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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
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District Court Rejects Recommendation that Complaint Is Not Adequately Specific
Collins & Aikman Corp. v. Stockman, C.A. No. 07-265-SLR/LPS (D. Del. Sept. 30, 2009).
Upon review of the Report and Recommendation issued by Magistrate Judge Leonard P. Stark, and the objections thereto, the district court rejected Judge Stark's recommendation that the complaint did not contain adequately specific allegations that the defendants knew or should have known that the company's financial statements were false in connection with a Rule 10b-5 claim. The complaint is a rare example of a pleading that sufficiently raised red flags which should have alerted the defendants to accounting irregularities from the fraudulent schemes asserted against the director and officer defendants.
District Court Finds Late Fee is Not Liquidated Damages
Leeseberg v. Converted Organics Inc., C.A. No. 08-926-GMS (D. Del. Oct. 7, 2009).
Applying Delaware law, the district court concluded that a late fee provision was not a liquidated damages clause and dismissed the defendant’s motion to dismiss the plaintiff’s claim for actual damages. The late fee provision did not bear the label liquidated damages and there was no explicit evidence in the contract indicating that the late fee was the plaintiff’s sole damages in the event of a breach.
Court of Chancery Explains McWane Exceptions
Delaware courts frequently must decide if a case filed in Delaware should be stayed in favor of another action filed elsewhere. While we wonder why anyone would want to leave Delaware, it happens. This decision carefully reviews when even "summary" proceedings filed in Delaware may be stayed in favor of another litigation. When a "summary" proceeding seeks to determine who is in change of a Delaware entity, there is a policy against staying the action because of the need to promptly resolve that important issue.
This is a case where that policy did not overcome the rule that a first filed action should proceed even over a Delaware case. Of course, given that the plaintiff in Delaware had filed first in Maryland, that hurt its claim to proceed in Delaware. The use of a status quo order also mitigated against the need to move quickly in Delaware.
ShareCourt of Chancery Upholds Jurisdiction Over Nonresident Partner
Total Holdings USA Inc. v. Curran Composites, Inc., C.A. 4494-VCS (October 9, 2009).
In a case of first impression, the Court of Chancery has upheld its jurisdiction over a nonresident partner in a Delaware partnership. The current version of the Delaware Uniform Partnership Act authorizes jurisdiction over nonresident partners for disputes arising out of the internal affairs of the partnership. Here the parties' joint venture agreement expressly created a partnership "under Delaware law," and that was enough to support the Court's jurisdiction over a partner who had no other contact with Delaware.
ShareCourt of Chancery Upholds Forum for Trade Secret Litigation
LeCroy Corporation v. Hallberg, C.A. 4328-VCP (October 7, 2009).
This decision is another example of why Delaware is more frequently chosen to litigate trade secret or unfair competition disputes. For, while the defendant had no ties to Delaware other than its incorporation here, the Court declined to dismiss the litigation on venue grounds. Instead, the Court promptly dealt with the dispute, entering a status quo order, and resolving the venue dispute to get on with the case.
Moreover, it is widely thought that Delaware law is more favorable to protecting trade secrets than other jurisdictions. Delaware, for example, recognizes that it is inevitable that a former employee will use a valuable trade secret in competition with her old employer even if the secret is held only in her head. Other states are not so favorable.
Here, the defendant was dismissed for want of jurisdiction over the non-resident individual. Whether that result would have been the same had her employment contract contained a forum selection and consent to jurisdiction clause for Delaware remains to be seen.
ShareVice Chancellor Strine Discusses Stockholders' Role in Corporate Troubles
In this New York Times piece, http://dealbook.blogs.nytimes.com/2009/10/05/dealbook-dialogue-leo-strine/, Vice Chancellor Strine discusses the role of stockholders, particularly institutional investors, in recent corporate woes.
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Court of Chancery Appoints Lead Counsel
Dutiel v. Tween Brands Inc., C.A. 4743-CC (October 2, 2009).
The Court has recently explained the criteria to determine who should be appointed lead counsel in a class action. In this decision it added a new twist, giving advantage to counsel that has shown it gets along best with co-counsel in the case. This just makes sense, if only to avoid the Court supervising the play in the sandbox.
Note, however, that on a motion for reargument, the Court stressed that not too much should be made of its re ference to coorperation among some counsel as a factor to be consided. Moreover, in that October 28, 2009 opinion the Court detailed how to assess the relative stockholder interest in deciding whose counsel should lead.
Recently, at least one fellow Delaware attorney has suggested that the way to win such favor from your co-counsel is to known as generous with the fee splitting that occurs when the case ends. Given that the division of the fee awarded by the Court among all the plainitff attorneys is not done publicly, that may be an insight into the world of plainitffs counsel that is worth remembering.
ShareCourt of Chancery Explains Lynch, Again
In re John Q. Hammons Hotels Inc. Shareholder Litigation. C.A. 758-CC (October 2, 2009).
The application of the Lynch doctrine to a merger is an often discussed topic. This decision does a great job of summarizing and explaining the rationale for applying the entire fairness test to a merger that has the majority stockholder on both sides of the deal. Given that Lynch has been applied to other deals where a majority stockholder was not involved [such as when a controlling stockholder dictates a self-dealing transaction], the parameters of that doctrine need such an explanation.
This decision also settles two other points. To shift the burden of proving fairness from the defendants, the vote of the minority stockholders must be by a majority of all the minority stockholders eligible to vote, not just a majority of those who did vote. Second, the vote must be binding and not waivable by a special committee.
ShareCourt of Chancery Explains the "Parnex Exception"
In re NYMEX Shareholders Litigation, C.A. 3621-VCN (September 30, 2009).
When is a claim that the merger was unfair a derivative and not a direct claim? This is a perplexing question under Delaware law. Generally, a claim that the merger price is too low because management manipulated the process to drive down value is derivative, because the claim asserts it is the company that was hurt by the actions taken. When, however, the price was unfairly reduced by the actions of a corporate fiduciary, then the so-called "Parnex exception" may apply, and a direct stockholder class action may be brought.
This decision explains the Parnex Exception. In general, a direct claim may be brought when the alleged breach of fiduciary duty was intended to benefit a particular fiduciary at the expense of all the other stockholders. The breach of duty must be directly connected to the reduced price, however, and any large gap in time may be fatal to the direct claim.
Keep in mind that all claims challenging a merger are not derivative, and it is only because this was an entrenchment claim that the court held it was derivative. This points out the importance of picking your legal theory wisely. A mistake can cost you the case in this complicated area.
ShareCourt of Chancery Enforces Non-Compete Agreement
Concord Steel Inc. v. Wilmington Steel Processing Co. Inc., C.A. 3369-VCP ( September 30, 2009).
This is another in a line of decisions enforcing agreements not to compete. What is striking about this case is the apparent utter disbelief of the defendants that the agreement would actually be enforced. Defendants in these cases seem to think that, if they are not actually engaged in the exact same business as the other party to their agreement not to compete, the Court will say there is "no harm, no foul." Wrong!
Agreements not to compete may cover not just exactly the same business but any line of work that may be a substitute for a business' normal work. In any case, it is the language of the agreement that counts, and this decision illustrates that point.
ShareCourt of Chancery Rejects Attack on Board Discretion to Retain Directors
This is the first Delaware decision to deal with the so-called Pfizer policy on when directors may be retained despite a shareholder vote on dissatisfaction. Axcelis had a bylaw that any director up for re-election who did not get a majority of the votes cast must tender her resignation to a committee of the whole Board, and that committee had the discretion to accept or reject the resignation. When three directors did not get the majority vote and tendered their resignations, the committee rejected the resignations and the directors stayed on the Board. The plaintiff then filed a books and records case to discover why.
The Court held that under the company policy the committee had the discretion to reject the resignations. In the absence of even a minimal showing that the exercise of discretion was wrongful, the Court denied inspection into the committee's reasoning. That seems consistent with existing Delaware law. Otherwise, any stockholder who disliked a board decision might demand inspection of corporate records to fish for a basis to sue.
The implications of this opinion are that any committee who rejects a director resignation under a policy giving it broad discretion will have its decision upheld. Indeed, the decision is virtually unreviewable.
ShareConference Board Issues Report on Executive Compensation
On September 21, 2009, the Conference Board Task Force on Executive Compensation issued its recommendations on executive compensation. Recommendations include the use of clawback policies and the avoidance of controversial pay practices such as excessive golden parachutes and gross-ups. The full report can be found at http://www.conference-board.org/ectf
ShareCourt of Chancery Enjoins Violation of Non-Compete
Zrii LLC v. Wellness Acquisition Group, Inc., C.A. 4374-VCP (September 21, 2009).
This is an interesting case because of the limitations on the remedy imposed for violating a non-competition agreement. The decision illustrates the rule that no matter how wrong the conduct, the remedy of an injunction will be limited to stopping the competition for the period provided for in the agreement. Of course, a damage remedy is also available.
ShareCourt of Chancery Upholds Claw Back Agreement
eBay Domestic Inc. v. Holdings Inc., C.A. 7705-CC (September 16, 2009).
This decision upholds the right to claw back privileged documents inadvertently produced in discovery, at least when there is an agreement permitting claw back rights.
ShareDistrict Court Applies Stone v. Ritter in Rule 23.1 Case
King v. Baldino, C.A. No. 08-54-GMS-MPT (D. Del. Aug. 26, 2009).
This memorandum order issued by Magistrate Mary Pat Thynge is an example of the continued judicial reluctance to impose liability on boards of directors for alleged failures in oversight responsibility, where the plaintiff fails to plead that the board was on notice, through “red flags,” of corporate misconduct. The Magistrate applied Delaware law on oversight liability as set out in Stone v. Ritter, 911 A.2d 362 (Del. 2006) to find that the plaintiff failed to plead demand futility and comply with Federal Rule of Civil Procedure Rule 23.1.
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