Posts tagged Case Summaries

Court of Chancery Uses Parties' Actions To Decide Their Contract Rights

Viking Pump, Inc .v Liberty Mutual Insurance Company, C.A. No. 1465-VCS (Del. Ch. April 2, 2007).

Perhaps no rule of contract construction is more often applied to ambiguous contracts than the rule that the parties' actions show their intent. This decision applies that maxim with full force to decide the parties' obligations over a 20 year old dispute on insurance coverage.

While this decision turns on its unique facts, the Court's reasoning illustrates a method of proceeding that has implications for all contract disputes. First, the Court carefully considered the business problems faced by the parties at the time they entered into their contract. Next it considered how a rational business would have resolved those problems to fit the business needs. Then the Court reviewed what the parties actually did as evidence of what they intended their contract to mean. 

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Court of Chancery Limits Inspection of Partnership Records

Holman v Northwest Broadcasting LP, C.A. No. 1572-VCN (Del. Ch. March 29, 2007).

When a stockholder or, as here, a partner demands inspection of an entity's records, the usual test of what records are to be produced is what is "essential and necessary" to the proper purpose for that inspection. Here the partner seeking inspection rights had been given audited financial information already. Thus, the Court had to decide if he needed more than those audited reports to accomplish his proper purpose, a valuation of his partnership interests.

As to those items in the audited report that were in enough detail to be used for valuation purposes, the Court denied further inspection. However, the result was different in the case of the audited reports' treatment of executive compensation. In that case, the Court concluded, the information was too general to be useful. How the compensation was allocated was important to any determination of whether that cost could be cut and the entity's value thereby increased. Therefore, the Court ordered that further information breaking down that cost be provided.

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Court of Chancery Limits Forum Selection

Troy Corporation v. Schoon, C.A. No. 1959-VCL (Del. Ch. March 26, 2007).

Forum selection clauses will be upheld by Delaware courts. However, when the dispute that is the subject of litigation in Delaware is not clearly subject to a contract clause requiring the dispute to be litigated elsewhere, the Delaware courts will not enforce such an unclear contract provision to bar litigation here.

In this decision, the contract required any litigation to be filed in federal court in New York. However, the federal courts lacked jurisdiction over the dispute set out in the complaint filed in Delaware. Thus, the Court of Chancery held that the forum selection clause was not enforceable.

This result illustrates the need to carefully draft forum selection clauses as they will not be read expansively.

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District Court Applies SEC Rules Amendments to Transaction, Grants Summary Judgment

Levy v. Sterling Holding Co., LLC, 2007 WL 582555 (D.Del. Feb. 13, 2007).

In this shareholder derivative action, the plaintiff shareholder sued two defendants, both of whom occupied board positions with the corporation, for allegedly purchasing stock in the corporation and then selling it at a profit within six months, in violation of Section 16(b) of the Securities and Exchange Act of 1934. After each side filed cross-motions for summary judgment, the SEC adopted Amendments to SEC Rules 16b-3 and 16b-7, which exempt certain transactions from the prohibitions of Section 16(b). Defendants argued that the transaction that formed the basis of Plaintiff’s complaint, whereby Defendant’s preferred stock in the corporation was “automatically” converted to common stock upon completion of an IPO, was an exempt “reclassification” transaction under the SEC Rules. Conversely, Plaintiff argued that the exemption did not apply. The Court found that the SEC had acted within its power in exempting reclassification transactions from Section 16(b), and that as a result of that exemption, Defendants were entitled to judgment as a matter of law.  More ›

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Court of Chancery Explains Revlon Duties

In re Netsmart Technologies, Inc., C.A. No. 2563-VCS, 2007 WL778612 (Del. Ch.).

When a company is to be sold, then the board of directors have so-called Revlon duties that basically come down to getting the best price. There is no set methodology or procedure the board must employ.  However it proceeds, its actions will be subject to a level of increased scrutiny by a reviewing court. In other words, the normal business judgment rules do not apply in such a case. This important decision illustrates what the Court of Chancery expects a board in "Revlon land" to do. 

Here the board was faced with two possible sets of potential buyers for their company: (1) so-called strategic investors who would acquire the company to run it as part of their other business interests and (2) private equity investors who would let current management run the company after taking it private. The board never really explored the possibility of a sale to strategic investors and, apparently, preferred a sale to private equity from the outset. Only one bidder stayed the course and the court was faced with a complaint that the price was not high enough. After finding some disclosure problems with the proxy materials, the Court held that the stockholders should be given an amended disclosure statement that included more financial information and enjoined the meeting until that was done. More importantly, the Court also ordered that the stockholders be told that their board had not really pursued a sale to strategic investors. More ›

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District Court Grants Summary Judgment on Contract, Fraud Claims

Rimmax v. RC Components, Inc., 2007 WL 521214 (D.Del. Feb. 21, 2007).

Plaintiff asserted breach of contract, fraud, and intentional interference with contractual relations, arising out of a purported agreement between the parties to manufacture wheel covers for motorcycles. Under Plaintiff’s theory, Plaintiff and Defendant agreed to manufacture the covers based on allegedly confidential information and proprietary technology that Plaintiff provided. Plaintiff asserted that Defendant breached their contract to manufacture and supply the covers, then misappropriated Plaintiff’s confidential information, proprietary technology, and actual and potential contractual relations. The District Court of Delaware granted Defendant’s motion for summary judgment, finding that Plaintiff had not provided sufficient evidence on any of its claims to withstand the motion. More ›

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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 Sets Disclosure Rule For Banker

Ortsman v. Green, C.A. No. 2670-N (Del. Ch. February 28, 2007).

There is sometimes uncertainty as to what should be included in a disclosure statement that seeks stockholder approval of a merger. This brief opinion makes it clear that the basis for an investment banker's fees should be included, particularly when the fee is dependent in some degree on the merger's completion.

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Court of Chancery Finds Hidden Appraisal Right

Louisiana Municipal Police Employees' Retirement System et al v. Crawford, C.A. No. 2635-N (Del. Ch. February 16, 2007).

In Delaware's corporate law, the doctrine of independent legal significance has a great importance. Basically, this means that if a transaction is authorized by any provision of our law, then it may go forward even if, in substance, it may seem to violate some other provision of that law. Thus, for example, a merger that really seems to be a sale of assets is still valid if it complies with the terms of the statute governing mergers. Here, the strength of that doctrine is called into question.

To make the merger of Caremark and CVS more competitive to a third party offer for Caremark, the directors of Caremark resolved to pay a special dividend to the Caremark stockholders. The problem was that the dividend was conditioned on those stockholders approving the merger with CVS. The plaintiffs argued that this dividend was really a cash payment as part of the merger consideration and thus triggered stockholder appraisal rights that occur when stockholders receive cash in a merger. The Court of Chancery agreed with the plaintiffs and rejected application of the doctrine of independent legal significance.

The result clearly was influenced by the evidence that the Caremark directors were motivated to declare the dividend to make the merger go through and thereby receive large personal benefits in the form of change of control payments. The point then is that when  the so-called "independent" event is really tied to personal interest and not to just getting a deal done, the Court is less likely to give it recognition as truly independent. More ›

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District Court Rejects Defenses to Breach of Contract, Awards Attorneys' Fees

Chase Manhattan Bank v. Iridium Africa Corp., 2007 WL 518440 (D.Del. Feb. 16, 2007)

In this breach of contract case, the defendant members of a bankrupt LLC asserted various defenses to their alleged contractual obligation to make capital contributions after the bankruptcy. The plaintiff lender had made an $800 million dollar loan to the LLC, and asserted that the members were contractually obligated to continue capital contributions despite the bankruptcy. The District Court entered summary judgment for the plaintiff on its breach of contract claim, but delayed entering final judgment until the parties could brief remaining “open issues”. The defendants argued that the plaintiff’s alternate theory of recovery should be dismissed as moot prior to a final entry of summary judgment for the plaintiff, that the plaintiff was not entitled to attorneys’ fees, and that the Court’s grant of summary judgment had left unresolved various defenses asserted by the defendants. The Court concluded that the entry of summary judgment was appropriate without addressing the plaintiffs’ alternate theories of recovery and did not leave any defenses unresolved, and that the plaintiff was contractually entitled to attorneys’ fees. The Court therefore found that the entry of final judgment for the plaintiff was appropriate. More ›

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Court of Chancery Extends Date For Meeting

Louisiana Municipal Police Employees Retirement System v. Crawford, C.A. No. 2635-N (Del. Ch. February 13, 2007).

The question sometimes comes up of whether a stockholder meeting should be postponed to permit supplemental proxy materials to be sent and read by the stockholders. Here, the Court did extend the meeting based on the facts presented to it. Hence, this decision provides guidance on this issue.

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Court of Chancery Upholds Special Committee Action

Perelegos v. Atmel Corporation, C.A. No. 2320-N (February 8, 2007) The actions of special committees of  a board are often questioned, but this decision strongly affirmed the power of a properly organized and functioning  special committee. Indeed, given that the committee here removed the corporation's founder as its CEO, there can be few corporate actions more important than the act upheld here. There are still limits on that power, however, as the Court of Chancery also held that the board could not cancel the special stockholders' meeting called by the fired chairman to review the acts of the Special Committee. This reflects the strong Delaware respect for the rights of stockholders to vote on who should be on the board. More › Share

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 Upholds Post-Closing Adjustment Clause

AHS New Mexico Holdings, Inc. v. Healthsource Inc., C.A. No. 2120-N (Del. Ch. February 2, 2007).

It is often the case that a merger agreement or sale of stock will provide for an adjustment to the closing price based on post-closing events. This decision holds that in such cases the procedures for submitting any dispute are enforceable and absent agreement of the parties will include all of their disputes over the adjustment. This later point is important because it permits the parties to reach preliminary agreements on some parts of the dispute while preserving their right to take the whole dispute to the chosen forum for resolution if all points are not resolved by negotiations. More ›

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