Delaware Business Litigation Report

Court Of Chancery Explains When To Not Enjoin Arbitration

Angus v. Ajio LLC, C.A. 11895-VCG (May 13, 2016)

This is another in a line of decisions that explains when the issue of arbitrability should be sent to the arbitrator to decide. When the familiar tests are applied that favor letting the arbitrator decide that issue, only a strong argument for not sending the issue to arbitration will avoid doing so.

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Superior Court Dismisses Warranty Of Accuracy Claim

National Union Fire Insurance Company of Pittsburgh, PA. v. Trustwave Holdings, Inc., C.A. N14C-10-160-MMJ (CCLD)

This decision holds that Delaware does not recognize a claim for the implied warranty of accuracy for a report of an inspection company. Of course, that does not mean there is no breach of contract claim for inspection services. The problem in such matters is that the contract often contains a limitation of damages clause that a clever plaintiff may try to avoid, but not this time.

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Court Of Chancery Enforces Nearly Ironclad Safe Harbor For Conflict Transactions Involving Alternative Entity

Employee Retirement Systems of the City of St. Louis v. TC Pipelines GP Inc., C.A. 11603-VCG (May 11, 2016)

This is an important decision because it enforces a nearly ironclad protection against any attack on the decision of a special committee to approve a conflict transaction for a LLP and an LLC. More ›

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Court Of Chancery Resolves Appraisal Voting Requirement

In re Appraisal of Dell Inc., C.A. 9322-VCL (May 11, 2106)

It is well understood that to be entitled to the appraisal of your stock you need to not vote for the merger. However, in the complex world of how shares are held by beneficiaries and depositories, it is easy to overlook the importance of this requirement. This decision provides an excellent review of how shares are held and actually voted and reveals how it is now possible in many instances to determine how a beneficial owner’s stock was actually voted. The petitioners thought they had instructed the record holder to object to the merger. They were wrong. An intermediary failed to have the vote cast against the merger due to a communication error. The result was that the Court denied the petitioners' appraisal rights.

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Court Of Chancery Denies Second Chance To New Derivative Plaintiff

Binning v. Gursahaney, C.A. 10586-VCMR (May 6, 2016)

This decision illustrates the importance of putting your best foot forward in derivative litigation. Here, a different plaintiff had his complaint dismissed for failure to satisfy the demand excused rules. When this plaintiff tried to overcome that precedent with some additional allegations, he found the going too tough even if the Court did not apply stare decisis. The Court of Chancery is usually very consistent in its analysis even where different judges are involved in different but related matters. Hence, when multiple suits are filed over the same alleged grievance, attacking the weakest complaint may bear extra dividends.

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Delaware Superior Court Clarifies When The Duty Of Acting In Good Faith Applies To Enforcement Of A Guarantee

Comvest Capital II, L.P. v Selkoe, C.A. N15C-08-110 JRJ CCLD (April 26, 2016)

This is a novel decision because it deals with when a guarantor can defend against enforcement of his guarantee by claiming the company whose obligations he guaranteed was wrongly put out of business by the plaintiff who is trying to enforce the guarantee. The Court held that there was a duty to act in good faith and fairly to permit that company to first fulfill its obligation to the guaranteed party, before it could enforce the guarantee against the guarantor. Whether this defense will win, of course, remains to be seen. However, the decision is a caution that it is important to not prejudice the ability of a party who has given a guarantee to have his guarantor pay off the debt..

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The Court of Chancery Declines to Disturb Company’s “Waiver” of its Forum Selection Bylaw to Settle Derivative Action in California

Many Delaware companies have adopted forum selection bylaws that prevent their stockholders from bringing internal corporate claims in courts outside of Delaware.  These bylaws are a valid and effective tool for limiting duplicative stockholder litigation filed in multiple jurisdictions.  The Delaware courts have authorized their use and the Delaware General Assembly validated them under Section 115 of the Delaware General Corporation Law.  Numerous other courts have also enforced Delaware forum selection bylaws.

Although these bylaws specify Delaware as the exclusive forum, they often permit the company to waive its right to Delaware as the exclusive forum and consent to a different venue.  While even the seminal Delaware decision on forum selection bylaws, Boilermakers 154 Retirement Fund v. Chevron, 73 A.3d 934 (Del. Ch. 2013), approved of bylaws that permitted such a waiver, to our knowledge no court has addressed whether a company may properly waive its right to Delaware as the exclusive forum under a forum selection bylaw and consent to venue elsewhere.  That is, until Niedermayer v. Kriegsman, C.A. No. 11800-VCMR (Del. Ch. May 2, 2016) (Montgomery-Reeves, V.C.). More ›

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Court Of Chancery Explains What Is Required To Plead Bad Faith

Brinckerhoff v. Enbridge Energy Company Inc., C.A. 11314-VCS (April 29, 2016)

This is an interesting decision for at least two reasons. First, in it the new Vice Chancellor demonstrates that he is both well-versed in Delaware business entity law and fully capable of carrying out the Court of Chancery’s tradition of well-written, comprehensive decisions. Second, the decision explains what is required to adequately allege the bad faith sufficient to overcome an LLP’s exculpatory provisions for a conflicted transaction. In general, the use of a special negotiation committee, receipt of an adequate fairness opinion and use of independent counsel are sufficient to overcome mere allegations that a transaction was approved in bad faith. There is no need to also submit the transaction to a majority vote of the entity’s owners, at least when the entity is a limited partnership and when the LLP agreement does not require such a vote.

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Court Of Chancery Dismisses Derivative Complaint for Want Of Factual Support

The Joseph Penar Family Trust v. Adams, C.A. 10441-VCG (April 28, 2016)

This is an interesting decision because it illustrates what many do not understand - a complaint has to have some actual facts to support its claims, not just inferences.  Thus, when a plaintiff fails to use his rights to inspect an entity’s records to get out the facts, his general allegations of wrongdoing will not be enough to sustain a complaint.

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Exercise of General Jurisdiction Over Foreign Corporations Overturned

The Delaware Supreme Court overturned its long-standing precedent in Sternberg v. O'Neill, 550 A.2d 1105 (Del. 1988), and ruled that a foreign corporation's registration to do business in Delaware and related appointment of a registered agent for the acceptance of service of process did not subject the corporation to general jurisdiction in Delaware, in Genuine Parts v. Cepec, No. 528, 2015 (Del. Supr. April 18, 2016). Examining more recent U.S. Supreme Court jurisprudence undermining the rationale of the 1988 Sternberg decision, the Delaware Supreme Court concluded that compliance with Delaware's registration statutes could no longer be interpreted as a broad consent to personal jurisdiction in any cause of action, however unrelated to the foreign corporation's activities in Delaware. Thus, unless a foreign corporation has its principal place of business in Delaware or has operations here that are so substantial, continuous and systematic as to render the corporation "at home" here, Delaware cannot exercise general jurisdiction over the foreign corporation. Rather, personal jurisdiction will depend upon the presence of specific jurisdiction and a showing that the claim arose from the foreign corporation's activities in Delaware. More ›

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Court of Chancery Eyes Duties in Deals Involving Stockholder

To determine the applicable standard of review in a stockholder challenge to a corporate transaction, a plaintiff may rebut the business judgment rule by pleading facts that support a reasonable inference that "a controlling stockholder stands on both sides of a transaction, or at least half of the directors who approved the transaction were not disinterested or independent." If the business judgment rule is rebutted, the most rigorous standard of review, entire fairness, which examines fair dealing and fair price in a transaction, is applicable. A stockholder is deemed a "controlling stockholder," owing fiduciary duties to other stockholders, "if it owns a majority interest in [the corporation] or exercised actual control over the board at the time of the transaction." More ›

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Delaware Supreme Court Limits Jurisdiction Over Registered Corporations

Genuine Parts Company v. Cepec,  No. 528, 2015 (April 18, 2016)

Under Delaware law, an entity doing any business in Delaware must register to do so and thereby appoint a registered agent to receive process. For years this was held to confer general jurisdiction over that entity, even for claims that did not arise out of the business it did in Delaware. This decision reverses that old law and confines jurisdiction over non-Delaware entities to claims that arise out of what they have done in Delaware. Of course, there are still exceptions to that general rule, such as when an entity expressly agrees to jurisdiction in Delaware.

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What Non-Delaware Lawyers Need to Know About e-Discovery in Delaware

Many non-Delaware lawyers will, at some point in their careers, find themselves practicing in a Delaware court after being admitted pro hac vice. For those that do, it is important to note that the Delaware courts take e-discovery seriously and have a sophisticated understanding of it. The body of e-discovery law in Delaware continues to grow, tackling issues as broad as document collection and as narrow as records review and privilege logging. This article serves as a primer on conducting e-discovery in the Delaware courts. More ›

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Court Of Chancery Explains Limits On Discovery In Advancement Case

Harrison v. Quivus Systems LLC, C.A. 12084-VCMR (April 7, 2016)

This is an interesting bench ruling because it illustrates the limits on discovery into the reasonableness of the fees sought in an advancement case. In general, that discovery will be postponed until after the Court determines there is a right to advancement.

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Court Of Chancery Explains Demand Refused Rules

Friedman v. Maffei, C.A. 11105-VCMR (April 13, 2016)

This initial formal decision by the recently-appointed Vice Chancellor shows her firm commitment to the tradition of the Court of Chancery to produce well-written, scholarly opinions. Here the decision explains that after making a demand on a board to file suit and having that demand refused, a plaintiff must do more than plead the Board was wrong to deny the demand. Instead, the complaint must plead a factual basis for the Court to find the Board’s investigation was unreasonable or the Board acted in bad faith. While there are several ways to do just that, just arguing the board’s decision was bad is not one of those ways.

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