Delaware Business Litigation Report

Court of Chancery Declines to Upset Unusual Arbitration Ruling

Zurich America Insurance Company v. St. Paul Surplus Lines Inc., C.A. 4095-VCP (December 10, 2009, revised April 14, 2010)

In this case, the Court of Chancery declined to upset an arbitrator's decision and explained the limits on the Court's review of arbitration awards. Here, that limit applied even when the arbitrator had declined to rule based on his decision that he lacked jurisdiction.

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Court of Chancery Explains Sanctions for eDiscovery Abuse

TR Investors LLC v. Genger, C.A. 3994-VCS (December 9, 2009)

This is the most important recent decision on the Court's handling of discovery of emails and other e-documents. For spoliation, the Court imposed four forms of sanction: (1) it increased the burden of proof to a clear and convincing standard for the offending party to prove his case, (2) it held his testimony must be corroborated by other evidence to meet that burden, (3) it denied any claim of attorney-client privilege to certain documents, and (4) it imposed attorney fees for the sanction motion work.

This is also a good read for its explanation of how e-documents are stored in computers and servers and may be retrieved long after they were thought to be destroyed.

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Court of Chancery Reviews Advancement Law on Counterclaims

Paolino v. Mace Security International Inc., C.A. 4462-VCL (December 8, 2009)

In this decision the Court examines when a corporate officer is entitled to have his fees advanced in defending a counterclaim against him. The opinion does so in the context of a full explanation of the Cochran. line of cases that determine when an employee is entitled to indemnification (when sued for acting in an official capacity) and when he is not (when sued for breaching his employment contract). That is not as easy a distinction as it may seem, and this case helps us understand it

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Court of Chancery Limits When a Stockholder May Claim Appraisal

DiRienzo v. Steel Partners Holdings L.P., C.A. 4506-CC (December 08, 2009)

While it is well known that appraisal rights are limited to stockholders of record, sometimes stockholders do not really understand what it means to be "of record." They think if their name is on a brokerage statement, they are a "stockholder of record." Wrong! They must be listed on the records of the company to be "of record," and most stock in public entities is held by nominees, such as Cede & Co., to facilitate trading.

Here, the Court examines when the corporation is estopped by its conduct from denying appraisal rights and finds that the elements of waiver or estoppel are hard to establish and not present in this case.

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Court of Chancery Summarizes Privilege Law

Cephalon Inc. v. John Hopkins University, C.A. 3505-VCP (December 4, 2009)

This is a short, but excellent summary of the law of attorney/client privilege. It also is an example of how the Court conducts an in camera review of documents to decide privilege questions.

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Expert Preparation Fees Permitted

Reid v. Johnston, C.A. 08C-01-025-JRS (December 3, 2009)

In this case of first impression, the Court held that a party seeking to depose an opponent’s expert must pay for the expert's preparation time. However, to prevent abuse, the Court limited the fees to a time period equal to the length of the actual deposition. Talk fast to save money.

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Court of Chancery Extends Jurisdiction to Parent Entity

Vichi v. Koninklijke Philips Electronics N.V., C.A. 2578-VCP (December 1, 2009)

This decision provides a full review of the basis for jurisdiction over foreign entities by the Court of Chancery. This includes a discussion of the limits of the conspiracy theory of jurisdiction.

Most interestingly, the Court holds that a parent company may be subject to Delaware jurisdiction because of the acts of agents of its subsidiaries, at least when those agents had the apparent authority to act for the parent. That may occur when, as here, the parent entity touts the business interrelationship of it and all its subsidiaries. This is another example of getting not wanting what you wished for and a caution against ignoring the separateness of corporate entities in how they do business.

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Court of Chancery Explains Beneficial Ownership

Mangano v. Pericor Therapeutics Inc., C.A. 3777-VCN (December 1, 2009)

This decision illustrates another loop hole in a stockholder agreement designed to restrict voting rights. Briefly, the agreement provided that an otherwise controlling stockholder would place his stock in a voting trust that would then vote his stock as did the other stockholders. However, there was a provision that permitted the otherwise majority stockholder to transfer his stock to a family member and another provision that terminated the trust if the majority stockholder's stock in trust fell below 45% of the stock outstanding.

Of course, what the majority stockholder did was transfer enough stock to his sister to make him own less than 45% and thereby terminated the trust. His sister then voted with him, and they took control of the corporation.

The Court held that the stockholder did not have a beneficial ownership in the sister's stock as she had no obligation to vote with him or give him any benefit from her ownership of the stock.  To be a beneficial owner you have to have some interest in the stock.

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Court of Chancery Explains Limitations for Receiver Litigation

In the Matter of Texas Eastern Overseas Inc., C.A. 4326-VCN (November 30, 2009)

This decision answers the question of whether it is possible to have a receiver appointed for a dissolved Delaware corporation more than 3 years after it is dissolved. Section 278 of the Delaware General Corporation Law provides for a 3 year statute of limitations for litigation against a dissolved Delaware corporation. However, when the petition to appoint a receiver seeks to get at assets still held by the dissolved corporation (in this case an insurance policy), the Court ruled that the petition may proceed. The theory is that the persons protected by Section 278, such as its stockholders, will not be affected by the appointment of a receiver who is only seeking assets still held by the entity and that they would not receive anyway.

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Court of Chancery Holds Arbitrator Decides Limitations Defense

Lefkowitz v. HWF Holdings LLC, C.A. 4381-VCP (November 11, 2009)

The Delaware Arbitration Act has a unique provision that permits the Court of Chancery to enjoin an arbitration when the claim asserted is barred by a statute of limitations. However, to get into Court, the arbitration agreement must be governed by Delaware's Arbitration Act. If it is not, then this unique remedy is not available, and it is up to the arbitrator to decide if the claim is barred on limitations grounds.

This decision also contains an excellent discussion of when the Delaware Arbitration Act applies and, when it does, to what extent its provisions control.

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Court of Chancery Explains Anti-Reliance Clause

Airborne Health, Inc. v. Squid Soap, LP, C.A. 4410-VCL (November 13, 2009)

In this decision, the Court explains that an anti-reliance clause is different from an integration clause. The anti-reliance clause bars claims of reliance on extra contractual promises and must be very specific in doing so. A more general integration clause will not bar such claims of reliance.

There are two aspects of this decision that are particularly worth noting. Most importantly, this is the first extensive and significant opinion by the newest Vice Chancellor. It shows he writes wonderfully well and is fun to read.

Second, he brings to the task his extensive business background. That shows how important it is to have a judge who knows what he is talking about.

As a result, the future of the Court of Chancery looks secure.

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Court of Chancery Expands Dissolution Remedy

Lola Cars International Limited v. Krohn Racing LLC, C.A. 4479-VCN (November, 12, 2009)

The Delaware Limited Liability Company Act permits the Court of Chancery to dissolve an LLC when it is not "reasonably practicable to carry on the business" of the LLC. The initial decisions under this statute tended to adopt a narrow construction of its terms and dissolution was not ordered just because of a business dispute between the members of the LLC. More recent decisions have expanded the circumstances when dissolution will be ordered, including when there is a management deadlock. This decision expands that trend to permit dissolution when there is serious mismanagement established. While not yet to the point of "no-fault" dissolution, the trend is headed that way, and it remains to be seen exactly how much mismanagement needs to be shown to win a dissolution decree. Probably disloyalty such as self-dealing is still required.

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Court of Chancery Explains Duty of Good Faith and Fair Dealing

Amirsaleh v. Board of Trade of The City of New York, Inc., C.A.2822-CC (November 9, 2009)

The law of good faith and fair dealing in contracts is a “judicial tool used to imply terms in a contract that protect the reasonable expectations of the parties." This decision clearly explains Delaware law in this area, including the point that not acting in good faith involves bad faith and that is proved by showing an improper motive.

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Court of Chancery Demonstrates its Understanding of Modern Discovery

eBay Domestic Holdings, Inc. v. Newmark, C.A. 3705-CC (October 29, 2009)

Modern discovery is often subject to problems, particularly with electronic "documents." As a result, some courts have imposed harsh sanctions for a party's failures to follow all the requirements. While not in any way excusing those failures, this decision shows that the Court of Chancery is aware of the difficulties involved. The Court held that only deliberate failures to follow the rules will be sanctioned by a fee award.

The opinion is also noteworthy for the discussion of a party’s offer to help the Court do an in camera document review. That offer took a lot of nerve to make and, characteristically, the Court politely declined the offer to do its job for it.

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Court of Chancery Resolves How to Treat Preemption Issue

Petroplast Petrofisa Plasticos S.A. v. Ameron International Corp., C.A. 4304-CC (October 28, 2009)

When does the Uniform Trade Secrets Act preempt claims arising out of the misuse of documents based on other legal theories such as  conversion? While not answering that question definitively, this decision does go a long way to clarifying how to decide that issue at the pleading stage.

Briefly, it holds that, if the alternative legal theory may be applied after trial because the documents in dispute are found not to be trade secrets under the Trade Secret Act definition, the case should go forward on alternative theories of recovery. This let the Court decide the case on the evidence and not some preliminary assessment based on the pleadings alone.

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