Delaware Business Litigation Report

Delaware Supreme Court Signals Due Process Might Prevent Dismissal Based On Demand Futility Issue Preclusion

California State Teachers Retirement System v. Alvarez, No. 295, 2016 (January 18, 2017)

When a derivative suit is dismissed for the failure to plead demand futility, does that also mean that any other pending derivative suit based on the same facts must be dismissed because the shareholders are precluded from relitigating the issue of demand futility? This is a particularly important question because the Delaware Court of Chancery has held that that issue preclusion applies and dismissal is required. Hence, defense counsel may well seek to obtain a fast dismissal in a favorable jurisdiction when the plaintiffs’ bar rashly files suit outside of Delaware. This Order by the Delaware Supreme Court, which remands such a dismissal for consideration of a Due Process argument, signals that issue preclusion might be inappropriate at the motion to dismiss stage under the circumstances.

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Court Of Chancery Explains Pleading Rules For A Caremark Claim

Horman v. Abney, C.A. 12290-VCS (January 19, 2017)

At first look, this decision seems to involve just another unsuccessful failure of oversight Caremark claim against directors. But it is worth reading because it outlines the various theories of a Caremark case and then explains when inferences of utterly ignoring one’s fiduciary duty may be inferred from otherwise neutral facts. The decision makes it clear that the Court will not infer the directors were told of wrongdoing just because wrongdoing occurred, and that once proper safeguards are put in place to avoid illegal actions, there is usually no duty to monitor the monitors without reason to suspect they are not working.

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Delaware Supreme Court Implies Duty Of Disclosure For Limited Partnership Conflicts Provision

Dieckman v Regency GP LP,  No. 208, 2016 (January 20, 2017)

Agreements for publicly-traded limited partnerships often disclaim any fiduciary duties and provide safe harbors for transactions involving a conflict for the controller.  The safe harbor provisions frequently contain minimal disclosure requirements for any minority unitholder approval. All that is fine under Delaware law. However, when the controller asks the minority unitholders to approve a transaction under the safe harbor provision and does so in a fulsome proxy statement containing more than the minimal required disclosures, the controller must act fairly.  As the Court finds here, the safe harbor provisions of the agreement necessarily imply an obligation to be honest with the investors. That is a classic example of when the covenant of good faith and fair dealing applies.

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Court of Chancery Explains Role of Records Demand in Alleging Wrongful Pre-Suit Demand Refusal

Andersen v. Mattel, Inc., C.A. 11816-VCMR (January 19, 2017)

This decision examines when pre-suit demand may be excused because the board who refused the demand declines to disclose the report of its investigation when responding. In this case, the board’s unwillingness to disclose the report was not sufficient, standing alone, to show the necessary gross negligence or bad faith in the board’s demand refusal, particularly when the plaintiff has not made a formal request for the report using its books and records rights under Section 220.

The decision is also a good review of what circumstances otherwise might be sufficient to show a board’s demand refusal was in bad faith. In short, where the board’s justifications for refusing the demand falls within the bounds of reasonable judgment, the refusal is not in bad faith.

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Delaware Corporate and Commercial Case Law Year In Review – 2016

Morris James attorneys Lewis Lazarus, Albert Manwaring and Albert Carroll authored an article published in Transaction Advisors titled Delaware Corporate and Commercial Case Law Year in Review – 2016. The article summarizes ten significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past year, including matters such as disclosure-only settlements, appraisal rights, books and records inspections, and the standards of review in shareholder litigation.  Continue reading for the full article. More ›

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When Is a Manager Not Really a Manager?

Under the Delaware Limited Liability Company Act, a non-Delaware resident may be deemed to have consented to being sued in Delaware if she is a “manager” of the LLC. But who, exactly, is such a manager? That question is answered by the recent decision in In re Dissolution of Arctic Ease, C.A. No. 8932-VCMR (Del. Ch. Dec. 9, 2016). As that decision points out, all who manage are not “managers” under the Delaware LLC Act. More ›

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Court Of Chancery Explains Limits On Stockholder Challenges To Short-Form Mergers

In Re United Capital Corp. Stockholders Litigation, C.A. 11619-VCMR (January 4, 2017)

It is well understood that minority stockholders have limited rights to object to a short-form merger under Delaware law.  This decision affirms that minority stockholders cannot challenge the merger on fairness grounds alone, but must seek appraisal as the remedy for an inadequate price. However, since the stockholders are faced with the decision of whether to accept the deal price or seek appraisal, the duty of disclosure still applies.  This decision is helpful for its in-depth analysis of the many disclosure allegations.

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Court Of Chancery Explains Disclosure Pleading Standards And Burdens For A Corwin Defense

In Re Solera Holdings Inc. Stockholder Litigation, C.A. No. 11524-CB (January 5, 2017)

The well-known Corwin decision requires that the Court of Chancery apply the deferential business judgment rule to attacks on a merger approved by a majority of the disinterested stockholders who had all the material information.  The current plaintiff strategy is to plead that the stockholders were not fully informed such that the vote should not have a cleansing effect.  Most notably, this decision addresses who has the burdens of pleading and proof regarding the sufficiency of the disclosures for a Corwin defense.  As the Court explains, the plaintiff must first sufficiently plead one or more disclosure violations, and only then will the burden shift to the defendants to show that the stockholders were fully informed.  The decision also explains that Corwin did not change the disclosure standard—directors are only obligated to disclose material information to satisfy Corwin.

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Supreme Court Clarifies Attorney Lien Rights

Katten Muchin Rosenman LLP v. Sutherland, No. 151, 2016 (January 3, 2017)

This decision explains the extent of an attorney fee lien in Delaware. The lien extends to the entire fee when the fee is based on hourly rates, regardless of whether all the time spent was necessary for the recovery. In other words, the lien is for unsuccessful efforts as well as those that resulted in the actual recovery.

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Patricia A. Winston and James J. Gallagher, II Elected As Partners

Morris James LLP is pleased to announce that Patricia A. Winston and James J. Gallagher, II have been elected partners effective January 1, 2017.  More ›

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Delaware Superior Court Limits Fraud Exclusion

Arch Insurance Company v. Murdock, C.A. N16C-01-104 EMD CCLD (December 21, 2016)

This is an important decision because it limits the use of the typical fraud exclusion in a D&O policy to avoid liability to the insured.  The insured David Murdoch was found to have breached his fiduciary duty to Dole Foods resulting in a damage opinion awarding over $148,000,000. He soon settled the case by paying the damages and the suit was dismissed prior to the entry of a final judgment. He then sought to be reimbursed by the Dole D&O carriers. The insurers defended on the basis that the policy excluded coverage for litigation over a director’s personal gains obtained by fraud. However, the policy also required that the adjudication of wrongful conduct be reflected in a final judgment. The court held that even though there was a Court of Chancery opinion finding Murdock liable there was no final judgment and thus the exclusion for fraud did not apply. Further, the Court held that the insurers could not be subrogated in a suit against Murdock. While the case is not yet over, this result is probably upsetting to most insurers who do not expect to have to cover their insured’s frauds. But as the Superior Court correctly pointed out, there is precedent for this result. Hence, it can be said the insurers were on notice this might occur.  Of course, the answer to this problem is to change the policy wording to not require a final adjudication when a case is settled.

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Court Of Chancery Strikes Down New Fee-Shifting Bylaw

Solak v. Sarowitz, C.A. 12299-CB (December 27, 2016)

After the enactment of Section 109(b) of the Delaware General Corporation Law, one would have thought that fee-shifting bylaws were invalid. However, this decision deals with another attempt to shift fees, this time when a stockholder violates the company’s exclusive forum bylaw. Nice try, but the Court holds the bylaw is invalid.

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Del. Supreme Court Finds Demand Excused and Revives 'Zynga' Derivative Claim

Background

The derivative complaint alleged that Zynga's CEO, Chairman and controlling stockholder Mark Pincus, along with certain other top managers and directors were given an exception from the company's standing rule preventing insider sales until three days after an earnings announcement. The exception permitted the insiders to sell 20.3 million shares of stock for $236 million as part of a secondary offering. The insiders sold their shares for $12/share. Following the earnings announcement the market price dropped to $8.52 and following more negative news three months later dropped to $3.18, a 75 percent decrease from the offering price. The complaint alleged wrongdoing by the directors who approved the exception and those who participated in the sales. Of the company's nine directors, the Court of Chancery found that only the two directors who participated in the sale, Pincus & Hoffman, were interested and therefore could not impartially consider a demand. The Chancery Court rejected the argument that the facts alleged in the complaint were sufficient to create a reasonable doubt about the independence of director Siminoff because of an allegation that she was a "close family friend" of Pincus and had a business relationship with Pincus as co-owners of a private plane. The Chancery Court also rejected the argument that directors Doerr and Gordon lacked independence because of investment relationships they had with Zynga and Hoffman and Pincus. More ›

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Reliance on Extra-Contractual Statements in Fraud Claim

Buyers unhappy with the performance of a company or assets purchased frequently assert claims that the seller fraudulently induced the purchase by providing false information of the value of the company or assets in the sale process.

The Delaware Court of Chancery has often addressed whether the language in a disclaimer of extra-contractual representations in a purchase agreement is sufficient to shield a seller from liability for fraud. In these decisions, the court has provided guidance for the language in disclaimers or anti-reliance clauses necessary to avoid claims of fraud based on extra-contractual representations.

To start in Abry Partners V. v. F&W Acquisition, 891 A.2d 1032, 1059 (Del. Ch. 2006), the court ruled that a standard integration clause, barring contract claims based on prior written agreements, and prior or contemporaneous oral agreements, but without explicit anti-reliance language disclaiming reliance on extra-contractual representations, will not shield the seller from liability for fraud.

Further, in FdG Logistics v. A&R Holdings, 131 A.3d 842, 860 (Del. Ch. 2016), the court ruled that a disclaimer must come from the aggrieved party, meaning the buyer who asserts the fraud. Thus, a seller's disclaimer of what it did or did not represent is insufficient by itself to bar a fraud claim based on extra-contractual representations. Lastly, in Praire Capital v. Double E Holding, 132 A.3d 35, 51 (Del. Ch. 2015), the court ruled that to disclaim reliance does not require any "magic words," or even that a disclaimer or anti-reliance clause be styled negatively to deny reliance on extra-contractual representations. More ›

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Court Of Chancery Upholds Merger Price As Fair Value In Appraisal Action

Merion Capital L.P. v. Lender Processing Services Inc., C.A. 9320-VCP (December 16, 2016)

This is another decision in the continuing development of Delaware law on how to determine the acquired company’s fair value in an appraisal action.  The decision carefully reviews the more recent opinions on whether the merger price constitutes fair value, concluding that, in this case, it did.  Factors considered in weighing the use of the merger price included: meaningful competition during the pre-signing phase, that adequate and reliable information was provided to all parties during the pre-signing phase, and the lack of collusion or unjustified favoritism towards particular bidders.  In addition, because fair value is determined at closing, evidence from the post-signing period may also be relevant, such as the absence of a topping bid, and the company’s post-signing performance.  The decision is also useful for seeing how the Court will work carefully through the parties’ competing expert reports.

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