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

Prof. Ribstein has a post that provides insightful commentary on the new SCOTUS nominee, Judge Sam Alito of the 3rd Circuit Appeals Court. Ribstein analyzes prior business cases from Alito, including one on Delaware law (the 3rd Circuit includes Delaware). Interestingly, his post over the weekend, pre-dated the official announcement today. CNN has a more complete story about the nominee and the announcement today.
UPDATE: On the theory that relevant background on Alito should be of interest to all those who make their living in the legal profession, Instapundit's post addresses the issues in an Alito decision involving the rights of a father of a child that the mother seeks to abort.

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The Delaware Supreme Court affirmed a Chancery Court decision that awarded only about 20% of the amount requested for attorneys' fees in a derivative case, despite a settlement agreement that allowed for payment of $1.2 million. The decision decribes the factors considered by the court in approving fees, regardless of the agreement of the parties on a specific amount of fees. O'Malley, et al. v. Jeffries, et al.,download file.

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Prof. Bainbridge posts about an article he has written regarding the duties of directors when the company is in the "zone of insolvency". The article is available to download here.

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In American Legacy Foundation v. Lorillard Tobacco Company,download file, Vice Chancellor Lamb denied a Rule 59 motion to reargue, and upheld his prior finding that there was no breach of the historic settlement agreement between the parties. I posted on the original ruling here.

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"Game theory" is a branch of economics that deals with interdependent decisionmaking and was in the news recently in connection with Nobel prize winners whose work helped them to be recipients of that award.
The Legal Ethics Forum blog has a mind-stimulating post about how that type of analysis can be applied to discovery in litigation.

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The blog called, May It Please The Court, reports on a recent California case that applied Delaware law to dismiss a derivative suit based on the well-known prerequisite of continuous stock ownership. This compares with the recent Delaware case of Examen, Inc. that I reported on here, in which the internal affairs doctrine was the basis for deciding that Delaware law applied to the determination of certain preferred stock rights despite the arguments that California law should control.

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Legal Reader blog quotes Chancellor Chandler as warning boards to be more mindful of executive compensation issues in order to avoid the blunt instrument of potential federal regulation on the matter.

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CNN reports that President Bush relucantly accepts withdraw request by Miers for her SCOTUS nomination

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Chancellor Chandler was suggested as preferable nominee to SCOTUS instead of Miers by Joe Miller of the Conglomerate blog.

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In the case ofIn Re: CompuCom Systems, Inc. Stockholders Litigation , download pdf file, a Motion to Dismiss this class action was granted in part because the court observed no facts to support a reasonable inference to overcome the business judgment rule based on claims that the board sold the company at the behest of the majority shareholder to satisfy cash flow needs. Specifically, taking the allegations of the plaintiffs as true, as required under Rule 12(b)(6) for a Motion to Dismiss, the court still determined that insufficient facts were alleged to support a reasonable inference that the board and the special committee were dominated and controlled by the majority shareholder. Similarly, the court found that the factual allegations contained in the complaint did not overcome the presumption that the board acted "on an informed basis, in good faith, and in the honest belief that the contested transaction was in the best interest of the corporation and all of its shareholders." The court reviewed in the detail the allegations that it determined did not establish a breach of the duty of care and it also reviewed the allegations that the board was dominated and controlled. It explained the analysis required to determine whether director independence was lacking. The court distinguished the McMullin decision by the Delaware Supreme Court because in that case a majority of the directors were found not to be independent and also in that case the court found, unlike the case at bar, that the board breached its duty of due care thereby not enjoying the protection of the business judgment rule.

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Two recent Chancery decisions addressed the TRO Standard and the test for an interlocutory appeal.
In Dweck v. Nasser Kids International Corp.,download pdf file, the court denied a Motion pursuant to Rule 65(b) for a temporary restraining order (TRO). The two main reasons for the denial were the failure to establish a threat of imminent irreparable injury and the fact that four months elapsed after the lawsuit was filed but before the Motion for TRO was filed with the court. In light of those findings, the court did not address the other factors considered in connection with a request for a TRO.
In another case, Vice Chancellor Noble allowed an interlocutory appeal of his decision to grant a motion to amend in connection with issues of demand futility under Rule 23.1. Zimmerman v. Braddock, et al.,download pdf file.

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The Delaware Supreme Court recently ruled in Cantinca v. Fontana , download pdf file, on a statutory interpretation issue of first impression. Specifically, the issue was whether in a civil action for negligence, a state statute barred evidence of conduct that was claimed to constitute a violation of a county ordinance, which would be negligence per se. The trial court held that Section 6636 of Title 16 of the Delaware Code prevailed over a different standard in the county code. The court disagreed that the state provision preempted the counterpart in the New Castle County Code. In Delaware, the state and its political subdivisions are permitted to enact similar provisions and regulations as long as the two regulations do not conflict. Where a conflict exists between a state statute and a local ordinance, the statute must always prevail. However, the test for determining a conflict and preemption analysis is whether the state statute was intended to be exclusive. Legislative intent to make a state statute exclusive of any regulation of the same subject matter by a political subdivision may be expressed or implied. Unlike the trial court, the Supreme Court here determined that no exclusivity intent, either expressed or implied, can be found in the statute at issue. The county code allowed the admission of a smoke detector violation, but the state statute did not. In light of the Supreme Court determining that the two provisions could co-exist, the case was remanded to the trial court.

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In Princeton Insurance Co. v. Vergano,download pdf file , an opinion issued just last Friday, Vice Chancellor Strine explained in great detail the policy reasons and other reasons why he denied a motion in limine to allow testimony of a mediator at a trial that sought the rescission of a settlement reached at mediation. In sum, an insurance company sought to rescind a settlement agreement that was reached at mediation in a medical malpractice case, based on video taken of the plaintiff, shortly after the settlement was agreed upon, and which allegedly showed the plaintiff performing actions that were fraudulently inconsistent with claims on which the settlement was based. The opinion discusses the roles of the lawyers in this predicament and refused to force the attorney for the injured party or the mediator to testify.

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The recent decision in Stone, et al. v. Ritter, et al. ,download pdf file, involved a Motion to File a Derivative Complaint under Seal, filed by the plaintiff, which was granted, but thereafter, in addition to requiring a public version of the complaint to be filed in accordance with Rule 5(g), the court directed the defendants to show cause why the sealed portions of the complaint should not be publicly disclosed. The plaintiff opposed the continuing sealing of any portion of the complaint. Defendants argued that the disclosures in the complaint of board minutes would have a chilling effect on board deliberations. However, the court distinguished the June 2005 decision of Vice Chancellor Lamb in a Section 220 action. The court noted that the confidentiality considerations involved in a Section 220 case are different than in a derivative case, and made clear that a proceeding in a derivative action which is based in part on confidential documents that were obtained in a Section 220 action will not be analyzed in the same way. The court observed that the documents at issue were the type of document that one would expect to be disclosed in the course of litigation. Reasonable expectations of confidentiality with respect to documents produced in a Section 220 action do not continue unabated in the context of litigation. Under Rule 5(g), the test is whether good cause exists for the complaint and related documents to continue to remain under seal. The court observed that such an analysis requires a balancing of the interests of the companies in protecting "proprietary commercial, trade secret or other confidential information against the legitimate interests of the public in litigation filed, as well as stockholder interest in monitoring how directors of Delaware corporations perform their managerial duties." In sum, the court ordered the disclosure of the portions of the complaint filed under seal in light of the failure to establish good cause required under Rule 5(g).

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In Bonham v. HBH Holdings, Inc., download pdf file, Vice Chancellor Parsons addresses a Motion to Stay Discovery pending the resolution of a Motion to Dismiss. The court observed that absent special circumstances, discovery is often stayed pending determination of a Motion to Dismiss a Complaint. The court referred to former Chancellor Allen's decision in In Re McCrory , for a list of special circumstances that would justify the denial of a stay of discovery despite a pending Motion to Dismiss. The court here found that in light of related similar litigation pending in federal court, a stay of discovery on the merits should be denied because, as the court acknowledged, discovery "should not be delayed if discovery is inevitable, either in this forum or in another, and that the parties could conduct virtually the same discovery in another forum." The court expected the parties to agree that discovery provided in one case can be used in the other case subject to any appropriate protective orders, and to avoid duplicative discovery.

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The National Law Journal has a story today about a tactic by prosecutors that threatens a new source of attack on rights to indemnification and advancement. The story appears below in full.

Execs: Misbehaving May Cost You
Dee McAree
The National Law Journal
10-12-2005

A move by prosecutors to attack the legal fee agreements of corporate executives in a high-profile white-collar crime case has raised concerns among corporate and defense counsel.

The maneuver took place during the trial of David Wittig and Douglas Lake, who were accused of looting Westar Energy Inc. of $37 million.

After a first trial ended in a hung jury in December 2004, a second Kansas City, Kan., jury last month convicted Wittig on all 39 counts and Lake on 30 counts, including fraud and conspiracy. U.S. v. Wittig/Lake, No. 03-40142-01/02 (D. Kan.).

But the convictions have rendered moot an important appellate question about the advancement of legal fees to accused corporate executives that was pending during the trial before the 10th U.S. Circuit Court of Appeals.

'ESSENTIALLY UNPRECEDENTED'

Prosecutors had attacked the indemnification and legal fee agreements that were extended to Wittig and Lake under Westar's bylaws, obtaining a broad restraining order on their assets, including their right to the advancement of legal fees.

"Throughout this case, the U.S. Attorney's Office has viewed Westar as the victim of a crime," said Jim Cross, a spokesman for the U.S. Attorney for the District of Kansas, Eric Melgren. "We do not believe that a victim should be required to pay the legal fees of a defendant."

Defense lawyers and amici say this is the first instance where such arrangements have come under attack during a trial. Most companies have similar advancement agreements, modeled on Delaware law, that provide legal fees to executives sued in connection with their office, noted Robert G. Morvillo, a defense attorney and partner at New York's Morvillo, Abramowitz, Grand, Iason & Silberberg.

"As far as we know, seeing an injunction on paying fees on an ongoing basis is essentially unprecedented," said Alok Ahuja of Lathrop & Gage in Kansas City, Mo., author of an amicus brief filed by the Association of Corporate Counsel. "There is no reported decision that has upheld this, but given that the government tried it here, we fully expect they will try it again," added Ahuja.

The ACC, while not involved directly with either Wittig or Lake, intervened because of the important public policy issues at stake, said ACC's general counsel, Susan Hacket.

"We were horrified when we learned that the government had found a way to say that a good way to roll the defendant is to prevent them from even raising a defense," Hacket said.

It is not uncommon for individual officers to be named in company lawsuits, and most of them would be hard-pressed if they had to be personally liable for litigation costs every time the company was sued, she added.

Moreover, the advancement of legal fees is an important check on prosecutorial restraint, argued Ahuja.

"In a post-Enron, post-Sarbanes-Oxley world, there is ever increasing pressure on prosecutors," he said. Companies may face lighter charges or sentences for cooperating in government investigations against their own officers, and the defendants' personal assets may be frozen, making it difficult to pay legal fees, he noted.

Defense lawyer Morvillo agrees that there is increased pressure on companies, and that Westar prosecutors took a "novel approach."

"Many in the defense bar are concerned about the government poking its nose in an area it doesn't belong," Morvillo said.

The advancement of legal fees was hotly contested throughout the trial.

Prosecutors had argued that the defendants' right to legal fees was connected to their alleged misconduct, and thus forfeitable, said Wittig's attorney, Jeffrey Morris of Berkowitz Oliver Williams Shaw & Eisenbrandt in Prairie Village, Kan. Defense lawyers countered that advancement was an independent right written into the company bylaws.

During the two trials, the district court went back and forth on the issue, finally placing the legal fees in escrow with instructions that the jury should decide the issue. Ultimately, the jury found, after delivering its verdict, that the advancement right of the defendants was not tied to misconduct and not a forfeitable asset, rendering moot the pending appeals.

The lack of a 10th Circuit ruling means that the advancement right is open for attack in future trials, lawyers say.

"What it means if the 10th Circuit doesn't address it is that it continues as a simmering issue," Ahuja said.

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My busy schedule and the publication of multiple cases lead me to a quick summary of several recent cases on various topics as outlined below. I have also summarized a few more recent cases that I will be posting on this week. The full decisions are available at the court's website.
Albert, et al. v. Alex Brown Management Services, Inc. This is a sequel to a prior decision which I posted about. In this recent decision, the court ruled on the issue of (1) whether any surviving claims were derivative, rather than direct claims as to which demand was neither made nor excused; and (2) whether the court could exercise personal jurisdiction over several defendants who served as agents, or employees of agents, of the partnerships. The Chancery Court found that there were some direct claims which would result in many benefits being received directly by the stockholder and the court noted that non-disclosure claims were generally considered to be direct claims to the extent that the disclosure violations did not result in harm to the entity. However, other claims involving mismanagement and breach of fiduciary duties, which would not result in a direct benefit to the stockholder, are the typical derivative claims which involve recovery going to the entity. Therefore, in such derivative claims, if no demand was first made, and demand is not excused, those claims must be dismissed. In the complaint, the plaintiffs neither alleged that they made demand nor why demand should be excused although the court gave them the opportunity to amend and replead. Finally, the court noted that it is both necessary and proper for the courts of this state to insure that the managers of a Delaware entity are held responsible for their actions in managing the Delaware entity and when a person manages such a Delaware entity it receives substantial benefit from doing so, and thus should reasonably expect to be responsible for his wrongful action relating to the Delaware entity in Delaware courts.

Heritage Homes of De La Warr, Inc. v. Alexander . In this opinion, the court interpreted an agreement that allowed for an option to purchase property. The court determined that the agreement involved was nothing more than a "bare agreement to agree" with terms so indefinite as make the entire effort nugatory. The court noted that it is a well settled principal of Delaware law that "an agreement to agree in the future without any reasonable objective controlling standards is unenforceable." The agreement involved left the negotiation of all material terms to a later date and instead, Delaware law requires that "to be enforceable, a contract to enter into a future contract must specify all its material and essential terms and leave none to be agreed upon as a result of future negotiations." Thus the court found that the agreement at issue was not definite enough to be enforceable.
In the Matter of the purported Last Will and Testament of Lucy B. Pietloc . In this letter opinion, Vice Chancellor Noble addressed the issue of whether or not a Settlement Agreement which provides for confidentiality should be subject to access by other parties in related litigation. The court ruled that parties to litigation do not have an absolute right to deny access to the terms of their settlement to the non-settling parties. The court cited in support of its conclusion both prior Delaware caselaw and caselaw in Kansas. The court ruled that to the extent that the prior Settlement Agreement contains information regarding claims of the estate against third parties, the disclosure of which could prejudice the pursuit of those claims, such concerns can be addressed by limiting access to the Settlement Agreement. Thus, the court ruled that the terms of the Settlement Agreement would be produced but access to its terms would be limited. Separately, the court also conditioned withdrawal of counsel on first replying to discovery requests that were pending.

FGC Holdings Limited v. Teltronics, Inc. In this case Vice Chancellor Parsons addressed a single question of whether the designee of FGC's Series B director had an immediate right to sit on the Board of Directors of Teltronics. The court concluded that FCG was entitled to a declaratory judgment that its Series B director had an immediate right to sit on the board of Teltronics. The argument was that the Certificate of Designation for the Series B limited the size of the board to five directors and because there were already five directors that the designee of FGC could not become a board member until the next annual stockholders meeting. FGC countered that the Certificate of Designation vested the Series B stockholder with an unconditional right to elect a Series B director at any time. The court agreed with the arguments of FGC. It noted that a Certificate of Incorporation is used as a contract among shareholders and that the general rules of contract interpretation apply to its terms. That rule similarly applies to Certificates of Designation. The court noted that a contract is not ambiguous simply because the parties do not agree to its proper construction nor, the court observed, does ambiguity exist where the court can determine the meaning of a contract "without any other guide that a knowledge of the simple facts on which, for the nature of language in general, its meaning depends. The court discussed the general principles of contract interpretation including the modern view of contract interpretation that allows the court to consider "undisputed background facts that place the contract in his historic setting."

Rockwell Automation, Inc. v. Kall . In this letter opinion, Vice Chancellor Noble addresses what confidential and proprietary information could be obtained from a dismissed employee's computer. The court determined, based at least in part on the Employment Agreement between the parties, that the employer is entitled to access to its proprietary material stored on the computer and it was not for the court to determine whether the employer could obtain access to separate personal privilege documents because that issue is not before the court. The parties were engaged in related litigation involving issues not before the court. The practical solution that the court arrived at was to allow, at the employer's expense, a third party service provider to retrieve and review all documents. That third party was required to provide to Rockwell all its proprietary or confidential documents, together with a list identifying each document delivered to Rockwell. The service provider was to preserve all data and documents stored on the computer equipment and not make them available to any other persons without either the agreement of all the parties or an order from a tribunal or jurisdiction over the parties.

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The Delaware Supreme Court yesterday issued a decision that may have nationwide impact in the blogosphere. In John Doe No.1. v. Cahill, download pdf file, the court refused to require the disclosure of the identity of someone whose anonymous post on a blog was alleged to be defamatory. The standard that the court used was that there first must be enough evidence of a defamation claim to survive a motion for summary judgment on that claim.
The Wilmington News Journal deserves credit for a story publicizing the case. The article described the decision as a victory for free speech.

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The Delaware Intercorp Blog posts with a link to a book on the history of the Delaware Chancery Court by former Chancellor William Quillen and Michael Hanrahan. Good source for anyone who wants to know about this court's origins and rise to prominence.

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In Lillis, et al. v. AT&T Corp., download pdf file, the Chancery Court, after extensive analysis, considered whether to allow leave to amend under Rule 15(a) in light of an effort by a defendant to change the admissions made in answer to a complaint several days before oral argument on a Motion for Judgment on the Pleadings under Rule 12(c). The court determined that the distinctive Delaware practice under Chancery Court Rule 15(aaa) did not apply because this was not a motion to dismiss, but rather a motion for judgment on the pleadings. Based on the lateness of the motion and the costs incurred by the other parties, the court conditioned the granting of the motion to amend on payment of reasonable attorneys' fee incurred by the other parties as a result of the belated change in position. The court also ruled that judicial estoppel did not apply because the court had not relied on any of the parties' earlier positions in making any decisions.

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The Delaware Corporate Litigation Reporter (DCLR) is an excellent eponymous source of scholarly analysis and commentary on corporate cases filed in and decided by the Delaware Chancery Court and Delaware Supreme Court. A subscription is required, but well worth it for anyone who seeks to keep abreast of this area. The time demands of my practice do not allow me to provide the breadth of treatment that they provide on each case. The DCLR presents extensive insights on pending cases before they are decided, as well as access to the briefs and pleadings. I often must limit my posts to the key decisions and the issues they address. My sincere thanks goes to the editor of the DCLR, Frank Reynolds, for placing a link to my blog on the webpage of his publication--which can be viewed without subscription at this link.

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As frequent readers of this blog know, the limited focus of this blog is to highlight key decisions of the Delaware Court of Chancery and Delaware Supreme Court. On occasion I stray from that limited focus. This is one such occasion. Today, the Delaware Bar Association had its Annual Golf Tournament. I have not played golf in over a year, but playing with other lawyers today highlighted an aspect of Delaware law and practice that is relevant to this blog. I was reminded today that getting to know lawyers on a personal level helps to be more productive when working with them on a case, which often means the clients get their cases resolved more efficiently. My foursome included Richard DiLiberto; Rolin Bissell and Sheldon Sandler, all of the respected Young Conaway firm in Wilmington.
Though I have a list of recent cases that I should be summarizing for this blog instead of talking about my day on the links, for those in other states who read this blog in part to learn about Delaware law and practice, this is an important point: Many of us try to maintain collegiality, as best we can, and spending a day together on the links helps foster that goal, which ultimately helps clients as well. I may not be as collegial as I should be at all times, but I am convinced that the lawyers I golfed with today helped me improve both my golf game and my collegiality. For that, I thank them.

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