Delaware Business Litigation Report

Court of Chancery Explains Some Consequences For Violating Forum Selection Agreement

CMS Investment Holdings LLC  v. Castle, C.A. 9468-VCMR (August 19, 2016)

This is a significant decision because it explains how filing suit somewhere other than in the contractually-designated jurisdiction does not toll the time to sue in the proper jurisdiction. Hence, if the improperly-filed suit is dismissed, it may be too late to bring suit in the proper jurisdiction.

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Are Appraisal Cases to Decline?

Among the most-discussed issues in corporate law today is whether appraisal actions should be curtailed. Triggered by above-merger price awards after deals were shopped in the market, the argument is that the appraisal process is being used unfairly and sometimes ends in a home-run result for plaintiffs. In response to those concerns, Delaware recently amended its appraisal statute to address some of the perceived abuses. But, before the reformers claim success too soon, recent developments may actually increase appraisal actions. First, some background is helpful in understanding these changes. More ›

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How to Determine Whether the Statute of Limitations or Laches Applies

Lawyers who practice in the Delaware Court of Chancery probably can recite the shorthand rule that, for most claims, the Court of Chancery will decide whether a claim is filed too late by application of the statute of limitations by analogy. In application, however, the rule is not quite that simple, nor is it applied consistently. In Kraft v. WisdomTree Investments, C.A. No. 10816-CB (Del. Ch. Aug. 3, 2016), the Court of Chancery waded through the murk to bring some clarity to the analysis. More ›

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Court of Chancery Awards Mootness Fee for “Helpful” Supplemental Disclosures

The Court of Chancery’s highly-publicized decision in In re Trulia, Inc. Stockholders Litigation, 129 A.3d 884 (Del. Ch. 2016) (Bouchard, C.) (discussed here) took aim at the problem of disclosure-only settlements and class-wide releases in M&A litigation.  Trulia announced the Court’s preferred approach for adjudicating disclosure claims – either (1) on a pre-closing preliminary injunction motion, or (2) on a mootness fee application after defendants moot plaintiffs’ claims with voluntary supplemental disclosures.  Trulia also warned that parties choosing the “suboptimal” disclosure-only settlement and class-wide release path should expect the Court to be “increasingly vigilant” in assessing the reasonableness of the “give” and “get.”  After Trulia, the Court will only approve disclosure-only settlements if the supplemental disclosures address a “plainly material” misrepresentation or omission and the release is “narrowly circumscribed.” 

When setting forth the “plainly material” standard for disclosure-only settlements in Trulia, Chancellor Bouchard noted that disclosures need not be plainly material to support a mootness fee award.  In the Chancellor’s words, awards in the mootness fee scenario “may be appropriate for supplemental disclosures of less significance than would be necessary to sustain approval of a settlement.”  Id. at 898 n.46.  The Court of Chancery has since adhered to this view in Louisiana Municipal Police Employees’ Retirement System v. Black, 2016 WL 790898 (Del. Ch. Feb. 19, 2016) (Noble, V.C.) (discussed here).  There, then-Vice Chancellor Noble awarded a mootness fee for disclosures that were material, “if not much more than material,” noting that “Trulia does not require a ‘plainly material’ inquiry in the mootness fee award context.”  Id. at *7 n.53.

No Court of Chancery opinion, however, addressed whether, post-Trulia, a disclosure must at least cross the threshold of materiality to support a mootness fee award until the recent decision in In re Xoom Corporation Stockholder Litigation, 2016 WL 4146425 (Del. Ch. Aug. 4, 2016) (Glasscock, V.C.).  In Xoom, Vice Chancellor Glasscock held that the standard for disclosures on a mootness fee application is whether the disclosure was helpful and there was a benefit to the class, and not whether the disclosure was material. More ›

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Court Of Chancery Limits Inspection To A Real Stockholder

Pogue v. Hybrid Energy Inc., C.A. 111563-VCG (August 5, 2016)

This decision holds that when stock issued is void, the recipient is not entitled to records inspection even if he is listed as a stockholder on the company's stock ledger.

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Court Of Chancery Explains When Caremark Claim Exists Based On Illegal Conduct

Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs, C.A. 10872-VCMR (August 1, 2016)

This decision explains when a Caremark claim exists based on illegal corporate conduct. The “substantial likelihood” of liability that justifies excusing a pre-suit demand on the board must involve a knowing violation of the duty to follow the law.  That occurred in the well-known Massey and Pyott cases. Here, however, the best the plaintiff could allege is that the board should have known its company was violating the antitrust laws and the Court held that was not good enough to excuse demand. The key is that the record showed the board was advised that the conduct involved was legal.  This highlights that the “should have known better” argument is not going to work in almost all  cases when the board has advice it has not crossed the line into illegal conduct.

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Fair Value in Arm's-Length Third-Party Transactions

With the rise of appraisal arbitrage, an increasing number of appraisal petitions and an increase in the size of appraisal classes, corporate practitioners have closely followed recent appraisal decisions in the Delaware Court of Chancery. In cases involving third-party arm's-length transactions and robust bidding, several more recent decisions established a level of predictability to the valuation analysis, looking to the negotiated merger price as the best evidence of the fair value that appraisal claimants are entitled to receive. In those cases the court rejected expert valuations of higher or lower amounts based on discounted cash flow and other expert financial analyses. The Court of Chancery's recent decision in In re Appraisal of DFC Global, C.A. No. 10107-CB (July 8), will likely create new uncertainty about the reliability of the market to establish fair value in an appraisal. More ›

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Court Of Chancery Explains How To Decide Whether A Claim Is Time-Barred By Statute or By Laches

Kraft v. WisdomTree Investments Inc., C.A. 10816-CB (August 3, 2016)

There is often some confusion over how the Court of Chancery will determine when a plaintiff has filed its action too late.  A statute of limitations may apply directly or the doctrine of laches may apply and then apply the same statute by analogy.  Through a careful historical analysis, the Chancellor explains how to decide, while also noting some tension in the case law.  The answer, whether statute or laches, controls what arguments are available to the dilatory plaintiff.

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Court Of Chancery Reviews Corporate Opportunity Doctrine Where Derivative Claim Eliminated By Merger

In Re Riverstone National Inc. Stockholder Litigation, C.A. 9796-VCG (July 28, 2016)

This is an excellent explanation of the corporate opportunity doctrine’s four elements, under which directors may be liable for taking a business opportunity that: (1) the corporation is financially able to take for itself; (2) is within its line of business; (3) would have been of interest to the corporation; and (4) presents a conflict of interest to the directors. More ›

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Court Of Chancery Explains Contract Interpretation Rules

iBio Inc. v. Fraunhoffer USA Inc., C.A. 10256-VCMR (July 29, 2016)

This is an excellent primer on the rules that guide the proper interpretation of a contract. While the rules it applies are taught to first year law students, they are too often forgotten by those of us long out of school.

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Majority of Fully-Informed, Disinterested Stockholders Insulated Merger from Attack

The Delaware Supreme Court held in Corwin v. KKR Financial Holdings, that "when a transaction not subject to the entire fairness standard is approved by a fully-informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies," even when a stockholder vote is statutorily required and the transaction is otherwise subject to the Revlon, 125 A.3d 304, 308-09 (Del. 2015),standard of review. More ›

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Arbitrator to Decide Arbitrability of Breach of Fiduciary Duty Claim

In Angus v. Ajio, C.A. No. 11895-VCG (Del. Ch. May 13, 2016), the plaintiffs sought to enjoin an arbitration initiated against them as officers of MoGo Sport. In the arbitration, certain members of the company (who were defendants in the court proceeding) asserted claims for breach of fiduciary duty, fraud and violations of the company's operating agreement, arising from the alleged misappropriation of an opportunity presented to the company. The plaintiffs argued, among other things, that the arbitration provision was too narrow to encompass the breach of fiduciary duty claims, as it covered "all disputes among members or former members over the provisions of [the operating agreement]." Applying the holdings in James & Jackson v. Willie Gary, C.A. No. 59 (March 14, 2006),and McLaughlin v. McCann, C.A. No. 3067-VCS (Feb. 21, 2008), the court found that, because the defendants' argument for arbitrability of the claim for breach of fiduciary duty was not frivolous, it should be decided by the arbitrator. Thus, the plaintiffs' request for injunctive relief was denied and the question of arbitrability of the breach of fiduciary claim was referred to arbitration. More ›

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Court Tackles Nonmember Appointed as a Special Litigation Committee

It is often said that Delaware limited liability companies are creatures of contract. Drafters of LLC agreements have the freedom to craft an LLC that best suits their goals. For instance, LLCs can be drafted to allow the members to manage the affairs of the LLC. LLCs can also be created so that members appoint a manager or managers to govern the LLC. Drafters can also mold an LLC to mimic a corporation by having the LLC's affairs governed by a board of directors. What practitioners must know is that when an LLC's governance features mimic another type of entity, a court analyzing a dispute involving that LLC will likely draw from existing precedent. So, where an LLC was created to parrot a corporation's governance structure, a court will likely look to corporate law for guidance in resolving a dispute. More ›

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Court Of Chancery Applies Business Judgment Rule After Majority Tender Shares

In Re Volcano Corp. Stockholder Litigation, C.A. 10485-VCMR (June 30, 2016)

In what might be one of the most important decisions this year, the Court held that the tender of their shares by a majority of the stockholders invokes an “irrebuttable” presumption that the business judgment rule applies and, as a result, the complaint generally must be dismissed.  This extends the Delaware Supreme Court’s Corwin decision to the tender offer context.  While the tender offer aspect of this case will get the most notice, the concept of an “irrebuttable” business judgment rule may prove to be more important.  For when that form of the business judgment rule applies, only facts demonstrating waste will let a complaint survive a motion to dismiss.  Of course, waste is almost impossible to successfully allege under Delaware law.

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Court Of Chancery Dismisses Previously Dismissed Case

Laborers’ District Counsel Construction Industry Pension Fund v. Bensoussan, C.A. 11293-CB (June 14, 2016)

What happens when a derivative claim is filed outside of Delaware and then is dismissed by that other court?  Well even if the other complaint might have stood up in Delaware, the subsequently filed Delaware case will also be dismissed when the law of the state where the case was dismissed gives preclusive affect to such a dismissal.  This result again shows that Delaware is respectful of other jurisdictions and that Delaware litigation may be threatened by bad filings elsewhere.

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