Lewis H. Lazarus

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 Dismisses Derivative Action in Stockholder's Litigation Demand

The Delaware courts have been critical of litigants who bring derivative claims without first seeking books and records. The absence of such records often makes it difficult to overcome the business judgment rule which prevents a stockholder from bringing derivative claims directly without first making a demand on the board of directors. Stockholders cannot so proceed unless they can show that a majority of directors at the time of the demand was not independent or disinterested or that the decision was not the result of a proper exercise of business judgment. The standard is even more difficult if a stockholder makes a demand which the board refuses and then seeks to proceed with litigation by claiming that the board wrongfully refused the demand. The Delaware Court of Chancery's recent decision in Andersen v. Mattel, C.A. No. 11816-VCMR (Jan. 19), illustrates the difficult burden a plaintiff bears in alleging wrongful refusal, particularly when he fails to use the tools at hand to obtain relevant books and records. More ›

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Court Dismisses Derivative Claim for Alleged Breach of Oversight Duty

The Delaware courts encourage plaintiffs who bring derivative claims in Delaware without making demand on the board of directors to seek books and records under Section 220 of the Delaware General Corporation Law so as to be able to plead facts sufficient to demonstrate that demand is excused. Many claims have been dismissed under Delaware Court of Chancery Rule 23.1 because a plaintiff failed to utilize the "tools at hand" to obtain relevant books and records. When a plaintiff grounds its claim on directors' alleged failure to exercise oversight, however, even receipt of books and records may not enable a plaintiff to plead facts sufficient to demonstrate that the directors knowingly ignored their duties so as to have acted in bad faith. That high standard as articulated by the Delaware Supreme Court in Stone v. Ritter makes a Caremark claim for breach of directors' oversight duties as among the most difficult in corporate law. The Court of Chancery's recent decision in Reiter v. Fairbank, C.A. No. 11693-CB (Del. Ch. Oct. 18), demonstrates that, regardless of the injury allegedly sustained by the subject company, a pleading based on books and records obtained from the company that at best reflects awareness of "yellow flags" is not sufficient to call into question the directors' good faith and hence to excuse demand, thus requiring dismissal of the plaintiff's derivative claim. More ›

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Court Applies 'Corwin' and Upholds Board's Adoption of Dissolution Plan

Contract and fiduciary duty law intersect when how a board acts, including the vote required, is affected by a shareholder agreement. Such agreements are common to enable investors to protect their investment, either through negotiated buybacks or issuance of additional shares upon certain milestones, through board seats or through super-majority vote requirements where the investment, while substantial, does not result in majority control. When a dispute arises over the effect of a shareholder agreement on a board vote a Delaware court will apply traditional principles of contract interpretation to ascertain and enforce the parties' intent. The language the parties use to reflect their agreement at the time of the investment will determine the outcome of the dispute when it arises long after, such as when the board acts to dissolve the entity. The Delaware Court of Chancery's well-reasoned decision in The Huff Energy Fund v. Gershen, C.A. No. 11116-VCS (Del. Ch. Sept. 29), illustrates the care by which a Delaware court will examine the potential contractual and fiduciary duties at issue when a board adopts a plan of dissolution following a sale of a significant portion of its assets. More ›

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Court: Derivative Claims Allowed to Be Asserted as Part of Merger Attack

It is well-settled under Delaware law that in a merger a stockholder loses standing to assert a purely derivative claim. That claim passes instead to the acquiring company. As an asset of a Delaware company, derivative claims should be valued in a merger transaction. Directors of a selling company, however, who fail to value derivative claims and who also bargain for their extinguishment following the merger are at risk of being found to have breached their fiduciary duty.

The Court of Chancery's recent decision in In re Riverstone National Stockholder Litigation, C.A. No. 9796-VCG (Del. Ch. July 28), instructs that a complaint asserting that directors, who faced personal liability on known derivative claims, both attributed no value to the derivative claims and bargained in a merger transaction that the buyer would not assert them, is sufficient to avoid dismissal based on the general rule of post-merger loss of standing, if the stockholder pleads the claims as part of a direct attack on the merger. More ›

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Chancery Declines to Require Buyer to Complete Merger Transaction

Parties who at the signing of a merger agreement are eager to close may have a change of heart if intervening adverse market conditions reduce or eliminate the economic benefits.

Those changing market conditions often do not affect the buyer and seller equally. In that circumstance one party may wish to avoid, and the other to consummate, the transaction.

A Delaware court faced with a claim for specific performance on the one hand and a request on the other for declaratory judgment that a party is excused from its contractual obligation will apply traditional principles of contract interpretation and standards applicable to an award of equitable relief. That is exactly what the Delaware Court of Chancery did in denying the plaintiff's request for specific performance in Williams Companies v. Energy Transfer Equity, C.A. No. 12168-VCG (Del. Ch. June 24, 2016), a case with instructive lessons for practitioners regarding when the Court of Chancery will decline specifically to enforce a merger agreement. More ›

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Court Upholds Allegedly Unfair Master Limited Partnership Transaction

When alternative entities first came into prominence, questions arose concerning the applicability to them and their stakeholders of corporate law fiduciary duty jurisprudence. Eventually the Delaware General Assembly amended the alternative entity statutes to permit the modification or elimination of fiduciary duties, including the duty of loyalty. While stockholders of Delaware corporations since 1986 were permitted to exculpate directors for liability for monetary damages, they cannot modify, much less eliminate, the duty of loyalty. In contrast, the Delaware courts of late have been consistent in enforcing as written the terms of alternative entity foundational documents that modify or eliminate fiduciary duties, often leaving investors with no remedy even though a similar fact pattern in a corporation would state a claim. The well-written April 29 decision from the court's newest vice chancellor, Joseph R. Slights III, in Brinckerhoff v. Enbridge Energy, C.A. No. 11314-VCS, illustrates this trend. More ›

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New Jersey District Court Rejects Shareholder Derivative Action Based on Cybersecurity Breach

In Palkon v. Holmes, C.A. No. 2:14-CV-01234 (SRC) (October 20, 2014), the United States District Court for the District of New Jersey dismissed with prejudice a shareholder derivative action arising from three distinct breaches of Wyndham Worldwide Corporation (“Wyndham”).  The Court granted the Defendant Directors’ Motion to Dismiss pursuant to Rules 23.1(b) and 12(b)(6) of the Federal Rules of Civil Procedure.  The matter was resolved on demand-refusal grounds, but the opinion provides fresh guidance to corporate boards in how to address their exposure to risk based on cybersecurity breaches and shareholder actions arising from those breaches.  Specifically, the decision highlights the importance of independent advice and of making a record of board review of policies and procedures to address the threat of a cyber-security breach.  As this decision illustrates, boards who seek independent legal and other advice and who make an appropriate record of reviewing policies for addressing the risk of cyber-security breaches are more likely to be able to withstand a shareholder derivative claim for breach of fiduciary duty. More ›

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Lewis Lazarus Gives ABA Podcast

Partner Lewis Lazarus participated in a podcast on behalf of the Committee on Director and Officer Liability of the Business Law Section of the ABA discussing attorney-client privilege implications for directors and officers. Listen here.

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Avoiding the Entire-Fairness Standard of Review

Authored by Lewis Lazarus This article was originally published in the Delaware Business Court Insider | June 18, 2014 The Delaware Supreme Court's recent affirmance in Kahn v. M&F Worldwide, No. 334, 2013 (Del. Mar. 14, 2014),referred to as MFW,allows controlling stockholders to avoid the entire fairness standard of review if at the outset of a self-dealing transaction the controlling stockholder effectively relinquishes control over the outcome to an independent committee of disinterested directors and a nonwaivable, fully informed vote of a majority of the minority stockholders. In that circumstance, reasoned the Supreme Court, the transaction would reflect arm's-length bargaining and afford an independent majority of the stockholders the opportunity to decide for themselves whether to approve the transaction. More › Share

Guidance on Use of Deposition Testimony in Motions to Dismiss

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | April 9, 2014

The record upon which a court evaluates a motion to dismiss is often outcome-determinative. If based upon the well-pleaded allegations of a plaintiff's complaint, the court cannot determine that it is reasonably conceivable that the plaintiff may obtain a recovery, the court must dismiss the complaint. As a general matter, the plaintiff controls the record by virtue of how and what the plaintiff pleads. The Delaware Supreme Court has held, however, that the record fairly before the court on a motion to dismiss may include documents "integral to and incorporated into the complaint." The recent Court of Chancery decision in In re Gardner Denver Shareholders Litigation, Cons. C. A. No. 8505-VCN (Feb. 21, 2014), provides useful guidance concerning how the Court of Chancery will treat deposition transcripts where, as is happening more frequently, a plaintiff pursues but abandons a preliminary injunction after deposing several witnesses, and then amends the complaint by selectively quoting from the deposition record. More ›

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Advancement Denied to Board Chair Following LLC's Conversion

 Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | January 29, 2013

Advancement rights assure directors and officers that if they are sued for conduct arising out of their company service, the company will pay their attorney fees and costs as they are incurred. Without advancement rights, many people would not serve out of fear that their personal assets would be depleted in defending suits based on their conduct as directors or officers. For that reason, Delaware courts regularly enforce advancement rights, even after a finding of criminal guilt at the trial level, until the judgment is final and all appeals are exhausted. Nonetheless, mandatory advancement rights apply only if provided by charter, bylaw or contract. The recent case of Grace v. Ashbridge LLC, C.A. No. 8348-VCN (Del. Ch. Dec. 31, 2013), provides a cautionary tale that advancement rights that may have existed when the entity was a corporation do not necessarily survive intact when the entity converts to a limited liability company. More ›

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Chancery Awards Advancement to Officer Accused of Self-Dealing

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | December 25, 2013   

Delaware entities generally provide broad advancement and indemnification rights to encourage directors and officers to serve. Absent such protection, managers bear the costs of defense for claims against them arising out of acts they perform in carrying out their company duties. Qualified officers and directors likely would be reluctant to serve or too risk-averse if every official act they performed were subject to litigation that the manager had to pay personally to defend. More ›

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Section 225 Order Stayed Pending Expedited Appeal

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | September 25, 2013 

If there is a dispute over the identity of the directors of a Delaware corporation, the corporation, its stakeholders and those with whom it does business require prompt certainty as to who is in charge. For that reason, Section 225 of the Delaware General Corporation Law provides for a summary proceeding to determine who rightfully comprises the board and officers of a Delaware corporation. While there is a rich body of Section 225 case law, there are few decisions addressing whether the party who loses at the trial court level is entitled to a stay of the court's order pending an appeal. The Court of Chancery recently addressed this issue in Klaassen v. Allegro Development, C. A. No. 8626-VCL (Del. Ch. November 7, 2013), known as Klaassen II, and partially stayed its post-trial order to allow the losing CEO to pursue an expedited appeal. In this decision, the court provided guidance on how it may limit the conduct of a judicially sanctioned board while a party challenges that outcome on appeal. The court also identified a significant issue that, once resolved by the Delaware Supreme Court, likely will affect how parties resolve leadership transitions when they are at odds over how to manage the company's business and affairs. More ›

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Supreme Court Applies 'Reasonable Conceivability' Test

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | October 23, 2013

Two important aspects of merger agreements are the price and the nature of the post-closing obligations of the sellers to defend or indemnify the buyer for claims arising out of presale conduct. As to the former, parties to merger transactions often bridge valuation gaps with earn-outs.

The selling stockholders receive a cash payment at closing and an additional contingent right to receive a specified amount of future payments depending on how well the business performs. Exactly how much is a function of the parties' written agreement. Similarly, the parties typically negotiate over the nature of the post-closing obligations of the seller to indemnify or defend. When disputes arise, parties calculate the likelihood of success in surviving a motion to dismiss for which the court's standard of review is critical. In the recent case of Winshall v. Viacom International, No. 39, 2012 (Del. Oct. 8, 2013), the Delaware Supreme Court addressed the standard on a motion to dismiss and also contractual provisions in a merger agreement regarding earn-out and indemnification provisions. Its opinion provides guidance to practitioners concerning how to draft provisions that carry out their intent on these points. More ›

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