Delaware Business Litigation Report

Supreme Court Chips Away at Concept of Direct And Derivative Claims

Just in time for Christmas, on December 20, 2016, the Delaware Supreme Court issued a Christmas present – or lump of coal, depending on your view – in its opinion in El Paso Pipeline GP Company LLC v. Brinckerhoff.  In this opinion, the Supreme Court reversed the Court of Chancery’s opinion holding that claims of a limited partner challenging a drop down transaction between the general partner’s parent and the partnership as a breach of the limited partnership agreement were direct, and therefore survived the merger of the limited partnership after trial with a third party.  The Court of Chancery had awarded $171 million in damages for the breach.  The general partner had argued that the merger extinguished the limited partners’ claims. More ›

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Partner Charles H. Toliver, IV Receives the Delaware State Bar Association Outstanding Service to the Courts Award

The Delaware State Bar Association has selected Morris James LLP partner Charles H. Toliver, IV as the 2016 recipient of the Award for Outstanding Service to the Courts and the Bar.  Established in 1999, the award is presented to a Delaware attorney or judge who has substantially assisted the Courts and the Bar and has strengthened public trust and confidence in the courts in the state of Delaware and the administration of justice.  More ›

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Use of Agreed-Upon Search Terms Not Proxy for Gathering All Responsive Info

Parties typically seek to narrow the scope of potentially responsive documents by meeting and conferring and reaching agreement on appropriate search terms. The parties next run those search terms against the data collected from the relevant custodians and review the resulting information for responsiveness. This method of identifying responsive electronic data has more or less become the norm in cases involving large data collection efforts. Occasionally, however, search terms miss the mark and fail to capture the information the opposing party is entitled to receive. The Delaware Court of Chancery recently addressed this and other related issues in deciding motions to compel filed by the defendant in BTG International v. Wellstat Therapeutics, No. 12562-VCL (Oct. 4). More ›

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Partner P. Clarkson Collins, Jr. Receives the Delaware State Bar Association Daniel L. Herrmann Professional Conduct Award

The Delaware State Bar Association has selected Morris James LLP partner P. Clarkson Collins, Jr. as the 2016 recipient of the Daniel L. Herrmann Professional Conduct Award. The award is presented to a member of the Delaware Bar who has demonstrated those qualities of courtesy and civility which, together with high ability and distinguished service, exemplifies the Delaware lawyer. More ›

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Court Of Chancery Appoints Lead Counsel In Appraisal Case

Sunrise Partners Limited Partnership v. Rouse Properties Inc., C.A. 12609-VCS (December 8, 2016)

Appraisal petitioners normally agree to consolidate their actions, on which law firm(s) will represent them, and on how their common objectives will be carried out.  That did not happen in this case: the petitioners disputed whose attorneys should take the lead counsel role. Significantly, the Court found it had the authority to choose one of the two competing law firms to lead on behalf of all petitioners despite one petitioner’s objection.  The Court also observed, however, that there may be instances in which each petitioner should be allowed to chart its own course without consolidation or coordination. 

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Court Of Chancery Explains Standing To Bring Fiduciary Duty Claims After Being Forced to Sell Stock

I.A.T.S.E. Local No. One Pension Fund v. General Electric Company, C.A. 11893-VCG (December 6, 2016) 

This is an important decision because it clarifies when a stockholder loses standing to bring a fiduciary duty case because he sold his stock. Briefly, breach of fiduciary duty claims may be direct (belonging to the individual stockholder), derivative (belonging to the corporation generally), or dual-natured (partially direct, partially derivative). Direct/individual claims for breach of fiduciary duty may also be personal (belonging to the individual) or non-personal (attaching to the stock).  As explained by In re Activision Blizzard, Inc. Stockholder Litigation, 124 A.3d 1025 (Del. Ch. 2015), a stockholder selling his stock gives up all but direct claims that are personal in nature—the non-personal rights otherwise travel with the shares to the new owner.   More ›

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Court Of Chancery Clarifies Personal Jurisdiction Over LLC Managers

In The Matter of Dissolution Of Arctic Ease LLC, C.A. No. 8932-VCMR (December 9, 2016)

The Delaware LLC Act provides for personal jurisdiction in Delaware over those who manage a Delaware LLC—i.e., those who are named as managers in the LLC agreement, and those who participate materially in the LLC’s management. This decision explains what it means to participate materially in the LLC’s management by a thorough analysis of the precedents. In effect, it means the person must have the management role usually undertaken by a corporate director—a control or decision-making role. Just acting as an officer is not enough when that person is subject to the control of others.

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“Directors’ Decisions Must Be Reasonable, not Perfect” Home Depot’s Shareholder Derivative Litigation Arising from Data Breach Dismissed; Demand Was Not Excused Under Delaware Law

On November 30, 2016, a federal district court dismissed a shareholder derivative complaint against various current and former directors of Home Depot arising from the well-publicized data breach the company suffered between April and September 2014.  In re The Home Depot, Inc. Shareholder Derivative Litigation, Civil Action No. 15-CV-2999-TWT (N.D. Ga. Nov. 30, 2016).  The complaint asserted claims against the directors for breach of the fiduciary duty of loyalty and corporate waste under state law, and a federal law securities claim under Section 14(a) of the Securities Exchange Act.  The decision illustrates important principles of corporate law reflected in Rule 23.1 (under both state and federal law), governing when a plaintiff can bypass the board of directors to assert a derivative claim for injury to the company on the company’s behalf, rather than deferring to the board’s judgment about asserting such a claim, and how these principles may affect litigation arising out of data breaches and alleged failures of director oversight.  More ›

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Claims That Controlling Stockholder Received Unique Benefits Dismissed

In GAMCO Asset Management v. iHeartMedia, Delaware's Court of Chancery considered claims that a controlling stockholder's liquidity needs created conflicts in otherwise arm's-length transactions with third parties. As demonstrated in New Jersey Carpenters Pension Fund v. infoGROUP, a controlling stockholder that receives the same financial benefit as the minority stockholders must also receive a "unique benefit" for the challenged transaction to be subjected to the entire fairness standard of review. Circumstances like infoGROUP, however, represent extreme cases. As discussed below, the plaintiff in iHeartMedia was unable to persuade the court that infoGROUP-like circumstances existed in its case. More ›

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Court Of Chancery Examines Whether Derivative Demand Was Wrongfully Refused

Zucker v. Hassell, C.A. 11625-VCG (November 30, 2016) and Kops v. Hassell, C.A. 11982-VCG (November 30, 2016)

Even after a board rejects a plaintiff-stockholder’s demand to bring a derivative litigation, the plaintiff may proceed to bring that derivative action if the plaintiff can show the refusal was “wrongful.”  Having conceded that the directors were not “interested” in the subject of the demand by making the demand rather than suing and trying to allege demand futility, the plaintiff must show that the decision to refuse the demand was a bad faith breach of the duty of loyalty, or a grossly negligent breach of the duty of care.  These two related decisions examine whether plaintiffs met the high bar of sufficiently alleging wrongful refusal.  They illustrate, for instance, how it might not be enough that an investigation proved wrong, or that the company subsequently agreed to a large settlement arising out of the investigated events.

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Court Of Chancery Addresses Who Is To Do Post-Closing Adjustments

Chicago Bridge & Iron Company N.V. v. Westinghouse Electric Co. LLC, C.A. 12585-VCL (December 5, 2016)

Many contracts for the sale of a company have a provision addressing how the parties should resolve disagreements concerning post-closing adjustments to the sale price.  Exactly who is to resolve those disputes (be it an accountant, an arbitrator or the court), and the scope of their authority is sometimes unclear.  This decision tracks some precedents and explains when the contract may be interpreted to permit an accountant to decide what adjustments are required by GAAP.

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Delaware Supreme Court Finds Pre-Suit Demand Was Excused

Sandys v. Pincus, No. 157, 2016 (December 5, 2016)

When a stockholder files a derivative suit she can avoid dismissal under Rule 23.1’s pre-suit demand-on-the-board requirement by showing that a majority of the directors were not independent enough to fairly consider her demand that the corporation itself file the suit.  This decision clarifies how to decide if a board member is sufficiently independent to fairly consider such a demand.  Briefly, at least two factors will be relevant: close social connections to the target of the suit, and disqualification under the NASDAQ tests for independence. There is no single test that controls, although either one of the aforementioned relationships may be disqualifying under the right circumstances, as the Court found them to be in this case.

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Court Of Chancery Summarizes Law On Reliance Disclaimers

IAC Search LLC v. Conversant LLC, C.A. No. 11774-CB (November 30, 2016)

Large commercial contracts frequently try to limit a buyer’s remedies for any extra-contractual misrepresentations by the seller.  Many Delaware decisions deal with disclaimers of extra-contractual representations and this decision does a nice job of summarizing some of that existing law. For example, it notes that a statement from the seller that it has not made any extra-contractual representations may not suffice, while a statement of non-reliance from the buyer should do the trick.

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Court Of Chancery Dismisses Dissolution Case In Favor Of Ongoing California Litigation

Zebala v. Aminopterin LLC, C.A. No. 12186-VCS (September 28, 2016) (TRANSCRIPT) 

An issue of some debate is whether a non-Delaware court has the power to dissolve a Delaware entity.  Here, the Court of Chancery was asked to dismiss a later-filed dissolution action in Delaware based on a California forum selection clause in the parties’ LLC agreement, and in deference to a long-pending first-filed action in California where the court had already issued an injunction restricting the LLC’s assets that the Court of Chancery was being asked to wind up.  The Court thus had the opportunity to address the important power to dissolve question, but under the circumstances found it appropriate to defer to the California court relying on principles of comity and a McWane analysis to dismiss the dissolution action.  In other words, the Court of Chancery would not step on the California court’s toes under the circumstances, and the California court could decide for itself if it has the power to dissolve a Delaware entity should the parties present that issue there.

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Court Dismisses Derivative Claim for Alleged Breach of Oversight Duty

The Delaware courts encourage plaintiffs who bring derivative claims in Delaware without making demand on the board of directors to seek books and records under Section 220 of the Delaware General Corporation Law so as to be able to plead facts sufficient to demonstrate that demand is excused. Many claims have been dismissed under Delaware Court of Chancery Rule 23.1 because a plaintiff failed to utilize the "tools at hand" to obtain relevant books and records. When a plaintiff grounds its claim on directors' alleged failure to exercise oversight, however, even receipt of books and records may not enable a plaintiff to plead facts sufficient to demonstrate that the directors knowingly ignored their duties so as to have acted in bad faith. That high standard as articulated by the Delaware Supreme Court in Stone v. Ritter makes a Caremark claim for breach of directors' oversight duties as among the most difficult in corporate law. The Court of Chancery's recent decision in Reiter v. Fairbank, C.A. No. 11693-CB (Del. Ch. Oct. 18), demonstrates that, regardless of the injury allegedly sustained by the subject company, a pleading based on books and records obtained from the company that at best reflects awareness of "yellow flags" is not sufficient to call into question the directors' good faith and hence to excuse demand, thus requiring dismissal of the plaintiff's derivative claim. More ›

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