Filip v. Centerstone Linen Services, LLC, C.A. No.8712-VCG (Del. Ch. Feb. 27, 2014).
Why is this notable: This Chancery decision upheld the Final Report of the Master in Chancery which found that the terms of an LLC agreement supported advancement even though the exact word “advancement” was not used in the agreement. Many other important contract interpretation principles supported the conclusion. This letter opinion is necessary reading for those who are interested in the Delaware law of advancement, and why such a claim often is a long and difficult struggle despite what, in many cases, is a straightforward obligation. The money quote from this ruling exemplifies the point:
It is far from uncommon that an entity finds it useful to offer broad advancement rights when encouraging an employee to enter a contract, and then finds it financially unpalatable, even morally repugnant, to perform that contract once it alleges wrongdoing against the employee. For the foregoing reasons, I find that Article 3.7 of the LLC Agreement mandates advancement of expenses, including costs, incurred by any Centerstone Manager or Officer by reason of his position as officer or manager.
Lehman Brothers Holdings, Inc. v. Spanish Broadcasting System, Inc., Cons., C.A. No. 8321-VCG (Del. Ch. Feb. 25, 2014)
Why litigators should care about this decision: The Court of Chancery in this opinion candidly acknowledged that the case law in Delaware on the doctrine of acquiescence suffers from a lack of clarity and has been “inconsistently applied”. Slip op. at 22. This decision provides a public service by stating the elements and contours of the doctrine in a more coherent and fulsome manner. (This doctrine was recently addressed in passing as part of another recent Chancery decision that addressed many other substantive issues and which was highlighted on these pages.) This opinion also compares and contrasts this doctrine with the separate doctrine of laches.
- This case was presented on cross motions for summary judgment in connection with a claim for breach of contract related to a Certificate of Designation
- The court observed that the doctrine of acquiescence in Delaware has “… rarely been addressed in a thorough, doctrinally-satisfying manner.” This opinion did not intend to fill that void but it came close anyway.
- Unlike laches that only bars equitable relief, acquiescence may bar both equitable and legal relief as a result of inaction or silence on the part of the plaintiff.
- Footnote 54 recited several different iterations of the doctrine of acquiescence and footnote 56 refers to it as a variation on estoppel.
- Five elements of acquiescence were described in this opinion as:
(1) the plaintiff remained silent (2) with knowledge of her rights (3) and with knowledge or expectation that the defendant would likely rely on her silence (4) the defendant knew of the plaintiff’s silence, and (5) the defendant in fact relied to her detriment on the plaintiff’s silence. (citations omitted). [compare recent decision linked above where no reliance was required.]
- Even though the applicable statute of limitations for a breach of contract action at law in Delaware is three years, and the claims in this case were filed within that three year period, the court reasoned that the doctrine of acquiescence, as explained in this 33-page ruling based on the facts of this case, “estopped” the plaintiff from receiving the relief sought.
As presaged on these pages and elsewhere when the Governor nominated him for the position, yesterday Delaware’s new Chief Justice was sworn in. Chief Justice Strine now leaves a vacancy in the position of Chancellor for the Court of Chancery which will be filled soon by the Governor’s nomination, which must be approved by the Senate.
An interesting statistic in the local paper’s reporting on the event, was in a quote from Justice Holland during the ceremony when he was commenting on the collegiality for which the Delaware Supreme Court is known: “… for the past 61 years 99 percent of the court’s rulings have been unanimous.”
There are two separate pending matters that relate to confidentiality in the Court of Chancery and what details of litigation pending in the court may be properly withheld from the public.
One is an appeal to the Delaware Supreme Court of a case involving a contract dispute that the Al Jazeera network has with AT & T, and the issue on appeal is how much of the pleadings filed with the court can be redacted and withheld from the public pursuant to Court of Chancery Rule 5.1. One of the several Chancery decisions in the case was previously highlighted on these pages. At least in part, the parties both would prefer some parts of the dispute to be withheld from the public, but the parties cannot make that final determination on their own pursuant to Rule 5.1. The issues involved in the appeal are helpfully reviewed in an article by Frank Reynolds of Thomson Reuters.
The second matter relates to the efforts of the Court of Chancery to ask the United States Supreme Court to allow them to maintain a confidential arbitration system for major business disputes that are submitted by consent of both parties. The Court of Chancery is a defendant in a suit challenging their ability to maintain those proceedings in private. The U.S. Court of Appeals for the Third Circuit found that system unconstitutional. The Court of Chancery has filed a petition to ask the SCOTUS to hear their argument for maintaining a confidential arbitration system. Many highlights of that litigation have been posted on these pages, e.g., here and here. Frank Reynolds of Thomson Reuters provides a useful overview of the Court of Chancery’s efforts to have their arguments heard before the U.S. Supreme Court. The usefulness of Frank’s article is not hampered by his quotes from yours truly.
Caspian Select Credit Master Fund Ltd. v. Key Plastics Corp., C.A. No. 8624-vcn (Del. Ch. Feb. 24, 2014).
Practical Insights on Decision: This Chancery opinion is one of many examples highlighted on these pages over the last 9 years or so, of the not infrequent inefficiency and unsatisfying nature of an action based on DGCL Section 220 in which a shareholder seeks books and records of a corporation. In this instance, the defendant company made the shareholder incur the substantial time and expense of going to trial based on what I would regard as a tactic by the company to make it as expensive and time-consuming as possible to obtain the books and records sought to value the shares of the company, notwithstanding the truism that valuation has been well-established as a proper purpose for a demand under Section 220.
The company’s defense, that only a lawyer could assert with a straight face, was that the stated proper purpose was merely a pretense for another unstated, improper purpose. It took the considerable expense of discovery and a trial for the court to conclude that the stated purpose of valuation was the “actual, real”, primary purpose, and any secondary purposes would not defeat the Section 220 claim. In an instance of the “pot calling the kettle black”, the defendant claimed, unsuccessfully, that the “real” purpose of the plaintiff was to use litigation as an expensive tactic to force a purchase of the plaintiff’s shares.
Bottom line: After the expense of a trial, even though the plaintiff stockholder won, the plaintiff now has the unfulfilling task (and continuing expense) of haggling with the defendant company about what documents the company claims to have that comply with the court’s ruling to produce the requested books and records.
Concluding Comment: DGCL Section 220 as a basis to demand books and records of a company (despite the apparent simplicity of the statute and the courts’ frequent exhortation to use Section 220 before filing a plenary action), is a tool that is neither suitable for the fainthearted nor for those who lack the financial stamina to deal with recalcitrant companies. Stated another way, unless there is substantial money at stake in terms of the value of one’s shares, if a company is determined to wage a war of financial attrition, Section 220 is not an economically rational option for most non-institutional or non-substantial shareholders to exercise.
Flaa v. Montano, C.A. No. 9146-VCG (Del. Ch. (Feb. 24, 2014). Takeaway: One point that can be taken from this pithy Chancery ruling is that it is not necessary for a director to be actually seated on the board in order to use DGCL Section 225 to ask the court to determine if that person should be deemed a validly elected director.
In Re Activision Blizzard, Inc. Stockholder Litigation, Cons. C.A. No. 8885-VCL (Del. Ch. Feb. 21, 2014).
Why this case matters: This Delaware Court of Chancery decision addresses the restrictions imposed by French law and the Hague Evidence Convention on efforts to take depositions and compel production of documents of French residents–in a pending matter in Delaware–some of whom are also directors of Delaware companies involved in the case. This decision would also be useful in the increasing number of instances where discovery is needed from parties or witnesses who attempt to use foreign law to block replies to discovery requests in a pending Delaware case.
This opinion relied in part on decisions of the U.S. Supreme Court which held that American courts have the power to require a party to respond to discovery in accordance with the rules of civil procedure, though “the court must make a discretionary determination about whether to do so on the facts of the case.” See also Restatement (Third) of Foreign Relations Law, Sections 441 and 442 (1987).
Importantly, although Vivendi is a French company, in the restructuring agreements at issue in this case, it agreed “… to the exclusive jurisdiction of Delaware courts and agreed that Delaware law would govern any disputes.” Slip op. at 31.
Bottom line: The Court required the residents of France who were directors of Delaware entities to “make themselves available for deposition in the United States.” See 10 Del. C. Section 362. Slip op. at 37. For other witnesses located in France, the court required that they make a good faith effort to comply with French law but if that proved unsuccessful for purposes of meeting imminent deadlines in the Chancery case, the Court would revisit the issue of whether to compel them to come to the U.S. to be deposed. See generally footnote 8.
Professor Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law at UCLA, a friend of this blog, and a nationally recognized corporate law expert who is often cited in opinions of the Delaware courts. He is a prolific scholar who has written countless books and articles. His latest article examines “reverse veil piercing” (as compared to piercing the corporate veil to find shareholders liable). The article also discusses the duty of majority shareholders–but in the context of his rebuttal to an amicus brief filed by other corporate law professors in a pending case before the U.S. Supreme Court. A partial synopsis of the article follows:
On March 25, 2014, the Supreme Court will hear oral argument in the Hobby Lobby and Conestoga Wood cases, in which the shareholders of two for-profit family-owned corporations argue that requiring them to comply with the contraception mandate [of The Affordable Care Act] violates the Religious Freedom Restoration Act. Forty-four corporate law professors filed an amicus brief in these cases, arguing that the essence of a corporation is its “separateness” from its shareholders and that, on the facts of these cases, there is no reason to disregard the separateness between shareholders and the corporations they control. The Brief is replete with errors, overstated claims, or red herrings, and misdirection.
Contrary to the Brief’s arguments, basic corporate law principles strongly support the position of Hobby Lobby and Conestoga Wood. In particular, the doctrine known as reverse veil piercing provides a clear and practical vehicle for disregarding the legal separateness of those corporations from their shareholders and thus granting those shareholders standing to assert their free exercise rights.
Martinez v. E.I. duPont de Nemours & Co., Inc., Del. Supr., No. 669, 2012 (Feb. 20, 2014).
Why One Should Care About This Decision: This Delaware Supreme Court opinion clarifies the “overwhelming hardship” standard applicable to the law of forum non conveniens and the related Cryo-Maid factors, and affirms a trial court decision that is one of the less common instances in which a case was dismissed in Delaware on the basis of a forum non conveniens argument. The facts involve claims by plaintiffs from Argentina, as well as a DuPont subsidiary in that country and issues relating to the law of Argentina. (Hence the flag of Argentina.)
This decision is must reading for anyone who needs to know the latest iteration of Delaware law on the topic of forum non conveniens. This opinion is also noteworthy for its feature of a rare and spirited dissent in an opinion of the Delaware Supreme Court. The dissenting opinion in this case describes the majority as reversing decades of stare decisis on the law of forum non conveniens, and having an unstated purpose of protecting Delaware’s corporate franchise in reaching its conclusion.
In the Matter of the Rehabilitation of Indemnity Insurance Corp., C.A. No 8601-VCL (Del. Ch. Feb. 19, 2014). Takeaway: This succinct letter ruling from the Court of Chancery provides one of many examples of why a motion to disqualify counsel based on alleged violations of the Delaware Lawyers’ Rules of Professional Conduct, such as for an alleged conflict of interest based on Rule 1.9, is often a fool’s errand–at least in state court. Other examples abound. See, e.g., prior examples here and here.
In sum, this decision made quick work of dueling motions based on the high threshold that was not met for such motions. Namely, violation of the rules of professional conduct applicable to lawyers is usually not sufficient, ipso facto, to disqualify a lawyer from representing a party in a pending matter. The same approach does not apply in other courts in other states. The reasoning in Delaware is that the agency of the Delaware Supreme Court known as the Office of Disciplinary Counsel is the proper forum where issues of violations by lawyers of the rules of legal ethics are investigated and enforced–not in the courtroom. In addition, the Court of Chancery is often skeptical of the tactical motives for filing such motions.
Stated another way, a motion to disqualify counsel based on an alleged violation of legal ethics will not prevail in Delaware unless the following standard is satisfied:
“Absent misconduct which taints the proceedings, thereby obstructing the orderly administration of justice, there is no independent right of counsel to challenge another lawyer’s alleged breach of the Rules [of legal ethics] outside of a disciplinary proceeding.” Slip op. at 3 (citation omitted). That is, a violation of the rules of professional conduct does not suffice to disqualify an attorney. Rather, the litigant “must show that the conflict prejudiced the fairness of the proceeding, not merely a violation of the Rules had occurred.” Id. (citation omitted). Clear enough?
Bottom line: Motions to disqualify counsel from representing a client in a pending matter, based on an alleged ethical violation, usually fail in Delaware state courts.