.
Ok that is an oversimplification, but this is just a blog for goodness sake.
ShareCourt Of Chancery Clarifies Termination Fee Calculation
In re Cogent Inc. Shareholder Litigation, C.A. 5780-VCP (October 5, 2010)
A termination fee must be reasonable. That is well known. But how to calculate the fee to test its reasonableness is sometimes misunderstood. This decision explains how to do so.
The preferred approach is to calculate the fee based on the equity value of the transaction. That is the amount needed to buy the equity, usually market value. Normally, the equity value is less than the enterprise value that includes the equity value and the value of the debt, less cash.
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