Posts from 2010

Court Of Chancery Upholds Arbitration Of Statutory Remedy

Aris Multi-Strategy Fund L.P v. Southridge Partners LP, C.A. 5422-CC (May 21, 2010)

It is sometimes believed that remedies such as the right to inspect a company's records are not subject to an arbitration clause.  Wrong.  This decisions upholds arbitration of such claims in a variety of contexts.

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Supreme Court Hints How To Avoid Losing Standing After A Merger

Arkansas Teacher Retirement System v. Caiafa, C.A. 530, 2009 (May 21, 2010)

This is the odd case whose dicta may be more important than we now appreciate.  It has long been Delaware law that a plainitff loses standing to pursue a derivative case when he is ceases to be a stockholder after a merger. The exception is when the merger is done solely to deprive the stockholders of standing to sue.

Here the Court seems to be saying that when a merger is the only way out for a corporation that has been devastated by wrongful conduct, the former stockholders may have a claim for damages even after they cease to be stockholders.  If so, that is new law and this bears watching.

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Court Of Chancery Explains How To Interpret Indenture

Concord Real Estate CDO 2006-1 Ltd  v. Bank of America N.A., C.A. 5219-VCL (May 14, 2010)

This is an intesting case even though it deals with how to interpret a complicated indenture.  As the Court explains, it will look to the commentary to the Model Debenture Indenture for guidance.  The reason is that there is a need for uniform interpretation of such documents.  It does not follow, necessarily, that the Court will accept "expert" testimony on what other contracts are supposed to mean.

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Court Of Chancery Enjoins Termination Of Supply Contract

Arkema v The Dow Chemical Company, C.A. 5479-VCP ( May 14, 2010)

When the economy is in stress, contracts to supply materials at a fixed price seem to be broken more often. This decision explains what you have to show to get  a TRO against the breaking of such a contract by the supplier.  In short, it is not easy but can be done when the ability to "cover" is not available.

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Court Of Chancery Enjoins Merger For Disclosure Violations

Maric Capital Master Fund, Ltd v. Plato Learning Inc., C.A. 5402-VCS (May 13, 2010)

It is important to note what sort of disclosure violations will casue an injunction to issue. This decision provides guidance on that issue by enjoining a merger until there are corrective disclosures over the discount rate used by the investment banker to give a fariness opinion, the projections of future income and the retention of management.

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Court of Chancery Explains Valuation Principles

Berger v. Pubco Corp., C.A. 3414-CC (May 10, 2010)

This decision explains 2 points of appraisal law.  First, when the discounted cash flow approach is used to value a company, no control premium is added to the result.  That sort of premium is only used when the valuation is based on comparable market prices or "comps" that reflect the minority discount inherent in the price of a small block of stock.

Second, at least in this case, there is no deduction for the capital gain tax due on the sale of assets by a holding company.  Instead, those assets are valued on a pre-tax basis.

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Court of Chancery Explains Standard of Review for Tender Offer

In Re Cox Radio Shareholders Litigation, C.A. No. 4461-VCP (May 6, 2010)

The standard of review that a court applies to a transaction may determine the outcome of the litigation in a close case.  Here the Court explains that entire fairness does not govern the review of a noncoercive tender offer by a controlling shareholder.  This continues the trend away from applying the test of Kahn v. Lynch that is now restricted to mergers involving a controlling shareholder.  This decision also explains when a tender offer is deemed not to be coercive.

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Court Of Chancery Upholds Derivative Suit By Preferred Stockholder

MCG Capital Corporation v. Maginn, C.A. 4521-CC (May 5, 2010)

This decision addresses the prevously unanswered question of whether preferred stockholders may bring a derivative suit.  They can.  While to some this may seem obvious, the answer was by no means all that certain.  In recent years the Delaware courts have consistently cut back on the rights of preferred stockholders and creditors to allege fiduciary duty claims. Now warrant holders and creditors may not sue derivatively [except when the entity is insolvent].  Hence, the right of preferred stockholders to do so was at least questionable.

This decision is also an excellent collection of the law on what claims preferred stockholders may bring, particularly on the limits to assert breach of fiduciary duty claims.

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Court Of Chancery Extends Revlon To Convertible Notes

 Binks v. DSL.net Inc., C.A. 2823-VCN (April 29, 2010)

In this unusual case filed by a pro se litigant, the Court extended Revlon duties to when a company issues convertible notes that will change control of the company upon conversion. This is consistent with past indications in other decisions.

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Delaware Superior Court Creates Commercial Litigation Division

Delaware's Superior Court has joined the ranks of courts in other states by creating a "business court" for commercial disputes between companies. The new "court" is technically a division within the existing Delaware Superior Court and has major advantages for resolving business disputes. Among those are:

1. Three very experienced judges have been assigned to cases filed in the new divisions and will stay with those cases until they are completed.

2. Each case will be subject to a tight case management order designed to control litigation expenses and keep the litigation moving to completion.

3. Discovery of electronically stored data will be subject to special "e-discovery' orders that will limit expense and avoid disputes.

4. Protocols are to be adopted for each case to control expert witness discovery and the recovery of inadvertently produced privileged information.

The creation of this new division followed an extensive review of business courts through out the United States by a Special Committee and adopts the best procedures of those other courts. The Delaware Superior Court and the Delaware Court of Chancery have been consistently voted the best courts for business disputes in the United States.  For more details, see the Administrative Directive establishing the new division and the Special Committee's report.

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Court Of Chancery Rejects Market In Appraisal Determination

Global GT LP v. Golden Telecom Inc., C.A. 3698 (April 23, 2010)

This is an interesting appraisal decision for 2 reasons.  First, the Court declined to use the price set in the market as a strong indicator of value notwithstanding recent decisions in Delaware that had been inclined to do so. The Court was not satisfied that in the case of this company with its dominant stockholders announcing that they would only support the deal on the table that there was a real market check.

Second, the Court's analysis of how to do a discounted cash flow valuation again illustrates its preference for expert opinion based on a knowledge of the industry involved.

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Court Of Chancery Upholds Forum Selection In England

Ashall Homes Limited v. ROK Entertainment Group Inc., C.A. 4643-VCS (April 23, 2010)

This decision is interesting because it upholds a forum selection clause requiring litigation in England.  How these parties could have not chosen Delaware seems unbeliveable.

The opinion also applied the forum selection not just to disputes that were based on the parties' contract, but also to tort claims that arose out of the same facts.  In short, you cannot plead around the forum you chose.

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Court Of Chancery Awards Big Damages In Stealing Business Case

Beard Research Inc. v Kates, C.A. 1316-VCP (April 23, 2010) This is an excellent primer on how to litigate a business tort case arising out of an employee's stealing all your confidential information and using it to lure away your customers to his new firm. It also includes a good outline on how to prove damages.  What we found particularly interesting is the interplay between a trade secret claim and a claim for breach of fiduciary duty.  You can have both in one case.  Of course, the elements of proof vary but together these prove an efficient way to maximize a recovery. Share

Supreme Court Clarifies Vote Buying Rules

Crown EMAK Partners LLC v. Kurz,  C.A. 64, 2010 (Del. April 21, 2010)

This important decision focuses on the increasingly controversial issue of vote buying in stockholder elections.  In general, vote buying occurs when a party acquires the right to vote stock it does not have legal title to or hold the beneficial interest in that stock.  It just buys the right to vote the stock.  On the other hand, when the buyer acquires the economic interests represented by the stock along with the right to vote it, that is not vote buying even if he does not then acquire legal title to the stock. The distinction may be critical as votes acquired by vote buying are invalid.

Exactly how this will play out is not clear.  For example, if the buyer obtains the right to vote and all appreciation in the value of the stock, but not title, that seems to satisfy the test and is not  vote buying. That is so even if he never has title transfererd to him or, possibly, even if all the buyer's rights revert to the seller a moment after a stockholder election. We shall see.

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Delaware Superior Court Awards Large Fee For Discovery Abuse

M&G Polymers USA LLC v. Carestream Health Inc., C.A. 07C-11-242 PLA (Del. Super.,  April 21, 2010)

In this 193 page opinion, the Court imposed a large fee award for the failure to disclose important documents during discovery.  The decision is a useful collection of authority on the parties' discovery obligations and the Court's powers to penalize offenders.

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