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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Morris James Blogs
Showing 546 posts by Albert J. Carroll.
Court Of Chancery Explains Jurisdiction Based On Delaware Incorporation
Terramar Retail Centers LLC v. Marion #2-Seaport Trust, C.A. No. 12875-VCL (Aug. 18, 2017)
Merely incorporating a business in Delaware does not automatically subject you to personal jurisdiction in the Delaware courts. But, when the act of incorporation is part of the events forming the basis for a claim, it may be enough. This decision explains the parameters of jurisdiction based on incorporating in Delaware.
ShareCourt Of Chancery Applies M&F Worldwide To A Selling Controller
Under M&F Worldwide, the business judgment rule standard of review applies to squeeze-out mergers with controlling stockholders if, from the outset of the negotiations, the controlling stockholder conditions the merger on both (i) negotiation and approval by a special committee of independent directors, free to select its advisors, empowered to say no, which fulfills its duty of care, and (ii) approval by an uncoerced, fully informed majority-of-the-minority vote. Compliance with M&F Worldwide limits plaintiffs to untenable waste claims. Significantly, this decision extends M&F Worldwide to circumstances where the controlling stockholder is a seller, rather than the buyer, and may have engaged in a conflicted transaction based on alleged side deals. The decision also holds that the dual protections of M&F Worldwide must apply from the start of the negotiations with the controller to be given effect.
ShareCourt Of Chancery Declines To Exercise Personal Jurisdiction Based On A Choice Of Law Provision In A Stockholders’ Agreement
EBP Lifestyle Brands Holdings Inc. v. Boulbain, C.A. No. 2017-0269-JRS (Aug. 4, 2017)
This decision holds that owning shares in a closely-held Delaware corporation and entering into a stockholders’ agreement containing a Delaware choice of law provision is not a sufficient basis, standing alone, for a Delaware court to exercise personal jurisdiction over a non-resident under Delaware’s long-arm statute. While these circumstances may be factors in the long-arm and due process analysis, more is required to purposefully avail oneself of Delaware law and be subject to personal jurisdiction in its courts.
ShareCourt Of Chancery Explains Fraud Pleading Standards
Sparton Corporation v. O’Neil, C.A. 12403-VCMR (August 9, 2017)
This decision explains what needs to be alleged to state a fraud claim. More particularly, it is not enough to just generally allege that a defendant must have had knowledge of someone else’s false statement.
ShareCourt Of Chancery Upholds Claim Based On Low-Ball Self Tender
Buttonwood Tree Value Partners L.P. v. R.L. Polk & Co. Inc., C.A. No. 9250-VCG (July 24, 2017)
This an interesting decision because it upholds a claim that the controllers of a Delaware corporation breached their fiduciary duties by having their corporation make a self-tender at a knowingly low price all the while intending to sell it for much more, which they in fact did a short while later. The facts illustrate how not to do a self-tender in terms of acting fairly. While tender offers, even self-tenders, are often thought of as mere offers that stockholders are free to accept without later recourse or complaint, this decision shows why that might not always be true if the facts are bad enough.
ShareCourt Of Chancery Protects Privilege In Books and Records Action And Addresses Corwin’s Effect On Mismanagement Investigation Claims
Salberg v. Genworth Financial Inc., C.A. No. 2017-0018-JRS (July 27, 2017)
This is an important decision for its analyses implicating the Garner and Corwin rules. The Garner rule is that, under certain narrow circumstances where the plaintiff establishes good cause, the attorney-client privilege will be unavailable to corporate fiduciaries who are defending against claims brought by the stockholders who are the object of their fiduciary duties. Here, the Court of Chancery declined to invoke the Garner rule and protected the attorney-client privilege in a books and records case where the same stockholders were already pursuing derivative litigation against the company on the same subject as the records demand but could not gain access under Garner in that earlier litigation. More ›
ShareDelaware Supreme Court Reverses DFC Global And Clarifies The Deal Price’s Role In Appraisal Litigation
DFC Global Corporation v. Muirfield Value Partners L.P., No. 518, 2016 (Del. Aug. 1, 2017)
Delaware law has long made clear that the deal price for a company, while relevant, does not necessarily equate to the “fair value” that petitioners are entitled to receive in an appraisal proceeding. A string of recent Court of Chancery decisions, however, adopted the deal price as fair value, reinforcing the view that the market price for an arm’s-length transaction achieved after a thorough sale process likely will be the best evidence of fair value. Two decisions in mid-2016 arguably departed from this line of cases in setting fair value above the deal price, although on different grounds: Dell and DFC Global. Both decisions have been widely-reported, hotly-debated, and appealed. More ›
ShareCourt of Chancery Decision Illustrates Flexibility In Rules Governing Trial
In Re Oxbow Carbon LLC Unitholder Litigation, C.A. No. 12447-VCL (Del. Ch. July 28, 2017)
This decision permits a rebuttal witness to testify in an unusual situation that illustrates the flexibility the Court of Chancery often employs when conducting a trial. Among the issues addressed is the order of proof, belated identification of a witness, sequestration orders, the witness-as-advocate rule, and the tactical considerations in calling an adverse witness in support of your case.
ShareCourt Of Chancery Declines To Enforce Agreement To Negotiate
Windsor I LLC v. CWCapital Asset Management LLC, C.A. No. 12977-CB (Del. Ch. July 31, 2017)
In this decision, the Court of Chancery declines to enforce an agreement to negotiate, applying Maryland law. The agreement set the rules of the road for any negotiations taking place between the parties, nothing more.
ShareCourt Of Chancery Upholds Duty Of Care and Loyalty Claims
H&N Management Group Inc. v Couch, C.A. No. 12847-VCMR (Del. Ch. Aug. 1, 2017)
This is a rare case involving apparent lack of care in approving a conflicted transaction and a failure to employ almost any safeguards to ensure fairness. It is worth reading just to see what not to do, particularly when dealing with a very significant business decision to the particular company.
ShareCourt of Chancery Advocates New Test Governing Preclusion in Derivative Litigation
In re Wal-Mart Stores Inc. Delaware Derivative Litig., C.A. No. 7455-CB (Del. Ch. July 25, 2017)
This is an important decision holding that just because one derivative litigation was dismissed for failure to overcome the requirement of pre-suit demand on the board, it does not mean a similar derivative suit must be dismissed on the same grounds. Instead, under the rule advocated for in this decision, an earlier dismissal only affects the second suit if the first suit was dismissed after the plaintiff survived a demand futility motion or the board conceded that demand is excused. It is at that point which the plaintiff in the first suit was acting on the company’s behalf and its actions may bind other plaintiffs. Originally stated as dicta in the EZCORP decision, this rule, among other things, prevents ill-prepared and typically rushed derivative complaints from cutting off better prepared complaints. Previously, before a remand in this action, the Court had applied a rule that examined the “adequacy of representation” provided by the plaintiffs in the first suit. This “grossly deficient” representation standard generally favored defendants and made dismissal likely in the second suit. It remains to be seen whether the Delaware Supreme Court will adopt the EZCORP rule as endorsed by Wal-Mart.
ShareCourt Of Chancery Explains Stock Restriction Law
Henry v. Phixios Holdings Inc., C.A. No. 12504-VCMR (July 10, 2017)
This is the rare decision explaining when restrictions on stock transfers (permitted by Section 202 of the DGCL) can be enforced. While the statute seems clear enough, the real lesson from this decision is that it might be difficult to show a stockholder had advanced knowledge of restrictions that are not on the stock certificate when no other written notice exists. Without such advanced knowledge or later assent by the stockholder, the restrictions are not enforceable.
ShareCourt Of Chancery Explains When Entire Fairness Applies To Option Grants And Voting Agreements
Williams v. Ji, C.A. No. 12729-VCMR (June 28, 2017)
While directors have the right to issue options, when the grant is to themselves and there are specific facts suggesting unfairness, those directors will have the burden of proving the grants were entirely fair in a stockholder challenge. The same is true when stock is issued conditioned on an agreement to vote that stock as the directors wish.
ShareCourt Of Chancery Explains Interrelationship Of MLP Exculpation Clauses
Morris v. Spectra Energy Partners (DE) GP, LP, C.A. 12110-VCG (June 27, 2017)
Master limited partnership agreements typically provide protection for the general partner who engages in a self-dealing transaction with the MLP. This decision reviews the existing precedent on how to apply those provisions, especially when a conclusive presumption of good faith is available to the GP. It also explains what language should be used to invoke at least the subjective standard of good faith that is most helpful to a GP using a conflicts committee. Hence, the decision is required reading for drafters of MLP agreements.
ShareCourt Of Chancery Addresses Material Adverse Change Clause In Commercial Contract
The Mrs. Fields Brand Inc. v. Interbake Foods LLC, C.A. 12201-CB (June 26, 2017)
A material adverse change or effect clause permits a party to avoid its contractual obligations under certain circumstances. Delaware courts have addressed so-called “MAC” clauses in the merger agreement context on a number of occasions. Under that precedent, the party claiming a MAC has a high burden of proof and the alleged adverse change to a company’s business must be unexpected, serious, and extend over a significant period of time. A short-term hiccup is not a MAC. This decision is notable because it largely extends this law to the commercial contract context.
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