Albert J. Carroll

Court Of Chancery Rejects Jurisdiction Based On Contract Interpretation

Green v. Geico General Insurance Co., C.A. 9431-VCS (February 1, 2017)

As this decision explains, the Court of Chancery will not have jurisdiction based on the claim an injunction is needed to force a defendant to comply with the proper interpretation of a contract. Rather, the presumption is that once the Superior Court interprets the contract that the defendant will honor that judgment.

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Court Of Chancery Holds That Wrong Forward Looking Statement Insufficient To Support Records Inspection

Haque v. Tesla Motors Inc., C.A. 12651-VCS (February 2, 2017)

It is not enough that certain forward-looking statements failed to come true to justify requiring an inspection of corporate records. More evidence of wrongdoing is needed if your inspection is based on a theory of mismanagement.

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Court Of Chancery Applies Corwin Doctrine To Dismiss Non-Exculpated Duty of Care Claims

In Re Merge Heathcare Inc. Stockholders Litigation, C.A. 11388-VCG (January 30, 2017)

Under the Corwin doctrine, approval by a majority of the fully-informed, uncoerced, disinterested stockholders invokes the business judgment rule so long as the transaction does not involve a controlling stockholder extracting personal benefits. This decision explains that law very well. More interestingly, however, the decision also applies Corwin to a complaint alleging a violation of the duty of care. That is unusual because almost all Delaware corporations have a duty of care exculpation clause in their charters and the result is that post-closing damages cases against directors usually focus on alleging a violation of the duty of loyalty. Why that should make a difference under Corwin is not clear but at least this decision seems to settle the issue and Corwin applies to duty of care claims as well.

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Delaware Superior Court Explains Liability Of Signatory To Contract

TMC Consulting v. Wright, C.A. N15C-11-132 EMD CCLD (January 26, 2017)

This is an excellent review of when a signatory to a contract might be personally liable notwithstanding that he claims to have only signed in a representative capacity. Hint: contractual references to the signatory separate and apart from the entity for which he is signing may create an ambiguity that prevents dismissal. It also has a good discussion on the limits of immunity for court-appointed receivers.

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Delaware Superior Court Explains How To Assert Fraud Exclusion

Gallup v. Greenwich Insurance, C.A. N14C-02-136 FWW (January 30, 2017)

This is an important insurance coverage decision. It upholds the claim of an insurer to bring a coverage suit to determine that a fraud exclusion applies to bar coverage on an underlying litigation that asserted a claim for fraud. This is important because fraud exclusions often depend on a finding in a final judgment of fraud by the insured in the underlying litigation. An insured may try to avoid such a judgment by settling and then asking the insurer to pay the settlement.  See e.g. the decision in Arch Insurance Company v. Murdock, Del. Super. C.A. N16C-01-104 EMD (December 21, 2016), denying the use of a fraud exclusion when the underlying case was settled.

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Delaware Supreme Court Signals Due Process Might Prevent Dismissal Based On Demand Futility Issue Preclusion

California State Teachers Retirement System v. Alvarez, No. 295, 2016 (January 18, 2017)

When a derivative suit is dismissed for the failure to plead demand futility, does that also mean that any other pending derivative suit based on the same facts must be dismissed because the shareholders are precluded from relitigating the issue of demand futility? This is a particularly important question because the Delaware Court of Chancery has held that that issue preclusion applies and dismissal is required. Hence, defense counsel may well seek to obtain a fast dismissal in a favorable jurisdiction when the plaintiffs’ bar rashly files suit outside of Delaware. This Order by the Delaware Supreme Court, which remands such a dismissal for consideration of a Due Process argument, signals that issue preclusion might be inappropriate at the motion to dismiss stage under the circumstances.

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Court Of Chancery Explains Pleading Rules For A Caremark Claim

Horman v. Abney, C.A. 12290-VCS (January 19, 2017)

At first look, this decision seems to involve just another unsuccessful failure of oversight Caremark claim against directors. But it is worth reading because it outlines the various theories of a Caremark case and then explains when inferences of utterly ignoring one’s fiduciary duty may be inferred from otherwise neutral facts. The decision makes it clear that the Court will not infer the directors were told of wrongdoing just because wrongdoing occurred, and that once proper safeguards are put in place to avoid illegal actions, there is usually no duty to monitor the monitors without reason to suspect they are not working.

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Delaware Supreme Court Implies Duty Of Disclosure For Limited Partnership Conflicts Provision

Dieckman v Regency GP LP,  No. 208, 2016 (January 20, 2017)

Agreements for publicly-traded limited partnerships often disclaim any fiduciary duties and provide safe harbors for transactions involving a conflict for the controller.  The safe harbor provisions frequently contain minimal disclosure requirements for any minority unitholder approval. All that is fine under Delaware law. However, when the controller asks the minority unitholders to approve a transaction under the safe harbor provision and does so in a fulsome proxy statement containing more than the minimal required disclosures, the controller must act fairly.  As the Court finds here, the safe harbor provisions of the agreement necessarily imply an obligation to be honest with the investors. That is a classic example of when the covenant of good faith and fair dealing applies.

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Court of Chancery Explains Role of Records Demand in Alleging Wrongful Pre-Suit Demand Refusal

Andersen v. Mattel, Inc., C.A. 11816-VCMR (January 19, 2017)

This decision examines when pre-suit demand may be excused because the board who refused the demand declines to disclose the report of its investigation when responding. In this case, the board’s unwillingness to disclose the report was not sufficient, standing alone, to show the necessary gross negligence or bad faith in the board’s demand refusal, particularly when the plaintiff has not made a formal request for the report using its books and records rights under Section 220.

The decision is also a good review of what circumstances otherwise might be sufficient to show a board’s demand refusal was in bad faith. In short, where the board’s justifications for refusing the demand falls within the bounds of reasonable judgment, the refusal is not in bad faith.

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Court Of Chancery Explains Limits On Stockholder Challenges To Short-Form Mergers

In Re United Capital Corp. Stockholders Litigation, C.A. 11619-VCMR (January 4, 2017)

It is well understood that minority stockholders have limited rights to object to a short-form merger under Delaware law.  This decision affirms that minority stockholders cannot challenge the merger on fairness grounds alone, but must seek appraisal as the remedy for an inadequate price. However, since the stockholders are faced with the decision of whether to accept the deal price or seek appraisal, the duty of disclosure still applies.  This decision is helpful for its in-depth analysis of the many disclosure allegations.

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Court Of Chancery Explains Disclosure Pleading Standards And Burdens For A Corwin Defense

In Re Solera Holdings Inc. Stockholder Litigation, C.A. No. 11524-CB (January 5, 2017)

The well-known Corwin decision requires that the Court of Chancery apply the deferential business judgment rule to attacks on a merger approved by a majority of the disinterested stockholders who had all the material information.  The current plaintiff strategy is to plead that the stockholders were not fully informed such that the vote should not have a cleansing effect.  Most notably, this decision addresses who has the burdens of pleading and proof regarding the sufficiency of the disclosures for a Corwin defense.  As the Court explains, the plaintiff must first sufficiently plead one or more disclosure violations, and only then will the burden shift to the defendants to show that the stockholders were fully informed.  The decision also explains that Corwin did not change the disclosure standard—directors are only obligated to disclose material information to satisfy Corwin.

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Supreme Court Clarifies Attorney Lien Rights

Katten Muchin Rosenman LLP v. Sutherland, No. 151, 2016 (January 3, 2017)

This decision explains the extent of an attorney fee lien in Delaware. The lien extends to the entire fee when the fee is based on hourly rates, regardless of whether all the time spent was necessary for the recovery. In other words, the lien is for unsuccessful efforts as well as those that resulted in the actual recovery.

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Court Of Chancery Upholds Merger Price As Fair Value In Appraisal Action

Merion Capital L.P. v. Lender Processing Services Inc., C.A. 9320-VCP (December 16, 2016)

This is another decision in the continuing development of Delaware law on how to determine the acquired company’s fair value in an appraisal action.  The decision carefully reviews the more recent opinions on whether the merger price constitutes fair value, concluding that, in this case, it did.  Factors considered in weighing the use of the merger price included: meaningful competition during the pre-signing phase, that adequate and reliable information was provided to all parties during the pre-signing phase, and the lack of collusion or unjustified favoritism towards particular bidders.  In addition, because fair value is determined at closing, evidence from the post-signing period may also be relevant, such as the absence of a topping bid, and the company’s post-signing performance.  The decision is also useful for seeing how the Court will work carefully through the parties’ competing expert reports.

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Court Of Chancery Appoints Lead Counsel In Appraisal Case

Sunrise Partners Limited Partnership v. Rouse Properties Inc., C.A. 12609-VCS (December 8, 2016)

Appraisal petitioners normally agree to consolidate their actions, on which law firm(s) will represent them, and on how their common objectives will be carried out.  That did not happen in this case: the petitioners disputed whose attorneys should take the lead counsel role. Significantly, the Court found it had the authority to choose one of the two competing law firms to lead on behalf of all petitioners despite one petitioner’s objection.  The Court also observed, however, that there may be instances in which each petitioner should be allowed to chart its own course without consolidation or coordination. 

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Court Of Chancery Explains Standing To Bring Fiduciary Duty Claims After Being Forced to Sell Stock

I.A.T.S.E. Local No. One Pension Fund v. General Electric Company, C.A. 11893-VCG (December 6, 2016) 

This is an important decision because it clarifies when a stockholder loses standing to bring a fiduciary duty case because he sold his stock. Briefly, breach of fiduciary duty claims may be direct (belonging to the individual stockholder), derivative (belonging to the corporation generally), or dual-natured (partially direct, partially derivative). Direct/individual claims for breach of fiduciary duty may also be personal (belonging to the individual) or non-personal (attaching to the stock).  As explained by In re Activision Blizzard, Inc. Stockholder Litigation, 124 A.3d 1025 (Del. Ch. 2015), a stockholder selling his stock gives up all but direct claims that are personal in nature—the non-personal rights otherwise travel with the shares to the new owner.   More ›

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