Posts from 2009

Court of Chancery Resolves Fee Dispute Among Plainitffs Counsel

In Re Cablevision/Rainbow Media Group, C.A. 19819-VCN (May 22, 2009)

In the good old days, the multiple counsel for plaintiffs class or derivative litigation always seemed to be able to agree on how to split the fee awarded by the Court.  Well, the good old days are over.  Here the Court explains how to split the fee in a complex settlement.

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"Handshake Agreement" Overcomes Motion to Dismiss in Superior Court

Sunstar Ventures, LLC v. Tigani, C.A. No. 08C-04-042 JAP (Del. Super. April 30, 2009)

This case illustrates the exception to the statute of frauds of "substantial part performance."

The seller of a $5MM home, and other items, brought a breach of contract action, because the buyer backed away.   The buyer moved to dismiss on the grounds that there was no meeting of the minds, and, in any case, the statute of frauds bars enforcement of such a handshake agreement.

But the Superior Court denied the motion to dismiss, holding, among other things, that the fact that the buyer took possession and began making modifications to the home supported an inference that there was substantial part performance, an exception to the statute of frauds.

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Court of Chancery Delineates Employee Duties in Case of First Impression

Triton Construction Company Inc v. Eastern Shore Electrical Services Inc., C.A. 32390-VCP (May 18, 2009)

While it is well known that directors and officers have fiduciary duties, what about employees who are neither a director nor an officer?  This decision addresses that issue.  While the decision goes into a detailed analysis, in general, even a non-essential employee may have a fiduciary duty to her employer as an agent of the employer.  That duty then would require the employee to disclose certain conflicts of interest and to not compete with her employer.

This decision also has an excellent discussion of how to calculate lost profits in a business tort case.

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Court of Chancery Approves "Continuing Directors"

San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals Inc., C.A. 4446-VCL (May 12, 2009)

One defense against a hostile takeover is a provision that permits only "continuing directors" to approve certain important corporate acts.  In general, to be a "continuing director" you need to be "approved" by the existing board.  Hence, if you are elected in a proxy contest that marks the beginning of a takeover battle, you may not be an approved "continuing director."  That would be a bad thing for your client.

In this decision, the Court upheld the power of the board to approve even candidates from an opposition slate of directors to be "continuing directors."  This unusual circumstance was the result of a bond debenture provision that would have triggered a default if there were too many non-continuing directors on the board.  To avoid a default, it was decided to approve even the enemy.

That, in turn, lead the Court to be concerned about whether the board had acted in the stockholders' best interests.  The Court cautioned that the approval must be a considered act and that the adoption of such continuing director provisions needs to be carefully reviewed by the board in the future if they are to be upheld.

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Court of Chancery Limits Inspection Rights in LLC

Jakks Pacific, Inc.v. THQ/Jakks Pacific LLC, C.A. 4295-VCL (May 5, 2009)

When the business of an LLC is limited, so too may inspection rights be limited. Here the "business" was to exploit a license that was about to come to an end, and the Court held there was no need to inspect business records to value the business as there may well be nothing left to value.

Further, the Court held that mere allegations, unsupported by facts at trial, do not provide a basis to inspect records to determine if there has been any wrongdoing.

 

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Court of Chancery Orders Dissolution Upon End of Term

In re Nextmedia Investors LLC, C.A. 4067-VCS (May 6, 2009)

This is an interesting case, because it upholds the right of a member of an LLC to have it dissolved at the end of the term set for its existence in the LLC Agreement even when more than 90% of the members want it to continue. In the current recession, many limited purpose investment funds are seeking to extend the term of their existence, because they have not been able to find an investment for their member or stockholders' money. When the LLC agreement or the corporate certificate of incorporation limits how long the entity may exist without making an investment of its funds, management may try to extend the life of the entity by amending its governing instrument. However, at least in the case of an LLC, when the LLC agreement says that all members must consent to extending the entity's existence, the court will uphold that requirement.

This decision reflects the primacy of contract law in the LLC context. The result may have been different for a Delaware corporation where a requirement for unanimous voting by stockholders is probably not valid.

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Court of Chancery Limits Turning Contracts Into Fiduciary Duties

Nemec v. Shrader, C.A. 3878-CC (April 30, 2009)

A contract right does not create a fiduciary duty. Here the plaintiffs had a contract that gave their former employer the right to buy back company stock at book value. The employer did so on the eve of a big transaction, greatly increasing the company's book value. The Court held that plaintiffs' contract did not give them the right to insist that the company hold off on stock redemption until the big deal was done.

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Chancellor Warns of the Perils of Inaction

Tooley v. AKA Financial Inc., C.A. 18414-CC (April 29, 2009)

While it is well known that the failure to prosecute a class action may lead to the case being dismissed, many practitioners just do not believe in the need to move a case along or risk losing it. Here, the Chancellor of the Delaware Court of Chancery sends a clear message that delay in litigating a case will lead to the dismissal of the claims in the future.

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Corporation's Ability to Take Advantage of Corporate Opportunity an Issue of Material Fact

Norman v. Elkin, C.A. No. 06-005-JJF (D. Del. Apr. 28, 2009)

The district court denied motions for summary judgment for claims of breach of contract, usurpation of corporate opportunities, breaches of fiduciary duty, breach of the duty of disclosure, conversion and misappropriation, and fraudulent representation.  In their motion, the defendants responded to the plaintiff’s usurpation of corporate opportunity and misappropriation claim by arguing that the claim failed as matter of law, because the defendant corporation did not have the financial capability to participate in an auction for certain licenses. The district court cited the Court of Chancery’s standard for establishing that a corporation is financially unable to take advantage of a corporate opportunity. “[S]uch financial inability must amount to insolvency to the point where the corporation is practically defunct.” The district court agreed with the plaintiff that a reasonable jury could find that the defendant was not practically defunct and could have raised funds necessary to participate in the auction.

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Court of Chancery Explains Scope of Representation Clauses

Ivize of Milwaukee, LLC v. Compex Litigation Support LLC, C.A. 3158-VCL (April 22, 2009)

While a statement may not be a lie unless the speaker knows he has failed to tell the truth, a contractual representation does not require knowledge that it is false for it to be actionable if untrue. This decision then puts to rest the argument that scienter is needed to prove a breach of a contractual representation.

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Spear Complaint Not Fatally Speculative

Spear Pharm. Inc. v. William Blair & Co. LLC, C.A No. 07-821-JJF (D. Del. Apr. 27 2009)

The district court denied motions to dismiss the complaint and found the Supreme Court’s decision in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) instructive. In Twombly, the Supreme Court considered whether a complaint that alleged conspiracy to restrain trade, in violation of the Sherman Antitrust Act, but lacked factual context suggesting an agreement, as distinct from identical, independent action, should be dismissed. The district court concluded that, under Twombly and Third Circuit precedent, the complaint was not “fatally speculative” and should not be dismissed. Unlike the Twombly complaint, where the allegations mentioned no specific time, place, or person involved in the alleged conspiracies, the Spear complaint cited an individual, a time frame, and a temporal sequence of events supporting the allegations.

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District Court Denies Motion for Summary Judgment Based on Void Ab Initio Defense

Lynch v. Coinmaster USA, Inc., C.A. No. 06-365-JJF (D. Del. Mar. 30, 2009)

In this opinion, the court denied a broad application of the ultra vires doctrine. Seeking damages for breach of an employment agreement with Coinmaster USA, Inc., the plaintiff claimed that he was owed outstanding monthly pay, a termination fee, profits, and stock options. Moving for summary judgment, the defendants argued, inter alia, that the agreement was void ab initio in light of the plaintiff’s pre-existing employment agreement with Coinmaster Gaming PLC, a company related to Coinmaster USA, Inc. The defendants cited Solomon v. Armstrong, 747 A.2d 1098 (Del. Ch. 1999), noting that ultra vires acts are void ab initio. Although the court was not entirely clear on the defendants’ position, the court ascertained that the defendants were arguing that the plaintiff, by contracting with Coinmaster USA, Inc. for additional compensation, breached the Coinmaster Gaming PLC agreement and, hence, breached a fiduciary duty to Coinmaster PLC. Under Solomon, the defendants claimed that such a contract is ultra vires and, therefore, void ab initio.     

Rejecting the defendants' argument, the court found that the Coinmaster USA, Inc. agreement was not void ab initio. Delaware law severely restricts the categories of claimants who can raise the ultra vires defense. The defendants cited no cases, and the court could not identify any authority, suggesting that such a contract was ultra vires and, hence, void ab initio merely because it conflicts with a contract involving a third party. Finding that Solomon does not stand for this proposition, the court denied the defendants’ motion for summary judgment with respect to the plaintiff’s breach of contract claim.  

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Court of Chancery Holds When There Is No Contribution There Is No Fee

In re William Lyon Homes Shareholders Litigation, C.A. No. 2015-VCN (Del Ch. April 4, 2009)

This decision deals with when a plaintiff may receive a fee when a merger price is increased after he files suit and then his case is mooted. The general rule applied here is that while the defense has the burden of proving the plaintiff did not contribute to the increased price, when the merger consideration was increased without any help from the plaintiff, there is no fee. In short, no help, no fee.

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The 21st Tulane Corporate Law Institute Begins Tomorrow

Here is the brochure for the program, which takes place April 2-3.  The panelists are among the most respected and knowledgeable legal minds and financial experts involved in corporate law and M&A, including Chief Justice Myron T. Steele and Justice Jack B. Jacobs of the Delaware Supreme Court and Vice Chancellors Leo E. Strine, Jr., Stephen P. Lamb, and Donald F. Parsons, Jr., of the Delaware Court of Chancery.      

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Court of Chancery Upholds Right of "Beneficial" Member to Sue in LLC Case

Mickman v. American International Processing LLC, C.A. No. 3869-VCP (Del. Ch. April 1, 2009)

In the case of an LLC, unlike with a Delaware corporation, the statutory definitions of who may seek court relief have not been broadened. Generally, only a member or manager has those rights, and membership is determined by the LLC operating agreement. This decision holds that a plaintiff may prove she is a member entitled to enforce membership rights by extrinsic evidence, such as a tax return listing her as a member.

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