Delaware Litigation Lawyer & Attorney : Francis G. X. Pileggi : Corporate, Business, Commercial, Delaware Chancery Court

A recent Chancery Court decision reaffirmed the traditional enforceability of agreements to restrict competition by ex-employees.

The recent decision by Vice Chancellor Noble limited the period of restriction against competition to two years instead of the three years that was in the agreement. The court upheld a bar to the ex-employee's competition against his former employer, within the geographic area of northern Delaware. Although the court agreed in general with the principle of enforceability, it emphasized that there is no mathematically precise "one size fits all" form of agreement regarding the duration or scope terms that employers can use to restrict key employees from competing against them after either voluntary or involuntary termination of employment. The court stated that depending on the industry involved, or the specific type of confidential information that an employer is trying to prevent an ex-employee from using, the geographic area and the duration of time that competition is restricted will vary. The Court will consider the facts of the particular situation and the circumstances at the time that the agreement is sought to be enforced; as opposed to the time that the agreement was entered into between the employee and the employer.

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This may be an infrequently encountered point, but as recent posts have discussed the overlap of bankruptcy law and Delaware corporate law, I mention here the overlap of Federal jurisdiction and Delaware corporate law. In an unreported ruling from the bench on April 25, 2005 by Judge Richard Owen of the U.S. District Court for the Southern District of New York in SEC v Northshore Asset Management, LLC, et al., the court ordered that MBA & Associates, who was appearing before him through counsel, stay a summary proceeding that MBA had filed in Delaware Chancery Court pursuant to Section 225 of the Delaware General Corporation Law to address an issue of whether certain written consents were valid to change the composition of the board. On April 15 Judge Owen had appointed a Receiver at the request of the SEC and that Receiver was given control over shares of the company whose board membership was contested by MBA in the Delaware action. Upon application by the SEC to hold MBA in contempt of the April 15 Order for proceeding in Delaware, Judge Owen made it clear that MBA was covered by the April 15 order prohibiting any party from interfering with the Receiver or the issues that were before Judge Owen. Much more can be written on this matter, but the point is that when the SEC secures a Receiver and that Receiver controls shares in a company, the Receiver can halt any litigation that in any way impacts on those shares.

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In Encompass Services Holding Corp. v. Prosero, Inc,
Del. Ch., No. 578, February 3, 2005 (Parsons, V.C.), the Chancery Court determined that the deadline for filing an appraisal action under Section 262 of the Delaware General Corporation Law was equitably tolled because the petitioner was a debtor-in-possession in Bankruptcy Court and the initial petition was filed in Bankruptcy Court because of the view that Bankruptcy Court had exclusive jurisdiction while the corporation was in bankruptcy. The Chancery Court determined that based on the facts of the case the 120 day period for filing an appraisal action after the effective date of the merger was tolled based on the filing of the claim initially in Bankruptcy Court. The Bankruptcy Court abstained and the petition was promptly filed thereafter in Chancery Court. The court reasoned that the defendant had prompt notice of the demand and that the petitioner acted reasonably and in a timely manner. This is another example of several recent cases dealing with the interface between bankruptcy proceedings and corporate law.

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A useful article discussing recent Delaware Chancery Court cases that refer to the interfacing of bankruptcy law and corporate law was written by Dennis Connolly and Caroline Keller in the March 7, 2005 issue of the National Law Journal. The article provides a useful analysis of the Delaware Chancery Court decision entitled: Production Resources Group LLC v. NCT Group, Inc., 2004 WL 2647593 (Del. Ch. Nov. 17, 2004). The article discusses the analysis in the Production Resources Group case regarding the duty of directors in the "zone of insolvency." The thoughtful analysis also referenced two later cases that cited the decision with approval.

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I want to thank Prof. Bainbridge for linking my blog to his blog. As an aside, he will give the Pileggi Lecture for the upcoming 2005 Annual Francis G. Pileggi Distinguished Lecture in Law, hosted by Widener University School of Law. The Lecture is named after my father and brings a nationally prominent corporate law expert to speak to the Delaware Bench and Bar, after which a law review article is usually published in the Delaware Journal of Corporate Law, based on the Lecture.

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In the recent case of Orman v. Cullman, the Court of Chancery on October 20, 2004 denied a claim that the Board of Directors of General Cigar Holdings impermissibly coerced the shareholders to vote for a merger because of a lock-up provision required by the acquiring party. The Court reasoned that the public shareholders had retained full authority to veto the transaction; the Board had negotiated an effective fiduciary out, and any interested third-party was free to purchase the publicly held shares. The issues in this case could easily lend themselves to a law review article, but this is intended as a short summary limited to the Court's decision in this case only.

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Legislation in 2003 passed by the Delaware Legislature expands the Delaware Court of Chancery's jurisdiction over major business disputes involving technology issues, and also adds a cutting-edge and controversial provision that allows for confidential mediation by the Court of substantial business disputes.

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I want to thank Professor Larry Ribstein for favorably mentioning my blog on his Ideoblog found at http://busmovie.typepad.com/ideoblog. He gave a lecture in Delaware not long ago, and wrote a law review based on it, as part of a lecture series named after my father, called the Annual Francis G. Pileggi Distinguished Lecture in Law Series, and hosted by the Widener University School of Law.

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I owe a debt of gratitude to Prof. Gordon Smith for his kind reference to the debut of my blog in his highly regarded blog called The Conglomerate which can be found at www.theconglomerate.org.
Coincidentally, Prof. Smith is in Delaware this week as a visiting distinguised professor at Widener University School of Law. Earlier this week, I attended an insightful lecture on current topics in Delaware corporate law that he gave at the Wilmington Club with members of the Chancery Court and Delaware Supreme Court in attendance as well.

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In the recent case of Tafeen v. Homestore, Inc., Chancellor Chandler reviewed the decision of a Special Master involving the determination of the reasonableness of the amount of a request for the advancement of attorneys' fees in an indemnification and advancement case. In prior decisions the court provided a detailed recitation of the facts and the court also determined that Homestore had not raised valid defenses to the advancement of Tafeen's fees, who was entitled to have his reasonable fees advanced pursuant to his indemnification contract. The court, with one exception, approved the final report of the Master regarding the reasonableness of the fees sought to be advanced. The reasonableness was based on Rule 1.5(a) of the Delaware Lawyers' Rules of Professional Conduct.

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The recent Delaware Supreme Court decision of Weinstein Enterprises, Inc. v. Orloff, discusses the recent amendment to Section 220 of the Delaware General Corporation Law regarding the right of a stockholder in a parent corporation to inspect the books of a subsidiary. In the first interpretation of the recent amendment of Section 220(b)(2), the court determined that unless the parent is capable of compelling the subsidiary to produce the documents, the stockholder of the parent corporation is not entitled generally to inspect the books and records of that subsidiary. The case discusses the analysis that needs to apply to a determination of the categorization of an entity as a subsidiary and the determination of whether a parent corporation has control for purposes of the statute.

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Professor Bainbridge on his blog also comments on the effect of the recent federal legislation on class actions filed in Delaware. He recites from a study by Robert Thompson and Randall Thomas many statistics on cases filed in the Delaware Chancery Court and concludes with a prediction that it is not likely to have a major impact on Delaware class actions involving the breach of fiduciary duties. See professorbainbridge.com.

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Although the primary format of this blog is to summarize recent Delaware Chancery Court cases and key Delaware Supreme Court cases on business law, I will make reference to articles and other sources of relevant information on the topic of Delaware business law. For example, in the current issue of The Delaware Journal of Corporate Law, Professor Robert B. Thompson of Vanderbilt University authored a very timely article on the interfacing between Delaware corporate law and the regulation by the federal government and the stock exchanges of related issues. The cite is 29 Del. J. Corp. L. 779 (2004) (This article was based on the annual Francis G. Pileggi Distinguished Lecture in Law delivered on November 14, 2003.)

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Orloff v. Shulman
Del. Ch., C.A. No. 852, February 2, 2005 (Lamb, V.C.)

In this case the court addressed the issue of a Motion to Stay Discovery Pending the Resolution of a Motion to Dismiss. The court noted that there is no absolute right to a stay of discovery, even where a case dispositive motion has been filed. Rather, the grant of such a request is within the discretion of the trial court. The moving party bears the burden of persuasion. The court relied on a three-part test in a decision by former Chancellor Allen that might justify the denial of the stay of discovery, despite a pending Motion to Dismiss:

1)Where the motion does not offer a reasonable expectation of avoiding further litigation;

2)Where the plaintiff has requested interim relief;

3)Where the plaintiff will be prejudiced because information may be unavailable later.

As applied to the facts before it, the court reasoned that the Motion to Stay Discovery should be granted in light of the extensive discovery requests and the substantial burden that would be imposed on the defendant, after application of the above factors.

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In Gilliland v. Motorola, Inc., the Delaware Chancery Court on March 4, 2005 decided a case involving the breach by a majority shareholder, Motorola, of its duties in connection with a short-form merger. The factual circumstances cannot be explained in detail in this short blurb, but in essence, the court determined that due to the delay in the filing of the suit by the minority shareholder, that a "quasi-appraisal" was the appropriate remedy. Due to the unusual procedure posture of the case, the more conventional appraisal procedure required modification. The court found that the breach of the duty of disclosure by Motorola was neither willful nor intentional and when the case was filed it was a novel question of law whether a company that met the express statutory requirements for appraisal could still breach its duty of disclosure to the stockholders in a short-form merger. The court deferred decision as to class certification and required that the plaintiff and other minority stockholders could opt-in and return a portion of the share price to the Register in Chancery and that fair value would be determined after a class had been established. The prior decision in the case provides greater factual background and can be found at Gilliland v. Motorola, Inc., 859 A.2d 80 (Del. Ch. 2004).

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In Capital Group Companies, Inc. v. Armour, the Delaware Chancery Court ruled on the validity of restrictions on stock transfer in a Stock Restriction Agreement for a private company and barred the disposition of that stock in a divorce proceeding without the express prior written consent of the private company, the Capital Companies, Inc. The company had redemption rights and was permitted to enforce the restriction on non-authorized transfers. The privately held company involved ("CGC") required all persons purchasing shares of its common stock to become parties to a Stock Restriction Agreement ("SRA") which included a general restriction on transfer and a right to redeem at a formula price upon transfer to a non-authorized transferee. Armour, an Executive Vice President of CGC, and Nina Ritter were married in 1984. In 1998, for tax planning reasons, and with the consent of CGC, Armour and Ritter placed stock owned by Armour into a trust called the Ritter-Armour Revocable Trust ("the Trust"). Ritter is a trustee of the Trust. The Trust provides that no stock held by the Trust may be transferred without the consent of CGC. As trustees of the Trust, Armour and Ritter both signed a Joinder Agreement agreeing to be bound by the SRA.

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