Supreme Court Raises Threshold to Sue Non-Delaware Corporations in Delaware

 The Delaware Supreme Court decided today, over a dissenting opinion, that a non-Delaware corporation cannot be sued in Delaware, even if it is registered to do business in Delaware, if the basis for the suit against it in Delaware is unrelated to the fact that it is registered to do business in Delaware as a foreign corporation. Genuine Parts Co. v. Cepec, Del. Supr., No. 528, 2015 (April 18, 2016). This ruling should be compared generally with an unrelated recent opinion of the Delaware Supreme Court, in Hazout v. Tsang, highlighted on these pages, that interpreted a statute to make it easier to impose jurisdiction in Delaware over directors and officers of Delaware corporations.

This recent Supreme Court opinion in Genuine Auto Parts needs to be read by anyone who wants to understand the latest iteration of Delaware law on the two types of personal jurisdiction and, in particular, the difference between general jurisdiction and specific jurisdiction as it applies to foreign corporations who are registered to do business in Delaware. The court distances itself from a decision of almost thirty years ago in Sternberg v. O’Neil, 550 A.2d 1105 (Del. 1988), in connection with applying the registration statutes at Sections 371 and 376 of Title 8, as well as the long-arm statute at Section 3104 of Title 10 of the Delaware Code.

In sum, Delaware’s high court applies the U.S. Supreme Court decision in Daimler AG v. Bauman, 143 S. Ct. 746 (2014), to interpret the Delaware statutes requiring foreign corporations to register to do business in Delaware to mean, for purposes of an analysis of personal jurisdiction consistent with the Due Process Clause of the U.S. Constitution, as follows: “In most situations where the foreign corporation does not have its principal place of business in Delaware, that will mean that Delaware cannot exercise general jurisdiction over the foreign corporation.” This ruling has wide application for those engaged in the practice of commercial litigation in Delaware and other types of civil litigation involving corporations.

Chancery Rejects Advancement Claim for Fees on Fees

Generally, a successful claim for advancement of legal fees for a former director or officer entitles the prevailing party to “fees on fees” incurred for obtaining the favorable ruling. A recent ruling from the newest member of the Delaware Court of Chancery explains the limitations or the contours of that general rule. In Wong v. USES Holding Corp., C.A. No. 11475-VCS (Del. Ch. April 5, 2016)(“Wong II“), the court denied a motion for reargument of a prior ruling on that issue by the most recently retired member of the court. Wong v. USES Holding Corp., C.A. No. 11475-VCN (Del. Ch. Feb. 26, 2016)(“Wong I“).

This useful decision concerning this perennial issue in corporate litigation can be most easily highlighted by noting that the issue addressed was: when the “fees on fees” started to accrue. After a thoughtful review of both the controlling bylaws and DGCL Section 145 (e), the court reasoned that the obligation of the corporation to advance fees, and thus the triggering of the fees on fees, did not commence until the required undertaking by the former officer was submitted.

This pithy decision deserves a place in my annually updated chapter in a book published by the ABA that provides an annual review of the key decisions from Delaware and around the country on the topic of advancement and indemnification of directors and officers. The 2016 edition with 2015 cases is expected to be available imminently from the ABA and was co-written by yours truly along with my colleagues Gary Lipkin and Aimee Czachorowski. Information about the last publication is available at this link.

Supplement: Frank Reynolds of Thomson Reuters has published an article about this case that provides more factual background and practical insights.

Chancery Upholds Waiver of All Fiduciary Duties and Bars All Claims

The recent opinion from the Delaware Court of Chancery in Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch., March 29, 2016), provides a useful reminder that the Delaware statutes for alternative entities, such as the LP in this case, allow for a waiver of all fiduciary duties. The only exception to that rule is that the implied covenant of good faith and fair dealing cannot be waived, but that is a porous net that does not save many claims and is a notoriously difficult theory to prevail on. See 6 Del. C. Section 17-1101(d)(allowing elimination of fiduciary duties in LP).Traffic Lights, Road Sign, Red, Yellow

This helpful opinion is also noteworthy for, in essence–in my words, reminding readers that claimants should look to federal law and not Delaware law in those cases where all fiduciary duties are waived under state law. See footnote 62. The court suggests a potential basis in federal law to seek remedies for disclosure violations and related claims, where Delaware law offers little or no solace in these situations. This noteworthy judicial observation should be compared to the many scholarly articles that decry the “creeping federalization” of corporate law, which for many years has threatened to displace Delaware as the nation’s leading source for corporate governance jurisprudence and a leading forum for corporate litigation. See, e.g., the scholarly articles of Professor Mark Roe and Professor Stephen Bainbridge, among many others. Footnote 62 refers to federal statutes that may be a source of potential claims when all fiduciary duties are waived under state law.

The decision cites to many prior Delaware opinions in which a provision in an LP agreement provides a procedure for handling conflicted, affiliated transactions by which a committee will “sanitize” such transactions. The court also notes that by contrast, fiduciary duties cannot be waived in the corporate context and the “cleansing procedure” of shareholder ratification in the corporate context is also dependent upon both sufficient disclosures and a majority of disinterested stockholders approving such contested transactions. See, e.g., footnote 30 for cases cited on this point.

Another practical iteration of Delaware law in this opinion for those who make their living in the vineyards of corporate and commercial litigation, relates to the elements of “tortious interference with contract”. One of the elements of such a claim is “an intentional act that is a significant factor in causing the breach of the contract.” An important exception to that requirement, however, exists when: “defendant’s wrongful conduct … induces the termination of the contract, irrespective of whether termination is lawful.” See footnote 74 for supporting case law.

Chancery Grants Advancement Based on LLC Agreement

The recent Delaware Court of Chancery opinion in Hyatt v. Al Jazeera American Holdings II, LLC, C.A. No. 11465-VCG (Del. Ch. March 31, 2016), is useful for those who need to be aware of the latest iteration of Delaware law on advancement of fees incurred by former officers and directors, which is one of the more common forms of corporate litigation. This is the latest in an ongoing series of rulings in Delaware involving a transaction in which the media company known as Al Jazeera, based in the Middle East, purchased a cable TV company in the U.S. which was owned at least in part by the former politician, Al Gore, as well as Joel Hyatt. Some of those decisions have been highlighted on these pages.

Introduction: The court begins the opinion with the apt description of many advancement cases being indicative of “Hirer’s Remorse”, to the extent that advancement is given to employees, officers and directors as an inducement for them to accept their positions for the benefit of a corporation, but afterwards when those corporations need to make payments pursuant to those advancement obligations, they often resist and try to find reasons not to pay.

Background. This case involves a twist on that typical pattern. Al Jazeera assumed the obligations of advancement from the company that it purchased. The underlying litigation began when Hyatt and Gore sued Al Jazeera to collect money that was placed in escrow after the transaction. Al Jazeera then counterclaimed against Hyatt and Gore contending that they breached provisions of the merger agreement based on certain alleged misrepresentations and related claims. It was undisputed that the initial claims in the suit filed by Hyatt and Gore were not covered by advancement. This case involved whether the counterclaims against Hyatt and Gore entitled them to advancement of their fees and expenses.

Key Facts: In large measure the case turned on whether the counterclaims against Hyatt and Gore were made against them in their capacities as former officers and directors. The court analyzes each of the counterclaims separately and found that most of them did assert allegations based on the actions of Gore and Hyatt as former officers and directors of the company. The analysis was based on the terms of the merger agreement which incorporated the advancement provisions in the LLC operating agreement.

Notably, the court found that fee shifting provision in the relevant agreement did not supersede the advancement obligation and that the shifting of fees provision was silent on the issue of advancement.

Useful Nuggets include the following:

Although indemnification and advancement rights are closely related, each are ‘distinct types of legal rights,’ and the ‘right to advancement is not ordinarily dependent upon a determination that the party in question will ultimately be entitled to be indemnified.’” See footnotes 31 and 32. The foregoing statement perhaps encapsulates the counterintuitive nature of the concept of advancement and is the aspect that most commonly frustrates many corporations who find it difficult to advance fees and expenses when they are at least personally convinced that ultimately the former officer and director will not be entitled to indemnification.

Another nugget of legal insight in this case refers to the application of cases interpreting Section 145 of the Delaware General Corporation Law to advancement provisions in LLC operating agreements. Footnote 38 in the opinion and the accompanying text explain how the court often applies the reasoning in cases interpreting Section 145 to the interpretation of language in an LLC operating agreement or other agreements that often incorporate the same statutory advancement language verbatim from Section 145. In this case for example, the operating agreement conferred advancement on former officers and directors that incurred expenses “by reason of the fact” that the person was a former officer and a director. That language tracks the language in Section 145 of the DGCL. The court cites to other cases that have relied on Section 145 jurisprudence to interpret provisions in agreements that use the same or similar language as the statute.

The court referred to Section 18-108 of the Delaware LLC Act as giving broad authority to LLCs to provide indemnification by contract. Specifically, the court in this case found that the parties intended to import the “strictures” of Section 145 by using the same language in their agreement. The court also allowed for “fees on fees” which is a well-established principle to cover the costs of litigation to the extent that a party prevails in establishing the right to advancement, as in this case.

Chancery Rescinds Contract Based on Unconscionability

The Delaware Court of Chancery recently issued a magnum opus on the topic of rescinding a contract based on unconscionability. James v. National Financial, LLC, C.A. No. 8931-VCL (Del. Ch. Mar. 14, 2016). This opinion is destined to be the definitive work on this aspect of Delaware law and should be of interest to those engaged in commercial litigation.finance-charge-hi

This opinion has much to commend it and deserves a more extensive synopsis, but for purposes of this short blog post I will focus on the court’s mini-treatise on unconscionability in the context of a contract. This 72-page opinion is a sequel to a prior decision in this case which imposed penalties for discovery violations. That decision was highlighted on these pages. A separate article could be written based on the scholarly analysis the court provided about the legal aspects of the “working poor’s plight” and how they are taken advantage of by consumer finance companies. In this case, the interest rate charged for a modest loan was more than 800%. Despite the defendant’s attempt to characterize it as something else, the court used equitable powers that focus on substance over form to determine that the essence of the disputed transaction was a payday loan that Delaware recently prohibited by statute–but that was only one part of the unconscionability analysis.

Contract Principles Addressed

The court explained that the doctrine of unconscionability is an exception to the broad support for freedom of contract in Delaware law. Delaware law is strongly inclined to respect the voluntary agreement of parties and will only interfere “upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract.” Generally, “parties who sign contracts and other binding documents or authorize someone else to execute those documents on their behalf, are bound by the obligations that those documents contain.” Slip op. at 21. Unconscionability in the context of contracts has been defined as a contract “such as no man in his senses and not under delusion would make on the one hand, and no honest or fair man would accept, on the other.”

The court provides extended definitions and historical explanations of the concept of unconscionability with citations to copious legal sources. The court referred to the definition in the Uniform Commercial Code at Section 2-302. Although technically limited in scope to the sale of goods, Delaware decisions have also applied Section 2-302 more broadly. See footnote 10.

The court observed that unconscionability is a concept that is used sparingly and requires that a court find that “the party with superior bargaining power used it to take unfair advantage of his counterpart.” Moreover, the terms must be so one-sided as to be oppressive. The court identified ten factors that guide the analysis of unconscionability. See Slip op. at 24-25.

The court also explained the difference between substantive unconscionability and procedural unconscionability. The concept of substantive unconscionability tests the substance of the exchange. An agreement is substantively unconscionable if the terms evidence a gross imbalance that “shocks the conscience.” This means a bargain on terms “so extreme as to appear unconscionable according to the mores and business practices of the time and place.”

By contrast, procedural unconscionability refers to the procedures that led to the contract with a goal of evaluating whether seemingly lopsided terms might have resulted from arms’-length bargaining. The court focuses on whether the weaker party could make a meaningful choice. The concept is “broadly conceived to encompass not only the employment of sharp bargaining practices and the use of fine print and convoluted language, but also a lack of understanding and an inequity of bargaining power.”

Court’s Reasoning

The two dimensions of unconscionability are not two separate prongs but rather the analysis is unitary and it is generally agreed that “if more of one is present, then less of the other is required.” Of the ten factors based on the Fritz case, six relate to substantive unconscionability.

The court conducted a thorough and probing examination and application of the six factors that apply to substantive unconscionability, as well as the four factors that are used to analyze procedural unconscionability. See Slip op. at 46-47.

The court explained that if a contract is found unconscionable, the proper remedy it to declare it invalid because it is void. See Restatement (Second) of Contracts, Section 208, cmt. g.

The court found that the defendant was using an interest-only, non-amortizing installment loan to evade Delaware’s Payday Loan Law. The court then went on to observe applicable equitable principles that include: “equity regards substance rather than form,” and also equity enforces the rights and duties which “spring from the real relations of the parties.” In substance, the court found that the disputed loan in this case, in essence, was a payday loan which was in violation of the applicable Delaware statute.

Although it will not be covered in this short blog post, the court’s opinion provides a useful analysis of a violation of the Truth in Lending Act. See 15 U.S.C. Section 1601(a). The court held that the violation of that Act entitled the plaintiff to an award of reasonably attorneys’ fees and costs. The court instructed the plaintiffs’ counsel to submit a Rule 88 affidavit.

No Per Se Duty to Disclose Financial Statement in Closely Held Company

A recent Delaware Court of Chancery transcript ruling is notable for stating that there is no per se affirmative obligation, absent a request for stockholder action, in a closely held company, to produce financial statements. The court held, however, that under certain circumstance, for example in response to a demand under DGCL Section 220, it could raise a fiduciary duty question if no financial statement were prepared in order to keep the minority “in the dark.” The Ravenswood Investment Company, L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Transcript) (Del. Ch. Feb. 25, 2016). Note that transcript rulings are often cited as “good authority” in Delaware briefs (and formal court opinions.)

The short transcript ruling follows many other decisions in this long running dispute between the parties, and some of those prior Delaware rulings have been highlighted on these pages. Three statements of law that are helpful for purposes of those engaged in Delaware corporate and commercial litigation can be summarized as follows:

1)         There is no duty per se to provide financial statements in a closely-held company when stockholder action is not being requested. See Slip op. at 7.

2)         Based on the facts of this case, the court did allow a claim for breach of fiduciary duty based on the allegation that no financial statements were provided or even created as a means of thwarting a pending Section 220 claim and “keeping the stockholders in the dark.”

3)         The court allowed an amendment to a complaint in a case that appears to have been languishing for several years although the transcript does not elaborate on the potential justification for that situation transpiring.

SUPPLEMENT: Keith Bishop on his California Corporate and Securities Law blog, comments on this case by noting that despite Delaware law, if a Delaware company has its main office in California or regularly holds board meetings there, it may be required to produce annual reports pursuant to California law.

SUPPLEMENT II: The estimable Professor Stephen Bainbridge provides scholarly insights about this decision with citations to authorities and learned commentary.

Supreme Court Reinforces Second Amendment Rights

The recent decision from the United States Supreme Court in Caetano v. Massachusetts, 577 U.S. _ (March 21, 2016), includes a concurring opinion that is a forceful reiteration of the Supreme Court’s position on the Second Amendment.  As many readers know, the decision in McDonald v. Chicago, 561 U.S. 742, 750 (2010), held that the Second Amendment right to bear arms is fully applicable to the states.  McDonald was a sequel to the Supreme Court decision in District of Columbia v. Heller, 554 U.S. 570, 582 (2008) (Scalia, J.). The Heller decision emphasized that the Second Amendment protects an individual right to keep and bear arms.  In the Caetano case, the U.S. Supreme Court granted a writ of certiorari, vacated the judgment of the Supreme Judicial Court of Massachusetts, and remanded for further proceedings not inconsistent with the per curiam opinion.  The Caetano opinion strongly criticized the Massachusetts court for failing to follow Heller in several respects.  That court failed to recognize a stun gun as among the types of weapons that are protected under the interpretation of the Second Amendment in Heller.

Justice Alito and Justice Thomas joined in a concurrence which strongly rebuked the Massachusetts court for flagrantly ignoring the clear rulings in Heller.  The concurring opinion of Justices Alito and Thomas could be viewed as a way of honoring the author of the Heller opinion, Justice Scalia.  The concurrence reminded the Massachusetts court of several basic principles in Heller including the following:

“It is settled that the Second Amendment protects an individual right to keep and bear arms that applies against both the Federal Government and the States, District of Columbia v. Heller, 554 U.S. 570 (2008); McDonald v. Chicago, 561 U.S. 742 (2010).  That right vindicates the ‘basic right’ of ‘individual self-defense.’”  Id. at 767; see Heller, supra, at 599, 628.

This case involved a woman who obtained a stun gun to protect herself against an abusive former boyfriend who towered over her by nearly a foot and outweighed her by close to 100 pounds.  The Supreme Court opinion described how after work one evening, her ex-boyfriend confronted her and started screaming.  She stood her ground, displayed the stun gun, and told him that she would not take his abuse, and if he did not leave her alone she would use the stun gun on him.  It worked.  The ex-boyfriend left her alone.  Subsequently, in an unrelated incident, the police found the stun gun in her purse and arrested her because apparently the possession of a stun gun is in violation of a Massachusetts statute, even though the possession of the stun gun may have saved her life.

Justice Alito explained the connection between the right to bear arms and the basic right of self-defense:  “By arming herself, Caetano was able to protect against the physical threat that a restraining order had proved useless to prevent.”  Slip op. at 2.

Justice Alito also explained that Heller confirmed that:  “The Second Amendment extends, prima facie, to all instruments that constitute bearable arms . . .”  554 U.S. at 582.  Justice Alito expressed discontent that the Massachusetts court defied the reasoning in Heller.  The reasoning of the Massachusetts court, instructed Justice Alito, “poses a grave threat to the fundamental right of self-defense.”  The concurrence observed that:

  “A State’s most basic responsibility is to keep its people safe.  The Commonwealth of Massachusetts was either unable or unwilling to do what was necessary to protect Jaime Caetano, so she was forced to protect herself.  . . . If the fundamental right of self-defense does not protect Caetano, then the safety of all Americans is left to the mercy of State authorities who may be more concerned about disarming the people than about keeping them safe.”

This concurrence by Justices Alito and Thomas reinforces the vitality of the Heller and McDonald decisions and gives hope to those who cherish the Bill of Rights.

Postscript: The Delaware Supreme Court’s opinion interpreting the Delaware Constitution’s version of the Second Amendment, known as Article I, Section 20, was reinforced in the opinion styled Doe v. Wilmington Housing Authority, highlighted on these pages. The natural right to self-defense that each person is born with transcends the typical corporate and commercial litigation fare typically found on this blog.

Supreme Court Determines SOL for Bad Faith Claims Against Insur. Co.

A recent Delaware Supreme Court opinion should be of interest to readers of these pages for two reasons: (1) Almost every litigator will find it useful during some point in her career to know when the statute of limitations runs for a claim against an insurance company for bad faith failure to settle within policy limits; and (2) for corporate and commercial litigators in particular, the court applies reasoning that borrows from its jurisprudence in the area of indemnification of directors and officers under Section 145 of the Delaware General Corporation Law. Connelly v. State Farm Mutual Automobile Insur. Co., Del. Supr., No. 426, 2015 (Mar. 4, 2016).

Issue on Appeal: When does the bad-faith-failure-to-settle claim accrue for purposes of the three-year statute of limitations.

Key Principles: The court began its analysis with basic principles. Readers are familiar with the condition imposed on all Delaware contracts of “good faith and fair dealing.” As applied to insurance contracts, the court explained that historically the implied covenant has “included a duty to settle claims within policy limits where recovery in excess of those limits is substantially likely.” See footnotes 12 and 13 for copious supporting citations.

The court drew upon analogous reasoning in the corporate context in which it is well settled that indemnity claims by a director or officer do not accrue until there is a final judgment. In other words, until the final judgment of the trial court withstands appellate review, the outcome of the underlying matter is not certain. See footnotes 33 to 36.

The court explained that insurance claims are a type of indemnity claim because in both cases the obligation to cover the indemnified party’s costs arises only once certain conditions occur—in the case of the bad-faith suit against an insurer, a final and non-appealable excess judgment as to a third-party claim. As for non-advancement indemnity claims, the “corporation’s obligation to indemnify its fiduciary, employee, or agent, is also conditioned on that party meeting the applicable standard of conduct” (citing DGCL section 145 (a) and (b)).

Delaware’s high court reasoned that the similarities between indemnity and insurance claims, justify the same policies of “litigative efficiency and preventing waste of judicial resources that have led Delaware courts to determine that an indemnity claim accrues when there is a final judgment….”

 

Chancery Explains Policy Reasons for Awarding Advancement to Former Director

The Delaware Court of Chancery’s opinion in Marino v. Patriot Rail Company LLC, C.A. No. 11605-VCL (Del. Ch. Feb. 29, 2016), is noteworthy for providing the most detailed historical analysis and doctrinal underpinning for the legislative scheme that requires corporations under certain circumstances to provide advancement to former directors and officers, that has come along in many years. The decision also explains why company’s are barred from terminating such advancement for former directors and officers unless certain prerequisites are satisfied.

Basic Facts

Although the factual background has many moving parts, for purposes of this short blog post that focuses on the legal analysis, the basic facts include a former chairman, president and CEO who had a controlling interest in the company involved. While a lawsuit was pending against the company by a former potential merger partner, the company was sold and an allegation was made that money from the sale was diverted in a manner that would make it difficult for the creditors to collect in the event of a judgment. After obtaining a judgment in the underlying suit that was pending prior to the sale, the creditor attempted to modify the judgment to add the former chairman as an individual party.

The former chairman sought advancement to cover the legal fees to defend against the efforts to add him as an individual party and to defend efforts to collect against him as a judgment debtor.

Legal Analysis

This opinion provides one of the “deepest dives” into legislative history and the policies underpinning advancement rights under Section 145(e); Section 145(f) and Section 145(j) of the Delaware General Corporation Law this writer ever recalls. This opinion also provides practical assistance for those handling this common form of corporate litigation.

In sum, Section 145(e) authorizes advancement; Section 145(j) suggests the extent to which a covered person’s indemnification and advancement rights for actions taken during the person’s period of service continued after the person ceased to serve; and Section 145(f) limits a corporation’s ability to cause a covered person’s rights to terminate after the person has served in reliance upon them. The court noted that Section 145(e) is permissive and therefore a corporation is free to limit the terms of advancement and even preclude advancement entirely at the outset.

The distinction in 145(e) between current and former directors and officers was not intended to do anything other than underscore the ability of current directors and officers to receive advancement if an undertaking is provided, and not be presumed to be engaged in self-interested transactions. See generally DGCL Section 144. Compare: principle of corporate actions being “twice tested.” See, e.g., footnotes 11 and 13.

The court refers to Section 145(j) as the “Continuation Clause” which requires an explicit opt-out before the advancement rights of a former director and officer can be terminated. So, although subsection (e) makes advancement permissive, once it is provided, this provision is mandatory to the extent that it prohibits termination of coverage for former directors unless this provision is satisfied.

The court explained that under the Continuation Clause in subsection (j), “the only way that a covered person loses coverage after having ceased to be a director is if the source of the coverage otherwise provided when authorized or ratified.” (emphasis added.)

By comparison and consistent with the Continuation Clause, the court explained that section 145(a) grants authority to a corporation to indemnify a person who “is or was” a director for actions that they took while a director. The “was” compliments the default rule of the Continuation Clause which states that unless the indemnification or advancement right specifies otherwise, coverage for actions taken while in a covered capacity continues after the person “has ceased” to serve in the covered capacity. Section 145(a) addresses whether an individual became involved in the litigation “by reason of” the individual’s service in a covered capacity.

Section 145(b) authorizes indemnification for actions by or in the right of a corporation and includes parallel usages of the words “is or was.”

The court next addressed Section 145(f) which “answers the more serious question of whether a corporation can cause those rights [of advancement] not to continue by altering or eliminating them.” The court refers to Section 145(f) as the “No Termination Clause.” It was added as an amendment to the statute in 2009 as a result of a decision which was superseded by this new statutory provision to negate the court ruling that allowed the corporation to terminate coverage of a former director after the former director left this position. This No Termination Clause provides prerequisites that must be satisfied before such coverage can be terminated.

The court discusses the policy reasons and doctrinal underpinning of the importance of providing advancement to former directors and officers for actions taken during their periods of service. Advancement has often been described as an important corollary to indemnification because of their use as inducements for attracting key individuals to perform corporate service. The court explained that the statute was designed to counter the natural human inclination to deny advancement to former directors and officers perceived to have harmed the corporation. Still, the court explained that: “by establishing a statutory presumption of continuing coverage for actions taken during the period of service, the Continuation Clause and the No Termination Clause ensure that the public policy interest prevails, unless the individuals know when they choose to serve that their rights will terminate or can be cut off later.” See Slip op. at 30.

The court explained why some actions that were taken after the resignation of the chairman in his personal capacity in this case would not be covered, but the actions taken while he was the chairman would be covered.

There are many parts of this opinion that make it required reading for anyone interested in this area of Delaware corporate law. One of the key parts of this opinion at pages 39 and 40 should be consulted not for its uniqueness but because it describes a detailed procedure that the parties and their counsel must follow to address disputed claims for advancement. This procedure is similar to prior procedures used in Chancery and will inevitably be needed to address disputes as this opinion is applied to specific bills that are received on a monthly basis and that will engender disagreement about which bills are properly covered pursuant to this opinion and which are not.

N.B.: This decision should be closely compared and contrasted with the Delaware Court of Chancery’s opinion styled Charney v. American Apparel, Inc., C.A. No. 11098-CB (Del. Ch., Sept. 11, 2015), which rejected the advancement claims by a former chairman and CEO (and founder), based on the provisions for advancement in the company’s charter and in an indemnification agreement. That ruling was highlighted on these pages.

Supreme Court Rejects Claims Against Directors

The Delaware Supreme Court, in a short Order issued not long after oral argument, rejected the arguments on appeal that challenged a decision of the Court of Chancery that dismissed claims that directors were beholden to those that they had business relationships with. Greater Pennsylvania Carpenters’ Pension Fund v. Giancarlo, et al., No. 531-2015, Order issued (Del. Mar. 11, 2016).

Frank Reynolds of Thomson Reuters provides helpful insights and more details on the case in an article. Frank writes that:

… the plaintiffs’ bid for a reversal faced long odds with the Delaware Supreme Court’s recent track record of quickly rejecting emergency appeals in cases such as this that were dismissed for failure to clear procedural hurdles like the pre-suit-demand requirement.

Over the past several months, the high court has summarily affirmed the dismissal of  high-profile shareholder suits in one-page orders often issued the day after oral argument was held. For example, within 24 hours, the justices tossed an appeal in a suit that claimed GM Co.’s directors negligently failed to respond quickly to reports of fatal ignition switch failures. In re GM Co. Derivative Litig., No. 392, 2015, order issued (Del. Feb. 11, 2016).

 

LexBlog