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

In Matthews v. Grove Networks, Inc., download file, the court interprets the terms of a Certificate of Incorporation regarding a claim that the "Liquidation Preference" does not apply to merger proceeds in the event of a merger. The definition of Liquidation Event which would trigger the liquidation preference, included a merger. The payment was to be due from "Distributable Assets," which was defined as the company's assets whether from capital, surplus or earnings. However, the definition for Distributable Assets is not specifically defined with specific reference to the proceeds in a merger. The plaintiff extrapolated on that silence to take the position that merger consideration was not intended to be part of the assets of the corporation and, therefore, they argued that the Liquidation Preference definition did not govern the distribution of merger consideration. The court disagreed and rejected as "making little sense," the argument of plaintiff that the Liquidation Preference did not apply in the event of a merger based on the observation that in the event of a merger, the assets are transferred to the acquiring corporation in return for cash consideration paid to shareholders. If the court adopted the interpretation of the plaintiff, the Liquidation Preference would "have no effect."

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In Breakaway Solutions, Inc. v. Morgan Stanley & Co., download file , the defendants sought reargument of Vice Chancellor Noble's opinion and order of August 27, 2004, which denied their Motions to Dismiss. The court's decision was based on New York law and the court found that a fiduciary duty claim was possible, under New York law, where an underwriter provided advice to an issuer in connection with an IPO, even though there was no breach of contract claim, at least for purposes of a Motion to Dismiss. The court's original opinion was based on a New York decision that was later reversed in part.

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As a Christmas treat, I will "go off topic" and refer to a little Catholic corporate governance in matters ecclesiatic. The Magisterium of the Catholic Church is colloquially referred to as that which represents the offical teaching and authority of the church. Steve Bainbridge links to catholic texts on this issue as a follow-up to a recent front page article in The Wall Street Journal about a parish is St. Louis, MO, that is attempting to assert itself in opposition to the local archbishop, and why this is an example of one of the things that makes the Catholic Church different than other denominations.

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Business Law Prof Blog posts about a new article by Vice Chancellor Leo Strine in the Harvard Law Review regarding shareholder voting and some suggestions he has, including interfacing between the federal and state regulation on those issues.

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Steve Bainbridge and Gordon Smith post about the Business Judgment Rule and they cite to articles they have written that discuss the nuances of the duty of care and whether it is a standard of liability or a standard of review or a standard of conduct. Some of the comments to their posts also are enlightening on this topic.

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Although this blog does not generally report on cases in Delaware's trial court of general jurisdiction, the Superior Court, which does not have the equitable jurisdiction of our Chancery Court, a recent opinion from that court is especially noteworthy. The court, sua sponte, determined under Rule 12(f) that statements about the opposing party in a brief were so rude and uncivil that it violated the rule against "impertinent comments", and ordered that part of the brief should be stricken, and resubmitted without the offending parts. Here is the link to the full decision in 395 Associates, LLC v. New Castle County, download file.

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In Hendry v. Hendry, download file, Vice Chancellor Parsons denied a motion by the defendant to disqualify plaintiff's counsel in light of a claim that the law firm for the plaintiff had represented the defendant in the past, and thus, it was alleged, Rule 1.9 of the Delaware Lawyers' Rules of Professional Conduct regarding the duty of loyalty to former clients was violated.
Relying on prior decisions of the court, and a case styled Sanchez-Caza v. Estate of Whetstone, 2002 WL 2087922 (Del. Super.), the court reasoned that even assuming, without deciding, that Rule 1.9 was violated, based on the facts presented, there was no impact on the fairness or integrity of the pending legal proceedings. In addition, this case had been pending for several years, and the court also found that disqualification at this stage would unfairly prejudice the plaintiff. Although it was not necessary for its decision, the court noted that a Rule 1.9 analysis requires that the former representation be "substantially related" to the current matter, and that the former attorney would have likely received confidential data from the former client that could be used against the former client in the current proceeding.
In closing, the court also ruled on an unrelated motion to quash a supboena under Chancery Court Rule 45, and found that technical defects in the form of the subpoena were not sufficient to quash a subpoena, but that in any event, motions to quash must be filed on a timely basis.

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In Oliver Press Partners, LLC v. Decker, download file, the Chancery Court explained in a letter opinion that a 2 week delay in filing a complaint militated against granting a motion to expedite. Plaintiff sought an expedited trial or a P.I. hearing to forestall a December 22 vote, but it only filed the complaint on December 2, even though it had notice of the issue on November 21. The court noted that it often grants requests for prompt adjudications but the delay of the plaintiff in filing would make it difficult for the defendant to prepare a defense on such short notice and the delay made it more difficult for the court to adequately adjudicate the matter. Moreover, the court determined that complete relief would be available even after the occurrence of the harmful event sought to be averted.

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Blog guru Kevin O'Keefe has a post with source links, in which he wonders aloud if Google will replace Martindale-Hubbell as the primary method that most people use to search for lawyers. As a practical matter, one can find out much more information about a lawyer, much more quickly, on Google--and its free. My bet is for Google and other search engines to become (if they aren't already) the first place that most people will look to find out about a lawyer. Search engines will also increasingly be the source where people go to choose a lawyer, either before or after they learn about her. Some credit for this should go to the person generally regarded as the inventor of the World Wide Web, Sir Tim Berners-Lee.

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For a good link to an article on the origin of the Court of Chancery, by former Chancellor William Quillen and Michael Hanrahan, see a post on the blog called Little Caesar's Daily R and R.

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Applying contract interpretation principles under New York law, the Chancery Court ruled that terms of an agreement were violated when restricted funds intended as security for a note were used for other purposes. This case has attracted widespread attention in the business press and is currently in the midst of an expedited appeal to the Delaware Supreme Court. Calpine Corp. v. Bank of New York, download file.
UPDATE: In an expedited appeal, decided within little more than a week or so after the Chancery Court decision was final, the Delaware Supreme Court largely affirmed the opinion of the Chancery Court in finding that use of the cash assets was a breach of the parties' agreement. Here is the decision announced late last Friday: download file.

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Bruce MacEwen posts at his blog called Adam Smith, Esq. about the trend towards bigger and bigger law firms, and the likelihood that those combinations may lead to more and more conflicts.

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The Conglomerate blog reports on a recent decision by the Chancery Court not to rule on an issue involving a proxy proposal by a shareholder of Bally's Total Fitness. It also links to an article that describes related federal proceedings in Delaware.

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With a tip of the hat to Bankruptcy Litigation blog and the How Appealing blog, here is a link to a scholarly discussion by Judge Posner of dicta (or dictum) in court decisions and how that interfaces with the common law principle of stare decisis. Especially in light of the role that stare decisis is expected to play in the upcoming hearings for SCOTUS nominee Alito, and how lawyers try to distinguish cases based on alleged dicta, Judge Posner's analysis is worthwhile reading.

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Patrick Robben, a Minnesota lawyer, wrote an article about lawyers who blog, and was kind enough to mention my blog in that article. download file.

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An article in the Columbia Law Review by Ehud Kamar describes Delaware corporate law as indeterminate, despite its leadership status, and the link to the article is provided here in a post by Steve Bainbridge, who also disagrees with that argument, and provides links to other articles that support the differing view, which holds that Delaware law is quite predictable.

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Prof. Bainbridge posts here with links to one of his articles and a more recent article on the connection, or not, between independent boards and the performance of their companies.

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Our friends at the Bankruptcy Litigation Blog have a recent post that provides a an insightful analysis of a recent decision from the U.S. District Court for the District of Delaware, which involves a fraudulent transfer claim that was brought post-bankruptcy, against Campbell Soup, in connection with their spin-off of their Vlasic unit. The post also includes many links to original source materials. Though the transaction at issue was not set aside by the court, it was a very close call, and the decision provides a good case study of fraudulent transfers, and how a relatively small creditor can pursue the claim, even after a plan is confirmed.
UPDATE: Courtesy of Steve Jakubowski from the Bankruptcy Litigation Blog, here is clarification/amplification of the key to the above case:

Remember that a relatively small creditor cannot pursue a fraudulent transfer action once the debtor is in bankruptcy because all avoidance actions are considered derivative type actions that vest exclusively in the debtor's estate. The unfairness of Moore v. Bay, in my view, is that a trustee in bankruptcy who steps into the shoes of this relatively small creditor is like a creditor on steroids who can avoid the entire transaction far beyond the creditor's own relatively insignficant claim. A creditor cannot gain for itself the benefits of Moore v. Bay; those are reserved exclusively for the steroid-enhanced trustee using its "strong-arm" powers.

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In a dispute over which of 2 cases pending in different states would proceed, the court declined to award any preference to the case that was "first-filed", and deemed cases filed within about one day of each other to be contemporaneously filed. Thus, instead of the McWane analysis, the court applied a forum non conveniens analysis, and determined that it would not stay the case pending in another state. Nor did it stay the Delaware case. The court noted that no collision course with the other proceeding appeared imminent, but that it would entertain a renewed motion in the future if that problem developed. As part of its analysis, the court distinguished a case called United Phosphorous on the facts. Rapoport v. The Litigation Trust of MDIP, Inc., download file. I summarized here another recent decision on this topic that was a rare instance of a Delaware court finding that Delaware was not the appropriate forum under a forum non conveniens analysis.

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Chancery Court Rule 59(f) and (e) is (are) not satisfied by mere restatements of arguments previously rejected. On that basis, the court denied a motion to reargue, clarify or amend a prior decision to dismiss at least part of a complaint. Chrin v. Ibrix, Inc., download file. The prior decision of the court was briefly summarized and is also available for download here.

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In Berger v.Intelident Solutions, Inc., download file, the court determined this to be one of those "rare cases" where it would be a hardship for the defendant to litigate in Delaware, and granted a motion to dismiss on forum non conveniens grounds. The witnesses were said to be mostly from Florida and the case was alleged to involve novel issues of Florida law. The complaint was filed by a minority shareholder in a freeze-out merger.

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Generally, I summarize court opinions only on this blog, and not decisions that are designated merely as orders of the court, but a recent Order of the Supreme Court contains citations to cases and has a discussion of recent Delaware law on a topic near and dear to most attorneys: fees awardable by the court. In P.J. Bale, Inc. v. Rapuano, download file, the Delaware Supreme Court affirmed the decision from the bench of the Chancery Court in which it was determined the there was not a basis to apply the "bad faith" exception to the American Rule that each party bears its own fees.

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This is an update of sorts to a prior post on this blog involving a Delaware court decision that determined Delaware law should apply to a shareholder dispute of a Delaware corporation, whose primary operations were in California, in light of the "internal affairs doctrine". Now, courtesy of the Financial Institution Law Blog, we have a cite to a California decision, admittedly on a slightly different issue, that upheld a Delaware choice of law provision in an agreement. I have a related prior post here.

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Applying Delaware law for the prerequisites to granting a preliminary injunction, the court applied the substantive law of Florida to grant a preliminary injunction regarding enforcement of a covenant not to compete. Deloitte and Touche USA LLP, V. Lamela, download file. A TRO had been granted about 2 weeks prior to the P.I. hearing, and within that 2 weeks, a motion to reargue the TRO was also heard.

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In Gentile v. Rossette, previously summarized here, the Chancery Court recently ruled that a claim for dilution is derivative, not direct, and was transferred to a surviving corporation. As a result, the court granted partial summary judgment, thereby defeating the claim. Now the Chancery Court has allowed an interlocutory appeal to the Delaware Supreme Court under Rule 42, on that issue, which was summarized thusly:

The question posed by the Plaintiffs is whether they can obtain any remedy for the issuance of stock for little or no value when that transaction is followed by a merger that precludes pursuit of a derivative claim. The waste claim passes to the acquiring corporation. Their stockholder dilution claim, based on the [the court's prior] Order, has escaped any judicial review. Ultimately, the Plaintiffs, in the Court's view, were unable to demonstrate that they can "prevail without showing an injury to the corporation," because their dilution claim cannot exist independently of the harm suffered by SinglePoint. This case does not present a question involving a material change in voting power, such as an increase in the insider's holdings from less than 50% to more than 50% (or increasing the holdings above some supermajority shareholder vote threshold). Here, Rossette's holdings were increased substantially as a percentage of outstanding shares, but his voting power (i.e., the power to control the outcome of any shareholder vote) and the voting power of the minority shareholders did not change materially. See Gentile v. SinglePoint Fin., Inc., 2003 WL 1240504, at *5, n.36 (Del. Ch. Mar. 5, 2003)(related appraisal action in which the Court speculated that "no forum may be available for injured shareholders [in this context] to assert their dilution claims").

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For those interested in whether one should refer to "an" LLC or the correct grammer should be "a" LLC, see the post by Professor Bainbridge on the topic here.

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In Seinfeld v. Verizon Communications, Inc., download file, the Chancery Court, based on cross-motions for summary judgment, ruled that a shareholder had not demonstrated the requirement under Section 220 of the DGCL, that there was a "credible basis" for its claims of mismanagement and excessive compensation and, therefore, did not carry the burden to establish a "proper purpose" for its demand for books and records. The court reasoned as follows:

While it is well established that an investigation into corporate waste and mismanagement is a proper purpose for books and records inspection under Section 220, a mere suspicion of wrongdoing, such as the claim the plaintiff is making in this action, is insufficient. The statute places the burden of proving a proper purpose on the stockholder who seeks inspection of the company's books and records. This burden is not insubstantial and "mere curiosity or a desire for a fishing expedition will not suffice." The stockholder must "present some credible basis from which the court can infer that waste or mismanagement may have occurred." Although the plaintiff does not have to prove actual wrongdoing, "a mere statement of a purpose to investigate possible general mismanagement, without more, will not entitle a shareholder to broad Section 220 inspection relief."

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In Dweck v. Nasar, download file, the Chancery Court ruled that an unsigned shareholders' agreement could not be specifically enforced because the court treated it as a voting agreement which must be a signed document to be enforceable under the DGCL.
For that reason, a claim under DGCL Section 226 was also denied. For further discussion of the appointment of a custodian pursuant to Section 226, due to a deadlock in a corporation, see Bentas v. Haseotes, 769 A.2d 70 (Del. Ch. 2000) and Bentas v. Haseotes, 2003 WL 1711856 (Del. Ch.).

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In Re: LNR Property Corp. Shareholders Litigation, download file. This is a purported class action against a Delaware corporation, its former directors and its former controlling shareholder alleging breach of fiduciary duty in connection with a cash out merger pursuant to which the controlling stockholder and other members of management exercise the right to purchase a 25% equity stake in the surviving entity. Specifically, the complaint alleged that the directors breached their fiduciary duties when they allowed the controlling shareholder to negotiate (and later vote to authorize) the merger on terms that were inadequate and unfair to the public stockholders. The principal issue addressed by the court in a Motion to Dismiss by the defendant directors was the proper standard of the court's review in examining the complaint. The defendants argued that the deferential standard of the Business Judgment Rule should apply as opposed to the more intrusive close scrutiny of the entire fairness standard. The court determined that despite the bare-bones facts in the complaint, in light of the standard on a Motion to Dismiss under Rule 12(b)(6) which requires the court to ignore most sources of information other than the complaint, the court found that there was a reasonable inference that the controlling stockholder had a disabling conflict and in essence, stood on both sides of the transaction, and therefore the entire fairness standard would likely apply. The court noted that the BJR does not protect the board's decision to approve a merger, even where a majority of the directors are independent and disinterested--where a controlling shareholder has a conflicting self interest. Instead, Delaware law imposes an entire fairness burden when the fiduciary charged with protecting a minority and the sale of the company does not have an undivided interest to extract the highest value for the shareholders. The court distinguished Orman v. Cullman as a recent decision where the mere fact that a controlling shareholder has or may be acquiring some interest in the buyer does not automatically trigger entire fairness review.

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