Posts from 2013

Court Of Chancery Holds Privilege Waived

Lake Treasure Holdings Ltd. v. Foundry Hill GP LLC, C.A. 6546-VCL (June 14, 2013)

This transcript decision illustrates the danger in using a computer generated privilege log.  It will leave out document descriptions, addresses, etc.  As a result, the Court here held that any privilege claim was waived by using the "worst" log ever.  Hence, loggers beware!

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Has the Merger Defense to Derivative Litigation Ended?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | June 12, 2013

Directors of a Delaware corporation have one sure defense to a derivative suit — eliminate the pesky stockholder plaintiff's standing to sue. Of course, that tactic involves also eliminating all of the other stockholders as well by a cash-out merger and that requires a willing merger partner who is willing to pay fair value for all of the stock. But when there is a controlling stockholder involved and the cash is available, the cash-out merger ends what may be costly litigation.

That is no small benefit. For when the derivative litigation challenges a transaction that allegedly benefited a controlling stockholder, that stockholder and his or her affiliated directors bear the burden of proving what they did was "intrinsically fair" to the corporation. While few such cases go to trial, the few that do have occasionally resulted in very big verdicts. The $1 billion threshold for such a verdict has now been crossed, for example. The costs to defend such claims are also worth considering, particularly for closely-held corporations that may find those costs to outweigh the expense of a cash-out merger. More ›

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Court Of Chancery Appoints Receiver To Hold Meeting

Rich v Fuqi International Inc., C.A. 5653-VCG (June 12, 2013)

What happens when the Court orders the holding of an annual meeting and the company refuses to do so?  In this decision the Court of Chancery appointed a receiver with the authority to hold the meeting once the receiver determines how to do so without running afoul of the SEC rules requiring audited financial statements the company presently does not have.

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The Debate on How to Remedy the Problem of Fast-Filing Plaintiffs in Derivative Actions Continues

Authored by Jason C. Jowers
This article was originally published in Business Law Today | May 2013 

Over the past several years, both the Delaware Supreme Court and the Court of Chancery have recognized the problem of plaintiffs that rush to file derivative actions without first investigating their claims, usually in multiple forums, following the announcement of some corporate trauma. Typically, there is a race to the courthouse by plaintiffs' firms in an effort to obtain lead plaintiff status. Although both courts acknowledge the problem, a satisfactory solution has thus far proven elusive. On April 4, 2013, in Pyott v. Louisiana Mun. Police Employees' Retirement System, __ A.3d __, 2013 WL 1364695 (Del. 2013) ("Allergan"), the Delaware Supreme Court reversed a controversial decision last year by the Delaware Court of Chancery that attempted to address the problem of the fast-filing plaintiff. The lower court had denied dismissal on collateral estoppel grounds of a shareholder derivative action alleging Caremark claims despite the fact that substantially similar claims brought by other shareholders in an action in California had been dismissed with prejudice. Supporting its decision, the Court of Chancery determined that Delaware's demand futility law, which the court believed should be incorporated into the privity prong of California's collateral estoppel test, could not be met because a shareholder does not become the representative of the corporation until a motion to dismiss for failure to make a demand on the board is denied. Additionally, the Court of Chancery found that the shareholder plaintiffs in the California action were not adequate representatives of the corporation because they failed to investigate their claims before bringing the action. In so finding, the trial court established a presumption that fast-filing plaintiffs who do not seek to inspect a corporation's books and records before bringing Caremark derivative claims do not adequately represent the interests of the corporation, but rather represent the interests of the plaintiffs' firms who routinely bring such claims immediately after the announcement of a corporate trauma. More ›

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Supreme Court Upholds Cross-Jurisdictional Tolling

The Dow Chemical Corporation v. Blanco, No. 492, 2012 (June 10, 2013)

The Delaware Supreme Court has upheld cross-jurisdictional tolling. Thus, when a class action is filed, the statute of limitations is tolled at least until the class is not certified. That is true even if, as here, the class action was filed in another jurisdiction.

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Supreme Court Broadly Upholds Fair Dealing Claims

Gerber v. Enterprise Products Holdings LLC, No. 46, 2012 (June 10, 2013)

This decision has big implications. In a line of past decisions, the Court of Chancery has upheld arguments that  an LLC agreement may define what constitutes "good faith" in such a way as to severely limit claims based on the implied duty of good faith and fair dealing.  Of course, that duty under the Delaware LLC Act cannot be eliminated in an LLC agreement.  But, by permitting drafters to define what constituted good faith, the trial courts came close to eliminating that duty.  No more.

Exactly what will constitute a violation of the duty of good faith and fair dealing is also implicated by this decision.  Conduct that may seem permitted by the LLC agreement may now be prohibited if done to take an action that the investors never would have agreed to had they thought of it when the LLC agreement was drafted. Time will have to tell what all this means.

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Expedition Doesn't Extend to Non-Colorable Claims

 Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 5, 2013 

The Delaware Court of Chancery has long expressed its preference that the time to bring a disclosure claim regarding a proposed merger is before the stockholders vote and the deal closes. Such prompt pleading enables the court to fix any potential harm before the merger occurs. In part for that reason, the court follows the practice of "'erring on the side of more [expedited hearings] rather than fewer,'" as it wrote in Ehlen v. Conceptus, C. A. No. 8560, slip op. at 3 (Del. Ch. May 24, 2013). While the standard to obtain expedition is minimal — the plaintiff must demonstrate a colorable claim and a sufficient possibility of irreparable harm — a plaintiff fails to meet it with rote pleading or conduct inconsistent with a demand for expedition. As Ehlen illustrates, the court will require a greater showing of colorability if a plaintiff unduly delays in seeking expedition, even if the delay itself does not constitute laches, and deny as colorable disclosure claims if the plaintiff cannot demonstrate that allegedly omitted information would alter the total mix of information available to the stockholders. More ›

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Court Of Chancery Applies BJR To Controller Merger

In Re MFW Shareholders Litigation, C.A. 6566-CS (May 29, 2013)

In this important decision the Court of Chancery for the first time has applied a business judgment rule analysis to a review of a merger where a controller is on both sides of the deal. This result limits the old Lynch doctrine that mergers involving a controller on both sides is subject to the intrinsic fairness standard that almost always requires a trial to resolve.  While this short blog cannot do justice to the Court's analysis, it held that the BJR will apply when: (1) the deal is subject to the approval of a SNC and the majority of the minority stockholders, (2) the SNC is independent, (3) the SNC has its own advisors and can say "no", (4) the SNC meets its duty of care, (5) the stockholder vote in fully informed and (6) the  vote is not subject to coercion.

 

 

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Supreme Court Upholds Forum Selection Clause

National Industries Group v. Carlyle Investment Management LLC,  No. 586, 2012 (May 29, 2013)

This is an important decision because it upholds the power of the Delaware Court of Chancery to enforce by an injunction the forum selection clause in a contract.  Previously, there was some doubt under the existing case law whether such an injunction would issue, but, at least among sophisticated litigants, there is no doubt any more.  Note that the clause in question provided that a "court in Delaware" would hear any dispute.  A clause that attempted to vest jurisdiction only in the Court of Chancery is questionable because a contract alone cannot confer jurisdiction on that court with its limited equity jurisdiction.

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Court Of Chancery Upholds Concealment Claim

Transdigm Inc. v. Alcoa Global Fasteners Inc., C.A. 7135-VCP (May 29, 2013)

This is another in the continuing series of cases involving buyers of companies who claim to have been misled by the sellers and where the sellers rely on exculpation clauses to defeat the buyers' claims.  What is interesting about this decision is that it upholds the novel argument that a concealment claim is not barred by such exculpation language. The decision has an excellent review of prior Delaware law interpreting such clauses.

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Delaware Supreme Court Affirms Contractual Exculpation

Norton v. K-Sea Transportation Partners L.P., No. 338, 2012 (May 28, 2013)

This decision affirms the consensus that a limited partnership agreement may set the standards for resolving a conflicted transaction and thereby absolve the controllers from any liability.

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Court Of Chancery Upholds Caremark Complaint

In re China Agritech Inc. Shareholder Derivative Litigation, C.A. 7163-VCL (May 21, 2013)

One of the harder aspects of practicing Delaware corporate law is dealing with all the decisions. This is an excellent summary of current Delaware law on Rule 23.1, Caremark and a lot of other aspects of Delaware law that are implicated by derivative complaints.  It is also yet another example of a Chinese-based entity whose controllers seem to have no concern about compliance with our law.

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Court Of Chancery Explains Exculpation Clause

Anvil Holding Corporation v. Iron Acquisition Corporation, C.A. 7975-VCP (May 17, 2013)

Many acquisition agreements contain provisions that are intended to limit the buyer's remedies. This decision explains what language to use to cut off claims based on extra-contractual representations.  The contract must specifically say that there is no reliance on anything outside the  terms of the contract.

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Is the Court of Chancery Reforming Merger Litigation?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | May 15, 2013

There is an uproar going on about the practice of filing suit over every merger announced for a publicly traded company. At least 90 percent of merger announcements are followed in a day or two by the filing of complaints alleging the merger is unfair to one or both of the companies involved. Given that these suits are filed so quickly and in almost every deal, they cannot be well researched and may well be meritless. That impression is further confirmed when virtually every one of these suits is soon settled, often for meager, additional disclosures to stockholders and attorney fees for the plaintiffs' lawyers. The whole practice looks too much like legalized extortion. As more than one court has noted, corporate defendants find it cheaper to settle than to litigate these cases.

The problem is compounded when several suits are filed in multiple jurisdictions. That drives up the cost of defense when multiple law firms are retained to cover all the jurisdictions involved. Jurisdictional disputes also occur, again increasing defense costs. Critics have written no end of articles decrying this mess. More ›

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Court Of Chancery Limits Third Party Discovery

In re: El Paso Partners LP Derivative Litigation, C.A. 7141-CS (Transcript, April 15, 2013)

This decision discusses when discovery from a third party not involved in the transaction under attack in the litigation is justified.  In part, the Court denied the discovery because it was not convinced the information to be obtained would be all that helpful in the litigation.

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