Chancery Determines that Electronically Stored Information and Personal Emails of Directors Must Be Provided to Stockholders

The Delaware Court of Chancery published an opinion this week that includes electronically stored information as part of the “books and records” that a stockholder can demand from a corporation and its directors and officers. Amalgamated Bank v. Yahoo!, Inc., C.A. No. 10774-VCL (Del. Ch. Feb. 2, 2016). It also addresses the duties of directors in connection with reviewing and approving executive compensation packages. (Plus: it features quotations from a law review article I co-authored on Section 220, as noted below.)

The treasure trove of corporate law jewels in this opinion, weighing in at 74 pages, can easily justify commentary of similar length. Those who want to keep abreast of key Delaware corporate law principles need to make the time to read the opinion in its entirety, but for present purposes I will provide bullet points with highlights.

  • Although this decision includes a comprehensive analysis of the prerequisites for demands under Section 220 of the Delaware General Corporation Law (DGCL) regarding the right of a stockholder to obtain books and records of a company, a fuller understanding of this opinion can be be obtained by comparing it to other recent decisions on Section 220, including the recent Delaware Supreme Court ruling in Abbvie which rejected a Section 220 request based on an exculpatory clause in the corporate charter in that case, and which was highlighted on these pages. The Yahoo decision should also be juxtaposed with a decision a day earlier by Vice Chancellor Noble which limited the scope of records that were demanded by a director. See Chammas v. NavLink, Inc., C.A. No. 11265-VCN (Del. Ch. Feb. 1, 2016). The Chammas opinion directly addresses the rights of a director to books and records but is not as expansive in ordering emails or records of individual officers, and does not address ESI as the parties appear to have agreed on that issue. The Yahoo opinion should also be contrasted with the Supreme Court decision in the Wal-Mart case, highlighted on these pages, which required the production of extensive information regarding board deliberations, including an exception to the attorney/client privilege.
  • One of the most important reasons why this case is destined to be often cited, and deserves a prominent position in the pantheon of seminal Delaware decisions, is because, to my knowledge, it remains the first Delaware opinion to directly interpret DGCL Section 220 in a manner that explicitly requires the production of electronically stored information (ESI) based on the statutory language. Although the court lists quite a number of Delaware decisions in footnote 42 that have ordered the production of emails in connection with Section 220 requests based on the facts of those cases, as far as I am aware, this is the first Delaware opinion that expressly addresses the obligation of a company pursuant to Section 220 to produce ESI as compared to requiring the production of just emails. But I don’t think that prior cases explicitly interpreted the statute to require ESI production (which is broader than emails).
  • This opinion, consistent with it statutory interpretation, rejected the argument by Yahoo that inspection rights under Section 220 are limited to paper records. See page 20. In doing so, I am happy to say that the court in this opinion quoted from a law review article co-authored by yours truly which argued that the court should include ESI as part of the obligation to produce records under Section 220. See 37 Del. J. Corp. L. 163, 165 (2012), highlighted on these pages here.
  • Although the Wal-Mart decision referred to above required the production of various emails, that decision as I recall, is fact specific and did not expressly include in the same direct and comprehensive fashion as this opinion, with the detailed analysis and supportive reasoning that this opinion did, an interpretation of Section 220 as requiring ESI (which is broader than email only) to be included in a production of “books and records.”
  • Importantly for those needing to understand the scope of Section 220, this opinion also required the production of relevant personal emails by officers and directors to the extent that they were responsive to the demand (i.e., emails on a non-business, personal email account). See footnote 43.
  • Although there are hundreds of Delaware decisions interpreting Section 220, many of them highlighted on these pages over the last ten years, this opinion describes the prerequisites of Section 220 and the nuances and scope of Section 220 demands more thoroughly than any other Section 220 opinion that I can recall. If a person interested in learning about Section 220 were to read only one opinion on Section 220, in an effort to understand all of its nuances as requirements, this should be that opinion.
  • In connection with its discussion of Section 220, the court also provides advice to directors regarding their fiduciary duties when reviewing and approving an executive compensation proposal. See pages 42 and 43.
  • The court also clarifies that the prerequisite of needing a credible basis to allege mismanagement as a threshold requirement for Section 220 is not the same as requiring or assuming that one will prevail on such a claim, nor is the Section 220 standard whether it is reasonably conceivable that one could prevail on such a claim, as in a Rule 12(b)(6) motion.
  • Lastly, the court imposed a condition on the production that all the documents that the court ordered Yahoo to produce in this opinion will be incorporated by reference into any plenary complaint that is filed by the plaintiffs.

Supplement: California lawyer Keith Paul Bishop and the venerable Professor Bainbridge, observe that if Nevada law were to apply to this set of facts, the result would likely be much different.

Chancery Awards Fees for Therapeutic Benefit Originating in a Ruling That Bylaw Amendment Not Applicable to Prior Stockholders

In a recent ruling from the bench, the Court of Chancery approved fees for a therapeutic benefit that had its genesis in a ruling from March 2015, that was previously highlighted on these pages in the matter of Strougo v. Hollander, and which determined that a bylaw amendment would not apply to former stockholders when adopted by the board on a date after the plaintiff-stockholder was cashed out in a reverse stock split. When the transcript of the settlement hearing on Feb. 3, 2016, becomes available I will upload it on this blog, but the key aspects of this ruling for future reference include the following bullet points:

  • The common fund that was the result of a negotiated settlement was created in the amount of $127,000 and although the court awarded 15% of that fund for attorneys’ fees, the court first “grossed-up” the amount. The net result of that “gross-up” was more in fees as compared to taking 15% of the $127,000. That is, the court added the 15% of the $127,000 to the amount of the common fund before applying the 15% to calculate the fee.
  • The court also awarded $333,000 for the fees attributable to the therapeutic benefit originating in the winning of a motion last year, highlighted on these pages and hyperlinked above, in which the court invalidated a fee shifting bylaw as applied to the former stockholders, even though no decision was made on the facial validity of that bylaw and no ruling was made regarding the substantive issues in the challenged reversed stock split. The ruling on the applicability retroactively of that bylaw did not depend on the particular type of bylaw it happened to be, but the fact that it was a fee-shifting bylaw brought more attention, and dicta, to that prior decision.
  • The amount of $333,000 is notable by comparison to the much smaller amount of the common fund obtained as a result of a settlement on the merits of the case, which was made possible or more likely by the ruling which allowed the case to proceed in light of the fee shifting bylaw which was held to be inapplicable to the former stockholders.
  • The amount of the fee of $333,000 for a therapeutic benefit appears identical to a fee award that was approved in a case involving the withdrawal of forum selection bylaws. In a case styled In Re Colfax, the transcript refers to that fee award in the other bylaw settlement case. The awkward and circuitous citation results from the fact that the Colfax transcript refers to a stipulated settlement in another case that I only have documented in consolidated stipulations, but those stipulations don’t mention the approved amount of the fee (as compared to a higher stipulated amount.) Refer to the stipulations of settlement in consolidated cases involving the withdraw of forum selection bylaws.
  • One takeaway from this bench ruling of Feb. 3, 2016, in the Strougo matter, is that a fee award for a therapeutic benefit can be several times larger than the amount of the common fund created for stockholders in the same case, and the lack of proportionality between the two amounts is not an impediment to the amount of the fee award for the therapeutic benefit. (Yours truly was one of the defense counsel in the Strougo matter.)

Chancery Sounds Death Knell for Most Disclosure-Only Settlements

The Delaware Court of Chancery recently issued a seminal decision that may signal the end of (at least) most disclosure-only settlements in class action cases that challenge mergers. In Re Trulia Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016), is must reading for those interested in class action settlements in general, and disclosure-only settlements in particular.

Michael Greene of Bloomberg BNA published a helpful overview of the case (with a few quotes from yours truly.) Professor Bainbridge also provides scholarly insights. Ted Mirvis provides expert commentary on the case as well.

Delaware Supreme Court Rejects Section 220 Claim

A recent decision of the Delaware Supreme Court affirmed a ruling of the Court of Chancery which rejected a claim under DGCL section 220 for books and records related to the aborted “inversion” merger of Abbvie, Inc. By Order dated Jan. 20, 2016, in Southeastern  Pennsylvania Transportation Authority v. Abbvie, Inc., Del. Supr., No. 239, 2015 (Del. Jan. 20, 2016), a majority of the en banc court explained that the stockholder did not present a credible basis of a claim for money damages that were not exculpated by the immunizing provisions of DGCL section 102(b)(7). Two members of the high court disagreed with the majority. Delaware’s high court historically has featured few dissenting opinions, but rarer still is a split in an Order of the court. A prelude to the oral argument in the case was provided on these pages earlier.

Delaware courts often instruct practitioners representing stockholders to use DGCL section 220 as one of the “tools at hand” to obtain books and records from a company prior to filing a plenary action. This decision is an example of why it is not always a simple exercise to use Section 220. Rather, as a “tool”, Section 220 in my experience can be more akin to a blunt instrument as compared to a precise implement.

Frank Reynolds of Thomson Reuters penned an article available at this link in which he provides more extensive background details and commentary about this case, in which he quotes yours truly.

Chancery Dismisses Non-Exculpated Claim with Prejudice

In the recent Court of Chancery opinion in the matter of In re EZCORP Inc. Consulting Agreements Derivative Litigation, C.A. No. 9962-VCL (Del. Ch., Jan. 15, 2016), Delaware’s equity court explains in scholarly detail the doctrinal underpinnings of the due process rights of non-parties to a case, including members of a class that have not been certified. Those considerations prevent a dismissal with prejudice from binding anyone but a named plaintiff in a case where a derivative action has not yet been authorized through the denial of a motion to dismiss under Rule 23.1 or a class has not been certified. The procedural context of this case was that a motion to dismiss had been briefed but prior to oral argument the Delaware Supreme Court issued its opinion in the matter of In re Cornerstone Therapeutics, Inc. Stockholder Litigation, 115 A.3d 1173 (Del. 2015) (highlighted on these pages).

In Cornerstone, Delaware’s high court held that “a plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct – – be it Revlon, Unocal, the entire fairness standard, or the business judgment rule.” Cornerstone, 115 A.3d at 1175 – 76 (footnotes omitted). The existence of an exculpatory provision in light of Cornerstone, operates more in the nature of an immunity as compared to an affirmative defense.

This decision explains the interfacing between Court of Chancery Rule 41(a)(1) and Court of Chancery Rule 15(aaa). In essence, when a court dismisses a complaint after full briefing in the absence of a timely motion to amend, the dismissal shall be with prejudice unless the plaintiff can show good cause why the dismissal with prejudice would not be just under all the circumstances. When confronted with a motion to dismiss, Rule 15(aaa) presents a binary choice at that point. The plaintiff can either amend the complaint or file an answering brief. After an answering brief is filed, the rule generally compels a court to dismiss the case with prejudice.

The noteworthiness of this opinion is, in part, due to the scholarly research and reasoning that supports the explanation about why the dismissal in this matter is with-prejudice only as to the named plaintiff. In addition to the application of the Court of Chancery rules and substantive Delaware law, the court cites to decisions of the United States Supreme Court based on the Due Process Clause of the United States Constitution that addresses why dismissal should not apply to a “nonnamed class member” before the class is certified. See Smith v. Bayer Corp., 564 U.S. 299, 131 S.Ct. 2368 (2011).

The Court of Chancery explained that the Due Process Clause likewise prevents a judgment from binding a corporation or other stockholders in a derivative action until the action has survived a Rule 23.1 motion to dismiss or the board of directors has given the plaintiff authority to proceed.

The court in this matter concluded by explaining that the dismissal would be with-prejudice because good cause did not exist to make the dismissal without-prejudice. The court allowed for the possibility that the with-prejudice dismissal could be revisited in the future if a “compelling reason to do so appears.”

Chancery Clarifies Director Liability for Corporate Acts and Enforceable Provisions Barring Misrepresentation Claims

A noteworthy opinion by the Delaware Court of Chancery should be read by all those who need to be, or should be, concerned about the latest iterations of Delaware law that elucidate the circumstances in which:

(i) a director may be exposed to personal liability even when ostensibly acting on behalf of a corporation in her official corporate capacity, for example, when signing a document as a corporate officer;

(2) Delaware courts will enforce a provision in an agreement that expressly states that: (a) the parties are not relying on any statements (or omissions) outside the four corners of an agreement–sometimes referred to as an anti-reliance clause; or (b) the parties to an agreement specifically limit the universe of information relied on as enumerated in an agreement. Both such provisions, if carefully drafted, will be enforced, as explained in this decision, in order to limit or bar claims that either misrepresentations or omissions outside the four corners of an agreement form the basis for a claim. As this ruling demonstrates, however, such restrictive clauses will not bar claims that the representations in the agreement itself were breached or fraudulently made.

An article that explains that case in more detail was published by yours truly in the current issue of Directorship, the magazine of the National Association of Corporate Directors. The name of the case is Prairie Capital III, L.P. v Double E Holding Corp., C.A. No. 10127-VCL (Del. Ch. Nov. 24, 2015).

Chancery Upholds Disputed Valuation Based on Contract Rights

A recent decision of the Delaware Court of Chancery applies a practical standard to uphold the valuation of shares based on a procedure in an LLC Agreement that called for a third-party to perform a valuation in connection with the right to put shares. In PECO  Logistics, LLC. V. Walnut Investment Partners, L.P., C.A. No. 9978-CB  (Del. Ch. Dec. 30, 2015), there was no challenge to the independence of the third-party valuation firm, but the LLC Agreement did not supply a standard of review for disputes about how the valuation was done. This opinion is useful for those who need to know the standard the Delaware courts will apply for challenges to a valuation performed pursuant to common contractual provisions that allow for valuations by third-parties but which do not address how to resolve disputes about the results of the valuation or how the valuation was performed.

Delaware Supreme Court Pens Must-Read Contract Decision

SIGA Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 20, 2015 (Dec. 23, 2015). Why This Case Is Noteworthy: Any lawyer interested in the latest iterations of contract law by the Delaware Supreme Court needs to read this opinion. More specifically, any lawyer who advises clients on the binding nature or enforceability of letters of intent, or preliminary agreements, for example, in connection with mergers, needs to read this opinion. The Delaware Supreme Court affirmed a decision from the Court of Chancery in which two types of preliminary agreements were upheld as enforceable. The first, known as a Type I agreement, involves an agreement where the parties have consented to the essential terms but may not have formalized their agreement in a fully executed document. The next type of enforceable preliminary agreement is known as a Type II. This category of preliminary agreement refers to an “agreement to negotiate in good faith,” when all essential terms have not been agreed to, and that was the type of preliminary agreement involved in this opinion in which the Supreme Court upheld expectation damages of $113 million.

Procedural history: This decision is the second opinion by the Delaware Supreme Court in this case. Highlights of the prior Delaware Supreme Court opinion in this case, and a few of the multiple decisions by the Delaware Court of Chancery in this case have been highlighted on these pages, and are available at this hyperlink.

Key facts: The factual basis for this decision is a merger agreement entered into between the parties which provided that if the merger was not consummated for whatever reason, then the parties would negotiate in good faith to enter into a license agreement. The merger was not consummated. The Court of Chancery found that SIGA, in bad faith, refused to negotiate a license agreement when the merger was terminated. Parenthetically, after the judgment was entered by the trial court, SIGA filed for bankruptcy. The facts are available in the prior Delaware opinions highlighted at the above link, and also are described in the first 37-pages of the 57-page majority opinion.

Also notable about this decision is that it features a divided Delaware Supreme Court which is not common, as well as a 28-page dissent that is quite vigorous in its opposition.

Key Takeaways: One of the more notable takeaways from this seminal contract pronouncement by Delaware’s high court is on the issue of contract damages, and the distinction between the need to prove the existence of damages with reasonable certainty, which must be distinguished from a completely separate analysis of the amount of damages. Although expectation damages for breach of contract must be proven with reasonable certainty, and no recovery can be had for loss of profits which are determined to be uncertain contingent, conjectural, or speculative, it is also true that less certainty is required of the proof establishing the amount of damages.

As the Supreme Court explained: “The injured party need not establish the amount of damages with precise certainty where the wrong has been proven and injury established.” The trial court found that PharmAthene firmly established the fact of damages. The Supreme Court upheld the Court of Chancery’s statement of the law that where the proof of the fact of damages is certain, the “proof of the amount can be an estimate, uncertain or inexact.” See footnote 78.

Wrongdoer Rule: The court also explained the “wrongdoer rule” as it applies to breach of contract damages. The wrongdoer rule applies where the wrongdoer’s breach contributed to uncertainty over the amount of damages. Where the existence of damages is certain, and the only uncertainty relates to the amount, “the burden of uncertainty as to the amount of damages falls upon the wrongdoer.” See footnote 132. Moreover, the court may consider post-breach evidence when determining the reasonable expectation of the parties in connection with calculating damages, and may consider the willfulness of the breach.

In addition, where there is a willfulness involved in the breach, the court may take that into account in deciding whether to require a lesser degree of certainty. Also: “Damages need not be calculable with mathematical accuracy and are often at best approximate.” See footnote 138.

Dissent: The spirited dissent offers a scholarly contrary perspective but highlights of it will not be included in this short post as it does not currently represent the prevailing law in Delaware. Nonetheless, the heavily footnoted dissent remains worth reading for those interested in a fuller understanding of the issues and the law addressed in this case.


Chancery Will Decide Claims Based on Law of India

The Delaware Court of Chancery in Pipal Tech Ventures Private Limited v. MoEngage, Inc., C.A. No. 10381-VCG (Del. Ch. Dec. 17, 2015), applies the overwhelming hardship standard to deny a motion to dismiss based on a forum non conveniens argument even when the location of most of the events, witnesses and applicable law support the litigation taking place in a forum in India.

Basic Facts.

The key facts of the case involved an alleged theft of intellectual property by persons resident in India and subject to employment contracts governed by Indian law. Those employment agreements require disputes regarding those contracts to be litigated exclusively in the courts of the country of India. Nonetheless, the defendant corporation, which allegedly “possessed” the purloined intellectual property, was a Delaware corporation. The individuals resident in India who allegedly stole the software at issue were not subject to Delaware jurisdiction but pursuant to both the Hague Convention and Indian law, were subject to compulsory process so that their depositions could be compelled.

Applicable Standards

The court applied the six factors recited in the Delaware Supreme Court case of General Foods Corp. v. Cryo-Maid, Inc. Those factors include the relative ease of access to proof. Although in light of modern technology this factor is not as meaningful, this factor still supported the defendant’s motion to dismiss in light of virtually all the documentary and deposition evidence being in India. The fact that compulsory process is available in India favored the plaintiff, however.

The overwhelming hardship factor is a high threshold but not an impossible standard to meet. Notably, the mere fact that the law of a foreign country needs to be applied and relevant documents need to be translated and foreign law experts need to be retained at trial, does not, per se, satisfy the overwhelming hardship standard especially where, as in this case, the law of that foreign country on the issue at hand is well settled. The recent Delaware Supreme Court case in Martinez, by contrast, held that where there is a novel issue of another sovereign, that issue might be best determined by the courts of that sovereign country.

Key Takeaway

One final takeaway from this case that supported the reasoning of the court in denying the motion to dismiss was the public policy that Delaware has a powerful interest in preventing Delaware entities from being used a vehicles for fraud. The legitimacy of Delaware as a chartering jurisdiction depends on it. The allegations that the persons alleged to have stolen the trade secrets involved in this case, allegedly used a Delaware entity to do so, supported the selection by the plaintiff of Delaware as a forum in which to litigate the matter. See footnote 95.

Chancery Grants Fees to Class Settlement Objector

In re Riverbed Technology, Inc. Stockholders Litigation, Consol. C. A. No. 10484-VCG (Del. Ch. Dec. 2, 2015). This short Delaware Court of Chancery decision is noteworthy to the extent that it grants modest fees to a law professor who objected to a class action settlement although the settlement was ultimately approved. The court weighs the pros and cons of granting any amount of an award to an objector who made important arguments about the problems with “disclosure only” settlements, but in the end did not prevent the class action settlement from being approved.

The court realized that any award to the objector might have the net result of encouraging other objectors even if their objections did not prevent the settlement from being approved by the court. The amount awarded in this case was modest enough that it should not be considered an incentive and is unlikely to entice objectors or their lawyers to incur the substantial amount of time and effort required to present formal objections and oral arguments in cases such as these. To that extent, the court’s treatment of this matter was Solomonic in many ways. This decision can be seen as another indication that what are known as “disclosure only settlements” are becoming more and more challenging for those plaintiffs and shareholders who seek to have those types of settlements approved by the court.

A prior decision in this case was highlighted on these pages.