Court Rejects Post-Closing Adjustment Claim

The Court of Chancery recently explained in a post-trial opinion why a post-closing adjustment claim seeking a milestone payment was rejected in light of a careful examination of the meaning of an ambiguous term in the milestone trigger provision. This opinion is helpful for those who want insights into how a Delaware court applies contract interpretation principles to extrinsic evidence to determine the meaning of a disputed term in a post-closing earn-out dispute. Shareholder Representative Services, LLC v. Gilead Sciences, Inc., C.A. No. 10537-CB (Del. Ch. Mar. 15, 2017).

Basic Background: The background facts of this case involve a merger of two pharmaceutical companies. Calistoga Pharmaceuticals, Inc. was purchased by Gilead Sciences, Inc. in 2011 pursuant to a merger agreement which included milestone payments based on certain triggers.  After considering the evidence presented at trial, the court held that Gilead is not required to pay a $50 million milestone payment under the terms of the merger agreement.  The court provided an extensive discussion of esoteric medical and pharmaceutical terms, and aspects of FDA approval for products that either ameliorate or cure a particular disease.

The core dispute in this case according to the court: “boils down to the meaning of essentially one word – – ‘indication’ – – as used in an 84-page merger agreement.”  The court explained in its 80-page opinion why Gilead’s interpretation of that word prevailed.

Key Principles and Takeaways:

In order to determine the correct meaning of the word in dispute, and the parties’ intent pursuant to the agreement, the court considered extrinsic evidence such as draft merger agreements, emails among the negotiators on opposite sides of the negotiating table, and emails among colleagues for each party, both before and after the closing, which provided an insight into how each party viewed the meaning of the disputed term.

The court includes a recitation of basic contract interpretation principles such as a reminder that Delaware follows the objective theory of contracts. Also useful to commercial litigation practitioners is the court’s discussion of what type of extrinsic evidence is allowed when provisions in an agreement are deemed ambiguous. See slip op. at 43-45.

Especially notable is a contract interpretation principle of Delaware law that is not commonly known, explained by the court as follows: There is no need for a party to convince the court that “its position is supported by every provision or collection of words in the agreement.” See footnote 175.

Although it did not play a role in its decision, the court observed that the phrase “commercially reasonable efforts” was defined in the agreement. Few Delaware opinions have authoritatively discussed commercially reasonable efforts, as explained in a Delaware decision that was highlighted on these pages.

The court explained that “in considering extrinsic evidence, the court should uphold, to the extent possible, the reasonable shared expectations of the parties at the time of contracting. In giving effect to the parties’ intentions, it is generally accepted that the parties’ conduct before any controversy has arisen is given ‘great weight’”

In addition, the court emphasized that “ascertaining the shared intent of the parties does not mandate slavish adherence to every principle of contract interpretation.” Instead, the following instruction was provided: “Contract principles that guide the court – – such as the tenet that all provisions of an agreement should be given meaning – – do not necessarily drive the outcome.  Sometimes apparently conflicting provisions can be reconciled . . ..”

Practical Guidance in Opinion:

The burden of proof that must be satisfied at trial was described, see slip op. at 42, and the decision provides practical guidance for litigators to the extent that it discusses the type of extrinsic evidence that the court found persuasive for purposes of determining the intent of the parties in their use of one word in this case that would have triggered a milestone payment.  The court observed that both parties used the word “indication” as synonymous for “disease” during their negotiations.  An interpretation of the word “indication” was the determining factor in the case.  The court described and relied on emails between the key executives for each side exchanged during the negotiations, as well as emails among executives for each party after the closing took place.

Anecdotally, I often make the observation that any merger agreement or agreement for the sale of companies that includes a post-closing adjustment or other milestone payment will almost invariably lead to litigation. This decision is good evidence supporting that anecdotal observation.  Those litigating such a case will find this opinion a helpful guide for how the court approaches these issues in a post-closing adjustment dispute.

Chancery Enforces Key Litigation Rules

Why noteworthy: All those who litigate in the Delaware Court of Chancery need to read an important opinion issued yesterday that enforces key litigation rules by way of granting a motion to compel discovery replies. The court, in the case styled In Re Oxbow Carbon LLC Unitholder Litigation, Consol. C.A. No 12447-VCL (Del. Ch. March 13, 2017), deemed waived a multitude of “non-substantive, generic” objections made to providing discovery responses, based on the deficiencies the court found in those objections. Although prior rulings of the court have similarly enforced the same discovery standards, see, e.g., recent case highlighted here, and synopsis of earlier decision here, this opinion provides comprehensive and formal additional guidance regarding the doctrinal underpinnings of the court’s conclusions and the reasons for striking the objections, with copious citations to Delaware case law and scholarly articles. The opinion includes reference to federal cases and commentary that are instructive because the Chancery Rules of Procedure are based on the federal rules of civil procedure.

Bottom line: This decision provides clear “step by step” instructions for litigators who want to avoid waiver of objections to discovery requests, and waiver of claims of privilege and work product. Nonetheless, as an anecdotal observation, it remains less than unequivocally certain that all members of the Delaware judiciary will strictly enforce the standards explained in this opinion–with the same vigor or rigor as applied in this decision–even though the same rules involved in this case and the same cited authority are applicable in other trial courts in Delaware. I’m also willing to bet that a large percentage of practitioners do not follow religiously the standards enforced in this decision–and are never challenged via a motion to compel.

Key principles/takeaways from this decision:

  • Chancery Court Rule 26(b)(1) is the starting point for an analysis about what is “discoverable”. The “spirit of Rule 26(b) calls for all relevant information, however remote, to be brought out for inspection not only by the opposing party but also for the benefit of the Court….”
  • When a party objects to discovery, “the burden is on the objecting party to show why and in what way the information requested is privileged or otherwise improperly requested.”
  • Once the requesting party provides “some minimal” justification for the request, the burden shifts to the responding party to demonstrate why discovery should be limited or foreclosed. See footnote 2 for cases cited.
  • Three requirements for a valid objection to discovery requests: (i) The objection must be specific; (ii) it must explain why it applies on the facts of the case to the request being made; (iii) if a party is providing information subject to the objection, the party must articulate how it is applying the objection to limit the information it is providing. Moreover, objections must be “plain enough and specific enough so that the Court can understand in what way the discovery is claimed to be objectionable.” (citing Van de Walle, 1984 WL 8270, at *2.)
  • Each of the challenged objections was reviewed, and “generic, non-substantive objections” such as assertions that the requests were “overly broad”, excessive or “unduly burdensome” or not relevant, were overruled. Rather, in order for such objections to be valid, the objecting party needs to “submit affidavits” or “offer evidence” revealing the nature of the burden.
  • Likewise, objections asserting “vague or ambiguous” questions were overruled because “they should have explained in what way the terms were giving them trouble, interpreted the terms in a reasonable and constructive way, and set our in their responses how they were interpreting them.”
  • A bare assertion of privilege will not suffice. Privilege cannot be properly asserted unless a party provides “sufficient facts as to bring the identified and described document within the narrow confines of the privilege.” Separately, privilege in this case was also waived because the facts sought to be discovered were “at issue” in the litigation, and the “truthful resolution of [those facts] requires an examination of the confidential communications.”
  • Work product likewise cannot be protected by invoking “in anticipation of litigation” as a “formulaic set of magic words” without specifying the litigation involved and satisfying the following requirements on a privilege log: 

(a) the date of the communication, (b) the parties to the communication (including their names and corporate positions), (c) the names of the attorneys who were parties to the communication, (d) [a description of] the subject of the communication sufficient to show why the privilege applies, as well as [the issue to which] it pertains…. With regards to this last requirement, the privilege log must show sufficient facts as to bring the identified and described document with the narrow confines of the privilege. Slip op. at 11 (citation omitted).

  • Work product was waived in this case because the log did not satisfy the foregoing requirements. In addition, “routine investigations” are not generally protected by work product.

In sum, many examples recited in this opinion of “non-substantive, generic” objections (that I know are commonly used by many litigators), were overruled as invalid, such as objections based on relevance, an unspecified assertions that the requests were overly broad, overly burdensome, or ambiguous.

Chancery Determines Rightful LLC Manager and Awards Fees

A recent Delaware Court of Chancery opinion is notable for its post-trial analysis, based on a summary proceeding, of who the rightful manager of an LLC was. The court also shifted attorneys’ fees based on the bad faith exception. Ensing v. Ensing, C.A. No. 12591-VCS (Del. Ch. March 6, 2017)

Background: The introduction to the opinion begins with the idyllic observation of a couple who “made the dream of many a reality: they acquired a picturesque vineyard in Italy and moved there with their two children to operate a winery and boutique hotel on the property.”  The businesses operated indirectly through two Delaware limited liability companies.  The wife was both sole manager and member of one of the entities, and “through that entity, was manager of the other.”  Her husband was neither a member nor a manager of either entity.

Eventually the marriage ended bitterly, after which the husband purported to remove his former wife and appoint himself as manager of the entities. He then engaged in a series of transactions intended to divest his former wife of her interest in the winery and the hotel.  The wife initiated summary proceeding pursuant to 6 Del. C. Sections 18-110 and 18-111 to obtain declarations regarding the rightful owners and the managers of the entities. (DGCL Section 225 is the corporate analog to Section 18-110.)

Key Principles from the Opinion:

One simplistic way to summarize the legal discussion in this opinion is to make the observation that the husband was never properly documented as a manager or a member of the LLCs involved, and his efforts to remove his ex-wife as a manager, and thereafter attempt to transfer assets, were based on fraudulent documentation which, of course, was ineffective.

Section 18-110 of Title 6 of the Delaware Code provides that any member or manager may apply to the Court of Chancery for a determination of the validity of any removal of a manager of a limited liability company and the right of any person to continue as a manager. The ex-wife in this former business venture sought a declaration under Section 18-110 that the following actions taken by her ex-husband were void:  (1) his removal of her as a manager and appointment of himself as a manager; (2) his transfer of 70% interest; and (3) his transfer of voting control.  She won on all three counts.  First, the court rejected summarily the argument that, notwithstanding a clear and unambiguous operating agreement, there was some relevance to the fact that a non-manager provided the “financial impetus behind the acquisition and operation of the vineyard” or that he was a “de facto manager.”

In addition, a tardy attempt to request judicial notice of foreign law under Rule 202(e) of the Delaware Rules of Evidence was unsuccessful in part because the rule was not complied with. The rule requires that a party wishing to rely on foreign law needs to satisfy its burden of proving the substance of the foreign law and providing adequate notice to the opposing party, neither of which was done in this case.

The court also observed that an effort to schedule a meeting was ineffective. Instead of sending a notice of the meeting where the other party was residing, the notice was sent to a registered agent in Delaware, and the other party did not receive the notice prior to the meeting.  Therefore, the actions taken at the meeting, among other reasons, were void as a matter of law for failure to give proper notice of the meeting.

The court shifted fees for two thirds of the fees incurred by the plaintiff based on the bad faith exception to the American Rule. The court found that the defendant engaged in subjective bad faith conduct both prior to and during the litigation.  For example, the court found that frivolous positions were repeatedly advanced and documents were presented and relied on that were not authentic.  Motions to compel discovery were necessary and status quo orders of the court and discovery orders were not complied with on more than one occasion.

Notably, the court referred to what has been described in prior cases as the “pizza principle.” As outlined in connection with prior decisions highlighted on these pages, in essence, the principle provides that if a party challenges the amount of fees awarded to the other side, it will be required to produce its own billing records and fee amounts for purposes of comparison.

Chancery Orders Predictive Coding to Assist E-Discovery Process

Alexandra D. Rogin, an Eckert Seamans associate, prepared this overview.

The Chancery Daily recently reported on the Court’s order in OSI Restaurant Partners, LLC v. United Ohana, LLC, C.A. No. 12353-CB (Del. Ch. Jan. 27, 2017) (Order), requiring the parties to use predictive coding to assist the plaintiff in expeditiously producing responsive documents.

As is often the case, the OSI parties were faced with sorting through voluminous documents during the discovery phase of litigation.  The plaintiff had belatedly produced a large volume of documents without adequately reviewing for relevancy and confidentiality.  As a remedy in connection with the defendant’s motion to compel, the Court ordered use of predictive coding, which the parties had suggested, to ascertain relevancy.

It was apparently relayed to the Court that no party in Delaware had yet used predictive coding, so the parties would be the first to go through the process.  Not so.  However, the parties would need to undergo training and extensive collaboration before making use of this technology.

Contrary to the belief that the use of predictive coding is a rarity in Delaware, at least some firms, including Eckert Seamans, have been using this discovery aid for quite some time.  Indeed, our firm has been using this tool (also called computer or technology assisted review) to help sort through hundreds of thousands of documents with accuracy, in far less time, and resulting in less cost to our clients.  A 2012 decision where Vice Chancellor Laster suggested the use of computer assisted review was covered on this blog here.

Technological advances bring opportunities to better serve our clients.  BNA Bloomberg published an article late last year regarding the benefits of technology assisted review in its Digital Discovery & e-Evidence section here.  As discussed by the article, predictive coding, a new but not unheard of technology, can help attorneys to provide more efficient and quality representation to their clients.

Chancery Upholds Merger Transaction Approved by Majority Shareholder Vote

Alexandra D. Rogin, an Eckert Seamans associate, prepared this overview.

In the Delaware Court of Chancery decision captioned, In re Merge Healthcare Inc. S’holders Litig., C.A. No. 11388-VCG (Del. Ch. Jan. 30, 2017), Vice Chancellor Glasscock applied the business judgment rule and dismissed an action for failure to state fiduciary-related claims.  This opinion is important because it highlights the deferential standard afforded to directors when the transaction at issue is approved by a vote of a majority of disinterested, uncoerced shareholders.

Background: This action arose from IBM’s acquisition of Merge Healthcare, Inc. (“Merge”).  The merger was supported by a vote of a majority of Merge’s stockholders.  However, the plaintiffs, former Merge stockholders (“Plaintiffs”), alleged that the sale process was improper.  Because Merge did not include an exculpation clause in its charter (a rarity), the defendant directors (the “Directors”) were potentially exposed to liability for both duty of loyalty and duty of care violations.

Plaintiffs’ Allegations:  Plaintiffs alleged that the Directors violated their duties of care and loyalty by putting their own personal interests first, and depriving the stockholders of the “true value inherent in and arising from” the company.  Plaintiffs also asserted a claim for breach of the fiduciary duty of disclosure in failing to disclose material information to the stockholders.  Plaintiffs sought a quasi-appraisal remedy and compensatory damages.

Defendants’ Allegations: The Directors moved to dismiss the complaint.  The Directors relied on the cleansing effect of the majority vote, asserting that the favorable presumption of the business judgment rule applied.

Court’s Analysis: In perhaps a bit of foreshadowing, the Court opened by noting that it can be “problematic” to establish a duty of loyalty violation.  A duty of care claim also requires the difficult showing of gross negligence, but that standard may be less burdensome then establishing disloyalty.

The Plaintiffs’ fiduciary claims were essentially two-fold: (1) disloyalty and care claims arising from the merger process, and (2) inadequate disclosure.  Before determining whether Plaintiffs had adequately pleaded their fiduciary claims, the Court was required to consider the effect of the vote by the majority of the shareholders.  Importantly, even where Plaintiffs alleged Director disloyalty, a vote by a majority of uncoerced and disinterested stockholders would have a cleansing effect on price and process claims in the merger context.  This is so because where a majority of disinterested and fully informed ownership of the corporate asset approves a transaction, any director conflict is ameliorated, and the need for judicial oversight is concurrently reduced.

Vice Chancellor Glasscock quoted the Delaware Supreme Court in explaining that “Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests.”  Corwin v. KKR Fin. Holdings, LLC, 125 A.3d 304, 306 (Del. 2015).  Thus, “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.”  Id. at 309.  The only transactions subject to entire fairness review that cannot be “cleansed” by proper stockholder approval are those involving a controlling shareholder, who also receives a personal benefit from the transaction, as coercion is presumed under those circumstances.  In the absence of such, when a transaction is approved by a fully informed, uncoerced majority of shareholders, the business judgment rule applies, despite the existence of individually conflicted directors.

Under the present circumstances, the Court determined that the business judgment rule applied.  Even if Plaintiffs had accurately alleged the existence of a controlling shareholder, there was no evidence that a controlling shareholder also received a personal benefit out of the merger.  Thus, the transaction was effectively “cleansed.”

To rebut the cleansing effect of the majority vote, Plaintiffs were required to sufficiently allege that the Directors’ merger-related disclosures were materially misleading.  To the extent that Plaintiffs alleged that the vote was therefore uninformed, the Directors had the burden to show that the alleged deficiencies were immaterial as a matter of law.  However, in reviewing the 12(b)(6) motion, based on the allegations in the complaint—and not facts or arguments first introduced in briefing—the Court found that Plaintiffs had failed to substantiate their bare assertions related to inadequate disclosure.

Based on the foregoing, the Court determined that the merger was approved by a majority of uncoerced, disinterested shareholders, without the presence of a controller who received personal benefits.  Accordingly, the business judgment rule applied to the Directors’ decision to approve the merger.

Conclusion: The Court highlighted that application of the business judgment rule tends to result in dismissal.  The present case was no exception.  Given the cleansing effect of the shareholder vote, and application of the business judgment rule, dismissal was warranted.

Section 220 Suit Requires Stockholder Status

A recent decision from the Delaware Court of Chancery addressed an issue of first impression, and the court ruled that:  In order to maintain a suit under DGCL Section 220 for corporate books and records, the plaintiff must be a stockholder at the time suit is filed.Weingarten v. Monster Worldwide, Inc., C.A. No. 1293-VCG (Del. Ch. Feb. 27, 2017).

Background:  The facts of this case involved a pre-suit demand for books and records under Section 220 of the DGCL.  The demand was made shortly before a merger was scheduled to close, but suit was not filed until after the merger closed.  The merger extinguished the stockholder status of the plaintiff.

Court’s Reasoning:  The court conducted a thorough statutory interpretation of Section 220 and determined that the statutory prerequisite was clear and unambiguous to the extent that it requires that a plaintiff in a Section 220 case be a stockholder at the time suit is filed.  Other Delaware decisions were distinguished to the extent that they involved a stockholder who lost that status after suit was filed.

Commentary:  The multitude of court decisions interpreting Section 220 belie the facial simplicity of the statute.  This well-reasoned decision provides another example of how Section 220 can be a complicated and expensive – – and unsuccessful – – method for obtaining books and records.  Notably, this is a post-trial opinion, which implies that substantial fees were incurred before the plaintiff found that its efforts were not fruitful.

 

Chancery Appoints Section 226(a) Custodian

A recent Delaware Court of Chancery opinion needs to be read by anyone who wants to fully understand the requirements for the appointment of a custodian of a company deadlocked due to stockholder and director dysfunction. Kleinberg v. Aharon, C.A. No. 12719-VCL (Del. Ch. Feb. 13, 2017).

Background:  This carefully reasoned opinion describes in extensive factual detail the dysfunctional relationships among stockholders and directors.  The thorough recitation of the factual context supported the conclusion of the court, in addition to the legal analysis, that the only judicial solution to the irreparable harm suffered by the company due to a deadlock in this case was the appointment of a guardian pursuant to DGCL Section 226(a).

The extensive factual details provided by the court are essential to the court’s analysis and conclusion, and must be reviewed in order to gain a complete understanding of this opinion.

Analysis:  The court’s analysis of the prerequisites of DGCL Section 226(a) and the challenges in satisfying those prerequisites, are among the most lucid explanations that this writer has read on this topic.

Section 226(a)(2) sets forth three conditions that must be satisfied before the court may exercise its authority under the statute to appoint a custodian when “the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division.”

First, the directors must be deadlocked.  Second, the business of the corporation must either be suffering or threatened by irreparable injury because of the deadlock.  Third, the shareholders must be “unable by shareholder vote to terminate the division between the directors.”

Importantly, when the factors are met, still “there is no right to the appointment of a custodian.”

Regarding the first requirement, the court explains that a court will not recognize a deadlock if one side sought to manufacture the deadlock “by refusing to consider any issue.”  The court explains in great detail, based on the extensively described facts involved in this case, why the first requirement is satisfied in this case.

Regarding the second requirement of irreparable harm due to the divisions between the directors, the requisite harm in order to satisfy this requirement can include damage to “a corporation’s reputation, goodwill, customer relationships, and employee morale.”  The court reasoned based on the facts of this case that:  “until the deadlock is resolved, the company will lack captain, heading, keel, and rudder.”  Regarding the third requirement, the court found that the stockholders were unable to break the deadlock because of a voting agreement that the stockholders signed and that conferred the right to appoint an even number of directors which resulted in an impasse.  Nonetheless, the court explained that a “deadlock, itself is not an injustice.  The consequences of that deadlock for the stockholders and the enterprise must be assessed.”

The court defined the general powers of the custodian, but said that a subsequent order with a more detailed description of the authority of the custodian would also address exculpation, indemnification and advancement.

Additional useful guidance for the conduct of board meetings was also provided in this opinion.  The following bullet points are helpful tools for the toolbox of corporate lawyers:

  • Directors cannot act by proxy;
  • Section 144 does not require board members to abstain from voting simply because they may not be disinterested; and,
  • All board members must understand the language spoken by others speaking at the board meetings.

Supreme Court Affirms Chancery Penalties for Litigation Misconduct

The Supreme Court’s recent affirmance of penalties imposed by the Delaware Court of Chancery for litigation misconduct is a useful tool for litigators of all stripes to brandish as an incentive for both their clients and opposing parties to comply with the rules of the road in connection with obligations to preserve evidence during discovery–and to tell the truth (Yes, some need reminders.)

In Shawe v. Elting, Del. Supr., No. 487, 2016 (Feb. 13, 2017), Delaware’s high court upheld a civil penalty of more than $7 million in legal fees and costs, imposed after a hearing which found that one of the parties in a hotly contested stockholder dispute, engaged in the following bad faith conduct:   (1) intentionally attempting to destroy information on a laptop after the court had entered an order requiring the production of that laptop for forensic discovery and after litigation hold notices were sent; (2) at a minimum recklessly failing to safeguard evidence on a cell phone which was regularly used to exchange text messages among relevant witnesses; and (3) by repeatedly lying in responses to interrogatories and in a deposition to conceal the details about deletion of information from a laptop.

The Chancery Court’s 100-plus page decision on the merits was highlighted on these pagesChancery’s decision imposing penalties was highlighted in this space also. The Supreme Court’s affirmance opinion on the merits was issued on the same day as the decision upholding penalties that is highlighted in this post.  The affirmance on the merits features a vigorous dissent that provides a thought-provoking contrasting analysis on the merits.  Several key takeaways from the Supreme Court’s decision upholding the penalty are featured in the following bullet points:

  • An important point made in upholding the penalty was that there was no requirement that a person succeed in his efforts to thwart the ability of an imposing party to prosecute the merits of the case in order for the court to have the power to impose penalties for discovery abuse or other litigation misconduct.
  • Even if the deleted emails were ultimately recovered, the attempt to delete emails or other data in violation of discovery obligations is a sufficient basis to impose penalties. The recovery of deleted emails does not negate the illicit intent and does not cleanse the bad faith.
  • Moreover, a party need not prove that deleted data was relevant in order for the court to impose penalties for its deletion.
  • A party in litigation has an affirmative duty to preserve potentially relevant evidence and a court may impose penalties on a party who fails to prevent destruction of that evidence.
  • Although a party is not obligated to preserve every email or shred of evidence, it must “preserve what it knows, or reasonably should know, is relevant to the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.”
  • In order to impose sanctions, such as the shifting of legal fees, a court “need only find that a party had a duty to preserve evidence and breached that duty.”
  • The court described as “incredible” the testimony of the co-CEO that his niece dropped his iPhone in a “cup of Diet Coke,” and then without having a professional try to preserve the data, discarded it after his assistant, who had no expertise in forensic discovery, was unable to retrieve the data after allowing the phone to dry.
  • The court found that the penalty of over $7 million in attorneys’ fees and costs was a civil penalty, and because it was not regarded as a criminal sanction for perjury, the court rejected the arguments regarding due process.

Notably, this seemingly high dollar amount as a penalty for legal fees incurred in connection with failure to comply with discovery obligations, including the deletion of electronically stored data, is not unprecedented in Delaware.  See Genger v. TR Investors, LLC, 26 A.3d 180 (Del. 2011), which was highlighted on these pages.

Court Appoints Lead Counsel in Appraisal Case

Justin M. Forcier, an associate in the Delaware office of Eckert Seamans, prepared this overview.

This case provides guidance to any attorney who would seek an appointment as lead counsel. In re Appraisal of Rouse Props., 12609-VCS (Del. Ch. Dec. 8, 2016)

Background:  On July 6, 2016, Rouse Properties, Inc. (“Rouse”) merged with an affiliate of Brookfield Asset Management, Inc. (“Brookfield”) in an all-cash merger for $18.25 per share.  Following the merger, a group of beneficial owners of Rouse, representing 21% of the pre-merger outstanding stock (the “Minority Petitioners”), filed a complaint seeking appraisal.  In August 2016, a group of former investors who represented 75% of Rouse’s beneficial owners (the “Majority Petitioners”) filed a similar complaint seeking appraisal.  Both groups were represented by different counsel.

During communications between the two parties’ counsel, the Minority Petitioners made clear that, despite any consolidation, they intended to engage and call their own valuation witness and would be free to deviate from the Majority Petitioners’ litigation strategy if they chose to.  Also, the Minority Petitioners would only agree to compensate their counsel, even if the Majority Petitioners’ counsel was chosen as lead.  Counsel for the Majority Petitioners filed a motion for appointment of lead counsel (the “Motion”).

Analysis: In their opposition to the Motion, the Minority Petitioners argued that the court could not grant the Motion because forcing the Majority Petitioners’ counsel on them would deprive the Minority Petitioners the right to “fully participate” in the appraisal action pursuant to 8 Del. C. § 262(h).  They also opposed the Motion because appointment of the Majority Petitioners’ counsel would deprive them of the right to be represented by the counsel of their choice.  Finally, the Minority Petitioners argued that granting the Motion would create negative incentives which should be avoided because their counsel fully intended on carrying their fair share of the workload.

Court’s Holding: The court examined 8 Del. C. § 262(h) and determined that it did not preclude it from overriding an active petitioner’s choice of counsel.  Citing Merriam-Webster’s Dictionary, the court noted that the verb “participate” means to take part in or to share.  It then held that nothing in the court’s order would preclude the Minority Petitioners from “taking part in” the appraisal litigation because their interests are perfectly aligned with the Majority Petitioners.

Next, the court found that the Minority Petitioners’ interests would be protected even if the counsel that was appointed was not the one they would have preferred.  First, Section 262(k) requires that the court approve the dismissal of an appraisal proceeding against any stockholder.  Second, Section 262(j) incorporates common-fund principles to attorneys’ fees.  And third, any counsel appointed as lead would owe every member of the class fiduciary duties.

Finally, weighing the Hirt factors, the court found that the Majority Petitioners’ counsel was well-suited to serve as lead counsel.  The court held that the quality of the pleadings was not a factor that weighed heavier in either direction.  Second, the enthusiasm and vigor with which the case was prosecuted so far was neutral towards both the Majority Petitioners’ counsel and Minority Petitioners’ counsel.  Third, no conflict existed with either parties’ counsel.  However, the competence of the Majority Petitioners’ counsel was a factor that weighed in their favor because of their extensive track record.  Finally, the Majority Petitioners comprised of 75% of the ownership; and therefore, they had more at stake to incentivize active litigation.  Therefore, the court held that the Majority Petitioners’ counsel should be appointed lead.

Military Generals and Boards of Directors

The National Association of Corporate Directors is hosting a seminar later this week for retired, or nearly retired, generals in the U.S. armed services who aspire to be on a board of directors. The goal of the two-day seminar is to provide the basic information that one should know in order to be better prepared to become a director. I’m honored to be on a panel for this seminar with Delaware Supreme Court Justice Karen Valihura during which we will present a basic overview of fiduciary duties of board members and the related role of the Delaware courts in determining compliance with those duties.

LexBlog