Delaware Supreme Court’s Latest Iteration of Implied Covenant of Good Faith and Fair Dealing

Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC, No. 441, 2014 (Del. Supr., Mar. 18, 2015). This Delaware Supreme Court opinion is notable for at least the following reasons:

(i) it provides the latest iteration of Delaware law on the amorphous but important contract provision imposed by law on every Delaware contract: the implied covenant of good faith and fair dealing. This 32-page opinion reversed the trial court’s finding that the implied covenant did apply to the contract at issue in this case. The Supreme Court’s reversal is another reminder of how challenging it is to make a successful claim based on the implied covenant;

(ii) many basic contract interpretation principles are explained in this opinion, but one that I found especially notable is that before the court can “fix a typographical error” in a contract, it must first satisfy the exacting prerequisites that would entitle one to the remedy of reformation of a contract, just as if it were a material term apparently.

There is much more to commend this opinion for its scholarly analysis and interesting facts, including the backstory of the buyer of an investment advisory firm who thought it was entitled to millions of dollars in damages because it did not think the seller gave it everything that it thought it was buying. That is not an uncommon complaint, but I still find it interesting that it remains such a common allegation.

Chancery Rejects Forum Non Conveniens Argument

Wilmington Savings Fund Society, FSB v. Caesars Entertainment Corp., C.A. No. 10004-VCG (Del. Ch., Mar. 18, 2015).

This Court of Chancery decision is noteworthy for two main points that should be of interest to those engaged in corporate and commercial litigation in Delaware:

(i)  the court found that a forum selection clause was not broadly worded enough, even if it were incorporated by reference, to cover the claims involved; and

(ii) this opinion serves as a useful example of how typically unsuccessful in Delaware is an argument that a case should not remain in Delaware based on forum non conveniens. The court applied the Cryo-Maid factors after declining to apply the first-filed McWane doctrine due to the two cases involved being filed close enough in time so that one was not regarded as being first-filed. The other case was filed in New York.

This case is related to the Caesars bankruptcy and there are many facts that serve as important background. But two other points in particular caught my eye: The court observes that it often is called upon to apply the law of New York in commercial disputes, so that was not a prevailing factor. Also, as part of its analysis, the court referred to the proximity of New York City and Wilmington, Delaware, and that excerpt deserves to be quoted for its masterful description:

 I take judicial notice, however, that the Courthouse in Wilmington is separated from Pennsylvania Station in Manhattan by a five-minute walk and 125 miles of shiny steel rails, which may be traversed in the comfort of the business section of an Acela train in an hour and a half. In that light, litigation in Delaware is less manifest hardship than inconvenience.

Chancery Denies Preliminary Injunction Request

Theravectys SA v. Immune Design Corp., C.A. No. 9950-VCN (Del. Ch. Mar. 8, 2015), is a Delaware Chancery opinion that may be useful for its application of the well-worn prerequisites that must be satisfied for obtaining preliminary injunctive relief.

The following three points from this 30-page decision, (the first 20 of which are mostly a recitation of complicated facts involving the manufacture of experimental vaccines), likely have the widest application to those practicing commercial and corporate litigation:

  • although in some instances the difficulty in quantifying damages may be a helpful factor in establishing the irreparable harm requirement for injunctive relief, the court will not assume the existence of irreparable harm simply because it is difficult to quantify;
  • the court describes those circumstances in which it may be permissible to interfere with and therefore defend successfully, a claim for tortious interference with contractual relations;
  • it seems basic, but the court addresses the statutory definition of a trade secret–which naturally must be satisfied before a claim for misappropriation of a trade secret can be established, and if one can reverse-engineer a product from publicly available information, then it may not be a trade secret.

Default Judgment Entered Against Non-Appearing Defendant Directors

In re Puda Coal Inc. Stockholders Litigation, No. 6476, 2015 WL 935322 (Del. Ch. Mar. 4, 2015). This Delaware Chancery ruling imposed a default judgment against director defendants who reside in China. One decision in the several prior proceedings in this case was highlighted on these pages, and featured duties of directors of Delaware companies with foreign operations.

Frank Reynolds of Thomson Reuters writes in Westlaw Journal Delaware Corporate about recent efforts to obtain a default judgment against the non-appearing directors, and the challenge of collecting on that judgment.

Notice and Hearing Procedure In Mooted Actions

The Court of Chancery recently issued a short letter ruling in Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch., March 12, 2015), summarizing the notice and hearing procedure requirements set forth in In re Advanced Mammography Sys., Inc. S’holders Litig., 1996 WL 633509 (Del. Ch. Oct. 30, 1996) and In re Zalicus, Inc. S’holders Litig., 2015WL 226109 (Del. Ch. Jan 16, 2015).

The opinion provides an instructive summary of the process involved and reasoning behind the notice and hearing required when a settlement is reached in a class or derivative action and (i) the parties agree that the defendants have taken action sufficient to render the action moot and (ii) plaintiffs’ counsel receives a fee in light of the benefits conferred by contributing to the action taken by the defendants.

Compound v. Simple Post-Judgment Interest

In a recent letter decision, the Court of Chancery in ReCor Medical, Inc. v. Warnking, C.A. No. 7387-VCN (Del. Ch., Jan. 30, 2015), discussed the equitable considerations involved in determining whether an award of post-judgment interest should be simple or compound:

 There is no clear-cut exit from the conundrum posed by the parties. Compound interest is not a default answer because the question is committed to the Court’s discretion. Yet, on balance, the reasons cited for simple interest do not outweigh the reality that compound interest is a more accurate means of measuring the time value of money owed by Defendants to ReCor. Accordingly, interest on the fee and expense award will be compounded quarterly.

Third Circuit Binds Non-Signatory to Forum Selection Clause

The Third Circuit, applying Delaware law in Carlyle Investment Management LLC v. Moonmouth Company SA, No. 13-3526 (3rd Cir. Feb. 25, 2015), recently bound a non-signatory to a forum selection clause found in a subscription agreement.  The court applied a three part test to determine whether the non-signatory should be bound by the forum selection clause: (1) is the forum selection clause valid, (2) is the non-signatory a third-party beneficiary or closely related to the agreement, and (3) does the claim at hand arise from the non-signatory’s status related to the agreement?  This opinion provides a contrast to a recent decision of the Court of Chancery, as discussed here.

Chancery Court Declines to Apply Fee-Shifting Bylaw Based on Timing of its Adoption

Today the Delaware Court of Chancery issued an opinion in Strougo v. Hollander, C.A. No. 9770-CB (Del. Ch. Mar. 16, 2015), on an issue of first impression.  The Court did not decide the merits of the underlying complaint; the only issue before the Court on the narrow motion for partial judgment on the pleadings was whether a fee-shifting bylaw could apply to the plaintiff stockholder when it was adopted after the challenged reverse stock split that extinguished the stockholder’s interest, but before the stockholder brought suit.

The Court did not discuss the merits of the fee-shifting bylaw, but held that only the bylaws in effect at the time of the transaction extinguishing his interest could be applied the plaintiff based on principles of conventional contract law, and its interpretation of DGCL section 109 as only applying to current stockholders.  The Court did not address equitable considerations.  Although it did not decide the issue of fee-shifting bylaws on the merits, the Court, in dicta, was critical of them in the context of this case.

As discussed previously on these pages, legislation is currently under consideration that would prohibit fee-shifting bylaws in stock corporations.

Chancery Denies Stockholder Demand for Section 220 Records

Fuchs Family Trust v. Parker Drilling Company, C.A. No. 9986-VCN (Del. Ch. March 4, 2015). This opinion of the Delaware Court of Chancery analyzes a stockholder demand pursuant to DGCL Section 220 seeking information concerning violations by the company of the Foreign Corrupt Practices Act (the “FCPA”).  The court rejected the stockholder request for documents in this post-trial opinion based on a paper record, which would reveal identities of those who allegedly violated the FCPA.

After explaining the nuances and prerequisites of a stockholder demand under Section 220, the court explained in a 20 page opinion with 57 footnotes why the stockholder was not entitled to any documents.  This is a highlight of the basis for the court’s decision.  The court explained that:

Even if a plaintiff demonstrates a proper purpose [under DGCL § 220], that plaintiff is not entitled to inspect all the documents that he or she believes are relevant or even likely to lead to information relevant to that purpose.  The scope of inspection . . . is limited to those documents that are necessary, essential and sufficient to the stockholder’s purpose.  A requesting stockholder bears the burden of proving that the books and records sought are essential to accomplish its purpose.  (footnotes omitted.)

The court held that the stockholder did not satisfy the foregoing prerequisite because it already had sufficient information to make a demand on the board to take further action against wrongdoers even if it did not know the identity of the wrongdoers.

This case is another example of how expensive and lacking in simplicity Section 220 cases can be.  In my view, unless a stockholder has a substantial amount of  money at stake, and is willing to spend a considerable amount of time and money to obtain those documents, Section 220 is not a cost effective way to obtain records from a company – – especially if that company is determined to make it as difficult and as expensive as possible for a stockholder to exercise her rights under Section 220.

Chancery Enforces Deposition Practice Standards

In my recent ethics column for The Bencher, I highlight a recent decision of the Delaware Court of Chancery in the Dole case that enforces standards of conduct for deposition practice. In addition to interpreting Court of Chancery Rule 37 as requiring the mandatory award of fees, the decision provides a helpful review of discovery standards in general that may be useful for corporation litigation and other litigation as well.