Delaware Business Litigation Report

Court of Chancery Imposes Incorporation By Reference Condition On Books and Records Production

The City Of Cambridge Retirement System v. Universal Health Services Inc., C.A. No. 2017-0322-SG (Oct. 12, 2017)

A stockholder may inspect a corporation’s records for any recognized proper purpose, including investigating alleged mismanagement. If that stockholder later files a complaint based on the records produced, must the stockholder agree that any reviewing court may consider all those records in ruling on a motion to dismiss rather than being limited to the complaint’s allegations? Under this decision, and a similar decision in the Yahoo! litigation, yes, potentially. While this decision notes that such a condition is within the Court’s discretion, the language of the opinion suggests that condition will be granted as a matter of course.

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Court Of Chancery Explains Demand Excusal Based On Knowing Violations Of Law

Kandell v. NIV, C.A. No. 11812-VCG (Sept. 29, 2017)

Derivative plaintiffs alleging that directors allowed the corporation they serve to violate the law typically face dismissal for failure to make pre-suit demand on the board unless they allege a bad faith breach of the fiduciary duty of loyalty. To survive dismissal, plaintiffs need to sufficiently allege the directors knowingly cause the violation or knowingly failed to act—a very high bar. This decision explains that a knowing violation may be found, as it was here (at the motion to dismiss stage), when the law in question is clear and the illegal corporate practice in question is well known to the board.

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Chancery Dismisses Claim Seeking Damages Post-Closing for Unfair Merger Transaction

Delaware jurisprudence encourages decision-making by boards of independent and disinterested directors. If a transaction does not involve a controlling stockholder and is approved by a majority of disinterested and independent directors, then a plaintiff cannot attack the transaction and seek damages except upon pleading that a majority of the board acted in bad faith. More ›

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Court Of Chancery Addresses The Need For Legally-Distinct Co-Conspirators Under A Conspiracy Theory Of Jurisdiction

LVI Group Investments LLC v. NCM Group Holdings LLC, C.A. No. 12067-VCG (Sept. 7, 2017) More ›

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Court of Chancery Applies Privilege Non-Waiver Rule

In Re Cellular Telephone Partnership Litigation, C.A. No. 6885-VCL (Aug. 29, 2017)

This is an interesting decision because it applies a recent addition to the Delaware Rules of Evidence, Rule 510(f), which allows a court to enter an order preserving privilege despite disclosure in connection with the litigation before it. Here, the Court of Chancery entered such an order in connection with an in camera review by a special discovery master.

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Court Of Chancery Reviews When To Vacate An Arbitration Award

Carl Zeiss Vision LLC v. Refac Holdings, Inc., C.A. 11513-VCS (August 24, 2017)

This is another decision explaining the narrow circumstances when the Court of Chancery will vacate an arbitration award. It is very hard to get that relief.

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Court Of Chancery Explains When Side Deals Are Actionable Under A Bad Faith Theory

Kahn v. Stern, C.A. No. 12498-VCG (Aug. 28, 2017)

It is not easy to sufficiently plead a bad faith breach of fiduciary duty by a board in approving a merger when a majority of the directors were disinterested and independent. One basis for such a bad faith breach might be that the board approved a merger where management extracted side deals, such as employment arrangements with the post-merger entity or performance-based sale bonuses. As this decision explains after reviewing the precedent, an extreme set of facts is required to survive dismissal on this theory.

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Superior Court Explains Bootstrapping Doctrine

In Re Bracket Holding Corp. Litigation, C.A. N15C-02-233 WCC CCLD (July 31, 2017)

This decision is an excellent explanation of the “bootstrapping doctrine” that seems to often befuddle litigants. Briefly, a plaintiff cannot “bootstrap” a breach of contract claim into a fraud claim except in certain limited circumstances that this decision explains. For example, misrepresentations made to induce a contract may form the basis for a fraud calm.

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Superior Court Explains The Personal Participation Doctrine

The Washington House Condominium Association Of Unit Owners v. Daystar Sills Inc., C.A. N15C-01-108 WCC CCLD (August 8, 2017)

When is a corporate employee responsible for tortious conduct in that capacity? This decision answers that question in a very helpful way. For example, mere nonfeasance is not enough to impose liability on a corporate actor.

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Court Of Chancery Gives Guidance On What Constitutes Bad Faith

In Re Meadwestvaco Stockholders Litigation, C.A. No. 10617-CB (August 17, 2017)

As this decision explains, to state a claim attacking a merger on the basis that the Board acted in bad faith you need more than  accusations that directors were motivated to avoid a proxy fight involving an activist investor. Informed stockholder approval, disinterested directors, careful consideration, a premium price, reasonable deal protection devices, and prominent advisors all work to negate inferences of bad faith.

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Court Of Chancery Explains Jurisdiction Based On Delaware Incorporation

Terramar Retail Centers LLC v. Marion #2-Seaport Trust, C.A. No. 12875-VCL (Aug. 18, 2017)

Merely incorporating a business in Delaware does not automatically subject you to personal jurisdiction in the Delaware courts. But, when the act of incorporation is part of the events forming the basis for a claim, it may be enough. This decision explains the parameters of jurisdiction based on incorporating in Delaware.

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Court Of Chancery Applies M&F Worldwide To A Selling Controller

In Re Martha Stewart Living Omnimedia Inc. Stockholder Litigation, C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017)

Under M&F Worldwide, the business judgment rule standard of review applies to squeeze-out mergers with controlling stockholders if, from the outset of the negotiations, the controlling stockholder conditions the merger on both (i) negotiation and approval by a special committee of independent directors, free to select its advisors, empowered to say no, which fulfills its duty of care, and (ii) approval by an uncoerced, fully informed majority-of-the-minority vote. Compliance with M&F Worldwide limits plaintiffs to untenable waste claims. Significantly, this decision extends M&F Worldwide to circumstances where the controlling stockholder is a seller, rather than the buyer, and may have engaged in a conflicted transaction based on alleged side deals. The decision also holds that the dual protections of M&F Worldwide must apply from the start of the negotiations with the controller to be given effect.

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Chancery Declines Applying 'Garner' Exception to Privileged Documents in Books-and-Records Action

In the recent decision in Salberg v. Genworth Financial,the Delaware Court of Chancery declined to compel the production of attorney-client privileged documents in a books-and-records action. In Salberg, Vice Chancellor Joseph R. Slights III was confronted with an unusual set of facts which culminated with a trial on the narrow issue of whether Genworth would be required to produce otherwise attorney-client privileged information under the Garner fiduciary exception. The court held that despite most of the factors in the Garner analysis being favorable to the plaintiffs' position, those factors were not all-inclusive nor dispositive in every case. Ultimately, the court held that the plaintiffs failed to demonstrate the "good cause" necessary to satisfy the Garner test. More ›

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Court Of Chancery Declines To Exercise Personal Jurisdiction Based On A Choice Of Law Provision In A Stockholders’ Agreement

EBP Lifestyle Brands Holdings Inc. v. Boulbain, C.A. No. 2017-0269-JRS (Aug. 4, 2017)

This decision holds that owning shares in a closely-held Delaware corporation and entering into a stockholders’ agreement containing a Delaware choice of law provision is not a sufficient basis, standing alone, for a Delaware court to exercise personal jurisdiction over a non-resident under Delaware’s long-arm statute. While these circumstances may be factors in the long-arm and due process analysis, more is required to purposefully avail oneself of Delaware law and be subject to personal jurisdiction in its courts.

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Court Of Chancery Explains Fraud Pleading Standards

Sparton Corporation v. O’Neil, C.A. 12403-VCMR (August 9, 2017)

This decision explains what needs to be alleged to state a fraud claim. More particularly, it is not enough to just generally allege that a defendant must have had knowledge of someone else’s false statement.

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