Delaware Business Litigation Report

Court Of Chancery Holds Stock Issuance Void

Southpaw Credit Opportunity Master Fund LP v. Roma Restaurant Holdings Inc., C.A. 2017-0059-TMR (February 1, 2018)

When stock is issued in violation of a stockholder agreement, the issuance is “void.” This has great significance because the issuance than cannot be ratified.

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Court Of Chancery Denies Advancement “As Incurred”

HOMF II Investment Corp v. Altenberg, C.A.2017-0293-JTL (Transcript December 13, 2017)

A provision in an LLC agreement that provides for “indemnification" “as incurred” does not provide for advancement. This illustrates that the confusion between advancement and indemnification still exists. If you want advancement, you had better say “advancement.”

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Court of Chancery Rejects Conspiracy Theory of Jurisdiction At Summary Judgment Stage

Reid v. Siniscalchi, C.A. No. 2874-VCS (January 30, 2018)

The facts underlying this summary judgment decision are rather remarkable.  The case is long-pending, and involved years of jurisdictional discovery granted for the purpose of allowing the plaintiff to explore its pleading-stage theory of personal jurisdiction under the so-called conspiracy theory.  The gist of that theory is that a Delaware court can exercise personal jurisdiction over all co-conspirators when one commits an act in the State that is central to carrying out the conspiracy.  It is a theory oft-invoked but rarely satisfied.  And, as this decision demonstrates, it is a theory that could be subject to some abuse by a clever litigant.  In this case, the evidence ultimately showed that the plaintiff misled the Court by claiming to be the victim of a Delaware-based conspiracy, when, in fact, the plaintiff was the architect of the very wrongdoing used to advance his conspiracy theory.  Thus, some ten years into the litigation, the non-resident defendant was dismissed from the case based on a lack of personal jurisdiction.   

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Where Do You Want to Be Sued?

Where does your company want to be sued? Of course, the obvious answer is “nowhere.” But in this litigious country that is not realistic. However, to a large extent, companies can chose the forum to decide claims made against them. The choice is not necessarily an easy one, given competing considerations that this article reviews. More ›

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Delaware Supreme Court Gives Preclusive Affect To Prior Dismissal In Wal-Mart Derivative Litigation

California State Teachers Retirement System v. Alvarez, No. 295, 2016 (Del. Jan. 25, 2018)

This is an important decision clarifying the rules regarding the preclusive effect a dismissal of a derivative suit may have on a similar suit pending or brought later in Delaware.  This litigation saga involving a bribery scandal at Wal-Mart took some interesting turns, ping-ponging between the Delaware Court of Chancery and the Delaware Supreme Court.  More ›

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Chancery Greenlights Use of Books and Records Demands to Buttress Post-'Corwin' M&A Challenges

Stockholder M&A challenges in the Delaware Court of Chancery have declined in the wake of the well-known Trulia (and its federal corollary Walgreens) and Corwin decisions, which respectively reduced incentives for pre-closing M&A challenges by outlining a strict standard of review for disclosure-only settlements; and confirmed that, regardless of whether the process at issue complied with Revlon, transactions approved by an informed and uncoerced stockholder vote are subject to the protections of the business judgment rule.  Against this backdrop, the Court’s year-end decision in Lavin v. West Corp., C.A. No. 2017-0547-JRS, 2017 WL 6728702 (Del. Ch. Dec. 29, 2017), is of note, as it endorses the use of books and records demands to help stockholders meet Corwin’s pleading demands. More ›

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Court Of Chancery Explains Inspection Rights Under An LLC Agreement

Aloha Power Company LLC v. Regenesis Power LLC, C.A. 12697-VCMR (Dec. 22, 2017)

This books and records decision addresses inspection rights granted under an LLC agreement. It also is useful as a reminder that a mere decline in an entity’s performance is not a sufficient proper purpose supporting inspection.  While the “credible basis” standard for suspecting mismanagement is low, it is not that low.

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Court Of Chancery Explains When A Prediction Is A Misleading Disclosure

Chatham Asset Management LLC v. Papanier, C.A. No. 2017-0088-AGB (Dec. 22, 2017)

It is often said that a mere prediction of some future event cannot be misleading because such predictions are speculations that cannot be relied upon. However, as this decision points out, stating something is “possible” when it is impossible is misleading and actionable as a disclosure violation.

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Supreme Court Reverses Chancery's Dell Appraisal Decision

In one of the most anticipated opinions of 2017, Delaware’s Supreme Court reversed the Court of Chancery’s appraisal decision valuing Dell, Inc.’s shares after its management-led buyout in 2013.  In its unanimous en banc decision, the Supreme Court ruled that the Court of Chancery abused its discretion by relying exclusively on its own discounted cash flow (DCF) analysis while affording no weight to the transaction price when valuing the company’s shares at the time of its 2013 going-private merger. So, consistent with its recent decision in DFC Global v. Muirfield Value Partners, the Supreme Court provided context where a deal price should represent strong evidence of fair value. More ›

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Happy Holidays from Morris James LLP

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Delaware Supreme Court Explains When Derivative Case May Be Dismissed

City of Birmingham Retirement and Relief System v. Good, No. 16, 2017 (December 15, 2017)

This decision explains again that actual or constructive knowledge of persistent corporate wrongdoing is needed before there is a substantial likelihood the directors may be liable and thus demand is excused. The Chief Justice's modest dissent points out that the facts are not fully developed at the motion to dismiss stage and he thought the complaint was good enough to warrant further discovery. This points out a potential problem in Delaware law. It will be a rare case where the board of director minutes provide clear notice of bad corporate conduct without some sort of corrective measure also promised. How sincere those promises are is hard to gauge just based on the minutes. Hence, pleading a case good enough to survive a motion to dismiss is getting harder.

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Court Of Chancery Explains Caremark Claims

Oklahoma Firefighters Pension & Retirement System v. Corbett, C.A. 12151-VCG (December 18, 2017)

This decision is an exhaustive review of what constitutes a Caremark claim. It makes it clear that merely because the directors were aware of red flags and the corporation later suffered harm that is not enough to support a Caremark case. Instead, the facts must show scienter deliberate violation of the law or a conscious indifference to wrongdoing. What this may mean in practice is that if the board minutes show some effort to correct corporate problems, that may negate a finding of the necessary scienter. More ›

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When a Pro Rata Dividend Triggers Entire Fairness

In IRA Trust FBO Bobbie Ahmed v. Crane, Consol. C.A. No. 12742-CB, the Court of Chancery dismissed a stockholder challenge to a reclassification implemented through a pro rata dividend to all stockholders.  In addressing the motion to dismiss, the Court saw three key questions: (1) does the entire fairness doctrine apply even though the reclassification involved a pro rata distribution of shares; (2) if entire fairness does apply, does the analytical framework articulated by the Delaware Supreme Court in Kahn v. M&F Worldwide, Corp. (“MFW”) apply to the reclassification; and (3) if MFW applies, have the defendants satisfied its requirements on the face of the pleadings.  My colleague, Ed McNally, blogged the other day about the Court’s holding that MFW applied to the challenged reclassification.  This blog post focuses on the first question in the Court’s analysis: does the entire fairness doctrine apply to a reclassification implemented by a pro rata distribution of shares.  More ›

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Delaware Supreme Court Clarifies Ratification Defense In Stock Option Cases

In re Investors Bancorp Inc. Stockholder Litigation, No. 169, 2017 (Dec. 13, 2017, revised Dec. 19, 2017)

There has been some uncertainly over the effect of stockholder approval of stock option plans for directors, such as does that approval constitute ratification so as to invoke the business judgment rule. This decision clarifies that law. In general, ratification will occur when the directors lack discretion on how the actual stock options are to be granted. For example, if the stock option plan permits the directors to fix the amount of stock or the price they are to pay, then the stockholder vote is not a ratification.

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Delaware Supreme Court Stresses Value Of Deal Price In Appraisal Case

Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd., No. 565, 2016 (December 14, 2017)

In this much-anticipated decision, the Delaware Supreme Court stresses the importance of the deal price to the award in an appraisal case. The Court is very careful to note how much the deal price reflected a highly efficient market and a prolonged exposure of the company to competing buyers. It probably did not help the petitioners that their expert testified to a value that seemed much too big. The case was remanded to the Court of Chancery so the Dell saga will continue. Finally, the Supreme Court’s comments on how to allocate the expenses of an appraisal may also have a future impact on appraisals arbitrage.

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