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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 380 posts by K. Tyler O'Connell.
Chancery Decides Questions of First Impression Regarding Statutory Claims for Unlawful Dividends and Fraudulent Transfers
Enforcement mechanisms available to creditors of Delaware corporations may include, inter alia, claims against directors to recover unlawful dividends under Section 174 of the Delaware General Corporation Law (8 Del. C. Section 174), and fraudulent transfer claims against the corporation and transferees including, where Delaware law applies, under Delaware’s Uniform Fraudulent Transfer Act, referred to as DUFTA (6 Del. C. Section 1301). In JPMorgan Chase Bank v. Ballard, C.A. No. 2018-0274-AGB (Del. Ch. July 11, 2019), Chancellor Andre G. Bouchard of the Delaware Court of Chancery addressed three important questions of first impression concerning standing and limitations periods issues under these statutes. More ›
ShareCCLD Holds that D&O Policy’s Duty to Defend “Securities Claims” Extends to Appraisal Proceedings under 8 Del. C. § 262
CCLD Holds that D&O Policy’s Duty to Defend “Securities Claims” Extends to Appraisal Proceedings under 8 Del. C. § 262, that Pre-Judgment Interest on an Appraisal Award May be a Covered “Loss” and that a Breach of Consent-to-Defense Clause does not Bar Coverage Absent Prejudice to Insurer
The Complex Commercial Litigation Division of Delaware’s Superior Court has become a leading venue for complex insurance coverage disputes. This decision addresses D&O insurers’ denial of coverage for over $13 million spent defending an appraisal proceeding under 8 Del. C. § 262, as well as $38.4 million in pre-judgment interest on the appraisal award. More ›
ShareSuperior Court CCLD Enters Final Judgment on Penalties and Damages against Overstock.com
French v. Overstock.com, Inc., C.A. No. N13C-06-289 PRW CCLD (Del. Super. June 28, 2019).
After a 6-day jury trial before the Complex Commercial Litigation Division of the Delaware Superior Court, a jury found that Overstock knowingly violated the Delaware False Claims and Reporting Act (“DFCRA”) by failing to report and remit dormant gift card balances to the State of Delaware. The jury verdict was for approximately $3 million. The Court held that under 6 Del. C. §1205(a), the DFCRA’s damages and penalties provision, Plaintiffs are entitled to an award of civil penalties, treble damages, and reasonable attorneys’ fees and costs. After finding that there was sufficient evidence presented to support the jury’s verdict, the Court then found that the statutorily mandated treble damages were not excessive or unconstitutional because they were not disproportionate to the harm caused and to Overstock’s level of culpability. Finally, the Court held that the proper method for calculating reasonable attorneys’ fees and costs is the lodestar method, which is the method used most often in cases involving fee-shifting statutes including federal False Claims Act cases. Under the lodestar method, the Court multiplies the hours reasonably expended against a reasonable hourly rate that can then be adjusted to account for additional factors such as the contingent nature of the case and the quality of the attorney’s work.
ShareChancery Awards $3 Million in Attorneys’ Fees Following Invalidation of Charters’ Forum-Selection Provisions for Securities Act Claims
Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Jul. 8, 2019).
In December 2018, the Court of Chancery held that forum-selection provisions in three corporate charters were ineffective. The provisions had required any claim under the Securities Act of 1933 to be filed in federal court (“Federal Forum Provisions”). The Court held them to be invalid, because federal securities claims were not “internal affairs” claims for which a Delaware corporation’s charter may choose a forum. Seven months later, the Court granted an application for an all-in award of attorneys’ fees and expenses in the amount of $3 million under the corporate benefit doctrine. Defendants had argued that the award should not exceed $364,723 plus expenses. Reasoning that “the plaintiff achieved a significant and substantive result by successfully invalidating the Federal Forum Provisions,” the Court turned to Delaware precedent to determine an appropriate fee for this kind of non-monetary relief. More ›
ShareChancery Upholds Adequacy of Description of Buyer’s Indemnification Claims but Finds Indemnification Request for Pending Litigation Unripe Because Buyer Failed to Allege it Had “Incurred” Losses
Horton v. Organogenesis Inc.,C.A. No. 2018-0537-KSJM (Del. Ch. July 22, 2019).
Sellers in merger agreements generally agree to indemnify buyers for certain “Losses” but require the buyers to provide timely notice of claims. Whether an indemnification claim succeeds depends on the language the parties use to define the indemnification obligation. In Horton, the seller agreed that indemnification claims would survive if the buyer provided by June 24, 2018 written notice “stating in sufficient detail the nature of, and factual and legal basis for, any such claim for indemnification” and an estimate and calculation of the amount of Losses, if known, resulting therefrom. The buyer timely sent a notice of indemnification with one-paragraph descriptions of the factual and legal basis of each of its five claims, which it said “may involve breaches of representations and warranties in the Merger Agreement.” It also sought a second category of indemnification for Losses arising out of pending litigation. As to the first category, the Court found the buyer’s one-paragraph descriptions sufficient even though the buyer did not specify the specific sections of the merger agreement it claimed were breached. This was because “sellers are charged with knowledge of their representations and warranties in the Merger Agreement.” As to the second category, the Court granted the seller’s motion to dismiss without prejudice, because the buyer had not adequately pleaded that it had incurred any costs, fees or adverse judgments in the litigation.
ShareDelaware Court of Chancery Orders Full Public Access to Confidential Filings Months After Settlement
Universal public access to court filings is the default and confidentiality is the exception. Rule 5.1 of the Court of Chancery provides for the filing of confidential information by litigants. In this decision, the Court makes clear that a violation of Rule 5.1 may result in the loss of confidential treatment. More ›
ShareChancery Holds Tension Between “Bespoke” Provision Governing Post-Closing Conduct and a Boilerplate Survival Clause Requires Consideration of Parol Evidence
Dolan v. Altice USA, Inc., C.A. No. 2018-0651-JRS (Del. Ch. Jun. 27, 2019).
The founders of Cablevision Systems Corp., the Dolan family, in connection with a $17.7 billion acquisition of that entity by Altice Europe N.V. and Altice USA Inc., obtained a commitment in the Merger Agreement affirming that Altice would operate a particular group of regional cable news channels (News12 Networks LLC) “substantially in accordance with the existing News12 business plan … through at least the end of plan year 2020[.]” When Altice proceeded to lay off News12 employees after the merger, the Dolan family filed an action in the Court of Chancery for specific performance. More ›
ShareChancery Declines to Stay or Dismiss Second-Filed Derivative Suit Against Google’s Parent Company
Irving Firemen’s Relief and Ret. Fund v. Page, C.A. No. 2019-0355-SG (Del. Ch. Jul. 1, 2019).
Delaware courts typically apply the McWane first-filed doctrine to stay a later-filed Delaware case in favor of a case already pending in another jurisdiction involving substantially the same parties and issues. In this instance, Alphabet, Inc., a Delaware corporation, and the director defendants, relying on McWane and forum non conveniens, sought to stay or dismiss a second-filed Delaware stockholder derivative action in favor of a first-filed action in California raising similar breach of fiduciary duty and failure of oversight claims. Both litigations arose from alleged workplace harassment at Google by officers and similar allegations against executives and directors of its parent, Alphabet. At oral argument, Vice Chancellor Glasscock, from the bench, rejected the forum non conveniens argument, and explained in this opinion “it is difficult to imagine a derivative litigation involving a Delaware corporation, and alleging breaches of fiduciary duty by corporate directors or officers of that Delaware corporation, that is nonetheless subject to dismissal on forum non conveniens grounds; if such an animal exists, it is absent from the menagerie before me here.” The Court also exercised its discretion to deny the stay motion because (i) the McWane first-filed rationale carries less weight in the context of derivative actions, where Delaware’s interest in promoting well-crafted derivative complaints is more important than filing speed; (ii) the proceedings to date in California were limited to disputes over consolidating related actions and appointing lead counsel; and (iii) Delaware has a higher interest than California in applying Delaware’s common law of corporations and fiduciary duty to the novel issues of corporate law involved in the litigation.
ShareCourt of Chancery Addresses Stockholder Standing to Enforce Corporate Contracts, Declines to Dismiss Claim for Breach of Anti-Takeover Protections Akin to Section 203 of the DGCL
Ark. Teacher Ret. Sys. v. Alon USA Energy, Inc., C.A. No. 2017-0453-KSJM (Del. Ch. Jun. 28, 2019).
Section 203 of the Delaware General Corporation Law, an anti-takeover statute, prohibits a target from entering into a business combination with an acquirer for three years from the date that the acquirer first obtains 15% or more of the target’s stock, unless the target’s board pre-approves the transaction crossing the 15% threshold. Here, to avoid Section 203’s three-year anti-takeover period, an acquirer sought pre-approval of its acquisition of a 48% block of shares. The target’s board agreed, but on the condition that the acquirer enter into an agreement that retained Section 203’s three-year standstill period for one year. A stockholder-plaintiff later brought suit arguing the acquirer failed to comply with the one-year standstill, and thus breached the agreement. It also argued the acquirer’s breach of the agreement to shorten Section 203’s three-year standstill period to one year in effect revived the longer period, such that the merger was void ab initio under the DGCL. When the defendants moved to dismiss claiming the stockholder-plaintiff lacked standing to enforce the target corporation’s agreement with the acquirer, the Court held that the stockholder sufficiently alleged it had standing as an intended third-party beneficiary. The Court reasoned that provisions of the Delaware General Corporation Law have been likened to a contract that stockholders may enforce by suing directly. Section 203 in particular was enacted to benefit stockholders by limiting hostile takeovers and encouraging fair, non-coercive acquisition offers. Here, the target’s agreement with the acquirer adopted those protections for the same apparent purpose of directly benefitting stockholders. More ›
ShareCiting Trulia and Walgreens Decisions, Federal District Court Orders Plaintiffs’ Counsel to Return Agreed-Upon Mootness Fee
House v. Akorn, Inc., Consol. Nos. 17-C-5018, 17-C-5022, 17-C-5026 (N.D. Ill. Jun. 24, 2019).
Disclosure-only settlements of stockholder class actions have received increased scrutiny following the Delaware Court of Chancery’s Trulia decision in 2016 and the Seventh Circuit Court of Appeals’ Walgreens decision later that year. Those decisions observed the problem of M&A strike suits, expressed disfavor of disclosure-only settlements in M&A class actions, and significantly raised the bar for getting the required court approval of such settlements. One consequence has been many M&A suits migrating from the Delaware Court of Chancery to federal courts around the country. Another has been defendants more frequently acting to voluntarily moot the claimed disclosure violations through supplemental disclosures. In that instance, the parties then face the choice of either litigating the appropriate mootness fee award to plaintiffs’ counsel for the supplemental disclosures prompted by their claims or, alternatively, privately negotiating the mootness fee award and thus avoiding the judicial process, provided no other stockholders object to the negotiated award. More ›
ShareAdvancement Available for Post-Separation Misuse of Confidential Information Obtained “By Reason of the Fact” of Corporate Service
Ephrat v. medCPU, Inc., C.A. No. 2018-0852-MTZ (Del. Ch. Jun. 26, 2019).
Former directors and officers may be entitled to advancement for post-separation conduct if that conduct is "by reason of the fact" of the directors' and officers' corporate service. In response to claims brought by former directors and officers for payments due under the parties' separation agreement, the company counterclaimed that the petitioners had breached non-compete obligations under the agreement and had improperly used the company's confidential information. The petitioners then sought advancement under the company's charter (which incorporated DGCL Section 145’s “by reason of the fact” standard), but the company contended no advancement was necessary because the complained-of conduct followed petitioners' separation from the company. The Court of Chancery reviewed its past decisions on this issue, beginning with Brown v. LiveOps, Inc., 903 A.2d 324 (Del. Ch. 2006). The Court ultimately concluded that the case upon which the company relied – Lieberman v. Electrolytic Ozone, Inc., 2015 WL 5135460 (Del. Ch. Aug. 31, 2015) – was "difficult to harmonize" with the others. Those other cases stand for the principle that allegations of misusing confidential information obtained “by reason of the fact” of former directors’ and officers’ service to the company may trigger advancement rights – even if the alleged misuse occurs after separation and in violation of the directors' and officers' personal agreements with the company. Consequently, the Court held that the petitioners were entitled to advancement for any counterclaims "where the underlying acts depended on or utilized confidential information [the petitioners] obtained by reason of their service at [the company.]" By contrast, they were not entitled to advancement to defend against post-separation violations of their personal contractual obligations that had no alleged "nexus or causal connection to [the petitioners'] service” – such as by engaging in an allegedly competing business, soliciting employees and unlawfully accessing the company’s computer systems – all of which allegedly occurred without any use of confidential information obtained while in service at the company.
ShareDelaware Supreme Court Reminds Counsel of Obligation to Prevent Clients’ Abusive Deposition Misconduct
“Depositions are court proceedings, and counsel defending the deposition have an obligation to prevent their deponent from impeding or frustrating a fair examination.” After reversing and remanding a contractual dispute involving popular Broadway shows back to the Court of Chancery on unrelated grounds, the Delaware Supreme Court included an Addendum to its opinion reprimanding an out-of-state attorney for permitting his client to engage in abusive deposition misconduct. During the deposition, Carole Shorenstein Hays, a prominent theater producer, repeatedly provided answers characterized by the Supreme Court as ridiculous, problematic, flagrantly evasive, nonresponsive, and flippant. Among other things, Hays claimed not to know whether she earned a university degree, claimed not to measure time in hours, refused to answer myriad straightforward questions, and made unprompted speeches in which she likened herself to Judy Garland and the deposition to a “piece of theatre that’s being recorded.” While no Delaware attorney for Hays attended the deposition, the two attorneys representing her were both admitted pro hac vice and made no attempt to stop her misconduct. The Court of Chancery had previously awarded attorneys’ fees and costs for this bad faith misconduct, and that ruling was not challenged on appeal. The Supreme Court felt compelled, however, to address the situation. The Supreme Court reasoned that, faced with such conduct, the deponent’s counsel “cannot simply be a spectator and do nothing.” In addition, “Delaware counsel moving the admission of out of state counsel pro hac vice also bear responsibility in such a situation. They must ensure that the attorney being admitted reviews the Principles of Professionalism for Delaware Lawyers, but they must also ensure that the out-of-state counsel understands what is expected of them in managing deposition proceedings outside the courthouse so that the litigation process is not abused.” In light of restrictions Delaware court rules and precedent impose on conferring with a client-deponent during the deposition, the Supreme Court advised that these points “should be addressed beforehand in the deposition preparation.”
ShareCourt of Chancery Holds it Lacks Subject Matter Jurisdiction over Defamation Claims
Unlike most U.S. states and the federal legal system, Delaware retains the historic distinction between courts of law and courts of equity. In the absence of a statute granting it jurisdiction over specific claims, the Delaware Court of Chancery has subject matter jurisdiction only where a complaint (i) states an equitable claim, or (ii) seeks an equitable remedy in circumstances where there is no adequate remedy at law. Here, the Court of Chancery held that it lacks subject matter jurisdiction to adjudicate defamation claims. Specifically, entrepreneur and inventor Stephen G. Perlman and his companies asserted claims of defamation against Vox Media, Inc., and requested relief that included a mandatory injunction requiring the removal of the offending articles from Vox’s websites, a public retraction, and compensatory damages. In response to Vox’s motion for summary judgment, the Court followed its recent decision in Organovo Hlds., Inc. v. Dimitrov, 162 A.3d 102 (Del. Ch. 2017) (Laster, V.C.) and concluded that “in connection with a claim for defamation, the Court of Chancery, in all instances, lacks subject matter jurisdiction to adjudicate the questions of whether a defendant made a false statement about the plaintiff and whether it did so with actual malice.” (emphasis added). Organovo explained that these factual questions have historically been reserved for juries rather than judges, and these determinations are best suited for adjudication by a court of law. Plaintiffs’ effort to couple their defamation claims with requests for equitable relief in the form of an injunction directed at past defamatory statements did not confer equitable jurisdiction, because declaratory relief and money damages generally are adequate remedies at law for defamation claims. The Court explained that equity will intervene to provide injunctive relief only in situations where the defamation claim has been adjudicated in a court of law and legal relief has failed to preclude ongoing publication or is otherwise inadequate. Accordingly, because it lacked subject matter jurisdiction, the Court dismissed the plaintiffs’ claims, but gave the plaintiffs the option to transfer the case to Delaware’s Superior Court, a court of law.
ShareOfficer and Director Entitled to Mandatory Indemnification Regardless of Circuitous Path to Victory
Brown v. Rite Aid Corporation, C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019).
Even when an indemnitee takes a circuitous path to victory, the indemnitee is entitled to indemnification under 8 Del. C. § 145(c) for litigation expenses if the indemnitee is ultimately successful “on the merits or otherwise.” Brown, an officer and director of Rite Aid, sought indemnification under § 145(c), as well as the corporate bylaws and charter, for litigation that spanned from 2002 to 2016 in Pennsylvania. Brown prevailed against Rite Aid in the Pennsylvania litigation on technical defenses. Despite this outcome, Rite Aid sought to limit the amounts to those attributable to Brown's successful technical defense and to exclude amounts attributable to several years of other unsuccessful defenses. But the Court continued its long-standing practice of "look[ing] strictly at the outcome of the underlying action" to determine whether an indemnitee is "successful on the merits or otherwise" under § 145(c). Under this "simple rubric for success," Brown avoided a "personally negative result," so he was entitled to indemnification.
ShareMerger Agreement’s Preservation of Privilege for Pre-Merger Communications Found to be Adequate, Notwithstanding that the Surviving Company Took Possession of E-Mails
This decision confirms that, in a post-merger dispute between an acquirer and the selling stockholders, broad contractual language can prevent a waiver of the acquired company's privileged pre-merger communications, even if the surviving company takes physical possession of the communications. RSI Holdco, LLC acquired Radixx Systems International, Inc. in 2016, and the merger agreement designated Shareholder Representative Services LLC as representative of Radixx's selling shareholders. As part of the merger, RSI Holdco acquired Radixx’s computers and email servers, which contained 1200 pre-merger emails between Radixx and its counsel; Radixx had not excised or segregated the communications from other data. However, the merger agreement contained a detailed provision that (1) preserved Radixx’s privilege, (2) assigned it the representative of selling stockholders, (3) required the parties to take steps to ensure that the privilege remained in effect, and (4) prevented RSI Holdco from relying on the privileged communications in post-merger litigation. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the Court had found that privilege transferred to the surviving company in a merger as a matter of law pursuant to section 259 of the DGCL because (i) the parties did not address privilege in the merger agreement, and (ii) because the at-issue communications were turned over. Great Hill cautioned future parties to "use their contractual freedom" to exclude privileged communications from the transferred assets. Here, the Court rejected RSI Holdco's argument that the failure to excise the communications waived privilege in this circumstance, and the Court noted that even if the privilege had been waived, the merger agreement still prevented RSI Holdco from relying on the communications in the litigation. Thus, the Court concluded that the sellers "heeded the Great Hill court's advice" and found the detailed provision in the merger agreement preserved the privilege attached to the pre-merger communications.
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