Posts tagged Case Summaries

Court of Chancery Appoints Class Representative with Close Relationship to Class Counsel

In Re: TD Banknorth Shareholders Litigation, C.A. 2557-VCL (Del. Ch. July 29, 2008)

It has long been known that some pension funds and other institutional investors use the same counsel over and over to bring their class actions. This decision recognizes that fact and holds that it is not a reason to disqualify the proposed class representative.

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Court of Chancery Details Board Duties in a Merger

Ryan v. Lyondel Chemical Company, C.A. 3176-VCN (July 29, 2008)

This decision is a textbook explanation and summary of the Delaware case law on the duties of a board of directors when considering a takeover proposal. The Court first sets out the Revlon duties in detail including the effect on those duties when the Barkin "exception" may apply. Next, the Court explains how to comply with the principles of both Omnicare and Unocal concerning defensive measures that protect the proposed transaction. Finally, the Court explains why in the context of a summary judgment motion that the otherwise disinterested board may have its good faith questioned.

This last part of the decision is surely its most controversial. While the Delaware statute protects directors from attacks on their decisions based on their lack of care, the loophole has always been that the statute does not protect from act not taken in good faith. When does a lack of care turn into a lack of good faith is the question.

In a series of decisions such as the Disney case, the Delaware Supreme Court has tried to set out some guidance on this issue. However, the test to be applied is still vague and in the context of a summary judgment motion when all inferences must be drawn in favor of the plaintiff, the test becomes even more difficult in application. This decision illustrates that problem and is worth reading for that issue alone.

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Court of Chancery Upholds Appraisal Demand

Andrew And Suzanne Schwartz 2000 Family Trust v. AM Apparel Holdings, Inc., C.A. 3172-VCS (Del. Ch. July 28, 2008)

The Delaware law has long been that the statutory requirements to obtain appraisal rights must be met, exactly. However, this decision is another example of when the Court will uphold appraisal rights when the company itself fails to comply with the statutory obligation of notice or has issued a confusing notice of the right to demand appraisal.

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Court of Chancery Set Rules to Uphold Arbitration Awards

TD Ameritrade, Inc. v. McLaughlin, C.A. 3603-CC (July 24, 2008)

This decision set out in detail when the Court of Chancery may set aside an arbirtation award. Not surprisingly, the answer is not very often. The only part of the award set aside was due to an obvious math error. The Court upheld the rest of the award even against an attack that the award was manifestly contrary to law.

The analysis of how to determine if the award is contrary to law is particularly instructive.

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Court of Chancery Upholds Corporate Documentation

Tanyous v. Happy Child World, Inc., C.A. 2947-VCN (Del. Ch. July 18, 2008)

This decision holds that when the corporate internal documents say the plaintiff is a stockholder, an alleged oral agreement that he was really just a lender with the stock as security is not to be believed. What is striking about this case is the extraordinary patience the Court gave to what seems to be a pretty far-fetched story that documents do not mean what they say.

The plaintiff contended that he was a stockholder entitled to inspection rights. The defense was that despite all the corporate documentation, including tax returns, that said the plaintiff was a stockholder, there really was a side deal that he was only a lender with a security interest in stock. Not surprisingly, that story did not wash.

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Delaware Supreme Court Clarifies when a Bylaw may Provide for Reimbursement of Proxy Expenses

CA, Inc. v. AFSCME Employees Pension Plan, C.A. 329,2008 (Del. 2008) (en banc)

In response to questions certified to it by the SEC, the Delaware Supreme Court has decided if a bylaw may mandate reimbursement of proxy solicitation expenses. No is the short answer.

As pension plans and other institutional investors seeks representation on corporate boards, they are looking for ways to make that process less expensive. Under the current Delaware law, even a successful proxy contestant will not be reimbursed for expenses unless it elects the majority of the board. Given how difficult that is to do as an outsider, few want to go through the expense of the effort. Here the bylaw proposed mandatory reimbursement for any successful election campaign, even if only one slot was filled.

The Court makes a distinction between bylaws that affect "process and procedures" of the board from bylaws that affect "substantive business decisions." Only process and procedure bylaws are valid, and a bylaw may not dictate the decision a board must make in the exercise of its fiduciary duty. As the Court acknowledges, that distinction is a tight one to make as some process bylaws affect the decision to be made.

The Court leaves open the possibility that a provision in a certificate of incorporation may mandate proxy solicitation reimbursement. However, as such a change in the certificate must be proposed by the board itself, that route seems a long road to travel.

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Court of Chancery Clarifies When Indemnification Right Includes Advancement

Sodano v. American Stock Exchange LLC, C.A. 3418-VCS (Del. Ch. July 15, 2008)

It is widely assumed that the right to be indemnified does not include the right to have attorneys’ fees advanced as the litigation proceeds. Actually, as this decision notes, lawyers deal in this area who do not even know the difference between indemnification and advancement. That is not entirely accurate as this decision holds it is all a matter of contract. When the contract or bylaw defines indemnification in such a way as to include advancement rights, then that is the deal and advancement is required.

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A Settlement Is A Settlement, Not An Adjudication Of Fraud For D&O Policy Exclusion Purposes

AT&T v. Clarendon America Ins. Co., C.A. No. 04C-11-167-JRJ (Del. Super. Ct. June 25, 2008).

This decision will be of interest to any parties drafting or negotiating D&O policy exclusions.

This coverage dispute arose out of stockholder litigation brought against certain AT&T directors, alleging false and misleading statements. That action settled during trial, with AT&T agreeing to pay $100 million to the plaintiffs. National Union, AT&T’s excess D&O carrier, denied coverage. 

The issue before the Superior Court here, on AT&T’s motion for partial summary judgment, was whether National Union could deny coverage based on the policy’s fraud exclusion. AT&T argued that the fraud exclusion requires an adjudication and does not apply to settlements. More ›

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Court of Chancery Declines To Enjoin Meeting

Wayne County Employees' Retirement System v. Corti, C.A. 3534-CC (Del. Ch. July 1, 2008)

In this disclosure case, the Court declined to order additional disclosures for all the usual reasons. The opinion is fun to read and makes the point that stopping a merger vote when, as now, the market is so uncertain, runs a real risk the deal will unravel. Hence, it is harder to stop the vote for less than material omissions.

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Delaware Supreme Court Sets Pleading Rules

Wood v. Baum, Del Sup. C.A. 621, 2007 (Del. July 1, 2008)

The Delaware Supreme Court has clarified the pleading standard that must be met to excuse demand on a board in a derivative suit. When a non-exculpated claim is plead, such as fraudulent conduct, the plaintiff must state particularized facts to support her claim.

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Court of Chancery Enjoins Vote

David P. Simonetti Rollover IRA v. Margolis, C.A. 3694-VCN (Del. Ch. June 27, 2008)

What must be disclosed to stockholders in a proxy for a merger vote is now well established. This decision again repeats that the interest of the investment firm giving a fairness opinion must be disclosed. Moreover, that does not just include its fees but also any gain it expects to make on the deal through its ownership of stock or other securities in the target.

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Court of Chancery Upholds Complaint Over Options

London v Tyrrell, C.A. 3321-CC (Del Ch. June 24, 2008)

One of the tests for whether a board of directors is interested in a transaction under attack in a derivative suit so as to excuse demand on them before suit is filed is if they have personally benefited from the transaction. This decision makes clear that in the case of the grant of a stock option, the directors who have received the option will always be deemed interested in the outcome of an attack on that grant, even without showing the amount of the option is material to their financial condition.

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Court of Chancery Upholds Advancement for Attorney

Jackson Walker LLP v. Spira Footwear Inc., C.A. 3150-VCP (Del Ch. June 23, 2008)

Recently, whether outside counsel is entitled to advancement under a corporate bylaw that provides for payment of the fees incurred by “agents” has become a hot issue. When the attorney is acting as an “agent” depends on whether he is acting on behalf of the company in its relationship with a third party. Thus, an attorney who files litigation meets the test, but one who advises the company on a legal issue does not for lack of acting with a third party.

This somewhat odd distinction reflects a policy of restricting advancement of fees to attorneys who are expected to have the possible cost of litigation built into their fees and malpractice coverage.

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Court of Chancery Upholds Right To Refuse To Settle

Barrett v. American Country Holdings Inc., C.A. 3071-VCS (Del. Ch. June 20, 2008)

There is a continuing tension between D&O insurers and the companies whose directors they insure to use the D&O coverage to pay for corporate transactions or, as in this case, for a settlement that no one but the company wants.  In this decision the Court of Chancery has strongly upheld the right of former directors to refuse a settlement of litigation against both them and their company when they do not want to settle.

This decision arose out of the company's wish to have its former directors agree to liability in litigation that would then permit the company to sue the D&O carrier for the remaining insurance coverage and so-called bad faith failure to settle damages, all under a side deal that the company would not actually ask the directors to pay anything themselves. The former directors did not want to settle, however, particularly when the insurer also did not want to settle and was defending them under a reservations of rights letter that may have permitted the insurer to go after the directors for the fees advanced.

The Court determined the directors were entitled to the continued advancement of their attorney fees and fees for fees in this case as well.

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Court of Chancery Denies Advancement for Litigation Instituted by a Director

Donohue v. Conning, C.A. 3733-VCS (Del. Ch. June 20,2008)

The Delaware Supreme Court has upheld a claim for fee advancement in litigation instituted by a former director, even though advancement has usually been thought of as a right to defense fees. This decision shows how limited that right may be when the advancement provision relied upon does not clearly provide for fees when the director starts the fight. For in such a case, the court held that there is no right to have fees advanced.

The decision has some unusual facts and may not cover another case were the director is clearly threatened with ligitaion and wins the race to the couthouse.

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