Delaware Corporate and Commercial Litigation Blog : Delaware Litigation Lawyer & Attorney : Francis G. X. Pileggi : Corporate, Business, Commercial, Delaware Chancery Court

 Rosen v. Wind River Systems, Inc., C.A. No. 4674-VCP (Del. Ch., June 26, 2009),  read opinion here.

Kevin Brady, a highly respected Delaware litigator, provides the following synopsis of this case.

In this decision, the Court of Chancery, in a putative class action regarding an all-cash, all-shares tender offer for the shares of Wind River Systems, Inc. (“Wind River”), declined to stay or dismiss the Delaware action in favor of various California actions (the “California Actions”) even though the earliest of the California Actions was filed 12 days before the Delaware Action.

Coast-to-Coast Battle

On June 4, 2009, Wind River announced a merger with a subsidiary of Intel Corporation. By June 16, 2009, four suits had been filed in California Courts challenging the merger and disclosures made in Wind River’s 14D-9. Only limited discovery had started. On June 16, Plaintiff Rosen filed an individual and derivative action in the Court of Chancery challenging the merger. The following day Rosen filed a motion for preliminary injunction and for expedited proceedings. Wind River then filed a motion to dismiss or stay the Delaware action. The Court of Chancery granted the motion to expedite and set the hearing on the preliminary injunction for July 7. The California court expedited those actions and set a hearing for the preliminary injunction for July 8.

Forum Non Conveniens Versus McWane

Defendants argued that under McWane, the California actions were first-filed and the Delaware action should be stayed or dismissed. Plaintiff responded by arguing that a forum non conveniens analysis should apply because the Delaware Action was filed in relatively the same time period as the California Actions. The threshold question was whether the Court should apply a McWane or forum non conveniens analysis. Citing his 2008 decision in In re Bear Stearns, 2008 WL 959992 (Del. Ch. Apr. 9, 2008), Vice Chancellor Parsons held that in the case of class actions the “appropriate approach is something akin to a forum non conveniens analysis.”  Where the delay in filing the class action is prejudicial, the forum non conveniens presumption may be rebutted.

Holding

Here, the Court found that there was no prejudicial delay. The California actions had not progressed far beyond the Delaware action. In addition, the Court noted that in light of the events from the announcement of the merger to the filing of the 14D-9, Rosen’s delay was minimal and in line with the Court’s “long expressed . . . ‘public policy interest favoring the submission of thoughtful, well-researched complaints – rather than ones regurgitating the morning’s financial press.’”

Applying the forum non conveniens analysis, the Court noted that none of the factors “severally or jointly, as applied to the facts and circumstances of this action, demonstrate the kind of hardship that would cause this Court to stay or dismiss the Delaware Action.” The Court did note that the applicability of Delaware law, even for issues that were neither “cutting-edge [n]or terribly novel issues of Delaware corporate law,” weighed heavily in favor of denying the motion.

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SEC Commissioner Elisse Walter's recent speech on corporate governance before the Society of Corporate Secretaries and Governance Professionals  has been published on The Harvard Law School Corporate Governance Blog here.

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Amazon.com, Inc. v. Hoffman, No. 2239-VCN (June 30, 2009), read opinion here.

In this letter decision, the Chancery Court grants a Motion to Dismiss claims that Amazon.com, Inc. brought against Basis Technology Corporation in connection with the preferred shares that Amazon.com owns in Basis. Amazon.com claimed that the directors breached their fiduciary duties, as well as the implied covenant of good faith and fair dealing based on the terms of the Certificate of Incorporation as a result of the issuance of additional shares that allegedly circumvented an anti-dilution provision that Amazon.com had negotiated. The Certificate of Designation in the Certificate of Incorporation (the "Charter")  included anti-dilution protection for Amazon.com by which the conversion price that would apply to the right of Amazon.com to convert its preferred shares into common shares would be adjusted in favor of Amazon.com if any new stock was issued at a price lower than $1.36 per common share.

The Charter included a Section 102(b)(7) exculpatory clause to protect its directors against monetary liability for breach of the duty of care. The court did not find any basis to question their loyalty and good faith, thus, allowing them to enjoy the protection of that Charter provision.
 

The court also rejected the argument that the issuance of new stock was a violation of the covenant of good faith and fair dealing. The court reasoned that simply because the applicable documents did not expressly address what would happen if shares were issued at a price equal to or greater than $1.36 per share, does not mean that the “expectation of the parties [if shares of common stock were issued for $1.36 per share or more] was so fundamental that it is clear that they did not feel a need to negotiate about them.”  Thus, the court dismissed the amended complaint, although Amazon was allowed leave to amend.

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Police & Fire Ret. Sys. of The City of Detroit v. Bernal, No. 4663-CC (June 25, 2009), read letter decision here. This Chancery Court decision provides a useful guide for the standard that will be applied to a motion to expedite proceedings. It also provides insight into the types of facts that may warrant injunctive relief in the context of a three-way contest for control when Revlon duties are triggered.

Overview

In this short letter that followed oral arguments on the same day, the Chancery Court provides a reasoned decision for granting a motion for expedited proceedings in connection with a motion to enjoin certain provisions of a merger agreement between Data Domain and NetApp, Inc. The plaintiff alleged that the merger agreement contained “deal protection mechanisms” such as a “no solicitation clause” and a termination fee. The board also entered into a voting agreement whereby they pledged to vote their shares, representing approximately 20% of Data Domain's outstanding shares, in favor of the NetApp merger. The plaintiff also alleged that the officers and directors of Data Domain would receive benefits separate and apart from the Data Domain shareholders such as indemnification from liability for matters arising from the completion of the merger, and for some individuals, positions with the company after the merger.

On June 1, EMC launched an all-cash tender offer for Data Domain at a price of $30 per share. On June 3, NetApp increased the cash component of its merger consideration which raised the overall value of its offer to $30 per share, but left all deal protection measures in place. The Data Domain board has stated that it is unable to negotiate with EMC because of the deal protection provisions of the merger agreement and if it failed to reject the EMC bid, Data Domain would be at risk of losing the NetApp bid.

Analysis to Determine whether Court will Grant Expedited Proceedings

The court explained that in deciding whether to grant expedited proceedings, the court must determine:

“Whether in the circumstances the plaintiff has articulated a sufficiently colorable claim and shown a sufficient possibility of a threatened irreparable injury, as would justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited preliminary injunction hearing.”

In this case, the plaintiffs have alleged that the directors violated their Revlon duties by not maximizing the sale price of the enterprise. This duty is triggered based on the allegations that the deal results in a change of control because the majority of the shareholders are being paid off with cash, and the preclusive deal protection measures deter other bidders and in any event the directors failed to inform themselves about the possibility for greater value to be obtained through the EMC bid.

At this early stage in the proceedings, in order to determine whether the motion to expedite should be granted, the court need only determine if the plaintiff has “stated a sufficiently colorable claim to justify proceeding on an expedited schedule.” (emphasis in original.) In determining whether there was a sufficiently colorable claim, the court recognized that Revlon does not require a certain blueprint that the board must follow, however, the board must exercise its duties in order to obtain the maximum price reasonably available. The court found that the plaintiff alleged facts that state a colorable claim that the Data Domain board is “favoring one bidder over others, thereby deterring bids from third parties that could provide greater value to Data Domain shareholders.”

Legal Analysis

In addition, importantly, the court emphasized that:

“On a motion for a preliminary injunction, the plaintiff does not have to overcome the hurdle of an exculpatory provision that, as permitted by 8 Del. C. Section 102(b)(7), exculpates directors from personal liability from monetary damages  for certain breaches of fiduciary duty.” (emphasis in original.)

The court also found a “sufficient likelihood of irreparable injury” because by deterring potential bidders, such as EMC, with deal protection measures, the resulting harm from such deterrents would be “incalculable,” (which is the word used by the court). Moreover, the court explained that it would be impossible to “unscramble the eggs” (the court’s phrase), by attempting to unwind the merger once it has been completed.

Finally, the court reasoned that injunctive relief may be the only relief reasonably available to shareholders for certain breaches of fiduciary duty in connection with the sale and control transaction, “particularly where the company has adopted a provision exculpating its directors from personal liability from monetary damages for breach of the duty of care.” (citing Lyondell Chemical Co. v. Ryan, 970 A.2d 235, 243-244 (Del. 2009) (recognizing the significant burden that a plaintiff faces to show that the board acted in bad faith by failing to reasonably inform themselves or otherwise carry out their fiduciary duties in a sale of control)).

Thus, the court concluded that in cases such as these, the only realistic remedy shareholders may have for certain breaches of fiduciary duty in connection with a sale of control transaction may be injunctive relief. The court scheduled a preliminary injunction hearing to be held in this case on August 13th at 10:00 a.m. in Georgetown, Delaware, scarcely two months after the complaint was filed in this case.  

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CME Group, Inc. v. Chicago Board Options Exchange, Inc., No. 2369-VCN (June 25, 2009), read opinion here. See several prior Chancery Court decisions in this case summarized here, including the court's approval of the Stipulation of Settlement in this class action. See, e.g., CME Group, Inc. v. Chicago Board Options Exchange, Inc., 2009 WL 1547510 (Del. Ch., June 3, 2009).

This most recent decision in this case addresses objections by those who were excluded from participating in the benefits conferred under the settlement because of their failure to comply strictly with the settlement’s conditions for eligibility.

The court placed the objections into five categories: (1) objectors who submitted untimely settlement claim forms; (2) objectors who failed to transfer their CME shares by the deadline--due to an oversight or error; (3) objectors who fell under both of the foregoing two categories; (4) objectors who were excluded based upon a determination by Class Counsel that they did not “beneficially own” the requisite shares needed to qualify; and (5) one miscellaneous objector.

The court reasoned that as part of its duty to “exercise its own business judgment as to the fairness of the settlement", it must also fulfill a corollary to that duty which is to “insure that the stockholders who are entitled to participate in the settlement are given a reasonable opportunity to file for and receive what is due to them.”

The court determined that whether the applicable standard for missing a filing deadline is either “excusable neglect” or “substantial compliance,” in either case the court found that the reasons for the missed deadline by those who wanted to participate was due to excusable, inadvertent error. (citing Mendich v. Hunt Int’l Res., Inc., 1981 WL 7629, at *2 (Del. Ch. Oct. 21, 1981)).

The court reviewed each of the other categories of objections in careful detail, and in general applied equitable principles to the extent that those who were excluded due to clerical errors or understandable administrative oversights were allowed to participate.

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The United States Supreme Court ruled today that white firefighters who were denied a promotion even though they scored higher on tests than minority counterparts, suffered violations of their civil rights. Though outside the normal scope of this blog, the issues addressed by the U.S. Supreme Court in this decision are so pervasive and so fundamental to the legal foundation on which our society is based, and are of such great concern to all businesses, that I provide below the official synopsis by the court of its opinion,  verbatim, with a link here  to the actual decision (with predictable dissenting opinions): 

RICCI, ET AL. v. DESTEFANO, ET AL.
No. 07–1428. Argued April 22, 2009—Decided June 29, 2009

New Haven, Conn. (City) uses objective examinations to identify thosefirefighters best qualified for promotion. When the results of such an exam to fill vacant lieutenant and captain positions showed thatwhite candidates had outperformed minority candidates, a rancorouspublic debate ensued. Confronted with arguments both for and against certifying the test results—and threats of a lawsuit eitherway—the City threw out the results based on the statistical racial disparity. Petitioners, white and Hispanic firefighters who passedthe exams but were denied a chance at promotions by the City’s re-fusal to certify the test results, sued the City and respondent officials,alleging that discarding the test results discriminated against thembased on their race in violation of, inter alia, Title VII of the Civil Rights Act of 1964. The defendants responded that had they certifiedthe test results, they could have faced Title VII liability for adoptinga practice having a disparate impact on minority firefighters. The District Court granted summary judgment for the defendants, andthe Second Circuit affirmed.

Held: The City’s action in discarding the tests violated Title VII.  Pp. 16–34.

(a) Title VII prohibits intentional acts of employment discrimina-tion based on race, color, religion, sex, and national origin, 42 U. S. C. §2000e–2(a)(1) (disparate treatment), as well as policies or practices that are not intended to discriminate but in fact have a dispropor-tionately adverse effect on minorities, §2000e–2(k)(1)(A)(i) (disparateimpact). Once a plaintiff has established a prima facie case of disparate impact, the employer may defend by demonstrating that itspolicy or practice is “job related for the position in question and con-sistent with business necessity.” Ibid. If the employer meets that burden, the plaintiff may still succeed by showing that the employerrefuses to adopt an available alternative practice that has less dispa-rate impact and serves the employer’s legitimate needs. §§2000e–2(k)(1)(A)(ii) and (C).   Pp. 17–19.

(b) Under Title VII, before an employer can engage in intentionaldiscrimination for the asserted purpose of avoiding or remedying an unintentional, disparate impact, the employer must have a strong basis in evidence to believe it will be subject to disparate-impact li-ability if it fails to take the race-conscious, discriminatory action. The Court’s analysis begins with the premise that the City’s actions would violate Title VII’s disparate-treatment prohibition absent somevalid defense. All the evidence demonstrates that the City rejectedthe test results because the higher scoring candidates were white.Without some other justification, this express, race-based decision-making is prohibited. The question, therefore, is whether the pur-pose to avoid disparate-impact liability excuses what otherwise would be prohibited disparate-treatment discrimination. The Court has considered cases similar to the present litigation, but in the contextof the Fourteenth Amendment’s Equal Protection Clause. Such cases can provide helpful guidance in this statutory context. See Watson v. Fort Worth Bank & Trust, 487 U. S. 977, 993. In those cases, the Court held that certain government actions to remedy past racial dis-crimination—actions that are themselves based on race—are consti-tutional only where there is a “strong basis in evidence” that the re-medial actions were necessary. Richmond v. J. A. Croson Co., 488 U. S. 469, 500; see also Wygant v. Jackson Bd. of Ed., 476 U. S. 267, 277. In announcing the strong-basis-in-evidence standard, the Wy-gant plurality recognized the tension between eliminating segrega-tion and discrimination on the one hand and doing away with all gov-ernmentally imposed discrimination based on race on the other. 476 U. S., at 277. It reasoned that “[e]videntiary support for the conclu-sion that remedial action is warranted becomes crucial when the re-medial program is challenged in court by nonminority employees.” Ibid. The same interests are at work in the interplay between TitleVII’s disparate-treatment and disparate-impact provisions. Apply-ing the strong-basis-in-evidence standard to Title VII gives effect toboth provisions, allowing violations of one in the name of compliance with the other only in certain, narrow circumstances. It also allows the disparate-impact prohibition to work in a manner that is consis-tent with other Title VII provisions, including the prohibition on ad-justing employment-related test scores based on race, see §2000e–2(l), and the section that expressly protects bona fide promotional ex-ams, see §2000e–2(h). Thus, the Court adopts the strong-basis-in-evidence standard as a matter of statutory construction in order to resolve any conflict between Title VII’s disparate-treatment and dis-parate-impact provisions.  Pp. 19–26.

(c) The City’s race-based rejection of the test results cannot satisfy the strong-basis-in-evidence standard. Pp. 26–34.

    (i) The racial adverse impact in this litigation was significant, and petitioners do not dispute that the City was faced with a primafacie case of disparate-impact liability. The problem for respondentsis that such a prima facie case—essentially, a threshold showing of a significant statistical disparity, Connecticut v. Teal, 457 U. S. 440, 446, and nothing more—is far from a strong basis in evidence thatthe City would have been liable under Title VII had it certified thetest results. That is because the City could be liable for disparate-impact discrimination only if the exams at issue were not job relatedand consistent with business necessity, or if there existed an equallyvalid, less discriminatory alternative that served the City’s needs but that the City refused to adopt. §§2000e–2(k)(1)(A), (C). Based on the record the parties developed through discovery, there is no substan-tial basis in evidence that the test was deficient in either respect. Pp. 26–28.
   (ii)The City’s assertions that the exams at issue were not job re-lated and consistent with business necessity are blatantly contra-dicted by the record, which demonstrates the detailed steps taken todevelop and administer the tests and the painstaking analyses of thequestions asked to assure their relevance to the captain and lieuten-ant positions. The testimony also shows that complaints that certainexamination questions were contradictory or did not specifically ap-ply to firefighting practices in the City were fully addressed, and that the City turned a blind eye to evidence supporting the exams’ valid-ity. Pp. 28–29.
    (iii) Respondents also lack a strong basis in evidence showing an equally valid, less discriminatory testing alternative that the City, bycertifying the test results, would necessarily have refused to adopt.Respondents’ three arguments to the contrary all fail. First, respon-dents refer to testimony that a different composite-score calculationwould have allowed the City to consider black candidates for then-open positions, but they have produced no evidence to show that thecandidate weighting actually used was indeed arbitrary, or that thedifferent weighting would be an equally valid way to determinewhether candidates are qualified for promotions. Second, respon-dents argue that the City could have adopted a different interpreta-tion of its charter provision limiting promotions to the highest scoring
applicants, and that the interpretation would have produced less dis-criminatory results; but respondents’ approach would have violated Title VII’s prohibition of race-based adjustment of test results,§2000e–2(l). Third, testimony asserting that the use of an assess-ment center to evaluate candidates’ behavior in typical job tasks would have had less adverse impact than written exams does not aidrespondents, as it is contradicted by other statements in the recordindicating that the City could not have used assessment centers for the exams at issue. Especially when it is noted that the strong-basis-in-evidence standard applies to this case, respondents cannot create a genuine issue of fact based on a few stray (and contradictory) state-ments in the record. Pp. 29–33.
  (iv) Fear of litigation alone cannot justify the City’s reliance on race to the detriment of individuals who passed the examinations andqualified for promotions. Discarding the test results was impermis-sible under Title VII, and summary judgment is appropriate for peti-tioners on their disparate-treatment claim. If, after it certifies the test results, the City faces a disparate-impact suit, then in light of today’s holding the City can avoid disparate-impact liability based onthe strong basis in evidence that, had it not certified the results, it would have been subject to disparate-treatment liability. Pp. 33–34.

530 F. 3d 87, reversed and remanded.

KENNEDY, J., delivered the opinion of the Court, in which ROBERTS, C.J., and SCALIA, THOMAS, and ALITO, JJ., joined. SCALIA, J., filed a concurring opinion. ALITO, J., filed a concurring opinion, in which SCALIA and THOMAS, JJ., joined. GINSBURG, J., filed a dissenting opin-ion, in which STEVENS, SOUTER, and BREYER, JJ., joined.

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Prof. Jayne Barnard on The Conglomerate blog writes here about Dante's masterpiece of literature called The Divine Comedy, and in particular her reference to Dante's Inferno and its 9th circle of Hell (the lowest) reserved for those who betray their friends. She uses this as an introduction to the sentencing today of Bernie Madoff, about which I don't plan to write (though she will), but the reference to Dante, and his classic book's relevance today--about 700 years after it was written, is worth noting.

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 In re: BEA Systems, Inc. Shareholders Litigation, No. 3298-VCL (June 24, 2009), read letter decision here.  A prior Chancery Court decision in this case was summarized here.

 This short 2-page letter decision addressed a request for attorneys' fees in a case that arose out of the acquisition of BEA Systems by Oracle Corporation. The case was filed in early 2008 but was dismissed by stipulation on grounds of mootness in January of 2009 while reserving jurisdiction to consider this current fee application. The basis for the fee request was that, after the complaint was filed, the company made two changes to is proxy materials to deal with misstatements pointed out in the complaint.. Since the changes were presumably a result of litigation efforts, it was argued that the right to recover fees following the mootness dismissal should be granted based on the line of cases originating with Chrysler v. Dann, 223 A.2d 384, 386-87 (Del. 1966).
The court found, however, that most of the time and costs spent on the litigation produced no benefit, especially in light of the fact that the court had rejected the large majority of claims at an initial hearing on a motion for preliminary injunction. Therefore, recognizing the imprecision involved, the court attributed “one quarter” of the time and costs spent as being attributable to the claims that resulted in the benefit. The court relied on the affidavits of counsel for fees at their normal hourly rate, and “applying a reasonable risk premium of 50%” calculated a fee award, with costs, of  $81,297.
 

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Lisa, S.A. v. Juan Jose Gutierrez Mayorga, No. 2571-VCL (Del. Ch., June 22, 2009), read opinion here.

Overview

This Chancery Court decision involves a 1992 sale of shares in a group of family-owned corporations organized under the laws of Guatemala and El Salvador. The plaintiff is a Panamanian corporation. The defendants are a Panamanian corporation, a Barbados corporation and two Delaware corporations. Also named is a Guatemalan national and resident, who is an officer and director.

The court concluded that the Delaware courts lack personal jurisdiction over any of the defendants other than the Delaware entities. Moreover, the court concludes that a number of the counts in the complaint failed to state a claim upon which relief can be granted against either of those Delaware entities and that, in addition, all claims against them must be dismissed on grounds of forum non conveniens.

Legal Analysis

The court discusses the burden that the plaintiff must bear to show a basis for the court’s exercise of jurisdiction over non-resident defendants when a motion to dismiss is filed under Chancery Court Rule 12(b)(2). The court explained that in addition to showing some statutory basis for the assertion of jurisdiction over non-resident defendants, the plaintiff must additionally establish that the exercise of jurisdiction over the non-resident defendants comports with the requirements of the Due Process Clause of the Fourteenth Amendment to the United States Constitution.

In rejecting the request for jurisdictional discovery (see case citation at footnote 19), the court also explained why there was not a basis for jurisdiction under either the general long arm statute at Section 3104 of Title 10 of the Delaware Code, nor was there jurisdiction pursuant to Section 3114 of Title 10 of the Delaware Code that relates to jurisdiction over officers and directors of Delaware corporations.

This decision provides a helpful discussion of the statutory and public policy basis for imposing jurisdiction under Sections 3114 and 3104, and the court explains why neither of those statutes allow for the imposition of jurisdiction in this case and why therefore the motion to dismiss was granted.

Moreover, the court explained that:  “where, as here, Delaware courts have jurisdiction over but a few of the interested parties, and there is a court in another jurisdiction capable of exercising jurisdiction over all of the interested parties, this court has dismissed the action for improper venue.” Parenthetically, the court considered testimony that the plaintiff did not want to use the courts in Guatemala based on alleged corruption in those courts. However, the court observed that the record only referred to alleged corruption in the criminal courts of Guatemala as opposed to the civil courts in that country. Nevertheless, the court concluded that based on forum non conveniens the court reasoned that the case should be dismissed.
 

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