Director Advancement and Indemnification Rights

The Delaware law of advancement and indemnification for directors and officers is not for the fainthearted. Much of the statutory interpretation in the case law is counterintuitive. Each year the ABA Business and Corporate Litigation Committee publishes recent developments in the eponymous areas of the law in a two volume publication.American Bar Association.svg

The chapter on the key cases around the country (most of which are in Delaware) regarding advancement and indemnification involving directors and officers was co-written by yours truly along with my colleagues Gary Lipkin and Aimee Czachorowski. Included are the most noteworthy cases from 2014 involving DGCL Section 145. Information about the publication is available at this link.

Divided Supreme Court Upholds First-Filed Rule

SupremCourtThe Delaware Supreme Court provided this week the latest iteration of Delaware law on the first-filed rule and whether a particular issue is covered by an arbitration clause. Over a vigorous dissent, Delaware’s high court affirmed a decision of the Delaware Court of Chancery that applied the first-filed rule to an arbitration proceeding that preceded the filing of a subsequent lawsuit. LG Electronics, Inc. v. InterDigital Communications, Inc., No. 475, 2014 (Del. Supr., April 14, 2015), also features a robust disagreement among the justices regarding whether the provisions of the parties’ agreements included a clear intent of the parties to submit the issues involved to arbitration.

The Chancery decision was highlighted on these pages here. Also notable is that the dissent, at 21 pages, was nearly as long as the majority opinion, which weighed in at 23 pages.

Also interesting as an aside, is the increasing percentage of Supreme Court opinions over the last year or so that feature dissents. A majority of the current members of the 5-person court were not on the court a year ago. The prior composition of the court, which previously had remained the same for about a decade or so, rarely included dissenting opinions. According to The Chancery Daily, the chronicle of record for Delaware corporate and commercial litigation, of the 21 opinions issued in 2015 so far by the Delaware Supreme Court, dissents were featured in six of them. Previously only about 1% of Delaware Supreme Court decisions included dissenting opinions. Draw your own conclusions.

Injunctive Relief Denied for Alleged Misuse of Customer Lists

The Delaware Court of Chancery recently addressed an issue that commonly appears in corporate and commercial litigation:  the alleged misuse of customer lists by someone other than the company who created the list.  In American Messaging Services LLC v. DocHalo, LLC, C.A. No. 10761-VCN (Del. Ch. Apr. 9, 2015), the court recited the well-worn prerequisites for obtaining a temporary restraining order (TRO).

In contrast to a request for a preliminary injunction, the focus in the court’s review of a motion seeking a TRO is more on the irreparable harm factor based on a mere colorable claim, but in this case the court found that even if the requirement for establishing a colorable claim was barely met, the balancing of the equities did not favor grant of the TRO.  In part, this was due to the agreement between the two parties that they were, under certain circumstances, entitled to cross-sell to their customers as part of a joint venture that quickly soured.  That is a factual component that is not commonly present in most cases alleging a misappropriation of customer lists, even though customer lists are often within the definition of the state statute for trade secrets.

 

Chancery Vacates TRO

In contrast to the decision in the American Messaging Services ruling  by the same Vice Chancellor on the same date, highlighted here on these pages, in AM General Holdings LLC v. The Renco Group, Inc., C.A. No. 7639-VCN (Del. Ch. Apr. 9, 2015), the Delaware Court of Chancery explains why, based on new circumstances and new developments since the initial injunctive relief was entered, it vacated the TRO it granted about two weeks earlier in this litigation.

Bylaws Mandating Arbitration of Stockholder Disputes

Bylaws mandating arbitration of stockholder disputes and the related issue of forum selection clauses in bylaws are the topics covered in a recent law review article written by Claudia H. Allen that appears in the current issue of the Delaware Journal of Corporate Law.  The current issue is Volume 39, Number 3. The article appears at page 751 (not yet available online). A comment addressing the subject matter also appeared in an earlier issue of the Journal.

Familial Relationships and Controlling Stockholders

An appeal pending before the Delaware Supreme Court addresses the impact of familial relationships on the independence of directors, as well as the classification of a group of stockholders as controlling stockholders for purposes of determining both pre-suit demand and the standard of review.  See Delaware County Employees’ Retirement Fund v. Sanchez, No. 702, 2014, reply brief filed (Del. Mar. 23, 2015).  It is well-settled in Delaware law that one need not have more than 50% of stock ownership in order to be determined a controlling stockholder for purposes of determining the standard of review that will be applicable to transactions involving that stockholder.  This appeal explores how familial relationships between a large stockholder and other stockholders as well as directors that they appoint, may impact these determinations.

Frank Reynolds of Thomson Reuters has written an article, available at this link, which describes in more detail the factual background of the appeal and the issues involved.

Successor Corporation Not Bound By Agreement of Former Parent Entity

Miramar Police Officers’ Retirement Plan v. Murdoch, C.A. No. 9860-CB (Del. Ch., Apr. 7, 2015). This Delaware Court of Chancery opinion addresses a dispute over whether a corporation created as part of a spin-off transaction is bound by provisions in a contract that the former parent corporation had entered into.  This decision provides useful contract principles that address those circumstances under which an assignee, transferee or the like, will be bound to the terms of an agreement entered into by its predecessor. One of the contract principles that the court relied on was that when an interpretation is so unreasonable as to lead to an absurd result which “no reasonable person would have accepted when entering the contract,” it will be rejected, as was the argument of plaintiff.  See footnote 50.

In addition, in order for a contract to be binding upon transferees, successors or assigns, there must be an intention to bind entities that assume, by legal succession, rights and obligations under contract.  By contrast, entities to which one may simply assign or transfer other assets or liabilities, are not typically bound.  See footnote 52. Notably, the court explained that the plaintiff provided no legal authority to support the broad interpretation that would broadly bind any transferee or assign.  The court referred generally to Section 271(a) of the Delaware General Corporation Law in connection with a sale of all or substantially all the assets of the corporation as opposed to a more modest level of asset transfer.

Delaware Supreme Court: Mexican Law Applies

mexico flagthBell Helicopter Textron, Inc. v. Arteaga, No. 333,2014 (Del. Supr., Apr. 6, 2015). This Delaware Supreme Court decision provides a useful application of principles that determine which jurisdiction’s laws apply to a particular suit with facts involving multiple fora. This split opinion concludes that the law of Mexico should apply to a lawsuit pending in Delaware state court involving the crash of a helicopter that was manufactured in Texas, primarily because the crash occurred in Mexico and all of the victims of the crash were residents of Mexico. Also featured is a somewhat rare dissent from an en banc Supreme Court. The trial court had applied Texas law. At oral argument, the plaintiff’s lawyer stated that he chose Delaware as a forum based on the state of incorporation of the defendant, even though no party argued that Delaware law applied.

The internal affairs doctrine was mentioned in passing, but it did not apply because this case did not involve a dispute among stockholders or directors and the corporation.

 

New Rapid Arbitration Available in Delaware

New legislation was recently passed in Delaware to provide a procedure for expedited arbitration of business disputes. The key features of the new law, called the Delaware Rapid Arbitration Act, include:

  • The decision of the arbitrator must be made within 120 days
  • Challenges to the arbitrator’s decision can only be made directly to the Delaware Supreme Court
  • The arbitrator decides issues of arbitrability (which is designed to avoid the multitude of disputes, often noted on these pages, in which a court is asked to determine if an issue is subject to arbitration.)
  • The Court of Chancery has limited authority in connection with the arbitration, and its role is limited, for example, to granting injunctive relief to enforce the arbitration process or to choose an arbitrator if the parties cannot agree to one. Otherwise the process is conducted by the parties with an arbitrator of their choosing.
  • Consumers are not eligible parties and one party must be a Delaware entity.
  • Parties must be signatories to an agreement that they will submit to arbitration under the new law (which precludes use of this new law via provisions in bylaws or charters.)

Recusal Motion Granted in Chancery

Motions to Recuse members of the bench from a pending case are rare, as are decisions to grant such motions, but in Greenspan v. News Corp., C.A. No. 9567-ML (Del. Ch., Apr.2, 2015), the Delaware Court of Chancery granted such a motion. Although the court found that recusal was not required by application of the Code of Judicial Conduct to the facts of this case, this letter ruling reasoned that (in my words) out of an abundance of caution and to avoid further distraction, the Master in Chancery would recuse herself. The allegations in the motion related to potential defendants in the case being from the same firm that the Master in Chancery worked for as an associate many years ago, and the court sought to avoid the “appearance of impartiality” alleged, even if no such impartiality existed.