Delaware Business Litigation Report

Court Of Chancery Explains Advancement Rights Of Former Director

Marino v. Patriot Rail Company LLC, C.A. 11605-VCL (February 29, 2016) 

As is well known, a former director may be entitled to have his fees advanced in suits against him even after he has resigned from the board. This decision explains the history behind those rights and how they have been steadily expanded over the years. It upholds advancement for acts committed as a director but not for post-resignation acts. It also sets out yet another way in which disputes over the amounts to be advanced will be determined.

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Court Of Chancery Explains When A Minority Stockholder May Have Actual Control Over A Deal

Calesa Associates, L.P. v. American Capital Ltd., C.A. 10557-VCG (February 29, 2016)

This is another in a series of decisions dealing with the allegation that a minority stockholder controlled a deal through its control of a majority of the board of directors. Its analysis of when such control is present is very helpful. It also points out that there is a Section 228 violation when stockholders are asked to sign stockholder consents without being provided with all the documents needed to understand what that consent includes.

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When a Director May Inspect the Company's Books and Records

Section 220(d) of the Delaware General Corporation Law (DGCL) permits a director to inspect a company's books and records "for a purpose reasonably related to the director's position as a director." It is well settled under Section 220 that a director's access to corporate books and records is broader than that of stockholders. A director, who has a proper purpose for inspection, i.e., reasonably related to his or her position as a director, has "virtually unfettered" access—at least equal to that of other board members—to inspect the books and records of the company. The broad inspection rights of directors to access corporate books and records relative to that of stockholders under Section 220 are correlative with the directors' fiduciary obligations to stockholders "to protect and preserve the corporation." However, in contrast to the broad scope of discovery permitted in a plenary action under the Delaware Court of Chancery Rule 26, Section 220 limits inspection (even by directors) to documents and communications that fall within its more limited "contemplation of 'books and records,'" which correlates with the "summary nature of a Section 220 proceeding." More ›

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Court Of Chancery Applies Demand Rules To Amended Complaint

Fotta v. Morgan, C.A. 8230-VCG (February 29, 2016)

In general, an amended derivative complaint does not need to show that demand is excused if it was excused for the filing of the initial complaint. However, as this decision points out, when the amended complaint alleges an independent, new derivative claim that fails to meet the “claims already in litigation” standard (which refers broadly to the acts and transactions in the original complaint), then the right to assert that new claim must be established by showing that demand was excused.

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Court Of Chancery Decides If Arbitration Required When Arbitration Clause Not In One Of Two Contracts

Align Strategic Partners LLC v. Moesser, C.A. No. 11240-VCN (February 26, 2016)

When only one of two related contracts has an arbitration clause, the Court can still require arbitration of a dispute under the contract lacking that clause. The question is whether the two contracts deal with the same subject matter and that is not as easy to decide as it may appear. For example, if the two contracts need to be read together to accomplish the parties’ intent, such as where one contract defines certain necessary terms while the other does not, then an arbitration clause in one contract may require arbitration of disputes that nominally arise under the other contract as well. While employing Illinois law, this decision helps guide how to determine if the relationship between the contracts warrants compelling arbitration.

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Court Of Chancery Limits Attorney Charging Lien

Sutherland v. Sutherland, C.A. No 2399-VCN (February 26, 2016)

An “attorney charging lien” allows an attorney to recover compensation for his services from a fund recovered with his assistance.  This decision limits the application of such liens to recoveries where the attorney has not already been paid for the work that led to that recovery.  In other words, if you have already been paid for the work that generated a fund, you cannot lien that fund for other work that did not generate it, even if it occurred in the same litigation. 

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Court Of Chancery Applies Demand Analysis To Changed Board

Sandys v. Pincus, C.A. 9512-CB (February 29, 2016)

This is an interesting decision because it applies the demand rules in a derivative case to an odd situation — when some but not all of the board members have changed between when the challenged conduct occurred and when the complaint was filed. The Court held that the demand rules need to be applied to the board in place when the complaint was filed. The changes in the board’s composition made it necessary for the analysis to consider the relationships of new to old board members, particularly as to the independence of the new members. The decision also is a good source for the facts that determine independence. Such facts as common board memberships or how the stock exchange rules apply do not show a lack of independence in themselves.

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Delaware Supreme Court Clarifies Director/Officer Implied Consent Statute and Rejects Hana Ranch

Hazout v. Tsang Mun Ting, No. 353, 2015 (Del. February 26, 2016)

Rejecting the Court of Chancery’s narrow reading of the director/officer implied consent statute in Hana Ranch, Inc. v. Lent, 424 A.2d 28, 30 (Del. Ch. 1980), an interpretation that had been followed by lower courts for decades, the Delaware Supreme Court ruled that a non-resident officer sued in Delaware is subject to personal jurisdiction in actions brought “by or on behalf of, or against” the corporation if that officer “is a necessary or proper party” to the case, even if the case does not involve an alleged breach of the officer’s fiduciary or statutory duties. More ›

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Chancery Analyzes Limits of 'Reasonable Conceivability'

In 2011, the Delaware Supreme Court in Central Mortgage v. Morgan Stanley Mortgage Capital Holdings, 27 A.3d 531, 537 (Del. 2011), unequivocally stated that the "pleading standard in Delaware to survive a motion to dismiss is reasonable 'conceivability.'" That standard remains the benchmark plaintiffs must meet when asserting claims subject to a motion to dismiss in Delaware. For stockholder plaintiffs, however, what is "reasonable" is often measured by what pre-suit investigation the plaintiff's counsel undertakes in support of the plaintiff's claims. Stated simply, if a stockholder plaintiff fails to utilize its Section 220 rights for books and records prior to filing a lawsuit, the plaintiff's claims better include all necessary facts that could have been discovered through a Section 220 demand. More ›

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Court of Chancery Explains Anti-Reliance Law

FdG Logistics LLC v. A&R Logistics Holdings Inc., C.A. 9706-CB (February 23, 2016)

Merger or company sale agreements frequently include clauses limiting what a buyer may rely upon after due diligence, particularly when there is some hold back of the merger or sale consideration that the buyer may seek to retain after the closing based on a misrepresentation claim. But as this careful decision explains, the elimination of reliance claims needs to be in a clause applying to the buyer, not just in a clause that tries to limit the representations from the seller. These clauses need very careful drafting and this decision explains how that should be done.

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Court Of Chancery Calculates Mootness Benefit In Post-Trulia Decision

Louisiana Municipal Police Employees’ Retirement System v. Black,  C.A. 9410-VCN (February 19, 2016)

This is an interesting decision for two reasons. First, the decision awards a mootness fee for disclosures and changes to deal protection measures in a merger gone bust. Thus, the opinion is useful precedent in the post-Trulia world, where mootness fee applications are one of the two optimal methods for adjudicating disclosure claims. More ›

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Delaware's Court of Chancery Clarifies Scope of Inspection Under Books and Records Demands

In Amalgamated Bank v. Yahoo!, Inc., C.A. No. 10774-VCL (Del. Ch. Feb. 2, 2016), Plaintiff Amalgamated Bank’s Section 220 books and records demand sought, among other things, the emails of certain Yahoo officers and directors.  Yahoo objected to the request as overly broad, but the Court found differently.  Continuing the trend from Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264, 1271 (Del. 2014), which first permitted access beyond board materials, the Court ordered inspection of certain Yahoo director and officer documents and communications.  In addition, the Court found that the directors’ and officers’ personal email accounts were subject to inspection if they were used to conduct business.  This development signals to corporate officers and directors’ that personal emails may be discoverable in a 220 Action if the emails are essential to fulfilling a plaintiff’s proper purpose. More ›

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Court of Chancery Approves Disclosure Settlement Post-Trulia and Finds Management Projections Plainly Material

In re BTU International, Inc. Stockholders Litigation, Consol. C.A. No. 10310-CB (Del. Ch. Feb. 18, 2016)(Transcript)

As detailed in a prior post (available here), the ruling in In re Trulia, Inc. Stockholders Litigation, 2016 WL 270821 (Del. Ch. Jan. 22, 2016) changed the legal landscape for so-called disclosure settlements. Among other things, Trulia holds that disclosures must be “plainly material” to support a disclosure settlement – meaning that it “should not be a close call that the supplemental information is material as that term is defined under Delaware law.”  Exactly what disclosures fit into that category remained an open question. More ›

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Court Of Chancery Explains Inspection Rights In An LLC

RED Capital Investment L.P.  v. RED Partner LLC, C.A. 11575-VCN (February 11, 2016)

This is an interesting decision because it explains inspection rights in the LLC context under the two different standards set out in Section 18-305(a) and (b) of the LLC Act. As expected, it is better to seek inspection as a manager than as a member.  Managers have similar “unfettered” access to company books and records as corporate directors, absent restrictions in the LLC agreement.  Also notable, inspection rights may include the books and records of subsidiaries, under the right circumstances.  

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CCLD Explains Indemnification For Assumed Contractual Liabilities

Alcoa World Alumina LLC v. Glencore Ltd., C.A. 15C-08-032 EMD CCLD (February 8, 2016)

This is an important decision because it explains the specificity with which provisions indemnifying a party for liabilities under a separate contract must be stated.  In this case, Glencore, which had sold an aluminum plant to an Alcoa subsidiary pursuant to an agreement in 1995 (the “1995 Agreement”), claimed that Alcoa had agreed in the 1995 Agreement to indemnify Glencore for any liabilities arising out of an earlier sale agreement pursuant to which Glencore had purchased the plant from Lockheed in 1989 (the “1989 Agreement”).  In a separate litigation, Lockheed was claiming that Glencore had to indemnify Lockheed for certain environmental liabilities pursuant to the 1989 Agreement. More ›

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