Posts from 2017

Stockholder Vote Enjoined Over Banker's Financial Interest in Merger

Investment bankers play a central role in the exploration, evaluation, selection and implementation of strategic alternatives for Delaware companies. To enable stockholders to carefully assess how much weight to give an investment banker's analysis of a proposed strategic transaction, Delaware law requires full disclosure of a banker's compensation or financial interest, and other potential banker conflicts of interest in connection with the transaction. If the banker's financial interest in the proposed transaction is "material" and "quantifiable," full disclosure of the financial interest to stockholders is required under Delaware law. To obtain meaningful relief for the benefit of stockholders, the Delaware Court of Chancery has indicated its strong preference for plaintiffs to assert claims to correct disclosures to stockholders in advance of the stockholder vote on the proposed transaction. More ›

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Court of Chancery Applies Ratification To Equity Grants Under Stockholder Approved Plan

In re Investors Bancorp, Inc. Stockholder Litigation, C.A. No. 12327-VCS (April 5, 2017)

Stockholder approval of an equity compensation plan may or may not constitute ratification over awards to the directors under the plan.  When it does, the Court of Chancery will review challenges under the business judgment rule.  There are Delaware decisions coming out both ways on the issue of ratification.  As this decision illustrates, whether or not ratification applies depends on how specific the plan is that the stockholders approved (and whether the vote was informed and uncoerced).  When it comes to the level of specificity required in the plan, generally speaking, a plan that sets specific and meaningful limits on the grants could constitute ratification of grants within those limits.  This decision, where the Court applied ratification, provides guidance on just how specific the plan must be.

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Where Is Delaware Corporate Litigation Going?

Litigation involving Delaware corporate law is undergoing major changes. Some commentators predict that Delaware will cease to be the favored forum for M&A litigation. While we disagree with that forecast, it is important to understand what is going on and how those changes may affect future litigation. There are two major evolutions and one more minor development that are worth considering. More ›

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Court Gives Great Weight to Pre-Merger Negotiations in Interpreting an Ambiguous Contract

Contract interpretation is a staple of litigation in the Delaware Court of Chancery. Disputes over the meaning of commercial contracts, foundational documents such as certificates of incorporation or bylaws or agreements governing alternative entities such as limited liability companies or limited partnerships require the court to interpret language in contracts. More ›

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Court Of Chancery Denies Corwin Defense

In re Saba Software Inc. Stockholder Litigation, C.A. 10697-VCS (March 31, 2017, revised April 11, 2017)

This is a significant decision because it is the first to find that a stockholder vote did not invoke business judgment review under Corwin because the vote was coerced and not fully informed. Under Corwin, a transaction approved by a majority of the disinterested stockholders in an informed, uncoerced vote is subject to business judgment rule protection. A Corwin-qualifying vote practically means an early dismissal. Thus, the key question on a motion to dismiss under Corwin is whether the stockholder vote was both informed and uncoerced. More ›

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Del. Justices Award Attorney Fees Under Promissory Note Fee-Shifting Provisions

Persuaded by the arguments of the appellant noteholders, the Delaware Supreme Court ruled that two fee-shifting provisions in the promissory notes entitled them to recover attorney fees the noteholders incurred filing suit to secure warrants issuable under the notes. Relying on an exception to the American rule permitting fee-shifting where a contract so provides, the Supreme Court in Washington v. Preferred Communications Systems, No. 436, 2016 (Del. Supr. Feb. 27), ruled that the amended notes unambiguously provided fee-shifting in this case. It rejected the company's argument that under the relevant contractual provisions the warrants did not constitute "any indebtedness" and that the noteholders action to recover them did not amount to a collection action after default. Having found a clear basis in the contract to support its fee award, the Supreme Court declined the opportunity to broaden its ruling and have Delaware address an emerging trend in other states to treat a one-sided fee provision as a mutual fee-shifting provision. More ›

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Court Of Chancery Rejects Vague Demand Excusal Allegations

LVI Group Investment LLC v. NCM Group Holdings LLC, C.A. 12067-VCG (March 29, 2017)

This is an interesting decision because it applies the rules for determining when a derivative plaintiff, in the LLC context, has sufficiently alleged that pre-suit demand on the board would have been futile.   More ›

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Court Of Chancery Explains Effect Of Notice Bylaw Violation

Rainbow Mountain Inc. v. Begeman, C.A. No. 10221-VCMR (March 23, 2017)

This is an interesting decision even if only because it is so well written and deals with an unusual family corporation.  Its legal significance is that it explains that a vote taken in violation of a bylaw requiring notice is void, rather than voidable, where equitable defenses could apply.  The distinction between a void and voidable failure to give proper notice has not always been clear, but Vice Chancellor Laster attempted to reconcile prior cases in the Klaassen decision, and Vice Chancellor Montgomery-Reeves signs onto his approach in this case.

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Court of Chancery Enjoins Transaction Pending Clearer Disclosure of Banker’s Conflicts

Vento v. Curry, C.A. No. 2017-0157-AGB (March 22, 2017)

A board must disclose all information material to the stockholder vote for a transaction.  Moreover, disclosures may be inadequate when they are buried in various places in a lengthy proxy statement.  One piece of material information is conflicts involving the board’s advisors.  The Court of Chancery is prepared to preliminary enjoin a transaction where the proxy omits or fails to sufficiently disclose material details concerning, for instance, a banker’s conflict.  For example, the inadequately disclosed conflict warranting an injunction in this case involved the fees the buy-side banker expected to receive for its participation in debt financing for the deal.  

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Delaware Supreme Court Issues New Standards Governing Master Limited Partnership Cases

Brinckerhoff v. Enbridge Energy Company, Del. Sup. C.A. 273, 2016 (March 20, 2017, revised March 28, 2017)

Agreements for limited partnerships, in particular for publicly-traded master limited partnerships, are notoriously complicated and often hard to understand, so much so that two of the state’s judges co-wrote a detailed article calling for more standardization in this area.  One consequence is that general partners in the MLP context may expose themselves to potential liability for decisions they thought protected by the partnership agreement’s terms, which often purport to eliminate common law fiduciary duties, replace them with a contractual duty to act in “good faith,” and provide safe harbors for conflict transactions.  This is another case where that may happen.   More ›

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Court Of Chancery Explains Discovery Objections

In Re Oxbow Carbon LLC Unitholder Litigation, C.A. No. 12447-VCL (March 13, 2017)

For some time now, the Court of Chancery has told litigants that objections to documents requests should be specific, not generic and boilerplate. This decision thoroughly addresses the case law on this issue, with numerous citations to federal court precedent and detailed explanations of what objections are proper, including for claims of privilege. Oxbow should serve as a useful resource when it comes time to object to document requests in the Court of Chancery.

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The Perils of Advancement

There is perhaps one single obligation that most aggravates corporate boards of directors: Paying your opponent's legal fees when you are convinced he has done you wrong. How then is that not just possible, but a regular occurrence?

Delaware law permits a corporation to agree to pay an officer or director's litigation expenses "in advance of the final disposition of such action, suit or proceedings." Persons considering serving on the boards of directors of a publicly traded corporation almost always insist that such "advancement rights" be provided to them, by contract or corporate bylaw. Thus, if their corporation later claims that the director acted improperly, such as by obtaining an unauthorized benefit or by deliberately neglecting her duties, that director will ask the corporation to pay for her defense.

Over the last few years, corporations have tried to avoid that obligation in many ways. For example, corporations have claimed they were fraudulently duped into hiring the defendant and therefore the advancement contract should be rescinded. More frequently, corporations have argued that the defendant's actions leading to filing suit did not "arise out the defendant's actions" as a director or officer (the commonly used qualifier in advancement contracts that must be met before fees are advanced). None of those defenses generally works, however.

Moreover, apart from the irritant of having to pay an allegedly "bad actor's" fees, the right to advancement often involves real money. The recent decision in White v. Curo Texas Holdings, Del. Ch. C. A. 12369-VCL (Feb. 21), involved an advancement claim for $5,121,651.73 and other decisions have involved similar large amounts. Under those circumstances, it is no surprise that corporations and other legal entities have sometimes resisted the advancement claims of their former directors or officers.

Once the advancement claim is denied, the claimant has the right to file suit in the Delaware Court of Chancery to compel payment, 8 Del. C. Section 145(k). Typically, that court will treat such a suit "summarily," meaning the litigation will be given priority on the curt's docket and scheduled for as prompt a hearing as circumstances permit. The Court of Chancery will then first determine if advancement is required. If so, then the parties will often be required to follow the procedures set out in Danenberg v. Fitracks , 58 A.3d 991 (Del. Ch. 2012) (the Fitracks procedures).

Briefly, the Fitracks procedures require that senior Delaware counsel for the parties review invoices for fees and expenses, meet to resolve any disputes and then no more frequently than quarterly, submit any still disputed amounts to the Chancery Court for its decision. In the meantime, the party who is required to pay advancement must pay at least 50 percent of the amount sought. Most significantly, the Court of Chancery's review is very limited with respect to what claims will be denied advancement. The Curo decision sets out in detail the limits of that review. Generally, only "grossly" overstated claims will be denied.

There are good reasons for limiting the Court of Chancery's scope of review in advancement cases. To begin with, advancements are subject to the claimant's providing "an undertaking to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation," 8 Del. C. Section 145(e). That determination occurs after the litigation is resolved, such as by judgment or settlement. Hence, the corporation has some safeguard to get its money back if the claimant is judged not to be entitled to keep it. Moreover, as the Curo court reminded, it would be inappropriate to seek a granular review of the advancement claim while the underlying litigation continues for months or years. Accordingly, the court typically adopts the Fitracks procedures requiring the parties to first use their own efforts to avoid unnecessary waste of the court's limited resources. In fact, as Curo also points out, a party who inappropriately resists a claim despite using the Fitracks procedures may be required to pay the claimant's attorney fees incurred in pursuing the advancement claim.

Given the summary nature of advancement proceedings and the often lack of any effective client restraint on lawyers who are being paid by someone other than the actual client, there is a natural concern that the claims for fees are inflated. Moreover, even if the claimant has agreed to repay the fees if she loses, it is often doubtful that an individual has the unencumbered assets to do so, particularly if millions of dollars are involved.

This then finally brings us to the question of what can be done to avoid the perils of advancement obligations to former directors or officers. To some degree, those obligations can be insured against. A typical director and officer liability policy will reimburse a corporation that pays the legal bills of current or former directors or officers. For this reason, actual advancement cases are not all that common, compared to the number of suits filed against boards of directors.

Unfortunately, insurance does not always solve the problem. A typical D&O policy will exclude coverage for potentially collusive litigation, such as by denying insurance payments for "insured versus insured" suits. Thus, if the corporation is the plaintiff suing a former director, both the corporation and the director are considered an "insured" and there is no insurance coverage. This exclusion is not all that easy to avoid. Even stockholder derivative suits may be subject to the insured versus insured exclusion if the suit has been instigated by a director or by the corporation having a stockholder file the claim in her name.

Nonetheless, there are some potential ways to limit the perils of advancement. While the right to advancement will almost always be provided just as a matter of common practice, the right is essentially contractual. Hence, it may be subject to limitations set out in a contract or bylaw. Insurance companies have the same concerns as corporations providing advancement rights in terms of excessive fees unrestrained by the real client's oversight. To at least try to limit that exposure, insurers often retain the right to select counsel (with whom they have pre-existing reduced fee agreements) or to consent to settlements. While the designated counsel must be independent of the nonclient party paying his fees, it might be expected that the promise of future referrals will dim his ardor for fees. At least the counsel designated should be chosen on the basis of their experience and expertise and not a lawyer learning the substantive law at someone else's expense.

There have been few proposals on how to limit advancement claims. That may well be because that is no easy task given the strong demand for unlimited advancement rights. But if insurance companies can negotiate cost controls with their clients, perhaps corporations can also do so with their prospective and often highly paid directors.

Delaware Business Court Insider | March 14, 2017

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The Court of Chancery Examines Indemnification Requirements

Horne v. Optimiscorp, C.A. No. 12268-VCS (Mar. 3, 2017) 

This officer indemnification case arises out of one of the more sordid tales to appear in a Court of Chancery opinion and a later Delaware Supreme Court affirmance.  This opinion, however, focuses on the less titillating but always intriguing question of whether the officer was sued by reason of the fact that he was an officer, as required to trigger indemnification rights.

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Court Of Chancery Sanctions Litigant For Fabricating Evidence And Violating Orders In LLC Dispute

Sara Ensing v. Hans Ensing, C.A. No. 12591-VCS (Mar. 6, 2017)

This case involves the unfortunate deterioration of a marriage, as well as the couple’s winery venture, carried on through various LLCs.  The decision illustrates the seriousness with which the Court of Chancery views the fabricating of evidence and the violations of its orders, including the status quo orders typically entered by the Court in control disputes. It also discusses interesting expert evidence on the subject of metadata used to prove the inauthenticity of certain electronic documents. In the end, the ill-behaving litigant was ordered to pay two-thirds of its adversary’s fees and expenses, as well as the expert witness fees and expenses.

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Court Of Chancery Stresses Importance Of Records Demand In Lead Counsel Battle

In re CytRx Corp. Stockholder Derivative Litigation II,  C.A 11800-VCMR (February 22, 2017)

When asked to choose the lead plaintiff and class counsel, the Court of Chancery applies the well-known Hirt factors.  As this decision demonstrates, the Court also will place some significant weight on which of the competing plaintiffs used a books and records inspection to bolster its complaint, rather than just relying on the financial press.

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