Posts tagged Fiduciary Duty

District Court Denies Motion to Dismiss, Allows Duty of Care, Loyalty and Fraud Claims to Proceed

Ad Hoc Comm. of Equity Holders of Tectonic Network, Inc. v. Wolford, 2008 WL 212 7464 (D. Del. May 21, 2008)

The District Court recently allowed claims for breach of the duties of care and loyalty against former directors and officers of Tectonic Network, Inc. (the “Company”) to go forward, rejecting Defendants’ jurisdiction, standing and insufficient claim arguments. Plaintiff, an Ad Hoc Committee of Equity Holders in the Company, sued Defendants for purportedly improper conduct in connection with the acquisition of three businesses and the resulting sale of one of the Company’s subsidiaries. Plaintiff alleged that Defendant Officers (Officer #1 and Officer #2) committed fraud related to the Company’s actions, and all Defendants breached their fiduciary duties. Specifically, Plaintiff alleged that the Defendants breached their fiduciary duties in recommending and/or approving the acquisition of the three businesses, all of which Officer #1 had a majority interest in. Plaintiff also alleged that the Defendant Officers committed fraud in making material misrepresentations to the board regarding the profitability of the acquired businesses and the prospective profitability of a future business plan that resulted in the sale of the Company’s subsidiary. Subsequent to acquisitions and sales, the Company’s financial picture worsened, and it filed for voluntary Chapter 11 bankruptcy. The Bankruptcy Court lifted the stay to allow Plaintiff to press its claims outside of the bankruptcy proceedings. More ›

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Court of Chancery Defines Unreasonable

Venhill Limited Partnership v. Hillman, C.A. 1866-VCS (Del. Ch. June 3, 2008)

For a director of a Delaware corporation to be guilty of gross negligence, her conduct must be so unreasonable that no one could have made the same decision. Unless the decision under review is this bad, it will be protected by the business judgment rule. This gross negligence rarely happens and it is thus difficult to find decisions that illustrate the type of conduct that meets this test. In fact, in this decision the defendant had a conflict of interest and thus the business judgment rule did not apply for that reason.

However, the Court went to great length to point out that the investment decisions under review did also exceed the gross negligence standard. This explanation provides an insight into what sort of decision-making is a breach of fiduciary duty. For example, in this case the investment was in a company that did not have a business plan, was continuously losing money, and was generally in such poor shape that no one but the hapless defendant would have lent it money. In short, it was gross negligence to make the loans and the defendant was liable for them as a result.

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Court of Chancery Upholds LLC Agreement Voting Rights

Fisk Ventuers LLC v. Segal, C.A. 3017-CC (Del. Ch. May 7, 2008)

A Delaware LLC is a creature of the members' contract. Here the LLC agreement gave voting rights to a class of members that effectively gave them veto rights over certain actions. When those members exercised those veto rights, the other members sued claiming that constituted a breach of duty. The Chancellor flatly rejected that argument as an attack on the veto rights that were given in the LLC Agreement.

The opinion also holds that a member's consultation with his designated managers on the LLC Board does not give Delaware jurisdiction over that member under the long arm statute's provisions that subject managers to jurisdiction in Delaware.

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Ebay Brings Stockholder Action In Court of Chancery Against Craigslist And Its Directors For Diluting Its Minority Stake

Yesterday eBay Domestic Holdings Inc. brought an action in the Court of Chancery, C.A. 3705-CC, against Craigslist and certain of its directors, challenging recent transactions implemented by the Craigslist board. eBay acquired a minority ownership interest in Craigslist (28.4%) back in 2004.  It now alleges that Craigslist's directors have taken unilateral action in violation of their fiduciary duties and have disadvantaged eBay and its investment. 

The complaint was filed under seal.  The matter has been retained by Chancellor Chandler.   

The WSJ Law Blog has coverage here.  And, The NY Times reports here.   

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Court of Chancery Finds Duty To Speak

Corporate Property Associates 14 Inc. v. CHR Holding Corp., C.A. No. 3231-VCS (Del. C. April 10, 2008)

In this case of first impression, the Court of Chancery held that a corporation had a duty to a warrant holder to truthfully answer its inquiries about corporate plans. This is significant because normally there is no fiduciary duty running to warrant holders and no duty to keep them informed. Here, however, finding that when asked about a matter that implicated the warrant holders' financial interest, there was a duty to answer a question truthfully.

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Delaware Bankruptcy Court Applies Caremark to Officers

Miller v. McDonald, C.A. 07-51350 (Bankr. Del. April 9, 2008)

In a case of apparent fist impression, a bankruptcy court in Delaware has held that Caremark duties apply to corporate officers as well as directors. Thus, corporate officers also have the duty to exercise reasonable care in oversight of corporate operations in their area of responsibility. This is hardly a surprise. However, given that the officer involved in this case was considered the company's general counsel, this decision has some far-reaching implications.

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Court of Chancery Upholds Proxy Power

In Re IAC/Interactivecorp, C.A. 3486-VCL (Del. Ch. March 28, 2008)

In this widely reported decision, the Court of Chancery applied well established principles of contract construction to determine when a proxy would be upheld. Once again, the Court rejected an attempt to modify the contract language to imply a duty of good faith and fair dealing, or a fiduciary duty that would override the rights given in the contract.

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Class Action Filed Against Bear Stearns in Delaware Seeking to Enjoin Acquisition by JPMorgan

See latest developments on 03/31/08 above: Last Thursday, a class action complaint was filed against Bear Stearns and its directors in the Court of Chancery.  The complaint alleges that the company has failed to maximize shareholder value by agreeing to be purchased by JPMorgan Chase for $2 per share.  The complaint further alleges that, by agreeing to the deal, the company has favored numerous constituencies over the shareholders. 

 

Update: The New York Times reports  that JPMorgan Chase raised its offer to $10 per share.  Professor Ribstein has commented , along with Pileggi. 

 

Further Update: An additional class action was filed against Bear Stearns on Monday by the Wayne County Employees' Retirement System .  And, yesterday a TRO was filed on behalf of the plaintiffs in both actions, seeking to enjoin the sale, which is set to close on April 8.  Both actions, and the accompanying TRO, have been assigned to Vice Chancellor Parsons. 

 

 

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Court of Chancery Explains Options Cases

Weiss v. Swanson, C.A. No. 2828-VCL (Del Ch. March 7, 2008)

In the latest of the Chancery decisions on complaints challenging the grant of options, the Court has explained what it takes to state a derivative complaint that excuses demand on the Board. Briefly, the Court here focused on what was disclosed to the stockholders when they were asked to approve option plans or elect directors who had received option grants. First, full disclosure is required, particularly of practices that are likely to lead to increasing the value of the options, such as the bullet-dodging alleged in this case.

Second, the fact that a majority of the board received the options also made them interested enough to excuse demand.

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Court of Chancery Dismisses Complaint Based On Conjecture

Pfeffer v. Redstone, C.A. No. 2317-VCL (February 1, 2008).

At first this seems like a common disclosure case. It is more than that, however. The court here shows that it expects claims to be based on more than mere conjecture to survive a motion to dismiss. The Complaint alleged that the key corporate officers knew of a bad cash flow analysis but failed to disclose it in connection with an exchange offer. When the plaintiff''s counsel could not even say he had seen the alleged report or explain how it was disclosed to the defendant directors, the complaint was dismissed.

To support allegations of knowledge of a red flag, the allegation must be based on common sense or specific facts. It is common sense to infer the directors saw a report if it was common knowledge in the corporation and is a type of report that one would expect the board to have seen. It is not common sense to believe that an obscure memo generated by a lower level employee was shown to the board of a publicly traded corporation.

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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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