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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Morris James Blogs
Showing 123 posts from 2011.
Court Of Chancery Validates Top Up Options
Olson v. ev3, Inc., C.A. 5583-VCL (February 21, 2011)
In recent years, top up options have been frequently used to speed up a merger by avoiding the time-consuming and expensive process of soliciting proxies to approve a merger after a successful tender offer. This decision explains how such an option works and why they are permitted under Delaware law.
The decision is also important is pointing out certain perils in the way top up option rights are structured. The option needs to comply with the provisions of the DGCL governing stock options.
ShareCourt Of Chancery Permits Inspection of Pre-Ownership Events
Sanders v. Ohmite Holding LLC, C.A. 5145-VCL ( February 21, 2011)
This decision determines that an owner of an LLC interest may obtain inspection of its books and records even with respect to events that occurred before he became a member.
ShareCourt Of Chancery Explains Categories Of Damages
Agreements sometimes try to limit any damages from a misrepresentation or contract breach by excluding consequential or special damages. This decision notes that is hard to do because what falls into what category of damages is not always clear. Better to limit damages some other way such as by the amount paid to the seller.
The opinion is also noteworthy as an example of the far-reaching scholarship the Court undertook to understand the science involved in the dispute. Litigants should not underestimate the Court of Chancery in such matters.
ShareCourt Of Chancery Creates Unique Remedy
In re Del Monte Foods Company Shareholders Litigation, C.A. 6027-VCL (February 14, 2011)
This is an important decision if only for the creative remedy that the Court came up with to deal with the breach of faith by a target's investment bank. In effect, the investment bank was willing to sell out its client to get a piece of the buy-side financing. The Court enjoined the deal for 20 days to let a competing bid emerge while at the same time not killing a deal that the target's stockholders might want.
The decision gives guidance to advisers on the proper conduct they should be expected to follow.
ShareSupreme Court Upholds Fee Award In No Damage Case
William Penn Partnership v. Saliba, C.A. 362, 2010 (February 9, 2011)
In this unusual decision the Supreme Court upheld an award of attorneys fees and costs to plaintiffs who proved a breach of fiduciary duties owed to them but where there were no apparent damages from the breach. In that way the plaintiffs were compensated for the breach. It is not clear if this means that in every breach of fiduciary duty case that attorney fees may be won by the plaintiffs as well. I doubt it for the Court does not announce any such major change in Delaware law and the decision seems limited to its peculiar facts. But, you can not know for sure.
ShareSpecial Master Reports On Fee Request
Fuhlendorf v. Isilon Systems, Inc., C.A. 5772-VCN (February 8, 2011)
In this report of a well-respected Delaware attorney serving as a special master, there is much to be learned about how to seek advancement of fees. He does a good job of explaining Duthie v CorSolutions Medical Inc., 2008 WL 4173850 (Del. Ch., Sept. 10, 2008), a leading decision on the administration of advancement claims. Finally, he comes up with the procedures going forward to avoid all the bickering over fees that so dominates this area.
If you doubt this is a real problem, note that the earnings restatement that gave rise to the underlying litigation involved $4.8 million. The attorney fees for just this one defendant approached $7 million.
ShareCourt Of Chancery Illustrates Possible Waiver Of LP Agreement
May the provisions of a limited partnership agreement governing withdrawal be waived? This decision says that is possible. That result is not particularly remarkable.
What is more interesting is the rest of the opinion. For while the plaintiff's conduct in presenting its case was outrageous, the Court nonetheless stood fast in applying its rules on summary judgment to hold the plaintiff may have a trial on its claims. While the case is more complicated than that [involving issues of what the Supreme Court meant in its remand to the trial court], the intellectual honesty of the Court of Chancery is heartening, as usual.
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Court Of Chancery Explains Jurisdictional Discovery
Reid v. Siniscalchi, C.A. 2874-VCN (January 31, 2011)
When personal jurisdiction over a defendant is challenged, the plaintiff has the right to take limited "jurisdictional discovery." Exactly what that means is well explained by this decision.
ShareCourt Of Chancery Explains Charter Interpretation Rules
When a certificate of incorporation is ambiguous, the Court must decide what it means. This decision explains how a court will do that job.
At least in the case of a publicly traded corporation, the Court is less inclined to use parol evidence and more inclined to fall back on rules of construction. One such rule is that it is presumed that stockholders retain the power to decide matters that are usually reserved for stockholder decision. Hence, if a stockholder or the board claim unusual powers, they had better spell those out clearly or lose the dispute.
ShareSupreme Court Upholds Late Inspection Suit
King v. Verifone Holdings Inc., No. 330, 2010 (January 28, 2011)
This decision reinstates a books and records case that was dismissed by the Court of Chancery. The Court of Chancery held that a stockholder who first files a derivative complaint may not later file a books and records case. The Supreme Court overturned that bright line test.
Instead, the Supreme Court held that when a stockholder suit might prove useful even after a derivative suit is filed, the books and records case may proceed. Thus, if the derivative suit is still pending or even after it has been dismissed if it may be refiled, the inspection of company records may be requested by a book and records suit. If, however, the derivative suit is dismissed with prejudice, then inspection serves no proper purpose and will be denied.
ShareCourt Of Chancery Denies Relief Over Two Week Delay
CNL-AB LLC v. Eastern Property Funds I SPE (MSREF) LLC ,C.A. 6137-VCP (January 28, 2011)
This decision again illustrates how fast a claim may be barred by inaction. Here two weeks passed after the plaintiff was on notice of its claim before suit was filed. Too late the Court said to ask for an injunction.
ShareCourt of Chancery Guidelines for Preservation of Electronically Stored Information
On January 18, the Delaware Court of Chancery issued a one and a half page "Guidelines for Preservation of Electronically Stored Information." In summary, the Guidelines are as follows:
1. There is a common law duty to preserve potentially relevant electronically stored information (ESI) within a party's possession, custody, or control once litigation is commenced or when litigation is "reasonably anticipated."
2. Parties must take reasonable steps in good faith to meet their duty to preserve ESI.
3. Parties and their counsel should confer early in the litigation regarding the preservation of ESI.
4. Parties and their counsel must develop, oversee, and document a preservation process in collaboration with the appropriate client information technology personnel.
5. Parties and their counsel should discuss the need to identify how custodians store their information, including document retention policies and procedures as well as the processes used to create, edit, send, receive, store, and destroy information for the custodians.
6. Counsel should take reasonable steps to verify information they receive about how ESI is created, modified, stored, or destroyed.
7. The preservation process should include a written litigation hold notice to individual custodians instructing them to take reasonable steps, act in good faith, and with a sense of urgency in preserving potentially relevant information.
8. Parties and their counsel may face "serious consequences" for failing to take reasonable steps to preserve ESI.
9. The reasonableness of a party's preservation process is judged on a case-by-case basis.
10. Counsel for all parties should confer about the scope and timing of discovery of ESI and may agree to limit or forgo the discovery of ESI.
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Court of Chancery Discusses "Best and Final" Offer
Air Products & Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249-CC (January 20, 2011)
This is another decision in the Airgas takeover battle. In this decision, Chancellor Chandler addressed Air Products' motion to compel Airgas' compliance with the protective order and Airgas' motion in limine to preclude Air Products from offering evidence that its $70 offer was indeed its "best and final" offer. With respect to the motion to compel, Air Products sought to reduce Airgas' designation of large chunks of deposition testimony and documents as "Litigators' Eyes Only" ("LEO"). The Court found that Air Products was itself somewhat responsible for the large designation of deposition testimony as LEO since it had not segregated LEO and non-LEO subject matter when deposing Airgas witnesses. The Court ordered Air Products to indicate the testimony that it did not believe should be LEO and then Airgas to respond within 5 hours of receipt of each transcript. Additionally, the Court ordered Airgas to produce a non-LEO version of an institutional shareholder letter setting forth that shareholder's opinion of the fair value of Airgas based on publicly available information. Finally, the Court refused to order Airgas to re-review documents previously produced and designated LEO given the rapidly approaching supplementary evidentiary hearing, but held Air Products could specify LEO documents it thought should be de-designated.
In its motion in limine, Airgas sought to preclude Air Products from offering documentary evidence that its $70 offer was its "best and final" offer because it had refused to produce internal analyses or valuations that the Air Products board relied upon in deciding to make its $70 offer. The Court had previously ordered in a December 23, 2010 opinion that the parties conduct limited discovery on Air Products' "best and final" offer. This discovery was limited to documents relating to the decision to make the final offer and limited depositions of people directly involved with that decision. The Court rejected Airgas's reliance on cases where defendants blocked discovery on privilege grounds to support its motion in limine. According to the Court, those cases involved situations where a party shielded evidence and then relied on that evidence at trial to meet its burden of proof on an issue central to resolution of the case. Air Products' characterization of its $70 offer was not an issue central to resolution of the case. Resolution of the case would depend upon whether Airgas' board had a good faith, honest belief that the $70 offer posed a "threat" to Airgas. The Air Products board's knowledge of Air Products' internal valuations of Airgas was not relevant to that inquiry. The Court was careful to point out, however, that there could be circumstances where a buyer's view of a target's value might be relevant to a fairness inquiry. In this case, Air Products was not required to prove the fairness of its offer or whether the offer was more or less than its internal valuations of Airgas. Accordingly, the Court the denied Airgas' motion in limine.
Significantly, the Court held that Air Products' public announcement of its $70 offer as its "best and final" offer meant Air Products had irrevocably represented to the Court it would not seek judicial relief for any additional offers. Bidders should keep this in mind when characterizing offers as "best and final".
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Court Of Chancery Explains When Fair Is What You Get
Reis v. Hazelett Strip-Casting Corporation, C.A. 3552-VCL (January 21, 2011)
When a reverse stock split eliminates minority stockholders, they are entitled to be paid the "fair value" of their stock. This decision explains what that means. In particular, it does not mean they get the same value as if their stock were subject to an appraisal. While the valuation process is very similar, it is affected by the standard of review involved, particularly if the squeeze out was done unfairly and the intrinsic fairness standard applies.
The opinion is also an excellent review of the overall Delaware law on the standard of review for any transaction.
ShareCourt Of Chancery Explains Expedited Procedures
Lavi v. Wideawake Deathrow Entertainment LLC, C.A. 5779-VCS (January 18, 2011)
The Delaware corporate and alternative entity laws have several provisions for expedited treatment of corporate disputes, such as over the right to inspect corporate records. Those matters are to go to trial quickly and, as this decision explains, are seldom subject to motion practice such as for summary judgment. Thus, the better practice is to ask for a trial date, soon.
A word of caution is in order on this point, however. When the Court calls in response to a request for a fast schedule, you had better be prepared to say why any trial is needed. At least in some cases, the Court has been known to rule on the merits during such a call when faced with a lawyer who has no good reason to oppose inspection or a decision on entitlement to vote stock.
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