Delaware Business Litigation Report

Delaware Supreme Court Rejects Fraud Defense To Advancement

Trascent Management Consulting LLC v. Bouri, No. 126, 2016 (November 28, 2016)

Delaware strongly protects a party’s right to advancement of attorney’s fees. This decision holds that a claim of fraudulent inducement cannot be asserted as a defense in a contractual advancement case even when the fraud is alleged to have induced the advancing party into signing the contract.  Rather than use the alleged fraud as a defense to providing advancement, the advancing party must satisfy its advancement obligations and then assert its plenary claim for fraud in a separate proceeding where it can recoup the allegedly wrongfully advanced funds.

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Superior Court Limits Contractual Indemnification To Third Party Claims

Deere & Company v. Exelon Generation Acquisitions LLC, C.A. N13C-07-330 MMJ CCLD (November 22, 2016)

This decision holds that a general obligation to indemnify another party to a contract applies only to claims filed by a third party and not to claims between the parties to the contract itself. Hence, if you want to cover inter-party claims, you need to say so explicitly.

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Delaware Supreme Court Explains Setoff And Recoupment

Finger Lakes Capital Partners LLC v. Honeoye Lake Acquisition LLC, No. 42, 2016 (November 14, 2016)

This decision explains the difference between a defendant’s right of setoff and recoupment. The key difference is that the right of setoff arises out of an independent transaction, while recoupment must be based on the same facts that support the main claim. Another difference concerns the statute of limitations.  Setoff is subject to a three-year statute of limitations, while time-barred claims can be considered for recoupment when they arise out of the same factually-related transaction as the plaintiff’s claim.   

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Court Of Chancery Grants Dissolution On Conditions

Abelmann v. Granum, C.A. 12041-VCMR (November 15, 2016)

This is an interesting decision in a small case. The Court granted the request to dissolve a Delaware entity in deadlock, but conditioned that dissolution on an agreement not to use the fact of dissolution in another proceeding between the parties to defeat a party’s standing. What other conditions might be imposed in other cases remains to be seen.

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Delaware Superior Court Explains Disgorgement Exclusion In Insurance Coverage

TIAA-CREF Individual & Institutional Services, LLC v. Illinois National Insurance Company, No. N14C-05-178 JRJ CCLD (October 20, 2016)

D&O policies often attempt to exclude from coverage sums paid to disgorge unlawful profits. The underlying theory is that the company did not suffer a true loss when it has to give back something that it never should have had in the first place. This decision tackles the hard problem of applying that theory in specific circumstances. The Court held that when a company settles a claim without admitting it has made an unlawful profit then the insurer has to prove the sums paid were in fact a return of an illegal profit. Merely settling a claim for some amount does not establish disgorgement occurred, even when the claim itself may have made that allegation. In particular, when the actual settlement agreement does not refer to a return of an illegal gain, there is no tie to actual disgorgement and the exclusion may not apply. Hence, when settling a claim it is important to consider how the settlement agreement should read.

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Court Relies on Fully Informed Uncoerced Stockholder Vote in 'Revlon' Challenge

Vice Chancellor Joseph R. Slights III's decision In re OM Group Stockholders Litigation, Consol. C.A. No. 11216-VCS (Oct. 12, 2016), represents the latest Delaware Court of Chancery decision to apply Corwin v. KKR Financial Holdings, 125 A.3d 312-314 (Del. 2015), and rely on the business judgment standard of review to dismiss a Revlon challenge to a cash-out merger. More ›

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Court Of Chancery Explains Law Of Issue Preclusion In Arbitration

Government Employees Insurance Company v. Progressive Direct Insurance Company, C.A. 11425-MZ (November 2, 2016)

This decision addresses issues that may arise when there are successive arbitrations involving the same basic set of facts, if different parties. It concludes that when engaging in the limited judicial review which asks whether an arbitrator exceeded its authority, the issue of whether the first arbitration’s findings are preclusive in the second arbitration is for the second arbitrator to decide, not the Court.

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Challenge to a Squeeze-Out Merger Dismissed Under MFW Framework

In a stockholder challenge to a going-private merger by a controlling stockholder to buy out minority stockholders, the operative standard of review is ordinarily the most rigorous judicial review, entire fairness. To obtain the most deferential judicial review, business judgment, in a challenge to a squeeze-out merger, the controlling stockholder may, however, structure the merger to satisfy the MFW framework approved by the Delaware Supreme Court in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014). The MFW framework requires that the controlling stockholder condition the merger on both approval of an independent, adequately empowered special committee of the board that fulfills its duty of care in negotiating a fair merger price, and the uncoerced, informed vote of a majority of the minority disinterested, independent stockholders. If the MFW requirements are satisfied, the business judgment rule applies, and the Delaware Court of Chancery will dismiss the stockholder challenge to the squeeze-out merger unless the merger somehow constitutes waste—which is logically impossible to prove after the fully informed, uncoerced, independent stockholders ratify the merger by their vote. More ›

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Dismissed Dell Appraisal Claimants Settle With Company

Appraisal litigation has been a topic at the forefront of the minds of many legal practitioners over the past few years. Recently, amendments to Section 262 of Delaware's General Corporation Law went into effect that were effectuated to eliminate de minimis appraisal claims while also allowing companies to make a pre-judgment payment to dissenting stockholders to reduce interest costs in connection with appraisal litigation. The Delaware Court of Chancery authored several opinions concerning appraisal arbitrage and the technical requirements of Section 262. There have even been unique appraisal cases where the court discussed the circumstances surrounding the proposed settlement of only factions of the appraisal class. More ›

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Court Of Chancery Explains Fee Award In Appraisal Case

In Re Appraisal Of Dell Inc., C.A. 9322-VCL (October 17, 2016)

Plaintiffs’ attorneys in representative litigation may obtain awards of fees and expenses when their efforts prove successful and provide benefits to the represented class. This decision explains how the Court of Chancery will calculate a fee award in an appraisal case based on the benefit conferred to the dissenting stockholders; here, a $21 million bump in the consideration. The decision addresses several important issues, including when expenses should be deducted from the benefit conferred before calculating the fees. Indicative of this litigation’s complexity, the expert witness fees alone were over $3.3 million. The decision will serve as a useful guide to any future fee awards in the growing field of appraisal cases.

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Court Of Chancery Reviews Caremark Pleading Standard

Reiter v. Fairbank, C.A. No. 11693-CB (October 18, 2016)

Directors may face liability for a failure of oversight that caused the company to suffer a loss, often involving fines imposed by various authorities. Claims alleging this oversight liability under Delaware law are governed by the famous Caremark standard. A considerable hurdle for the plaintiff is the Caremark standard’s sometimes overlooked scienter requirement—the need to show bad faith, meaning that the directors knew that they were not discharging their fiduciary obligations. This decision carefully analyzes a complaint’s allegations and the Caremark precedent to conclude the complaint should be dismissed for failure to meet that test.

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Court Of Chancery Dismisses Post-Closing Claims Under Corwin

In re OM Group Inc. Stockholders Litigation, C.A. 11216-VCS (October 12, 2016)

Under the recent Corwin decision, a fully-informed vote by uncoerced and disinterested stockholders to approve a merger invokes the business judgment rule and effectively precludes almost any claim the merger was improper.  This decision does a very good job of explaining when proxy disclosures are adequate to invoke Corwin.  Here, the alleged disclosure violations concerned (i) information regarding a competing bid, (ii) potential conflicts involving one director, and (iii) the banker’s compensation and potential conflicts.

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Court of Chancery Explains When Corporate Overpayment Claims Require Demand Futility

Chester County Employees’ Retirement Fund v. New Residential Investment Corp., C.A. 11058-VCMR (October 7, 2016)

The issuance of additional stock in exchange for less than fair value typically is a harm falling on the company, and hence gives rise to a derivative claim.  But, such a claim might be dual natured – partially direct and partially derivative – when a controlling stockholder has been benefited, or where the board is not independent.  The question for dual-natured claims is whether they remain subject to the usual Rule 23.1 test for derivative claims: is pre-suit demand on the board excused?  Here, Vice Chancellor Montgomery-Reeves adopts the view endorsed by Vice Chancellor Laster in In re El Paso Pipeline Partners, L.P. Derivative Litigation, 132 A.3d 67, 75, 105 (Del. Ch. 2015), and applies the Rule 23.1 test to dual-natured corporate overpayment claims.  Had the issue been whether the claims were extinguished by a merger, then the Court would have focused on the direct nature of the claims for standing purposes.

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Court Of Chancery Details Application of M&F Worldwide Criteria

In re Books-A-Million Inc. Stockholders Litigation, C.A. 11343-VCL (October 10, 2016)

A merger approved in accordance with the criteria set out in the M&F Worldwide decision is subject to the business judgment standard of review, and vulnerable to attack only if its terms are so extreme as to constitute waste. This decision does a good job of explaining how the M&F Worldwide criteria are to be applied to a given set of facts at the motion to dismiss stage.

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Court Applies 'Corwin' and Upholds Board's Adoption of Dissolution Plan

Contract and fiduciary duty law intersect when how a board acts, including the vote required, is affected by a shareholder agreement. Such agreements are common to enable investors to protect their investment, either through negotiated buybacks or issuance of additional shares upon certain milestones, through board seats or through super-majority vote requirements where the investment, while substantial, does not result in majority control. When a dispute arises over the effect of a shareholder agreement on a board vote a Delaware court will apply traditional principles of contract interpretation to ascertain and enforce the parties' intent. The language the parties use to reflect their agreement at the time of the investment will determine the outcome of the dispute when it arises long after, such as when the board acts to dissolve the entity. The Delaware Court of Chancery's well-reasoned decision in The Huff Energy Fund v. Gershen, C.A. No. 11116-VCS (Del. Ch. Sept. 29), illustrates the care by which a Delaware court will examine the potential contractual and fiduciary duties at issue when a board adopts a plan of dissolution following a sale of a significant portion of its assets. More ›

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