Posts from 2012

Court Of Chancery Upholds Compensation Claim In Derivative Suit

Seinfeld v. Slager, C.A. 6462-VCG (June 29, 2012)

Derivative suits alleging excess compensation are hard to plead.  To avoid dismissal, the plaintiffs must show the directors were interested in the compensation awarded and their customary director fees do not count.  Indeed, even bonus awards to themselves are not enough when the bonuses are approved by a stockholder vote.  But this decisions shows why there is an exception to this general rule.

Here the bonus plan did not contain any limit on the board's discretion, except for a cap on the total awarded.  Finding that this made the awards free from any real stockholder control, the Court held the complaint stated a valid derivative claim.  The lesson then is to put some guidance on the awards into the plan when it is submitted for the stockholders' approval.

Share

Court Of Chancery Rejects Compensation Claim

Zucker v. Andreessen, C.A. 6014-VCP (June 21, 2012)

This is a run -of -the mill dismissal of a derivative suit for failure to justify the lack of demand on the board, but with a twist.  For the decision highlights just how hard it is to show that a board is liable for paying an executive too much.  Hence, curbs on compensation are left to the stockholders' vote to control.

Share

Court Of Chancery Stays Section 273 Case

McElroy v Schornstein, C.A. 7233-CS (June 6, 2012)

It is often said that the Court of Chancery will not stay or dismiss an action filed under one of the statutory provisions for summary adjudication of a claim, such as to decide a proxy contest,  because there is prior litigation filed elsewhere.  That is generally true, but not always and this decision involves 1 of the rare exceptions.  Here the plaintiff sought a decree of dissolution by his complaint filed several months after a similar claim was filed by the other side in New Jersey. Noting that any decision by it would impact a preliminary ruling by the New Jersey court, the Court of Chancery dismissed its case to avoid such a conflict.

Share

Delaware Court of Chancery Sets New Rules for Derivative Claims

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | June 20, 2012

The Delaware Court of Chancery just issued possibly the most important decision in the last 10 years on derivative claims. In Louisiana Municipal Police Employees' Retirement System v. Pyott, Del. Ch. Ct. 5795-VCL (June 11, 2012), the court clarified when a previously dismissed derivative suit may be refiled and what plaintiffs should do to properly satisfy the requirement that individual stockholder plaintiffs adequately allege why they, rather than a corporation's board of directors, should control derivative claims brought on behalf of the corporation. Because derivative litigation is a principal tool to ensure proper corporate governance, this decision has large implications. More ›

Share

State Supreme Court Reaffirms Strict Procedural Requirements for Inspection of Books and Records

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 13, 2012

Cases brought under Section 220 of the Delaware General Corporation Law reflect the Delaware General Assembly's effort to balance the stockholder's important right to seek inspection of books and records to investigate wrongdoing with the directors' right to manage the business and affairs of the entity without undue interference from stockholders. In 2003, the Delaware General Assembly extended the right to demand inspection from stockholders of record to beneficial stockholders, but only if the beneficial holder states under oath with the demand that he or she is a beneficial holder, provides documentary evidence of beneficial ownership of the stock and states that such evidence is a true and correct copy of what it purports to be. More ›

Share

Court Of Chancery Upholds Derivative Claim Despite Prior Dismissal

Louisiana Municipal Police Employees' Retirement System v. Pyott, C.A. 5795-VCL  (June 11, 2012)

This is one of the most important decisions on derivative litigation in many years. There are 3 key holdings, at least one of which may reverse prior law.  First, the Court held that a derivative suit dismissed for failure to plead sufficient grounds to proceed under the demand rules may be refiled by a different plaintiff who has a better complaint.  This may modify prior law  that had held that once dismissed with prejudice, the suit could not be revived by a better complaint from a new plaintiff.

Second, this decision effectively kills off the old first-filed rule that held that the plaintiff who files the first complaint will control the litigation even if other complaints are filed later by different plaintiffs.  From now on, the better plaintiff will be the lead plaintiff.

Third, the decision again stresses the value of inspecting a company's records before filing a derivative suit.  Indeed, the failure to do so may cause the Court to view the complaint as presumptively meritless, at least with respect to whether the demand rules have been meet.

The opinion is worth reading for many other reasons as well.  Its discussion of the Caremark case alone is a good reason to study the decision.

Share

Court of Chancery Discusses The Role of a Stockholder Representative In Arbitration Proceedings

Pryor v. IAC/Interactivecorp, C.A. 6884-CS (June 7, 2012)

What is the role of a "stockholder representative" in an arbitration proceeding?  When there are many parties to an agreement, it is common for the parties on one side (such as the selling stockholders entitled to an earn out payment) to chose one of their bretheren to act for them all.  While most assume that the representative chosen has the right to call the shots in the arbitration, her role may be much more.  This decision explains why that may be important.  It holds that notice to the representative that begins the period in which an appeal may be filed also counts as notice to all the parties the chosen one represented.  Hence, if she does not file a timely appeal,  the others may not do so later.  Moreover, the decision suggests that only the representative may argue the merits of an appeal.

Share

Superior Court Explains When a Contract Claim Is Not A Tort

Cornell Glasgow LLC v. La Grange Properties LLC,  C.A. N11C-05-016 JRS CCLD (June 6, 2012)

Parties often try to plead as many different legal theories as possible.  Pleading tort claims is particularly popular because there is a sense that  it may lead to bigger damages and sounds aggressive.  After all, who wants to be a "tortfeasor?"  This careful decision explains when there is a tort claim and when there is not when the dispute arises out of a contractual relationship.

Briefly, after the contract has been at least partially performed, it is not a tort to promise to continue performance even if you do not mean to do so.  Instead, that is just a breach of the contract. Therefore, there is no claim in such circumstances for fraudulent inducement. Also, when the damages arising out of the breach are not different than the damages recoverable in tort, there is no tort claim either.

Share

Court Of Chancery Upholds Contract As Bar To Estoppel Claim

Blaustein v. Lord Baltimore Capital Corporation,  C.A. 6685-VCN (May 31, 2012)

This decision reiterates the settled Delaware law that when a contract deals with the parties' rights on a particular subject, one of the parties can not claim that it entered into the contract based on an oral promise that differs from what the contract provides.  After all, if you could do that, then why have the contract in the first place? More ›

Share

Court Of Chancery Implements The Pharmathene Decision

PharmAthene Inc. v. SIGA Technologies Inc., C.A. 2627-VCP (May 31, 2012)

The original PharmAthene decision is a landmark in the law of remedies for breach of contract because it imposed a form of profit sharing. This latest decision in that case, together with the attached Order, explains in detail how that remedy is to work.

This decision, including its award of expectation damages, was largely affirmed on May 24, 2013. See Del Supr C.A, 314, 2012

Share

Supreme Court Upholds Section 220 Jurisdictional Rules

Central Laborers Pension Fund v. News Corporation,  No. 682, 2012 (May 29, 2012)

The right of a stockholder to inspect a company's books and records is govenned by Section 220 of the DGCL.  A beneficial owner must first show proof of beneficial ownership, however, and Section 220 tells how to do so.  Here the plaintiff for some reason just ignored Section 220's requirements to show beneficial ownership.  When then faced with a motion to dismiss, he argued that he could supply that proof later because it was just a clerical mistake to not do so when his complaint was filed. The Delaware Supreme Court forcefully rejected  that argument and upheld the dismissal of his complaint.

Note that the Supreme Court sidestepped the holding of the Court of Chancery that once it filed a derivative suit, this plaintiff lost its rights under Section 220.

Share

Court Of Chancery Interprets Release

Travelers Casualty And Surety Company v. Sequa Corporation,  C.A. 7055-VCG (May 29, 2012)

This decision involved an interesting argument over the scope of a release.  As is common, the release was signed on behalf of a parent company and all its subsidiaries. To escape the scope of the release, a subsidiary argued that it was only bound to release the same claims that its parent had, but not any claims that were unique to the subsidiary.  The Court sidestepped that argument because in any case the release did not cover the claims asserted by the subsidiary.  However, this stands as a warning to better draft releases that cover all entities in a control group.

Share

Court Of Chancery Interprets LLC Consent Rights

Paul v. Delaware Coastal Anesthesia, C.A. 7084-VCG (May 29, 2012)

The LLC statute, like the DGCL, permits the operating agreement to bar member action by written consent.  Here the plaintiff argued that such an agreement's fairly common provisions dealing with how members were entitled to vote at a meeting also precluded member action by written consent. The Court held that any such prohibition must be clearly set out in the operating agreement and not merely implied.  Hence, the written consents were upheld.

Share

Court Of Chancery Explains Reformation Remedy

Brinckerhoff v. Enbridge Energy Company Inc., C.A. 5526-VCN (May 25, 2012)

This is an interesting decision because it suggests a remedy other than damages in an unfair price case.  Once a deal has closed, the plaintiff may find that his remedies in a pure unfair price claim are limited.  Frequently, damages against directors are foreclosed by an exculpation clause. Here the Court suggests that, at least when the merger consideration is not just cash, reformation may be an available remedy.  Given that has happened just once, it may be a long shot at best.

This decsiion was upheld by the Supreme Court on MAy 28, 2013. 67 A3d 369.

Share

Court Of Chancery Applies Hirt Test

Coyne v. Catalyst Heath Solutions Inc., C.A. 7448-VCN (May 25, 2012)

This decision applies the familiar Hirt factors to decide who should be lead class counsel.  Note the slight preference for who has the most support among the various plaintiffs' firms.

Share