Chancery Denies Motion to Dismiss and Describes Measure of Damages for Stockholder Denied Shares

Mehta v. Smurfit-Stone Container Corp., C.A. No. 6891-VCL (Del. Ch. Oct. 20, 2014).  This case is noteworthy for its description of the measure of damages that are potentially available for a stockholder who is wrongfully denied shares.

Background: This decision involves stockholders who initially made a demand for statutory appraisal rights in connection with a merger. The merger that is part of the background of this case, followed a plan of reorganization approved by the Bankruptcy Court in connection with a prior Chapter 11 bankruptcy proceeding of the company. The confirmation order of the Bankruptcy Court discharged and released all claims against the company and its directors relating to the bankruptcy. Shortly after the bankruptcy, the company merged. Pursuant to the merger, each share of the company’s common stock was converted into the right to receive a combination of cash, as well as a number of shares in the new company. See previous court decision in 2011 by the Delaware Court of Chancery involving this company and merger related litigation, highlighted on the pages.

The stockholders in this case made a timely demand for appraisal through their broker, and therefore did not receive the merger consideration. However, they did not complete the prerequisites for perfecting their statutory appraisal rights because they never filed a formal petition for appraisal. No other stockholder filed an appraisal either. The 120-day time period during which at least one stockholder must file an appraisal petition for an appraisal proceeding to move forward, came and went on September 24, 2011. Thereafter, the stockholders in this case withdrew the initial demand for an appraisal. After withdrawing their appraisal demand, they consistently argued and requested their right to receive the merger consideration.

The company refused to provide the merger consideration unless the stockholders agreed to broader settlement terms and other demands that the stockholders did not consent to, and therefore the company never provided the merger consideration to the stockholders in this case.

As a result the stockholders initiated this case alleging claims for breach of fiduciary duty. After a somewhat unexplained procedural delay, a motion to dismiss under Rule 12(b)(6) was briefed and oral argument was heard on September 15, 2014.

The court reviewed the relevant standard under a motion to dismiss and found that some claims were barred by the bankruptcy confirmation order which released bankruptcy related claims.

Highlights: Although the court found that there was no applicable fraud exception to the continuous ownership requirement for a derivative claim, the court found that there was a claim against the company due to the failure of the company to provide merger consideration to the stockholders in this case because after the effective date of the merger passed, and no stockholder filed a petition for appraisal by that deadline, the right to appraisal lapsed for all stockholders who had previously demanded appraisals. That triggered an obligation on the part of the surviving corporation to pay the merger consideration. Because that merger consideration was never paid, a stockholder has a claim to recover it. See Section 262(d)(1) of the Delaware General Corporation Law. See Section 262(e) regarding the deadlines within which a stockholder can withdraw an appraisal demand without the consent of the corporation. Compare also the deadline after which time the consent of the corporation is needed.

The claim against the corporation by the stockholders in this case could be framed as either a breach of contract or one for unjust enrichment.

Scope of the Remedy and Measure of Damages: The court explained that on a breach of contract claim, a plaintiff can only recover consequential damages if the damages were foreseeable at the time of the contract. Consequential damages are defined as those that do not flow directly or immediately from the breach. The court reasoned that those types of damages were not available in this case because that part of the relief requested was not reasonably foreseeable.page2image26208page2image26368 

The court described the remedy for the failure to provide the stock portion of the merger consideration as “more difficult and will require input from the parties if this case reaches the remedial stage.”

The court further explained that:

One method would be to convert the stock component into a cash value based on the trading price of the shares on the date when payment was due and bring that amount forward with interest. Another method would be to award the value of the shares at the time of judgment, including intervening splits and dividends. Both of these approaches, however, select arbitrary points for valuing the shares. A third possibility would be to recognize that if the [stockholders] had received the stock component when it was due, they [the stockholders] would have had the ability to sell at a time of [their] own choosing during the period after September 25, 2011 [the date the stock should have been issued], until the date of judgment. In other situations where a party has a right to sell and the defendant has foreclosed the plaintiff from exercising that right, the law awards the plaintiff the highest intermediate value of the shares. See Duncan v. TheraTx, 775 A.2d 1019, 1023 (Del. 2001); Paradee v. Paradee, 2011 WL 3959604, at *13 (Del. Ch. 2010); Am. Gen. Corp. v. Continental Airlines Corp., 622 A.2d 1, 10 (Del. Ch. 1992).

Slip Op. at 14-15.

In sum, the court allowed the claim for nonpayment of merger consideration to proceed and noted that other remedial issues regarding any damages due would be confronted at a later time in the case.

Chancery Addresses Equitable Jurisdiction and First-Filed Rule

Willis v. PCA Pain Center of Virginia, Inc., C.A. No. 9006-VCN (Del. Ch. October 20, 2014). This Chancery decision is noted for its usefulness in the toolbox of those who practice corporate and commercial litigation in Delaware, for two nuanced issues that often arise: (i) when equitable relief sought will be sufficient to provide Chancery with equitable jurisdiction even when legal remedies may arguably make the plaintiff whole; and (ii) nuances of the first-filed rule that explain situations (unlike this case) when deference is not always given to the suit that was first-filed.

Highlights:

I) Equitable jurisdictional basis: The court observed that even though specific performance can be an equitable remedy, it remains a discretionary one. If one is seeking specific performance for the transfer of personal property, as opposed to real estate, that typically can be satisfied by money damages, and thus is not necessarily a basis for a court of equity to exercise jurisdiction. But in this case involving professional services, the court found other facts that may not have allowed the parties to be made whole by money. Though not applicable here, the court noted that in some circumstances, there is a basis for equitable jurisdiction if a company’s insolvency can make a legal remedy unavailable–but a detailed foundation for the defendant’s insolvency must be adequately alleged. Equitable jurisdiction may also be available when the legal remedy is speculative or not quantifiable. Neither of the last two options applied in this case, however.

II) Nuances of the court’s discussion of the first-filed rule: (i) there are situations when complaints filed in two different fora within days or weeks of each other may be considered filed at the same time, and (ii) it is not necessary that parties be identical in both jurisdictions, especially if the missing party in one forum is controlled by a party in the other case;  (iii) allegations need not be identical if they arise in both cases out of the same “nucleus of operative facts”; and (iv) issues such as those implicating the internal affairs doctrine and corporate law are more likely to be retained by a Delaware court than a run of the mill contract case.

In this matter, a breach of contract case filed a week earlier in Virginia was considered first-filed, and thus, this Delaware case was stayed in favor of that case. For purposes of allowing a case filed only a few days before to be considered first-filed, and not contemporaneous, the court observed that it will consider whether the first-filed case was the result of a race to the courthouse, such as after an agreed-upon moratorium expired, or if it was retaliation for the first-filed suit, or both parties each had months to decide whether or not to file a complaint, and one just took action sooner.

Contract-Based Award of Attorneys’ Fees

 ReCor Medical, Inc. v. Warnking, C.A. No. 7387-VCN (Del. Ch. May 14, 2014). This letter opinion provides a helpful analysis of how the Court of Chancery awards attorneys’ fees based on a contract that provides for fees to be awarded to the prevailing party in a dispute. The issue here was the amount of fees, not the right to have them awarded. The essence of the objection to the amount of fees requested was that multiple lawyers worked on similar tasks and attended the same hearings. The court observed that, in hindsight, most legal services might benefit from greater efficiency, but the court concluded that the efforts in this matter were reasonable and consistent with professional judgment. The court applied a modest discount but granted most of the fees requested.

 

Expedited Trial in Section 225 Case Upheld

 Salvatore v. Visenergy, Inc., C.A. No. 10108-CB (Del. Ch. Oct. 6, 2014). This short letter ruling is noteworthy in passing as a reminder that in Section 225 cases, a trial date will often be scheduled within 60 days of filing a complaint. The substantive issue in this case surrounded a written consent of shareholders to elect board members, but this decision related to a request for a continuance of the trial

In this decision, the court refused to postpone a trial date set for 45 days from the complaint being filed. The “intervening holidays” and related excuses did not prevail. Nor did the fact that one party was pro se. DGCL Section 225 allows for expedited proceedings to determine the validity of board elections. This type of expedited proceeding is one of the “sweet spots” of Delaware corporate litigation.

Nuances of Advancement of Fees for Compulsory Counterclaims

Pontone v. Milso Industries Corp., C.A. No. 7615-VCP (Del. Ch. Oct. 6, 2014).

Why This Case is Important:  This decision of the Delaware Court of Chancery granted interlocutory appeals requested by both parties due to the arguable inconsistency in cases applying the Delaware Supreme Court decision in Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992), regarding what types of counterclaims are subject to advancement of fees.

Bottom Line Reasoning: The Court of Chancery reasoned that the parties would benefit and it would be in the interest of justice to have greater clarity on the issue of what types of counterclaims are advanceable.  The court explained that:  “Advancement cases can be quite contentious, time-consuming, and expensive.  A decision clarifying when counterclaims are advanceable would avoid unnecessary litigation and resolve at least some potential advancement disputes before they occur.”  Slip op. at 11.

Prior decisions in this case by the Court of Chancery have been highlighted on these pages.  The prior opinions of May 29, 2014, regarding a dispute over which counterclaims were compulsory and therefore advanceable, also addressed exceptions to a Special Master Report.  On September 3rd, the court denied a motion for reargument.

The court discusses Supreme Court Rules 41 and 42 which govern interlocutory appeals.  Both parties to the case sought interlocutory appeals based on slightly different arguments that had in common that several decisions of the Court of Chancery were not consistent with the two-prong test of the Delaware Supreme Court in Roven in connection with which counterclaims are advanceable, or subject to advancement of fees.  See, e.g., Zaman v. Amedeo Holdings, Inc., 2008 WL 2168397 (Del. Ch. May 23, 2008) (Strine, V.C.).  See also cases cited at footnote 18 of the letter decision in this case with citations to cases that are arguably not consistent with Roven, or at least internally inconsistent.

30th Annual Distinguished Lecture in Law

Delaware and the Development of Corporate Governance
PileggiLecture184px

The Delaware Journal of Corporate Law of Widener Law Delaware
presents the

30th Annual Francis G. Pileggi Distinguished Lecture in Law
Delaware and the Development of Corporate Governance
Professor Brian R. Cheffins
S.J. Berwin Professor Corporate Law,
University of Cambridge, Cambridge, UK

Friday, October 17, 2014
8:00 a.m. Breakfast; 8:45 a.m. Lecture

Hotel duPont, du Barry Room
11th and Market Streets
Wilmington, DE 19801

One substantive CLE credit available in Delaware and Pennsylvania.

Register online, or download the brochure and registration form as a pdf below and mail, email, or fax the form to Rose Callahan.

Download the brochure and registration form as a pdf ]

For questions or inquiries, please contact Rose E. Callahan at 302-477-2014 or via email at recallahan@widener.edu.

Since 1998, Professor Brian R. Cheffins has been the S. J. Berwin Professor of Corporate Law at Cambridge University. He began his academic career at the University of British Columbia’s Faculty of Law, where he taught from 1986 to 1997. Professor Cheffins has held visiting appointments at Duke, Harvard, Oxford and Stanford and was named a Guggenheim Fellow in 2002. His primary research interests are corporate governance and corporate law, with particular reference to economic and historical aspects. Professor Cheffins is the author of Company Law: Theory, Structure and Operation (Oxford, 1997), The Trajectory of (Corporate Law) Scholarship (Cambridge, 2004) and Corporate Ownership and Control: British Business Transformed (Oxford, 2008).

In the 2014 Pileggi Lecture, entitled “Delaware and the Development of Corporate Governance,” Professor Cheffins will assess Delaware’s contribution to a corporate governance transformation U.S. public companies have experienced over the past 40 years. He will focus on various judgments handed down by Delaware’s courts that qualify as corporate governance landmarks while making the point that Delaware’s impact has varied from marginal to substantial depending on the era and the governance topic involved.

Prior Lectures in this series, at least for the last few years, were highlighted on these pages.

History of the Annual Pileggi Lecture
In 1985, Francis G.X. Pileggi, who was then the Internal Managing Editor for the Delaware Journal of Corporate Law, envisioned creating a forum where practitioners, judges, and academics, distinguished in the area of corporate law, could speak directly to those most responsible for setting policy on corporate law in the United States—the Delaware bench and bar. Through his efforts and the generosity of his father, Francis G. Pileggi, the idea turned into reality. It continues today through the members of the Delaware Journal of Corporate Law and the continued generosity of Francis G. Pileggi, a founding attorney of Pileggi & Pileggi.

UPDATE: Frank Reynolds of Thomson Reuters has written an excellent summary of the Lecture this year.

Section 220 Demand Rejected As Time-Barred

Wolst v. Monster Beverage Corp., C.A. No. 9154-VCN (Del. Ch. Oct. 3, 2014), this post-trial Chancery ruling is a another example of why a demand for books and records based on DGCL Section 220 is often an unpredictable exercise, and not inexpensive. In this decision, the Court rejected a Section 220 demand in light of the purpose for the demand relating to actions taken about seven years ago–well beyond the typical three year statute of limitations for derivative breach of fiduciary duty claims. Several highlights of this decision are noteworthy for purposes of corporate litigation:

  • The court refused to extend to derivative claims the general rule that a class action tolls the statute of limitations for the putative members of the class pursuing direct claims. See Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974); Dubroff v. Wren Hldgs., LLC, 2011 WL 5137175 (Del. Ch. Oct. 28, 2011).
  • Although the Court of Chancery is not bound by statutes of limitations, and a demand may be allowed if there were other potential claims that were not time-barred, the purpose of the demand was to investigate matters that occurred seven years ago, which the court determined would be barred by laches.

New Section 220 Books and Records Decision Applies Wal-Mart to Allow Production

Oklahoma Firefighters Pension & Retirement System v. Citigroup Inc., No. 9587, final report issued (Del. Ch. Sept. 30, 2014). This decision by a Master in Chancery is of importance to the extent it is the first trial court decision to apply the recent Delaware Supreme Court’s Wal-Mart decision, highlighted on these pages, in connection with the types of data a shareholder can demand from a corporate board whose foreign subsidiary is credibly accused of wrongdoing, pursuant to DGCL Section 220. This ruling is subject to de novo review by the Court of Chancery. The money quote from the decision follows:

Having established a proper purpose for its inspection, Plaintiff bears the additional burden of showing that the books and records it seeks are “necessary and essential” to the stated purpose. The Delaware Supreme Court [in the Wal-Mart case] recently explained:

Documents are “necessary and essential” pursuant to a Section 220 demand if they address the “crux of the shareholder’s purpose” and if that information “is unavailable from another source.” Whether documents are necessary and essential “is fact specific and will necessarily depend on the context in which the shareholder‟s inspection demand arises.”40

To reiterate, I recommended in my draft report that the Court order Citigroup to produce for inspection (1) board and committee minutes and materials provided to the board or committees, (2) meeting preparation materials as defined above, and (3) policies and procedures, but only to the extent those books and records related to the following topics: (a) the Banamex fraud, (b) the BSA/AML matters at Banamex USA, (c) Citigroup‟s fraud detection and prevention efforts, and (d) Citigroup‟s BSA/AML compliance.

Frank Reynolds of Thomson Reuters provides an article with an insightful overview about the case.

Exculpation of Independent Directors Headed for Appellate Review

This post was prepared by Aimee M. Czachorowski.
An interlocutory appeal has recently been granted in the Delaware Court of Chancery case of In re Cornerstone Therapeutics, Inc., Cons. C.A. No. 8922-VCG (Del. Ch. Sept. 26, 2014), on the issue of when independent directors may be dismissed prior to trial. The next step in the process is for the Delaware Supreme Court to make their own independent determination about whether they will take the interlocutory appeal. This is an important issue in Delaware corporate litigation that is less settled than one would expect for such a common issue.
In a prior recent opinion highlighted on these pages, the Chancery Court declined to dismiss members of a special committee potentially exculpated from liability by a DGCL Section 102(b)(7) provision when the entire fairness standard is applied to review the transaction.  The Court held that, pursuant to Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001), it could not determine whether the director defendants could be exculpated until after a decision had been made as to the entire fairness of the transaction. 
The directors have now been granted an interlocutory appeal of that decision, in part because of the conflicting Chancery decisions on whether, under an entire fairness standard of review, exculpation under 102(b)(7) can be employed to dismiss them at the motion to dismiss stage, or whether they must await a full decision on the entire fairness of the transaction after trial. 
 

Non-Signatory LLC Members Bound By Operating Agreement

Seaport Village Ltd. v. Seaport Village Operating Company, LLC, et al., C.A. No. 8841-VCL (Del. Ch. Sept. 24, 2014). This decision by the Delaware Court of Chancery highlights a counterintuitive statutory rule. The Delaware LLC Act provides that each LLC member, and the LLC itself, are considered parties to an LLC operating agreement, even if they did not sign the agreement.

As the court explained, Section 18-101(7) of the Delaware LLC Act:

added the following language to the LLC Act: “A limited liability company is not required to execute its limited liability company agreement. A limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.” Del. SB 363, 141st General Assembly, 2002 Delaware Laws Ch. 295 (June 20, 2002). The amendment became effective on August 1, 2002. In 2005, the General Assembly added nearly identical language to the LLC Act to clarify that members also are bound by the LLC’s operating agreement, regardless of whether they execute the agreement. Del. SB 86, 143rd General Assembly, 2005 Delaware Laws Ch. 51 (June 14, 2005) (adding the words “[a] member … is bound by the limited liability company agreement whether or not the member … executes the limited liability company agreement”). These amendments make clear that the LLC and its members are parties to and bound by the LLC agreement, regardless of whether they sign it.

Another noteworthy aspect of this short ruling is one that the parties did not argue. The dispute related to a contractual provision that awarded attorneys’ fees to the prevailing party. There was no issue raised by the parties or the court that such a contractual provision was generally enforceable in Delaware, and enforceable in this case.

 Supplement: It deserve mention whenever the venerable Professor Bainbridge quotes or links to this blog, and so we are thrilled to note that he links to this post on his blog.