Delaware Business Litigation Report

Supreme Court Divides Over When Fair Dealing Claim Exists

Nemec v. Shrader , C.A. 305, 2009 (April 4, 2010)

In a rare split amongst the Justices, the Delaware Supreme Court has divided over when the duty of good faith and  fair dealing applies. The majority opinion is an example of the views of  Chief Justice Steele who is noted for his stance that  a contract should be held to fix the parties' rights and there is little room to add to those rights under the so-called duty to act in good faith and with fair dealing.  If the circumstances that the plaintiff complains of might have been anticipated when the contract was drafted, it is too bad if the contract does not give the plaintiff what he now wants.

The two Justices in the minority, Justices Jacobs and Berger, are not so sure they want to rely entirely on what the parties put into their contract to define their rights in all circumstances. They are more inclined to expand a party's rights when they feel the other side has acted in a way that would not have been agreed to had they thought about it beforehand.

For now at least, the strict upholding of the contracts limits has won the day.

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Court Of Chancery Limits Remedy For Charter Breach

Fletcher International Inc. v. ION Geophysical Corp.,  C.A. 5109-VCP (March 24, 2010)

When a provision in a certificate of incorporation is violated, the question that often arises is what is the remedy. Often the Court  will enjoin the violation, but not always. Here the preferred stock had approval rights for certain corporate transactions. Those rights were violated. Finding that an injunction would cause more harm than was merited, the Court denied the injunction and remitted  a damages remedy to the plaintiff.

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Court Of Chancery Rejects SLC Report

London v Tyrrell, C.A. 3321-CC (March 11, 2010)

When should the recommendations of a SLC to not pursue a derivative suit be accepted? As this opinion points out, certainly not when the defendants appoint their relative to the SCL and those that are indebted to them. Nor will the SCL be respected when its members approach their investigation with views fixed before their investigation was performed and when their non-Delaware counsel does not understand Delaware law.

This decision summarizes the Zapata principles for examining the report of a SLC, including a good summary of prior case law.  Apart from the basic rules it sets down on burden of proof, independence and the scope of any SLC investigation [all of which alone are worth reading], the decision's analysis of the internal logic of the SLC report is critical. Put simply, the Court wants the report to make sense under an objective review and when it does not, trouble will follow.

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Court of Chancery Dumps Class Counsel

In re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL  (March 16, 2010)

Vice Chancellor Laster took the unusual step of removing and replacing co-lead counsel and Delaware liaison counsel in a proposed settlement of a class action challenging a proposed merger by a controlling stockholder and a subsequent exchange offer by the target company.   Despite the refusal of the Special Committee's financial advisor to render a fairness opinion on the proposed merger and the refusal of the Special Committee to recommend the original transaction, plaintiffs' counsel engaged in minimal litigation efforts and quickly reached a settlement with the defendants.  Vice Chancellor Laster was highly critical of the actions of the New York and Delaware firms representing the class and proposing the settlement.  Among other things, Vice Chancellor Laster noted the New York and Delaware law firms' extensive history of filing and settling representative cases in the Court of Chancery, the existence of significant discrepancies between the plaintiff counsel's actions as set forth in the memorandum of understanding and the exchange offer, the strong possibility of the entire fairness standard applying to the exchange offer, the failure of the exchange offer to receive a majority of the minority shares and the lack of litigation by the plaintiffs' counsel.  Although the new counsel had only sought to represent stockholders who exchanged their shares in the exchange offer, Vice Chancellor Laster appointed that counsel to represent the entire class and take over the litigation.  Interestingly, Vice Chancellor Laster rejected the leadership structure proposed by new counsel, which would have consisted of two non-Delaware firms known for performing the same type of work as former counsel as lead counsel and a Delaware firm less known for performing similar work as Delaware liaison counsel.  Instead, Vice Chancellor Laster appointed the Delaware firm to act as lead counsel along with the non-Delaware firms and gave the Delaware firm decision-making authority in the event of disagreements.

Plaintiffs' counsel and defense counsel should pay close attention to this decision in negotiating settlements, drafting disclosures related to such settlements and defending such settlements in the Court of Chancery.  This decision could also encourage law firms not traditionally associated with frequent representative litigation in the Court of Chancery to bring such actions and seek appointment as lead counsel.

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Court Of Chancery Explains Rights Of Preferred Stock

 LC Capital Master Fund, Ltd. v. James,  C.A. 5214-VCS (March 8, 2010)

 Lately, there seems to be a lot of interest in the rights of preferred stock compared to the rights of common stock and how the board of directors should act when caught in the middle of their conflicting claims. This decision summarizes the past decisions and explains what to do.

Here are some "rules" to go by:

1. When the certificate of incorporation speaks to the preferred stock's rights on an issue, that controls and the board does not need to consider granting greater rights to the preferred. The charter ends the discussion.

2. When the certificate of incorporation is silent on an issue and leaves the preferred in the same position as the common [such as on the right to get the highest price for the company in a merger] then the board needs to consider the preferred and common as having the same rights and owed the same fiduciary duty.

3. When the issue somehow falls in a gap between the preferreds rights under the certificate of incorporation and the rights of the common stock, get a good lawyer. Seriously, the board needs to do its best to strike a  fair balance under the circumstances.

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Court Of Chancery Upholds Nullification Claim

Thor Merritt Square LLC v. Bayview Malls LLC, C.A. 4480-VCP (March 5, 2010)

On occasion, the members of an LLC try to end its life by filing a certificate of cancellation with the Delaware Secretary of State. This is done in the hope that it will provide a defense to suits over the LLC's obligations. Well, that does not work. As this decision explains, a creditor may then file a claim to nullify the certificate of cancellation and to seek a receiver.

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Court Of Chancery Upholds NOL Pill

Selectica Inc. v. Versata Enterprises, Inc., C.A. 4241-VCN ( February 26, 2010) In a case with an unusual factual setting, the Court of Chancery has upheld a poison pill with a 5% trigger. The very low trigger is explained by the need to protect a NOL that might be adversely affected by the acquisition of 5% of a company's stock. In its discussion of the Unocal standard of review that applies to defensive measures, the Court applied a very differential approach to the board's decisions. Arguably, that is not the higher standard of review that had been suggested by Moran as applicable to the adoption of a poison pill. This decision illustrates the Court's limited role in reviewing board's decisions that are not affected by any conflict of interest on the part of directors. Briefly, unless there is a duty of loyalty issue involved, directors just will not be second guessed in Delaware. This decision was affirmed . See 5 A3d 586 (Del Sup.) Share

Court Of Chancery Discusses Scope Of Arbitration

RBC Capital Markets Corp. v. Thomas Weisel Partners LLC, C.A. 4709-VCN (February 25, 2010)

Many decisions discuss when arbitration is required by an agreement.  This one deals with the rarer problem of what claims may be presented to arbitrators in a matter that the parties concede must be arbitrated.  The Court will usually leave that decision to the arbitrators in the first instance, but will at least consider if a claim is so far outside  the scope of the arbitration clause that its presentation should be barred.

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Court Of Chancery Explains How To Apply For Fees

Global Link Logistics Inc. v. Olympus Growth Fund III, L.P., C.A. 4444-VCP ( February 24, 2010)

This decision explains what should be in a fee application to the Court of Chancery. Redacted bills, explanations of what the time was for and why it was spent are all required in a contested matter.

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Court Of Chancery Interprets Exculpation Clause In LLC Agreement

Kelly v. Blum, C.A. 4516-VCP (February 24, 2010)

It is well known that an LLC agreement may limit the right to sue for breaches of fiduciary duty. What is less well thought out is what language needs to be used to do so. This decision tells you what to say if you want to limit liability.

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Court Of Chancery Explains Damage Calculations In Trade Secret Litigation

Agilent Technologies Inc. v. Kirkland, C.A. 3512-VCS ( February 18, 2010)

Calculating damages in trade secret litigation is often difficult.  Lost profits may overlap with unjust enrichment claims and the whole process may be affected by possible injuntive relief. This decision explains how a court will decide the right remedy and calculate damages.  It is also a particularly good example of the Court of Chancery's thoughtful approach to remedies.

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Court Of Chancery Denies Power To Eliminate Board Seats

Kurz v. Holbrook, C.A. 5019-VCL  (February 9, 2010)

This significant decision holds that you cannot eliminate a director by amending the bylaws to reduce the number of seats on the board of directors.  Of course, this only came up in the odd context of a stockholder who could not vote for directors and hence could not vote to eliminate them as well. Nonetheless, it is interesting as a limit on the power to amend bylaws

Perhaps more importantly, the decision explains the complicated and often misunderstood ways in which proxies are obtained to vote the shares of public companies. Those shares are mostly held in the name of Cede & Co., a depository for brokers and banks.  Getting the proxy from Cede, and then to the brokers and then to the actual beneficial owners has proved cumbersome in fast proxy battles. This decision helps that process by letting the records of Cede act as a list of owners.

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Court Of Chancery Holds Old Guys Do Not Rule

Concord Steel Inc v. Wilmington Steel Processing Co. Inc., C.A. 3369-VCP (February 5, 2010)

In this decision, the Court modestly reduced an attorney fee award because too much of the legal work was done by a senior partner when a lower cost associate could have been used. While perfectly reasonable, it only shows getting old is not for sissies.

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Court of Chancery Now Open for Arbitration of Corporate and Commercial Business Disputes

 The Delaware Court of Chancery (“Court of Chancery” or “Court”) has announced new rules for arbitration procedures of business disputes. This offers businesses another attractive option to resolve not only the corporate governance disputes traditionally associated with the Court of Chancery but also other commercial and business disputes. It provides access to efficient expertise in a confidential and expedited process. Arbitration before a member of the Court will provide greater finality for the parties, and for the Chancery judge or master, more flexibility to craft a remedy or other equitable relief.  

STATUTORY AUTHORITY 

The General Assembly recently conferred statutory authority, 10 Del. C. § 349 to the Court of Chancery to arbitrate business disputes without the requirement of a case pending before the Court ; thus, “arbitration only” cases are now permitted. This will allow the parties to seek arbitration very early in the dispute and avoid excessive attorneys’ fees and time. Eligibility is the same as for mediation of business disputes pursuant to § 10 Del. C. 347(a) and (b), except that the parties must consent to arbitration rather than mediation. See § 349(a). While not defined in the Delaware code, the term “business disputes” has been viewed as including commercial, corporate, and technology disputes. The parties must consent to arbitration through contract or through a stipulation to arbitrate. Under the new arbitration rules, the parties must satisfy the same requirements as in the mediation process. For example, at least one party must be a business entity (e.g., a corporation, business association, partnership) and at least one party must be a Delaware business entity or have its principal place of business in Delaware. Further, if the dispute involves only monetary claims, the amount in controversy must be at least $1,000,000. Finally, each party must be represented by Delaware counsel at the arbitration. 

EXPEDITION

The rules expedite the resolution of disputes. Within 10 days of the filing of the petition for arbitration, a preliminary conference is required and the arbitration hearing will generally be held within 90 days of filing.  The discovery process is truncated. The parties will only exchange the information and documents or conduct the depositions necessary to permit the arbitrator to understand the dispute. The arbitrator has the last word if the parties cannot agree.

CONFIDENTIALITY

The parties’ interest in confidentiality is recognized and accommodated. The petition for arbitration is not entered on the Court’s docket. The proceedings are confidential and do not become part of the public record unless the arbitration becomes the subject of an appeal to the Delaware Supreme Court which shall exercise its authority in conformity with the Federal Arbitration Act

EFFICIENCY

On January 4, 2010 Chancellor Chandler, in an effort to encourage utilization of the arbitration rules, issued a standing order implementing the fee schedule for the arbitration of business disputes.  The process is efficient. Parties must pay a $12,000 filing fee for the first day of arbitration and a $6,000 per day fee for each partial day thereafter, with all fees to be divided equally among the parties. This fee structure is quite favorable when compared to those charged in other arbitration forums, and allows disputants to eliminate the fees and expenses occasioned by a trial or unfocused settlement discussions.

EXPERTISE

The new rules provide access to the special expertise of the Court of Chancery’s judicial officers. Court of Chancery judges are accustomed to complex business litigation, have a pragmatic understanding of business realities, and are capable of prompt action. The new rules give the chancellors and masters of the Court the authority to fashion equitable and binding resolutions of complex commercial, corporate and technology disputes efficiently and expeditiously.

A copy of the jurisdictional statute can be found here: http://delcode.delaware.gov/title10/c003/sc03/index.shtml#349

A copy of the Delaware Court of Chancery’s New Arbitration Rules can be found here: http://courts.delaware.gov/rules/?Chancery96-97-98_020110.pdf

A copy of the Court’s Standing Order regarding fees of January 4, 2010 can be found here: http://courts.delaware.gov/forms/download.aspx?id=42348

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Court Of Chancery Explains Damages For Breach Of Non-compete Agreement

Great American Opportunities Inc. v Cherrydale Fundraising LLC., C.A. 3718-VCP (January 19, 2010)

This decision is a landmark case on Delaware law on non-compete agreements with employees. It establishes so many new precedents that it is hard to briefly summarize. For example, it holds that it is possible to assign an employee non-compete agreement in connection with an asset sale.

Perhaps the most significant part of the decision is its discussion on how to calculate damages when an at-will employee is lured away by a competitor and then violates his non-competition agreement.  Damages are not, under this decision, what the new employer won in new business with the purloined employee.  Instead, how to calculate damages in such a case is much more complicated and requires a careful reading of this decision.

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