Posts in Fiduciary Duty

Court of Chancery Explains Limitations Period

In re Coca-Cola Enterprises Inc. Shareholders Litigation, C.A. No. 1927-CC (October 17, 2007).

In breach of fiduciary duty cases, a frequent question is when to apply the three-year statute of limitations that applies to actions at law. Here, the Court again holds that the statute of limitations begins to run in a breach of fiduciary duty case when the parties enter into their contract and not when the harm resulting from that contract occurs.

Thus, when the complaint alleged that Coca-Cola was abusing its bottling company under the  terms of a 1986 contract, the breach ran from 1986, not from when Coca-Cola took certain actions under that contract in 2004. Time and again, the Court has used this approach to reject late claims or claims asserting a so-called continuing wrong theory where the limitations period never expires.

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District Court Applies Delaware Statute of Limitations Carve Out For Fiduciary Claims, Denies Summary Judgment

Norman v. Elkin, 2007 WL 2822798 (D.Del. Sept. 26, 2007)

In this action the District Court evaluated the application of the statute of limitations to claims that a corporate fiduciary engaged in self-dealing at the corporation’s expense. Plaintiff was a 25% shareholder in a closely-held Delaware corporation with Pennsylvania headquarters, formed to participate in the wireless communications industry. Defendant #1 owned the remaining shares of the corporation, and also served as its President and sole director. Plaintiff alleged that Defendant #1 breached his duties to the corporation when he personally obtained newly-issued communications licenses from the FCC, then sold them along with the corporation’s pre-existing licenses to a third party, keeping the proceeds of the sale himself. Plaintiff further alleged that Defendant #1 took the action without notifying Plaintiff in his capacity as a shareholder, without holding an annual meeting, and without making any disclosure of the sale. Plaintiff sued Defendant #1, along with his wholly owned corporation and another corporate officer, in the Delaware Court of Chancery for breach of contract, unjust enrichment, declaratory relief, and breach of various fiduciary duties. Defendants removed the action to District Court based on diverse citizenship and moved for summary judgment, arguing that all claims were time-barred. More ›

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Court of Chancery Permits Option Backdating Case To Proceed

Conrad v. Blank, C.A. No. 2611-VCL (September 7, 2007).

In the latest of the Delaware option cases, the Court of Chancery permits the action to go forward when it appears that the Board considered the option backdating and did nothing about it. It is noteworthy from its decision that this apparent indifference to a wrong served to distinguish this case from others where the backdating appeared to be a simple mistake.  In the case of a simple mistake, the error would not be enough to expose the board to liability and that would excuse demand before the derivative suit was filed.

The Court also declined to apply the "continuing wrong" theory. Under that theory, a plaintiff who acquires her stock during the series of wrongful acts has the right to challenge all the actions including even those that occurred before she acquired her stock. Instead, here the court held that each backdated option was a separate wrong and the plaintiff could only sue for those that had occurred  after she bought her stock.

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District Court Allows Breach of Fiduciary Duty Claim Under ERISA, Dismisses State Contract Claim

Roarty v. Tyco Int'l Ltd. Group, 2007 WL 2248086 (D. Del. Aug. 2, 2007)

In this action alleging violations of ERISA and state contract law, Defendants moved to dismiss two of the claims under F.R.C.P. Rule 12(b)(6). Plaintiff’s husband was employed by one of the defendants. Plaintiff brought the action against the employer and its insurance company, alleging that Defendants wrongfully denied her claim under an employee welfare benefit plan after her husband was killed while on a business trip. She alleged that defendants wrongfully denied benefits under ERISA, breached fiduciary duties owed under ERISA, and violated state contract law. Defendants moved to dismiss the fiduciary breach and state contract claims. The Court allowed the breach of fiduciary duties claim, but dismissed the state contract claim.
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District Court Denies Motion to Dismiss Fiduciary Duty Claims Under ERISA

Cannon v. MBNA Corp., 2007 WL 2009672 (D. Del. July 6, 2007)

In this class action lawsuit brought by former MBNA employees, Plaintiffs asserted various breaches of fiduciary duty arising under ERISA in connection with administration of their 401(k) plan. Plaintiffs’ claims arose out of MBNA’s 2005 announcement of expected 10% annual growth for several years. Plaintiffs’ 401(k) plan contained MBNA stock. Several months later MBNA announced lower-than-expected earnings and MBNA stock fell nearly 35%. Plaintiffs alleged that the Defendants breached various fiduciary duties that resulted in this loss. Defendants were MBNA, the former CEO of MBNA, the committee responsible for the administration of the 401(k), and the individual committee members. Defendants moved to dismiss the various claims under F.R.C.P. 12(b)(6). The District Court found that dismissal as to all counts in the complaint was inappropriate at the pleading stage, and denied the motion. More ›

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Court of Chancery Defines Coercion

Gradient OC Master Ltd. v. NBC Universal Inc., C.A. No. 3021-VCP (July 12, 2007).

A line of Delaware decisions recognizes that it is improper to coerce stockholders into accepting a transaction. What exactly is coercive, however, is not well defined. After all, almost any transaction that offers a choice has incentives built into it to induce taking the deal, but that cannot be improperly coercive. Here the Court of Chancery summarizes the prior decisions and articulates helpful standards to determine when there is actionable coercion.

While the decision is complex, the bottom line appears to be whether the Court is convinced the terms offered make economic sense. Thus, in this case it made sense to ask stockholders to give up some of the restrictive covenants that went with their preferred stock to achieve a successful restructuring. In contrast, when in another case a self-tender was seen as an unjustified attempt to fight off a competing offer, the Court held the too high tender price was an unlawful attempt to coerce stockholders to take the offer or be left with an over-leveraged company in the hands of the same directors.

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District Court Declines to Exercise Supplemental Jurisdiction Over Fiduciary Duty Claims, Grants Motion to Dismiss

Lemon Bay Partners LLP v. Hammonds, C.A. No. 05-327 (D.Del. June 26, 2007)

 

In this shareholder derivative action for breach of fiduciary duties against various corporate defendants, the Court held that the state law claims asserted so predominated the lone federal claim that exercise of supplemental jurisdiction was inappropriate. Plaintiffs, former shareholders of MBNA Corporation, asserted various claims against the defendants based on breach of fiduciary duties in connection with earnings reports and the merger of MBNA with Bank of America. Defendants moved to dismiss based on lack of subject matter jurisdiction, arguing that the Plaintiffs’ sole claim that rested on federal jurisdiction was so predominated by the state law claims as to make the exercise of the Court’s supplemental jurisdiction inappropriate. The Court concurred with the defendants, concluding that Plaintiffs’ federal law claim bore only a tangential relationship to the rest of the claims. The Court therefore granted Defendants’ motion to dismiss for lack of subject matter jurisdiction.  More ›

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Court of Chancery Rejects Options Suit

Desimone v. Barrows, et. al., C.A. No. 2210-VCS (June 7, 2007).

Since the Tyson decision, some have predicted that the Court of Chancery will be hard on option granting abuses. That has proved to be so, but not always. Here the Court discussed a suit that alleged improper option granting because the plaintiff really could not plead a case that the board of directors was knowingly breaking the rules.

Many of the options involved were granted to lower level employees when the board itself was not directly involved. In that case, the plaintiff could not show that the members of the board had enough culpability to fear personal liability. Under those circumstances, the plaintiff could not meet the rules for showing a demand on the board to bring suit would be fatal.

In the case of other options, while they may have been granted at favorable times before good news caused the market to rise or after bad news caused it to fall, the options were part of a prearranged plan with set grant dates. Hence, timing of the grants was not at issue. Again, under these circumstances board liability was too remote to excuse demand under Rule 22.1.

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Supreme Court Resolves Creditor Fiduciary Claims

North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, C.A. No. 521, 2006 (May 18, 2007).

For many years, the rights of corporate creditors to bring breach of fiduciary duty claims against directors has been the subject of much debate. For the most part, commentators have felt there was little need to protect creditors who it was said should protect themselves through their loan agreements. Nonetheless, substantial case law existed that upheld the right of creditors to sue directors.

In this decision, the Delaware Supreme Court has effectively ended the debate. It holds that creditors may not bring a direct claim against directors for breach of their fiduciary duties. This is true whether the corporation is insolvent or is close to insolvent. Creditors may, however, bring derivative claims when the corporation is insolvent because then they are the residuary risk takers for whom the directors should act. While the opinion does not answer this question, it seems likely that creditors may not bring derivative claims when their corporation is close to but not actually insolvent. More ›

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Court of Chancery Explains Appraisal Valuation Process

Crescent/Mach I Partnership LLP v. Turner, C.A. 17455-VCN (May 2, 2007).

Predicting how the Court of Chancery will determine value in an appraisal proceeding is a difficult task. To some extent, each appraisal case will involve a battle of experts. Which side will ultimately prevail can be hard to predict, at least before cross examination. Further, the discounted cash flow approach frequently used by the Court of Chancery can be complicated. This decision offers a primer on that process and is well worth the trip for those willing to put in the time.

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Court of Chancery Voids Bonus Payments

Valeant Pharmaceuticals International v. Jerney, C.A. No. 19947 (Del. Ch. March 1, 2007).

Payment of bonuses to officers and directors often seems so routine that extra care is not required to be sure they are fair. This case shows what can go wrong when fair process and fair amounts are not properly considered.

Because each member of the board was to receive a bonus under the plan in issue, the bonuses were subject to the rigorous entire fairness review by the Court. That involves testing to see if the process used to approve the bonuses was fair in the sense of using appropriate safeguards to protect the corporation's interests and fair in the sense that the amounts involved were within a range of reasonableness. These bonuses failed on both counts.

To begin with, the committee to whom the bonus plan was referred consisted of persons who would receive a bonus and a majority of the committee were closely allied with the CEO who was targeted for a $30 Million bonus under the plan. The consultant they hired came in after the plan was set up and was really only asked to justify the amounts involved.

Second, the amounts were extremely high compared to other bonuses and were for work that had not just been done already before the plan was announced but that had in a sense already been  the subject of prior bonuses. All in all, this was just too much and the Court voided the bonuses. More ›

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Court of Chancery Blasts Backdating Options

Ryan v. Gifford C.A. No. 2213-N (Del. Ch. February 6, 2007).

Backdating of stock options has long been under fire. This decision spells out the legal theories under Delaware law that support a breach of fiduciary duty claim for backdating. In addition, the opinion also seems critical of similar practices such as "springloading" option grants. Moreover, by characterizing the backdating of options as constituting "bad faith", under the facts presented in this case,  the opinion removes the protection of the director exculpation provisions provided in many charters. More ›

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Court of Chancery Extends Time To Sue

In Re Tyson Foods, Inc., C.A. No. 1106-N (Del. Ch. February 6, 2007).

The Court of Chancery applies a three year statute of limitations to claims asserting breach of fiduciary duty. However, there are several theories that extend that time, such as for fraudulent concealment of the facts that would provide notice of the claim. This decision explains those theories in a comprehensive way. Moreover, the decision applies this law to the detailed facts presented in this case. That is useful as it is not always easy to understand when the Court will extend the time to sue. More ›

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Court of Chancery Finds Waste Claim Valid

Sample v. Morgan, C.A. No. 1214-N (Del. Ch. January 23, 2007).

It is a rare case where the Court of Chancery finds grounds for a claim of waste. The standard to be met is very strict. This is such a case. Here the Inside Directors caused their corporation to issue  them rights for 200,000 shares for the grand total of $200, all while knowing that the shares had a value of over $5 per share if not more. To make matters worse, the Inside Directors tried to implement this scheme by asking the stockholders to approve it through seriously misleading disclosures and then used a conflicted process to have the actual issuance of the shares approved at the board level. It is hard to see how they could have done a worse job in trying to secure their option rights.

The decision notes that even informed stockholder approval of an option plan does not give management a blank check to issue options under any circumstances. There still must be an informed process that takes due care in the decision to actually issue the options. More ›

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Federal Court Excludes Expert Testimony Dealing With The Law Of The Case

Cantor v. Perelman, Civil Action No. 97-586-KAJ, 2006 WL 3462596 (D. Del. Nov. 30, 2006).

Plaintiff and defendants filed motions to exclude the testimony and reports of several experts. The Court granted the motions to exclude the entire proposed testimony of one expert from both parties. The motions were denied with respect to all other experts in all other respects.

This action originates from a plan of reorganization in bankruptcy litigation involving Marvel Entertainment Group, Inc. (“Marvel”) and the Trustees of the MAFCO Litigation Trust (“Trust”) created as part of the Reorganization Plan. The Trust was created to pursue breach of fiduciary duty and unjust enrichment claims against defendants comprising Perelman, a controlling stockholder and chairman of Marvel, and other directors of the Marvel companies. The instant opinion is connected to the issue of three tranches of notes (“Notes”) issued in 1993 and 1994 by Marvel, raising $553.5 million by using Marvel stock as collateral. Plaintiffs alleged that the defendants breached their fiduciary duties by using Marvel resources to sell the Notes and including restrictions on the issue of debt or dilution of Perelman’s shareholding in those Notes.

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