Delaware Business Litigation Report

Delaware Supreme Court Affirms Sanctions Award

Shawe v. Elting, No. 487, 2016 (February 13, 2017)

The Supreme Court affirmed perhaps the largest award of attorney fees as a sanction for bad conduct in Delaware’s history in this very unusual decision. It is a good summary of when a Court may depart from the “American Rule.”

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Delaware Supreme Court Affirms The TransPerfect Decision

Shawe v. Elting, No. 423, 2016 (February 13, 2017)

The Supreme Court has affirmed the Court of Chancery decision that Section 226 of the DGCL permits the Court to appoint a custodian to sell a Delaware corporation when the board of directors and stockholders are deadlocked and the company is suffering as a result.

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Stockholder Merger Vote Sets High Bar for Post-Closing Claims

The Delaware Supreme Court's decision in Corwin v. KKR Financial Holdings , 125 A.3d 304 (Del. 2015), reaffirmed the power of fully-informed, uncoerced, disinterested stockholder approval to immunize M&A transactions against stockholder challenge. Under Corwin, where a noncontrolling stockholder transaction "has been approved by a fully informed, uncoerced majority of the disinterested stockholders," the business judgment rule applies irrebuttably, leaving plaintiffs with a claim for waste. Since waste requires stockholder approval of an irrational deal, a Corwin-qualifying vote will likely result in dismissal. Corwin therefore sets a high bar for plaintiffs in post-closing fiduciary duty claims challenging M&A transactions. More ›

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Court Of Chancery Explains Limitation On Fiduciary Duty Claims

CelestialRX Investments LLC v Krivulka, C.A.11733-VCG (January 31, 2017)

This decision explains how a provision in an LLC agreement waiving fiduciary duties is to be applied in the context of conflicted transactions. It is a good summary of Delaware law on that issue. 

It also has an instructive summary of the law governing contract interpretation, albeit under New York law.

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Court Of Chancery Limits Fee Award To Account For Misconduct

Dore v. Sweports Ltd., C.A. 10513-VCL (January 31, 2017)

What will the Court of Chancery do when a Petitioner's attorney alters his records to increase the fees sought in an advancement or indemnification case? Here at least the Court disallows the altered fees, rather than barring the entire request.

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Court Of Chancery Rejects Jurisdiction Based On Contract Interpretation

Green v. Geico General Insurance Co., C.A. 9431-VCS (February 1, 2017)

As this decision explains, the Court of Chancery will not have jurisdiction based on the claim an injunction is needed to force a defendant to comply with the proper interpretation of a contract. Rather, the presumption is that once the Superior Court interprets the contract that the defendant will honor that judgment.

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Court Of Chancery Holds That Wrong Forward Looking Statement Insufficient To Support Records Inspection

Haque v. Tesla Motors Inc., C.A. 12651-VCS (February 2, 2017)

It is not enough that certain forward-looking statements failed to come true to justify requiring an inspection of corporate records. More evidence of wrongdoing is needed if your inspection is based on a theory of mismanagement.

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Court Of Chancery Applies Corwin Doctrine To Dismiss Non-Exculpated Duty of Care Claims

In Re Merge Heathcare Inc. Stockholders Litigation, C.A. 11388-VCG (January 30, 2017)

Under the Corwin doctrine, approval by a majority of the fully-informed, uncoerced, disinterested stockholders invokes the business judgment rule so long as the transaction does not involve a controlling stockholder extracting personal benefits. This decision explains that law very well. More interestingly, however, the decision also applies Corwin to a complaint alleging a violation of the duty of care. That is unusual because almost all Delaware corporations have a duty of care exculpation clause in their charters and the result is that post-closing damages cases against directors usually focus on alleging a violation of the duty of loyalty. Why that should make a difference under Corwin is not clear but at least this decision seems to settle the issue and Corwin applies to duty of care claims as well.

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Delaware Superior Court Explains Liability Of Signatory To Contract

TMC Consulting v. Wright, C.A. N15C-11-132 EMD CCLD (January 26, 2017)

This is an excellent review of when a signatory to a contract might be personally liable notwithstanding that he claims to have only signed in a representative capacity. Hint: contractual references to the signatory separate and apart from the entity for which he is signing may create an ambiguity that prevents dismissal. It also has a good discussion on the limits of immunity for court-appointed receivers.

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Delaware Superior Court Explains How To Assert Fraud Exclusion

Gallup v. Greenwich Insurance, C.A. N14C-02-136 FWW (January 30, 2017)

This is an important insurance coverage decision. It upholds the claim of an insurer to bring a coverage suit to determine that a fraud exclusion applies to bar coverage on an underlying litigation that asserted a claim for fraud. This is important because fraud exclusions often depend on a finding in a final judgment of fraud by the insured in the underlying litigation. An insured may try to avoid such a judgment by settling and then asking the insurer to pay the settlement.  See e.g. the decision in Arch Insurance Company v. Murdock, Del. Super. C.A. N16C-01-104 EMD (December 21, 2016), denying the use of a fraud exclusion when the underlying case was settled.

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Court Dismisses Derivative Action in Stockholder's Litigation Demand

The Delaware courts have been critical of litigants who bring derivative claims without first seeking books and records. The absence of such records often makes it difficult to overcome the business judgment rule which prevents a stockholder from bringing derivative claims directly without first making a demand on the board of directors. Stockholders cannot so proceed unless they can show that a majority of directors at the time of the demand was not independent or disinterested or that the decision was not the result of a proper exercise of business judgment. The standard is even more difficult if a stockholder makes a demand which the board refuses and then seeks to proceed with litigation by claiming that the board wrongfully refused the demand. The Delaware Court of Chancery's recent decision in Andersen v. Mattel, C.A. No. 11816-VCMR (Jan. 19), illustrates the difficult burden a plaintiff bears in alleging wrongful refusal, particularly when he fails to use the tools at hand to obtain relevant books and records. More ›

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Delaware Supreme Court Signals Due Process Might Prevent Dismissal Based On Demand Futility Issue Preclusion

California State Teachers Retirement System v. Alvarez, No. 295, 2016 (January 18, 2017)

When a derivative suit is dismissed for the failure to plead demand futility, does that also mean that any other pending derivative suit based on the same facts must be dismissed because the shareholders are precluded from relitigating the issue of demand futility? This is a particularly important question because the Delaware Court of Chancery has held that that issue preclusion applies and dismissal is required. Hence, defense counsel may well seek to obtain a fast dismissal in a favorable jurisdiction when the plaintiffs’ bar rashly files suit outside of Delaware. This Order by the Delaware Supreme Court, which remands such a dismissal for consideration of a Due Process argument, signals that issue preclusion might be inappropriate at the motion to dismiss stage under the circumstances.

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Court Of Chancery Explains Pleading Rules For A Caremark Claim

Horman v. Abney, C.A. 12290-VCS (January 19, 2017)

At first look, this decision seems to involve just another unsuccessful failure of oversight Caremark claim against directors. But it is worth reading because it outlines the various theories of a Caremark case and then explains when inferences of utterly ignoring one’s fiduciary duty may be inferred from otherwise neutral facts. The decision makes it clear that the Court will not infer the directors were told of wrongdoing just because wrongdoing occurred, and that once proper safeguards are put in place to avoid illegal actions, there is usually no duty to monitor the monitors without reason to suspect they are not working.

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Delaware Supreme Court Implies Duty Of Disclosure For Limited Partnership Conflicts Provision

Dieckman v Regency GP LP,  No. 208, 2016 (January 20, 2017)

Agreements for publicly-traded limited partnerships often disclaim any fiduciary duties and provide safe harbors for transactions involving a conflict for the controller.  The safe harbor provisions frequently contain minimal disclosure requirements for any minority unitholder approval. All that is fine under Delaware law. However, when the controller asks the minority unitholders to approve a transaction under the safe harbor provision and does so in a fulsome proxy statement containing more than the minimal required disclosures, the controller must act fairly.  As the Court finds here, the safe harbor provisions of the agreement necessarily imply an obligation to be honest with the investors. That is a classic example of when the covenant of good faith and fair dealing applies.

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Court of Chancery Explains Role of Records Demand in Alleging Wrongful Pre-Suit Demand Refusal

Andersen v. Mattel, Inc., C.A. 11816-VCMR (January 19, 2017)

This decision examines when pre-suit demand may be excused because the board who refused the demand declines to disclose the report of its investigation when responding. In this case, the board’s unwillingness to disclose the report was not sufficient, standing alone, to show the necessary gross negligence or bad faith in the board’s demand refusal, particularly when the plaintiff has not made a formal request for the report using its books and records rights under Section 220.

The decision is also a good review of what circumstances otherwise might be sufficient to show a board’s demand refusal was in bad faith. In short, where the board’s justifications for refusing the demand falls within the bounds of reasonable judgment, the refusal is not in bad faith.

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