Lewis H. Lazarus

Supreme Court Reaffirms Fraud Exception's Narrow Scope

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

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Chancery Court Reaffirms Entire-Fairness Application

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | August 28, 2013 

The standard of review for a transaction involving a controlling stockholder may determine whether the proponents can expect a Delaware court to approve a contested transaction without a trial. If the controlling stockholder is on both sides of a self-dealing transaction, entire fairness is the standard of review and defendants likely cannot avoid a trial because the question of the fairness of the process and price normally raises a triable issue of fact under Kahn v. Lynch Communication Systems, 638 A.2d 1110 (Del., 1994), and its progeny. The Court of Chancery's recent decision in In re MFW Shareholders Litigation, C.A. No. 6566-CS, which is on appeal to the Delaware Supreme Court, provides an exception if the controlling stockholder at the outset of a going-private transaction conditions consummation on negotiation and approval by a fully-informed special committee of disinterested and independent directors and a nonwaivable vote by a majority of the minority stockholders, and forgoes coercive measures that would prevent arm's-length bargaining. More ›

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Court Upholds Facial Validity of Board-Approved Bylaws

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | July 10, 2013

Roscoe Pound once wrote that "law must be stable and yet it cannot stand still." The Delaware Supreme Court in Unocal v. Mesa Petroleum, 493 A.2d 946, 957 (Del. 1985), likewise noted that "our corporate law is not static." Circumstances change and the law cannot be so inflexible as to require the law to stand still. Recently, the burden and expense of stockholder litigation in multiple forums, particularly in merger cases, has increased, creating the additional risk that a court other than the appellate court in the state of incorporation will resolve novel and fundamental questions affecting the internal affairs of a corporation. It is to address this threat that the directors of Chevron and FedEx (and 250 other public corporations) used the power conferred in their certificates of incorporation to adopt bylaws that made Delaware the exclusive forum to bring suit for matters involving the internal affairs of the corporation. In Boilermakers Local 154 Retirement Fund v. Chevron, Civil Action No. 7220-CS (Del. Ch., June 25, 2013), Chancellor Leo E. Strine Jr. echoed Pound and followed Unocal to find that the mere fact that Section 109(b) of the Delaware General Corporation Law had not previously been used to create binding forum-selection clauses for specified shareholder litigation did not preclude boards of a Delaware corporation from so acting today. In so holding, the court provides a useful primer on the standard applicable to facial challenges to bylaws, and a clear rationale for why a board-adopted forum-selection clause is valid statutorily and why it creates a contractual obligation binding on the stockholders even though they did not approve it.

Stockholders Bear Burden of Establishing Invalidity
Delaware law presumes the validity of bylaws. A plaintiff challenging the facial statutory and contractual validity of a bylaw bears the burden of showing "that the bylaws cannot operate lawfully or equitably under any circumstances." To prevail, a plaintiff must show that the bylaw does not address a subject matter within the scope of Section 109(b) and can never operate consistently with law. The court emphasized that whether a bylaw that serves a legitimate purpose may also be used inequitably is irrelevant to its determination of facial statutory and contractual validity. Such a challenge can occur when there is a real-world, extant controversy over the enforcement of a forum selection clause. "By long-standing, settled law, such as-applied challenges are to be raised later, when real-world circumstances give rise to a genuine, concrete dispute requiring judicial resolution," the opinion said. More ›

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Expedition Doesn't Extend to Non-Colorable Claims

 Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 5, 2013 

The Delaware Court of Chancery has long expressed its preference that the time to bring a disclosure claim regarding a proposed merger is before the stockholders vote and the deal closes. Such prompt pleading enables the court to fix any potential harm before the merger occurs. In part for that reason, the court follows the practice of "'erring on the side of more [expedited hearings] rather than fewer,'" as it wrote in Ehlen v. Conceptus, C. A. No. 8560, slip op. at 3 (Del. Ch. May 24, 2013). While the standard to obtain expedition is minimal — the plaintiff must demonstrate a colorable claim and a sufficient possibility of irreparable harm — a plaintiff fails to meet it with rote pleading or conduct inconsistent with a demand for expedition. As Ehlen illustrates, the court will require a greater showing of colorability if a plaintiff unduly delays in seeking expedition, even if the delay itself does not constitute laches, and deny as colorable disclosure claims if the plaintiff cannot demonstrate that allegedly omitted information would alter the total mix of information available to the stockholders. More ›

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Supreme Court Affirms Chancery's Ruling That Managing Member Violated Fiduciary Duties

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | November 21, 2012

In transactions where a majority of directors or a controlling stockholder stands on both sides, the Delaware courts apply the entire fairness standard of review. That standard also applies in the limited liability company or limited partnership context where the parties adopt that standard by contract. While the two prongs of this nonbifurcated standard are well known — fair dealing and fair price — not that many cases have been tried and resulted in a Court of Chancery opinion that is then subject to review by the Delaware Supreme Court.

Gatz Properties v. Auriga Capital, No. 148, 2012 (Del. Supr. Nov. 7, 2012), is the most recent post-trial entire fairness decision by the Delaware Supreme Court. The court's affirmance that the contract at issue adopted the entire fairness standard for affiliated transactions, that fiduciary duties had been breached, that the limited liability company agreement provided no exculpation and that the lower court properly determined damages provides important guidance to practitioners for transactions subject to entire fairness review. More ›

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Reports of Industrywide Investigation and Prior Settled Lawsuits Don't Make a Claim Real

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | October 24, 2012

In light of the dismissal risk to plaintiffs who do not use the tools at hand to inspect books and records prior to bringing a claim for management failure to oversee a corporation's business and affairs, guidance regarding the standard necessary to support a demand for inspection is important. The recent decision of Louisiana Municipal Police Employees' Retirement System v. Lennar, 2012 WL 4760881 (Del. Ch. Oct. 5, 2012), indicates that newspaper articles reflecting an industrywide government investigation of compliance with the Fair Labor Standards Act and prior lawsuits alleging violations of the FLSA will not suffice.

The plaintiff's demand for books and records pursuant to Section 220 of the Delaware General Corporation Law followed publication in The Wall Street Journal of articles describing an investigation by the U.S. Department of Labor, the IRS and state regulators into compliance by large homebuilders with the FLSA and state law. The defendant's 2011 10-K acknowledged that failure by its employees or subcontractors to comply with state or federal labor law could cause financial and reputational harm to the company. The plaintiff demanded documents, including board minutes, relating to the company and its subcontractors' compliance with federal and state labor, tax and immigration laws. The defendant declined to provide any documents on the ground that the evidence relied upon by the plaintiff — solely the newspaper articles — did not reflect "a credible basis for thinking there has been wrongdoing." The plaintiff sued, claiming that the newspaper articles and the prior lawsuits provided sufficient credible evidence of wrongdoing. More ›

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Court of Chancery Explains Why Not All Sale Processes Require Entire Fairness or Revlon Review

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | September 5, 2012

Since Kahn v. Lynch in 1994, the Delaware Supreme Court has subjected cash-out merger transactions proposed by controlling stockholders to a higher level of entire fairness scrutiny than the more deferential business judgment review, regardless of whether disinterested directors negotiated the transaction or a majority of the disinterested minority stockholders approved the transaction. Even in a third-party transaction where a controlling stockholder is not on both sides, courts have applied the test of entire fairness where stockholders can allege that a controlling party used its power to cause the company to enter into a transaction that diverted proceeds unfairly to the controlling stockholder at the expense and to the detriment of the minority stockholders. Likewise, since the landmark Revlon decision in 1986, the Delaware Supreme Court in sale-of-control transactions has required defendant directors to prove they followed a reasonable decision-making process and acted reasonably in light of the available information. Because in any of these circumstances the standard of review is less deferential, a minority stockholder attacking a transaction materially increases the prospects of surviving a motion to dismiss if able to plead facts that demonstrate that either entire fairness or intermediate Revlon-level scrutiny applies. In In re Synthes Shareholders Litigation, C.A. No. 6452, 2012 WL 3641014 (Aug. 17, 2012), the Court of Chancery dismissed a complaint attacking a sale transaction in an opinion that demonstrates that mere conclusory allegations that a controlling stockholder favored a sale transaction will not suffice to trigger a higher level of judicial scrutiny where the plaintiff cannot allege a genuine conflict of interest. More ›

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Court of Chancery Enforces Contractual Fee-Shifting Provision

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | August 8, 2012

 A contract provision in a limited liability company agreement that entitles the prevailing party to reimbursement for all reasonable fees and costs in connection with enforcement of the agreement, including reasonable attorney fees, is not unusual. In defending against such a claim, a nonprevailing party may challenge whether the claims arose under the agreement, whether expenses incurred in related litigation in other courts merit reimbursement and whether the fees are reasonable in light of the comparable fees and rates of the nonprevailing party. Sometimes a question arises, where similar issues exist involving substantially similar contracts but different parties, of whether the court must allocate the fees among the separate parties. What is unusual is for all of these issues to be addressed in one opinion. The Court of Chancery's recent decision in ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, 2012 WL 3027351 (Del. Ch. July 9, 2012), does just that and provides important guidance to practitioners regarding the nature of a claim for breach of the implied covenant of good faith and fair dealing and enforcement of contractual fee-shifting provisions. More ›

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State Supreme Court Reaffirms Strict Procedural Requirements for Inspection of Books and Records

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 13, 2012

Cases brought under Section 220 of the Delaware General Corporation Law reflect the Delaware General Assembly's effort to balance the stockholder's important right to seek inspection of books and records to investigate wrongdoing with the directors' right to manage the business and affairs of the entity without undue interference from stockholders. In 2003, the Delaware General Assembly extended the right to demand inspection from stockholders of record to beneficial stockholders, but only if the beneficial holder states under oath with the demand that he or she is a beneficial holder, provides documentary evidence of beneficial ownership of the stock and states that such evidence is a true and correct copy of what it purports to be. More ›

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Failure to Plead Demand Futility Risks Losing Attorney Fees

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | April 11, 2012

When a defendant engages in arguably unlawful conduct, a plaintiff files an action to complain about and seek relief prohibiting the unlawful conduct, and the defendant thereafter changes its practices and moots the plaintiff's complaint, a plaintiff may be entitled to attorney fees based upon the benefit conferred. Absent such a rule, a plaintiffs counsel could undertake a contingent-fee case, incur fees to investigate and file the action and then wind up with no case and no compensation, even though the defendant had changed its practices in a manner consistent with the plaintiff's demand. More ›

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Court Leaves it to Stockholders to Decide on El Paso Merger Transaction

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | March 14, 2012

Chancellor Leo E. Strine Jr. has long had a high regard for the ability of stockholders to decide for themselves what is in their own best interests. A corollary of that is judicial restraint when stockholders on full information of flaws and conflicts of interests in a sales process have the opportunity to approve or reject a merger transaction with a substantial 47.8 percent control premium, albeit one likely not as robust as a well-run sales process may have generated. More ›

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Chancery Court Allows Evidence in Appraisal Trial of Mandatory Redemption

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | February 15, 2011

When a dissatisfied stockholder petitions the Court of Chancery for an appraisal of shares extinguished in a merger, the petitioner will have the burden of persuading the court of the fair value of those shares. When the holder owns preferred stock, valuation issues arise that do not pertain to the holders of common stock. That is because, unlike for common stockholders, preferred stockholders' rights, including to redemption and sometimes to valuation in the event of a merger, are spelled out contractually. More ›

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Preferred Shareholder Must Look to Certificate of Incorporation to Prove Redemption Right, Supreme Court Reaffirms

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | December 7, 2011

When is a holder of preferred shares of a Delaware corporation entitled to have the corporation redeem its investment? In SV Inv. Partners LLC v. ThoughtWorks Inc., Nov. 15, the Delaware Supreme Court reaffirmed that question is answered by reference to the terms of the certificate of incorporation that establish the rights of the preferred stockholder and to the proof at trial.

At issue was a clause in the company's charter that required the company to redeem the entire amount of outstanding preferred stock "out of any funds legally available therefore and which have not been designated by the board of directors as necessary to fund the working capital requirements" of the company. The Court of Chancery had concluded that "funds legally available" meant funds that could be disbursed for redemption without violating the Delaware General Corporation Law, specifically Section 160 of the DGCL, or common law. The Court of Chancery had rejected the plaintiff's definition of "legally available funds" as meaning the same as "surplus."  More ›

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Delaware's Court of Chancery Prevents Parties From Escaping Their Chosen Forum by Artful Pleading

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | October 26, 2011

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Court of Chancery Arbitration Likely to Become More Prevalent

 Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | September 28, 2011

In 2009, Delaware's General Assembly passed and Gov. Jack Markell signed legislation enabling arbitration in the Court of Chancery.  In 2010, the Court of Chancery adopted rules governing arbitration. As the statutes — 10 Del. C. §§ 349 and 351 — and rules — Court of Chancery Rules 96-98 (Arbitration Rules) — are new and arbitration requires mutual agreement, arbitration may become a more prevalent means of resolving disputes as deal lawyers increasingly require Court of Chancery arbitration for disputes arising out of merger and other agreements.

Reportedly, the current dispute between Skyworks Solutions and Advanced Analogic Technologies contains a dispute resolution clause mandating arbitration in the Court of Chancery. It is thus appropriate to review why Chancery Court arbitration is likely to become an increasingly preferred method of dispute resolution.

First, the arbitration rules permit resolution of disputes by decision-makers with the knowledge and experience of the chancellor and vice-chancellors. To be eligible for Court of Chancery arbitration, the dispute must involve at least one party that is a Delaware entity; both parties must agree to arbitration; and if the dispute is solely about monetary damages, the amount in controversy must exceed $1 million. The procedure is not available for consumer disputes. Previously, disputes solely for monetary damages were not amenable to subject matter jurisdiction in the Court of Chancery.

Second, the members of the Court of Chancery are used to resolving matters on an expedited basis. The arbitration rules contemplate that generally an arbitration hearing will be scheduled within 90 days of the filing of the petition. However, they also allow for modification of the schedule with the consent of the parties and approval of the arbitrator. The arbitration rules thus permit flexibility for the parties and arbitrator to structure the dispute resolution on a schedule that makes sense.

Third, Chancery Court arbitration proceedings are confidential. The filing of a petition for arbitration is not included on the court's docket system. The petition and all supporting documents are by rule considered confidential and not of the public record, unless there is an appeal.

Fourth, Section 351 of Title 10 expressly authorizes parties to stipulate that an arbitration award shall be final, binding and non-appealable. As the synopsis to the legislation explains, "In many matters parties desire an answer and their dispute is narrow enough that even if they cannot settle, they are willing to agree in advance to live with the outcome rendered ... ." The new statutes permit that voluntary option.

Fifth, any appeals go to the Delaware Supreme Court, a decision-making body equally acclaimed for its knowledge and experience in the prompt resolution of significant business disputes.

Sixth, for parties in disputes with foreign entities, the new statutes and arbitration rules may provide greater comfort that the arbitration award will be enforceable against a foreign entity on its home turf under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Finally, the price is right compared to private arbitration. The filing fee is $12,000, to be equally divided by the parties. For each day or partial day that the vice chancellor or master engages in arbitration after the first day of arbitration, there is a $6,000 fee, also to be equally divided by the parties.

Efficiency, confidentiality, first-rate decision-makers experienced in resolving complex business disputes — for these reasons deal lawyers should consider the benefits of Chancery Court arbitration. And as they counsel their clients to specify Chancery Court arbitration in their agreements, we can expect that it will be an increasingly utilized tool for dispute resolution.

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