Posts from 2013

Court Of Chancery Explains Limits Of Review Of Appraiser Decision

Senior Housing Capital LLC v. SHP Senior Housing Fund LLC, C.A. 4586-CS (May 13, 2013)

This decision explains the limits on any substantive review of an appraisal determination the Court will undertake when the parties' agreement limits that review.  it is an excellent overview of the way in which parties may decide how much judicial review they want in such cases.

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Court Of Chancery Explains When A Derivative Suit Survives A Merger

In Re Primedia Inc. Shareholders Litigation, C.A. No. 6511-VCL (May 10, 2013)

This is a major decision.  Generally, a merger ends the standing of a plaintiff to pursue derivative litigation.  To get around this problem, derivative plaintiffs have alleged that the merger itself was invalid because the consideration paid to the stockholders eliminated in the merger did not include anything for the value of a pending derivative claim.  Until this decision, that claim did not go very far because the courts found that the derivative claim was worth very little.  But what if the claim is worth a lot?

This decision explains how to deal with that situation to effectively assert what is known as a "Parnes" claim.  As a result, we may see more such claims at least when the derivative litigation asserts big damages.

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Supreme Court Sets Reformation Rules

Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, C.A. 437, 2012 (May 9, 2013)

This is an important decision because it sets the rules for when a contract may be reformed for a unilateral mistake.  First, it is not a defense to a reformation claim that the other party failed to read the contract.   That may be a defense to a rescission claim, but not reformation.  Second, a unilateral mistake, known to the other party who remains silent, may justify reformation.  Third, the defense of ratification of such a mistake must be based on knowledge of the mistake.

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Court Of Chancery Upholds Acceptance Of One Offer Without Market Check

In re Plains Exploration & Production Company Stockholder Litigation, C.A. 8090-VCN (May 9, 2013)

 As this decision points out again, when a board of directors is disinterested in the transaction, its decision to accept the first offer for its company does not run afoul of the Revlon doctrine just because there was no pre-agreement market check.  Instead, their decision is subject to the business judgment rule.

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Court Of Chancery Agrees To Consider Post Merger Evidence

In re Rural Metro Corporation Shareholders Litigation, C.A. No. 6350-VCL (April 16, 2013)

The Delaware appraisal statute is generally interpreted to preclude consideration of post-merger events in determining the fair value of the company.  However, in this transcript ruling, the Court indicated that it would consider such evidence when: (1) it sheds light on what the parties were thinking at the time of the merger (such as on revenue projections) and (2) it helps prevent a true outlier (such as wildly wrong revenue projections).  The Court cautioned that it might not give much weight to this evidence and it remains to be seen how far this transcript will go to permit other post-merger evidence.

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Should Directors Sue Their Company for Its Misdeeds?

 Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | May 8, 2013

What should directors do when their company ignores their efforts to end corporate mismanagement? Until recently, this question rarely came up. Rogue companies are rare in the sense of openly refusing to comply with the law. Directors almost always were able to obtain corrective action when violations of the law came to light. But what if those directors were not able to cure serious management problems? What should they do? More ›

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Court Of Chancery Explains A Fiduciary's Duty To Selling Stockholders

In Re Wayport Inc. Litigation, C.A. 4167-VCL (May 1, 2013)

When does a corporate fiduciary owe a special disclosure duty to a minority stockholder whose stock he purchases?  There are several approaches to this question and this decision fully reviews them all.  Ultimately the Court adopted the so-called "special circumstances" rule that requires disclosure when the buying fiduciary knows of material facts not known to the seller.  Note that in this context what is "material" is a higher bar to pass than in a more common disclosure case.

The decision is also useful for its review of the equitable fraud and common law fraud rules,  particularly after a duty to disclose arises because of a past disclosure.

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Court Of Chancery Rejects Special Rights For Minority Stockholders

Blaustein v. Lord Baltimore Capital Corporation, C.A. 6685-VCN  (April 30, 2013)

This decision affirms the long held law that Delaware does not recognize the "abuse of minority stockholders" theory whereby there is a duty to treat minority stockholders in such a way as to give them benefits that are not provided by contract or the law, such as dividends.

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Court Of Chancery Explains When Board Must Respond To Demand

Rich v. Chong, C.A. 7616-VCG  (April 25, 2013)

The rules governing when a demand on a board to file suit is excused are well known.  Less well known is what happens when a demand is made and nothing happens.  This decision explains that the failure to even respond is itself evidence that the board cannot be trusted to fairly evaluate the need to sue.  While each such case turns on its own facts, this decision is an excellent summary of Delaware law on when a Caremark claim is well pled to excuse demand.

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When Is Advice of Counsel a Defense You Can Raise, but Not Disclose?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | April 24, 2013

 Most defendants in corporate fiduciary duty litigation want to say, "My lawyer said it was all right." They usually avoid making that point for fear of waiving the attorney-client privilege. A recent Court of Chancery decision suggests that it is possible to say your lawyer advised you without opening the door to disclosure of exactly what the lawyer said. Doing so involves walking a tightrope. One slip and you're waiving your privilege. Yet, the benefits may be worth the risk. More ›

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Court Of Chancery Permits Access To Litigation Reserves

JP Morgan Chase & Co. v. American Century Companies Inc., C.A. 6875-VCN (April 18, 2013)

This decision explains the rare case when a litigant may gain access to the opposing party's litigation reserves. That information is usually subject to attorney-client privilege.

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Does Allergan Spell Litigation Relief?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | April 17, 2013

The corporate defense bar is excited over the Delaware Supreme Court's April 14 decision in Pyott v. Louisiana Municipal Police Employees' Retirement System, No. 380, 2012 (more often referred to as the "Allergan case"). The Supreme Court reversed a Court of Chancery decision that had refused to dismiss a Delaware derivative complaint notwithstanding that a California federal court had previously dismissed virtually the same complaint. The Court of Chancery ruled that it was not bound under principles of collateral estoppel to follow the federal court ruling. It further held that even if it would normally follow the prior court's decision, it would not in the Allergan case because the California plaintiff had not adequately represented the Allergan stockholders before the California federal court.

The Court of Chancery's Allergan decision had been widely criticized by counsel for corporate defendants. They pointed to the abuse presented when multiple complaints are filed in multiple jurisdictions over a single transaction. That forces defendants to wage a multistate defense. Thus, if the Allergan case decision in the Court of Chancery had been upheld, defendants feared that even if they won one battle, the war against them would continue on another front. The defendants' concern led to several amicus briefs filed in the Delaware Supreme Court urging reversal of the Court of Chancery's Allergan decision. More ›

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Court Of Chancery Explains When Directors May Shield Other Directors

Kalisman v. Friedman, C.A. 8447-VCL (April 17, 2013)

When may most of a Board of Directors deny another director access to the advice of counsel the majority received?  This decision answers that interesting question and concludes "not very often."  There are exceptions to that general rule, such as when there is a board committee involved whose counsel has not also been counsel to the excluded director, when the excluded director wants the information for a proven improper purpose, etc.

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Court Of Chancery Explains Privilege Waiver Law

In Re Comverge, Inc. Shareholders Litigation, C.A. 7368-VCP (April 10, 2013)

When does the mere assertion that your client had "advice of counsel" waive the attorney-client privilege?  This question comes up more often than you might think.  This decision makes clear that in some instances, merely asserting that you sought an attorney's advice is not a waiver of the privilege.  The 2 keys to retaining the privilege are not injecting the advice of counsel issue into the litigation yourself and not actually saying what the attorney told you.  But, if you follow the guidance in this decision, the privilege will be preserved.

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Supreme Court Reverses Important Decision Giving Delaware Primacy

Pyott v. Louisiana Municipal Police Employees' Retirement System, No. 380, 2012 (April 4, 2013)

In a major decision, the Delaware Supreme Court dismissed a derivative suit on the basis that a prior dismissal of essentially the same suit by a different stockholder barred the Delaware litigation.  This reverses the Court of Chancery that held the suit might proceed despite the dismissal of the other litigation by a Federal Court in California.

Pyott may have major implications for derivative litigation, at least when multi-state cases are filed. Defendants may be expected to race to file motions to dismiss in what they see as the most favorable jurisdiction or in those cases where they see less formidable opponents.

It is also noteworthy that the Supreme Court rejected any presumption that a "fast filer" is an inadequate plaintiff.

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