I will be out of the country on a business trip for a few days and am not sure how much Internet access I will have, so posts may be light until the middle of next week. I still will be reading recent cases to summarize here, but might not have access to post my case summaries. So please stay tuned. Thanks.
Prof. Bainbridge is blogging about the verdict today. Here is the link:
ProfessorBainbridge.com: Lay and Skilling Convicted: Ongoing Reaction
In Norman v. US MobilComm, Inc., download file, the stockholder made the bold move of asking for attorneys' fees in a books and records case brought under DGCL Section 220.
Seasoned or jaded practitioners might be able to predict the result of the effort. After a one day trial, the Court indicated that it was inclined to rule in favor of the Petitioner, but reserved decision and invited post-trial briefing on the proper scope of the anticipated production of documents. The parties later settled the case but entered into a stipulated order and final judgment. The Petitioner now seeks to recover its costs and attorneys' fees. Based on extensive reasoning, the Court denied the request for fees but allowed the request for costs (typically a nominal amount compared to fees.) The demand for books and records was to "determine whether [the Company] acted properly in disposing of assets of the company, whether the company acted properly in distributing proceeds from sales transactions and otherwise assess the propriety of management decisions". After a Motion to Dismiss, an amended complaint was filed pursuant to Chancery Court Rule 15(aaa). A second Motion to Dismiss was filed and was also denied.
The Court conducted the traditional analysis in connection with claims for attorneys' fees and the American Rule. See, e.g., McNeil v. McNeil, 798 A.2d 503, 514 (Del. 2002); Carlson v. Hellinan, 2006 WL 771722 at *22 (Del. Ch. Mar. 21, 2006). For a prior summary on this blog of the Carlson case, which includes a smorgasbord of many legal issues, in addition to addressing a fee request in a 220 case, see this link.
The Court found that the narrow exception to the general rule that each party pays its own fees was not applicable in this case, but that as the prevailing party in the litigation, the Petitioner was entitled to its costs which amounted to approximately $5,700.
(Of course, this result confirms the view of many that asking for attorneys' fees and spending time and money to obtain a court ruling on the request, is rarely an economically efficient exercise.)Although the Plaintiff claimed that it was clearly entitled to books and records for valuation purposes, the Court determined that it did not make that basis entirely clear. In addition, although a demand for books and records is generally proper when sought for a determination of waste and mismanagement, not every such request is the basis for required production.
Practice Tip:
The Chancery Court admonished and instructed that "merits-based defenses" to a Section 220 demand are subversive of a Section 220 action, and that a company engages in a merits-defense when it seeks to rebut a plaintiff's allegations as to purpose in a Section 220 case by arguing that the alleged conduct never occurred. However in this case, the Court determined that there was no merits-based defense asserted and therefore no attorneys' fees would be awarded.
The Wall Street Journal's blog reports that Chancellor Chandler has instructed the lawyers in the settlement of the News Corp litigation to use plain English in describing the settlement terms. Here is the link:
Law Blog: Delaware's Chandler to Lawyers: Plain English, Please!
In a case that is destined to be frequently cited for several Delaware law principles, Vice Chancellor Noble recently wrote a 139-page decision with 361 footnotes that covered many important areas of Delaware law in a case styled: Khanna, et al. v. McMinn, et al., involving the Covad Communications Group. (For a summary on my blog of a related prior decision on a Section 220 matter involving the same company and plaintiff, see here.)
Due to the length of the decision (which is not too unusual in Chancery Court) I am making it available for download in 2 separate parts as it may be too long for some to download in one fell swoop:
Part Iand Part II.
My schedule this week will not allow me to do a complete summary at this time, but here are some of the key allegations (in addition to proxy claims and whether or not some sealed documents should be unsealed), that were addressed in the context of a motion to dismiss--which was granted as to most counts in the Amended Complaint:
(i) whether a founder of Covad was improperly permitted to develop a competitor; (ii) whether an acquisition of BlueStar Communications, an act that rescued a failing investment, was the principal cause of Covad's entry into bankruptcy; and (iii) whether certain founders' shares were improperly vested. These claims were examined based on alleged fiduciary duty breaches either directly, or as a controlling shareholder, or as an aider and abettor.
Though there are many, here is one that some might refer to as a "money quote", from footnote 203: "The court cannot permit ex post results of a decision to cloud analysis of a board's ex ante judgment...."
SUPPLEMENT: In this 139-page decision, Vice Chancellor Noble reviews many fundamentals of Delaware corporate law in derivative cases. On page 30 he discusses whether a "settlement letter" constituted a presuit demand under both the two prong Aronson test as well as under the Rales standard where no decision by the board was made. On page 34 he described in greater detail what kind of a letter would be considered a presuit demand letter. On page 65 he discussed that the second prong of the disjunctive Aronson test required reason to doubt that the board acted honestly and in good faith or that the board was adequately informed such that it should enjoy the presumption of the business judgment rule. Pages 88 through 90 discuss the duty of disclosure of material data in a proxy. On page 93 he observed that votes that were based on a faulty proxy may be set aside. Page 119 discussed the attorney/client privilege in connection with advice given to a corporation or its board members and dealt with a situation where the attorney sought to use the privilege as a sword in a suit against a former client. On page 120 the court noted that when a vice president was acting in his business role that he did not waive the privilege in communications with general counsel. The court noted that before the communication between general counsel and the board can be deemed attorney/client communications, it has to be clear that the communications were not regarding business issues, as opposed to legal issues. Finally, on page 126, the court determined that the former general counsel was disqualified as a representative shareholder in a derivative suit and that it was important to note that the suit was against a former client. The court was simply not persuaded that the former general counsel learned the data as a "officer" and not as a lawyer for the corporation. Thus, he would not be able to use the privilege information as ammunition against his former client. This derivative and class action complaint by a former general counsel of Kovad Communications Group, Inc. challenged actions and omissions of the Kovad board while the plaintiff was general counsel and focused on certain omissions and misrepresentations which he alleges impaired the accuracy of Kovad's proxy statements issued in advance of shareholders' meetings. Two other shareholders who joined him as representative plaintiffs were not disqualified.
Gordon Smith talks about the "canard" mentioned in a post by Bill Sjostrom about whether one should use "shareholder" or "stockholder" --or if it really matters, and whether one term is more prevalent in Delaware than elsewhere. Here is the link:
Conglomerate Blog: Business, Law, Economics & Society
The Chancery Court case of Delaware Open MRI Radiology Associates, P.A. v. Kessler , download file, involved the squeeze-out merger of a closely-held private company made up of radiologists. The Court referred to the case as "another progeny of one of Delaware law's hybrid varietals: the combined appraisal and entire fairness action."
The Court addressed the principles that applied to both the appraisal claims under the appraisal statute and under the common law governing conflicting mergers, but the questions are the same for both claims: was the merger price fair, and if not, what was the extent of the underpayment to the minority stockholders?
This 85-page opinion is a veritable reference text for the analysis of fair price and valuation of closely-held businesses. Along the way, key fiduciary duty principles are explained. For example, the amount that the majority paid wholly-owned affiliates for services was governed by the entire fairness standard. See footnote 73 citing Telxon Corp. v. Meyerson, 802 A.2d 257, 265 (Del. 2002) (like any other interested transaction, the compensation that directors decided to pay themselves is outside the protection of the business judgment rule and where properly challenged, is subject to affirmative showing that the compensation arrangements were fair). At page 51 of the decision, the Court determined that the fees that the majority paid to its wholly-owned entity for services were above the market rate.
The Court also disagreed with the testimony of both valuation experts. One valuation expert used an analysis based on a "C" Corporation and the other expert used a valuation based on an "S" Corporation, but did not make a deduction for taxes. The Court found both approaches flawed and made its own independent valuation determination.
The Court noted that its determination of fair value based on the appraisal statute would also determine the award of damages for the purpose of the entire fairness claim. In analyzing the discounted cash flow method and the determination of terminal value, the Court cited to leading treatises in the area of corporate finance and business valuation, such as those of Shannon Pratt. See, e.g., footnotes 125 and 130. The Court concluded after very detailed and thorough analysis of the various valuation methods that the price paid by the majority for the ownership interest of the minority was unfairly low and thus, the Court calculated its own new valuation which was the basis for both the appraisal award and the award based upon the entire fairness claim.
In a derivative case that was preceded by a Section 220 action, the Chancery Court determined that documents designated confidential in the Section 220 case and filed under seal needed to be unsealed and publicly disclosed based on a thorough anlaysis of the applicable cases and policy concerns. In Romero v. Dowdell , download file, (see my blog summary and a copy of prior decision in the case here ), Plaintiff requested court approval to unseal and make public in a derivative case, certain documents that had been originally filed under seal and designated in a Section 220 case as "highly confidential". The parties entered into a Confidentiality Agreement during the Section 220 action which specifically allowed documents to be used in a subsequent derivative action. However, the use of such documents was required to be in a pleading that was filed under seal pursuant to Chancery Court Rule 5(g).
The Confidentiality Agreement provided a mechanism by which the parties could challenge the designation of material as confidential or highly confidential , but pursuant to Rule 5(g)(2), the burden of establishing confidentiality and of filing a document under seal is on the parties seeking such treatment. See blog summary here of July 19, 2005 decision denying the Motion to Dismiss the Section 220 case among the parties.
There is pending a Consolidated Federal Securities Class Action filed against Career Education Corp., the company involved in this case, in the Northern District of Illinois. Discovery in that consolidated case has been stayed pursuant to the Private Securities Litigation Reform Act of 1995 (the "PSLRA").
The Court recited the legal analysis for determining whether "good cause" exists under Rule 5(g) to shield documents from the public, and it was observed that the Court has repeatedly held that good cause exists to shield documents under Rule 5(g) when those documents contain either trade secrets or third party confidential material or non-public financial information. See One Sky, Inc. v. Katz, 2005 WL 1300767 at *1 (Del. Ch. May 12, 2005). See blog summary and copy of decision here of One Sky.
The Court found that the instant case was on all fours with the recent decision in Stone v. Ritter, No. 1570-N, Slip Op. at 3 (Del. Ch. September 26, 2005 (Opinion on Remand). See my blog summaries of the 2 decisions in that case here and here.
In Stone v. Ritter , Plaintiffs obtained books and records pursuant to a Section 220 demand and later filed a derivative complaint under seal pursuant to the Confidentiality Agreement of the parties, at which time the Court ordered the Defendants to "show cause...as to why the sealed portions of the complaint should not be publicly disclosed". The Defendants relied on the decision of Vice-Chancellor Lamb in Disney v. Walt Disney Company, No. 234-N, Slip Op. (Del. Ch. June 20, 2005)(Opinion on Remand). For a copy of that opinion download file.
The Stone v. Ritter decision rejected the application to the facts of that case, of Disney v. Walt Disney Company, because that Disney case arose in the context of a Section 220 action while Stone involved a derivative action "in which the stockholder Plaintiffs assert derivative claims based on information obtained using the "tools at hand" under Section 220.
The portion of the Stone case that was quoted by the Court as applicable here is as follows: "reasonable expectations of confidentiality with respect to documents produced in the Section 220 action do not continue unabated in the context of litigation. The test now is under Court of Chancery Rule 5(g) and the Court must determine whether good cause exists for the complaint and other related documents to continue to be filed under seal." (citing Stone v. Ritter, Slip Op. at 3).
The Court also cited Stone v. Ritter for the determinative analysis as follows: "balancing the interests of companies in protecting proprietary commercial, trade secret or other confidential information against the legitimate interests of the public in litigation filed in the Courts, as well as stockholder interests in monitoring how directors of Delaware corporations perform their managerial duties".
In conclusion, the Court determined that after reviewing all 76 paragraphs of the 40-paged derivative complaint, there was no basis for continuing to seal any portion of it.
The Court found most of the information drawn from publicly available documents and determined that none of the details comprise trade secrets or third party confidential information or non-public financial information.
Nor was disclosure likely to show sensitive internal deliberations of a Board or any of its committees. The Court also found that the information contained in the minutes of a Board meeting was insufficient to justify treating them as confidential information. Nor did the Court find a basis in the PSLRA or in the Securities Litigation Uniform Standards Act ("SLUSA") of 1998 to prevent disclosure of information in the complaint.
The cognoscenti already know about the recent indictment of class action firm Milberg Weiss, and the issues about how they managed to obtain representation of some plaintiffs in class actions, but not yet as widely known (so far) is the website that the firm created to rebut the charges. A link to the site is provided with The Wall Street Journal's blog report about it.
OSI Systems, Inc. v. Instrumentarium Corporation, download file, is a Chancery Court case that involved a motion for judgment on the pleadings filed by both parties regarding the interpretation of an Asset Purchase Agreement. The dispute involved an adjustment to the purchase price based on working capital as determined after the date of closing. The agreement provided for two different types of arbitration procedures depending on the type of issue raised. The lawsuit arose out of the method by which OSI came to its conclusions for the closing adjustment. OSI admits that it did not apply the same accounting principles that Instrumentarium had used to produce the amounts for working capital necessary for the post closing adjustment. The reason OSI gave for the different approach was based on their argument that the accounting methods used by Instrumentarium were not compliant with generally accepted accounting principles in the United States as required by the Purchase Agreement.
The court discussed the procedural standard for cross motions for judgment on the pleadings and determined that the allegations regarding the proper accounting method were to be treated as claims for misrepresentation--which required the parties to submit the issue to a law trained arbitrator as defined in the agreement, as opposed to the type of arbitration procedure provided for in the agreement that was to be conducted by an accountant.
The current issue of Metropolitan Corporate Counsel has a cover story that includes an interview with Delaware Supreme Court Chief Justice Myron T. Steele, entitled: Why Delaware's Courts Attract U.S. and Foreign Companies.... One of the questions presented to the Chief Justice in the article dealt with approval by directors of executive compensation packages. Here is the link:
Metropolitan Corporate Counsel -May 2006 Issue
The current issue of The Bencher, a publication of the American Inns of Court, includes my ethics column, which summarizes two recent cases involving the right to use one's name in the name of a law firm. Here is the link.
In Regal Entertainment Group v. Amaranth LLC, download file, the Chancery court granted a motion for certification of a defendant class under Chancery Court Rule 23. The court denied the objections of the defendant. The defendant did not succeed in arguing that it could not be representative of the defendant class because it was a hedge fund. The court determined that a hedge fund should not be accorded any special treatment and issues of adequacy and typicality were rejected as makeweight arguments, and coming "with ill grace" in light of the positions that were taken previously in the litigation.
In the context of a Section 220 action, there was a dispute about the confidentiality of certain items produced, in the Chancery Court case of Dolphin Ltd. Partnership I, L.P. v. infoUSA,Inc., download file. The court relied on a "business strategy immunity" to refuse the request for access to documents that included highly sensitive, non-public information concerning valuation and strategic alternatives, including potential strategic partners.
In In Re: General Motors (Hughes) Shareholder Litigation, download file, the Supreme Court affirmed the opinion of the Chancery Court dismissing a lengthy complaint that alleged a long list of claims in connection with the spinoff by GM of its wholly-owned subsidiary, Hughes. The claims included: the breach of the duty of loyalty and unjust enrichment in the payment of a special dividend by Hughes to GM; the breach of the duty of loyalty and failing to deal fairly with GM shareholders; the breach of the duty of loyalty and manipulating the shareholder vote; breach of the duty of disclosure; and the aiding and abetting of a breach of fiduciary duty.
The Chancery Court's opinion in essence held that the effect of shareholder ratification was to maintain the presumptions of the business judgment rule.
In affirming the dismissal of the complaint, the court also discussed the application of "judicial notice" under Delaware Rule of Evidence 201(b), as well as under what circumstances a court may consider matters outside of the complaint in a Motion to Dismiss under Rule 12(b)(6). In upholding the denial of discovery on the Motion to Dismiss the Supreme Court determined that the Chancery Court may properly consider facts that are otherwise subject to judicial notice without affording the plaintiff an opportunity to take discovery where the plaintiff has no good faith basis for challenging the authenticity or the legitimacy of an extraneous fact.
In Parfi Holding AB, et al. v. Mirror Image Internet,Inc., download file, the Chancery Court accepted the recommendation of a Special Master and denied the exceptions from the report of the Special Master The Court granted the motion of plaintiffs' counsel to withdraw from representation in light of the substantial disagreements between plaintiffs and their counsel. The court gave the plaintiffs six weeks to find new counsel or else the case would be dismissed. N.B.: An appeal of this case is pending before the Delaware Supreme Court.
A post on ProfessorBainbridge.com discusses the dynamics of meetings and how to make them more efficient. Here is the link:
ProfessorBainbridge.com: Meetings and Dominance Rituals
In NuCar v. Doyle, the Chancery Court considered the application for attorneys' fees in connection with a prior finding in April 2005 that the defendants were liable for misappropriation of trade secrets based on conduct that was willful and malicious, although the court did not award legal fees on the other claims that were made. See NuCar Consulting, Inc. v. Doyle, 2005 WL 20706 (Del. Ch., April 5, 2005). The original action was filed in 2002 on July 18th and a TRO hearing was held on July 31, 2002 but the request for a TRO was denied. A trial was held on June 2004 after which the court held that the "form contract and potential client list" were trade secrets under the Delaware Uniform Trade Secrets Act under Section 2004 of Title 6 of the Delaware Code. Because the court found that the defendants willfully and maliciously misappropriated the trade secrets, they were entitled under that statute to reimbursement of reasonable attorneys' fees in prosecuting the misappropriation of trade secrets claimed. Although the court granted a permanent injunction with regard to the "form contract" it did not grant any injunctive relief as to the potential client list, although it did award damages for misappropriation in the amount of $69,750 related to that client list.
The court observed that there are four general circumstances in which the court has discretion to award attorneys' fees: (1) Where authorized by statute; (2) Where the applicant creates a common fund or nonmonetary benefit for the benefit of others; (3) Cases where the underlying (pre-litigation) conduct of the losing party was so egregious as to justify an award of attorneys' fees as an element of damages; and (4) Cases where the court finds that the litigation was brought in bad faith and a party's bad faith conduct during the litigation increased the costs of litigation.
In this case, fees are authorized by statute; specifically Section 2004 of Title 6 of the Delaware Code, the Delaware Trade Secrets Act. This provision allows the prevailing party to recover reasonable attorneys' fees if the opposing party willfully or maliciously misappropriates trade secrets. The court also addressed arguments regarding its award of costs. It determined that it needed to review three statutory sections to determine whether costs could be awarded; namely Sections 5101, 5102 and 5106 of Title 10 of the Delaware Code, as well as Chancery Court Rule 56(d). The court found that reading all of those statutory sections together, it had the discretion to award costs in an appropriate case. But, the court found that Section 5102 bars a party from recovering costs if the plaintiff files the action in a county other than where the defendant resides. Although the court still had discretion to award costs under Section 5106, it found that it would not do so in this case.
The court spent considerable care and attention in parsing the various time charges of the attorneys seeking fees, and tried to apportion those charges to the limited claims in which fees were awarded, as opposed to all the various claims and defenses that were litigated throughout the proceedings. Based on a total amount of fees requested of over $132,000, the court awarded just over $60,000 in fees and no costs.
Barrett, et al. v. Toroyan, download file , is an Appellate New York State Court decision applying Delaware law. My thanks to David J. Hoffman of New York City for referring this case to me for a short summary on my blog. The New York court, applying Delaware law, found that directors of corporate general partners can be personally liable for self-dealing transactions, even if there is a clause in the Limited Partnership Agreement allowing members to pursue competitive business interests. The court relied on several Delaware cases including the following: Continental Insurance Co. v. Rutledge, 750 A.2d 1219 (Del. 2000); Kahn v. Icahn, 1998 Del. Ch. LEXIS 223 (Del. Ch. 1998); Gotham Partners, LP v. Hallwood Realty Partners LP, 817 A.2d 160 (Del. 2002).
The Washington Post has started a new legal blog called Bench Conference. Here is the link:
Bench Conference
By coincidence, a pair of recent decisions in unrelated cases from the Federal Court for the Southern District of New York highlight the increasing necessity for lawyers to be conversant with electronic discovery obligations. Because the Delaware Rules of Civil Procedure are based on the federal rules, decision applying the federal rules are persuasive even in state court in Delaware.
Treppel v. Biovail Corp., download file, 2006 WL 278170 (SDNY Feb. 6, 2006). In this defamation action, the defendants were ordered, in response to a Motion to Compel, to preserve both electronic and paper data, to answer questions about their electronic data management practices, and to produce all accessible and responsive data. Before filing the motion, the plaintiff's counsel sent defense counsel a proposed discovery preservation order including provisions for exchanging document retention policy information, identifying a deposition witness with computer system knowledge and preserving all electronic data. The proposed order also declared accessible data would be produced in its native format and inaccessible data would be identified but not immediately produced. Defense counsel opposed the order but the trial court agreed with counsel for plaintiff. Although the court did not impose the preservation order, it ordered the defendants to answer the electronic data management questions as if they were interrogatories and ordered the defendants to search for relevant data and provide the plaintiff with a detailed explanation of the search protocol. The court also found that native production format was appropriate as the defendant failed to offer a substantive basis for a objection to the native format.
Gilliam v. Addicts Rehab. Ctr. Funds, Inc., download file, 2006 WL 228874 (SDNY, Jan. 26, 2006). In this class action lawsuit, the court ordered the defendants to produce to plaintiffs time keeping payroll records, as well as policies and procedures. Defendants failed to produce data contained on 148 compact disks, claiming that it would reveal private employee data and stated that instead they would produce paper records containing the relevant information. Noting that the paper records would comprise 46 boxes, the court declared that it would be more cost efficient to produce the disks for review more quickly and that plaintiffs could make duplicates of the computer disks more easily and inexpensively and they also could be reviewed in a way that would allow the reviewer to skip sensitive information that could be further protected by a confidentiality order.
Prof. Bainbridge posts about what speech should be considered offensive, with a cite to a case from the U.S. Supreme Court. Here is the link.
The Chancery Court once again upheld the enforceability in general of covenants not to compete, but based on the facts of the case determined that there was no breach proven, due to a prior settlement agreement. American Homepatient, Inc. v. Collier, et al. . The non-competition agreement in this matter was for one year and a radius of 50 miles, which the court found reasonable in scope and duration. (Footnotes also refer to other cases upholding similar temporal and geographic scopes.) The court listed the elements for enforceability in general of these agreements. The court balanced the equities and also found a legitimate interest being advanced. The industry involved was medical equipment services and in-home patient care, which relied heavily on referral networks. After finding no breach of the covenant, the court also rejected claims for tortious interference with a contract (hiring of an employee with a covenant); tortious interference with prospective economic advantage; and the common law tort of "unfair competition".
As a reminder for new readers and those who may not have read the link that explains this blog, the theme of this blog is primarily to summarize recent cases fom the Delaware Chancery Court and Delaware Supreme Court on matters of corporate and commercial law. I also touch on legal ethics; e-discovery and related topics of interest to those who spend much of their time on business litigation. Most posts are very short blurbs about the issues addressed in a case with a link for the reader to download the entire case if the issues decided by the court are of interest.
Prof. Bainbridge posts about his latest law review article that he co-authored and which addresses, among other things, the alter ego theory of liability. For example, under certain circumstances, the theory allows one to argue that 2 affiliated corporations are so closely aligned that one should be liable for the debts of the other, or the sole shareholder should be liable for the debts of her corporation if certain factors are present. He discusses this in the context of the claims being made against many of the dioceses of the Catholic Church and the methods by which church property is held. Here is the link:
ProfessorBainbridge.com: The Bishops' Alter Ego
As an aside, due to my busy schedule recently, although I have prepared over the last few weeks quite a number of case summaries of Chancery Court and Supreme Court cases, I have not had time to post them. Thus, I will likely be posting a large number of case summaries in bunches for the next few days in order to catch up.
In Feldman v. Cutaia, et al., download file, Motions to Dismiss under Chancery Court Rule 23.1 and Rule 12(b)(6) were denied in light of a breach of the duty of loyalty and breach of candor allegations that were made in connection with an alleged improper dilution in connection with a reverse stock split, as well as disclosure violations for the repurchase of shares based on misleading information and because insiders reportedly received stock for no consideration. The court also addressed DGCL Section 160 and found that the repurchase of shares in the case at bar resulted in an impairment of the corporation's capital in violation of Section 160 of the DGCL. The court also found that the complaint adequately alleged failure to disclose claims in connection with a tender offer.
In the separate Chancery Court case of In Re: Triarc Companies, Inc. Shareholders Litigation, download file, attorneys' fees were awarded in a class action settlement where disclosure claims were made in an amended complaint in connection with a Dutch Auction. The disclosure issues were corrected after a complaint was filed and based on that, even though this was one of many similar suits filed elsewhere, the court granted fees.
Revised entry:
The Chancery Court case of Ramone v. Lange, download file, involved two persons who intended to form an LLC and although they negotiated many terms over a period of time, they never finalized an LLC Operating Agreement. The court refused to find a conventional contract but found that promissory estoppel applied to a limited extent.
Footnote 56 is important for reciting the Delaware law that a "mere agreement to agree" without reasonably objective controlling standards is not an enforceable agreement. The court referred to Section 15-202(a) of Title 6 of the Delaware Code which provides that a general partnership can be formed whether or not the persons intended to form a partnership, but determined that though the result of their inability to agree on the terms of a final, executed LLC agreement, could potentially have resulted in a general partnership being formed, that result would not be warranted based on the facts presented. The court also discussed the fundamental elements of contract formation and the details required for an acceptance to be the "mirror image" of an offer in order to create a binding contract.
Patrick Robben and I will present a seminar for the ABA on blogs entitled, Blogs: What Lawyers and Businesses Need to Know on June 14, 2006 via teleconference and live audio webcast. Details are on the attached brochure that also appears in the current issue of the ABA publication Business Law Today. Here is the link.
Though it is not uncommon for Chancery Court decisions to be in the area of 100-pages long, due to its length, my summary will be longer than usual for the blurbs on this blog. Oliver v. Boston University is 105-pages long and deals with a voluminous set of facts and a multitude of legal issues. I have divided the downloadable opinion into 2 parts for the user's convenience: Part I and Part II.
Specifically, the case involves a financially troubled biotechnology company by the name of Seragen, Inc., which was controlled by Boston University ("BU"), as well as its friends and affiliates, who on several occasions came to its fiscal rescue in transactions implemented without procedures reasonably designed to protect the interests of minority shareholders. With Seragen on the precipice of financial doom, a company by the name of Ligand offered merger consideration of approximately $75 million to acquire Seragen, but that amount would not satisfy all of the stakeholders because the claims of many stakeholders asserting rights to priority payment exceeded the amount of Ligand's offer. A group of minority shareholders brought to trial a series of claims challenging certain transactions before the merger between Seragen and Ligand and the process by which the merger proceeds were allocated. This 105-page decision followed that trial. The court noted that if the merger did not succeed, bankruptcy was the likely result on a very short timetable and that bankruptcy may have necessarily involved sacrificing the interests of the minority shareholders to placate other stakeholders, and it is within that troubled context that the court addressed the corporate governance issues.
Unlike other similar factual settings, this case did not deal with the issue of possible duties that the directors may have owed to creditors, because it was only the minority shareholders who were complaining that their ox was gored, primarily because they did not receive enough of the allocated proceeds of the merger. Among the legal issues addressed were: equity dilution and voting power dilution; business judgment rule; entire fairness standard; duty of loyalty that majority owes to the minority; duty to disclose material facts in proxy; aiding and abetting breaches of duty; and the difference between derivative and direct claims.
For the remainder of the summary click on the link that follows.
In Re: Grupo Dos Chiles, LLC, download file. In this case the Chancery Court found that an LLC that was not in good standing due to its failure to pay annual Delaware franchise taxes could not be revived without the consent of the majority of its members. While the LLC was defunct, a minority owner attempted to revive it in order to gain some advantage, but the court found him powerless to do so.
Larry Ribstein quotes from a report by the Government Accountability Office (GAO) that provides statistics on the numbers of corporations and LLCs formed in 2004. More LLCs were formed nationwide compared with the number of new corporations formed that year. Delaware has more LLCs on file than any other state. This is more evidence that the historic prominence of the corporate form is giving way to the LLC. Here is the link to the GAO report and Larry's post:
GAO Report
Though it may be old hat by now, because he just wrote his first opinion on the SCOTUS, Justice Alito has been in the news recently. I wrote a short bio of him for the magazine of the Delaware Trial Lawyers Association that was just published. Here is the link.
Helen Gunnarsson in the Illinois Bar Journal writes about why lawyers blog; how they blog; and related issues. Notably described is my friend Steve Jakubowski and his bankruptcy blog. Here is the link. Very useful reading for anyone interested in this topic.
Larry Ribstein posts about an article by Jeff Lipshaw that discusses the recent Chancery Court Abry decision by Vice Chancellor Strine which addresses whether a disclaimer for fraud in a contract is enforceable. Here is the link: Ideoblog: Blogging, lies and scholarship. Here is my short post on the Abry case with a link to download the whole case.
The Supreme Court reversed the Chancery Court and determined that despite the parties and the witnesses being based in Florida, and the application of Florida law, the Cryo-Maid factors did not justify dismissal of a claim based on forum non conveniens. The case of Berger v. Intelident Solutions, Inc., download file, dealt with minority claims relating to a cash-out merger. The trial court's decision was summarized previously on my blog here.
In a recent Chancery Court decision that covers the intersection of corporate law and bankruptcy law, the court determined that the claims made were derivative and not direct in nature, and therefore, belonged to the corporate debtor's bankruptcy estate. Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, et al., download file, involved a sponsored management buyout transaction that generated claims of breach of fiduciary duty against certain officers and directors who received special distributions in connection with the buyout.
The court concluded that the Motion to Dismiss should be granted because most of the plaintiff's claims were barred as being derivative in nature, not direct, and thus belonged to the bankruptcy estate of the corporate debtor that had filed for bankruptcy under Chapter 11 of the bankruptcy code. The court emphasized that to hold otherwise would have the unavoidable effect of granting relief that would unfairly advantage the plaintiff, an unsecured creditor, over any number of other unsecured creditors having claims in the bankruptcy.
The court summarized its holding thusly: "Simply put, this case stands for the well established proposition that derivative claims cannot be used by a single creditor to upset the structured bankruptcy process. That principle equally applies when a plaintiff has erroneously characterized various derivative claims as direct, in the hope of escaping the broad jurisdiction of the bankruptcy court and the proceedings therein."
Supplement: At ProfessorBainbridge.com, footnote 50 of Vice Chancellor Lamb's opinion in this case is pointed out as citing to writings of both Prof. Bainbridge and Prof. Ribstein, both of whom have blogs that are often referred to here.
In Paul S. Levy, et al. v. Hayes Lemmerz International, Inc., download file, former directors and officers of a company that filed for bankruptcy sought indemnification under the bylaws of "an old company", as well as the "new company" that emerged after reorganization under Chapter 11. The Chancery Court recently determined that the directors of the new company that emerged after bankruptcy reorganization had no obligation to indemnify the former directors and officers of its predecessor. However, the court denied the motion to dismiss as to the old company because the court found that the directors had preserved their right to proceed against the "old company" with their claim. The reorganization plan, in essence, protected the new company from the claims against the old company that predated the bankruptcy filing. In interpreting the reorganization plan, the court relied, at footnote 18, on the basic contract principle that "a trial court may not consider parol evidence when interpreting a clear and unambiguous contract."
Key observations were made about indemnification claims in general. For example, the court rejected the argument that an indemnitee must make a demand on the corporation before suit, in a way analogous to the normal procedure in a derivative suit that gives the power to the board of directors over a derivative claim. The court cited to prior Supreme Court case law which held that there is no requirement that an undertaking for purposes of indemnification include a financial ability to repay. Thus, the creditworthiness of the person making an undertaking, as a prerequisite to an indemnification claim, can not be considered by the corporation. The court also noted that indemnification agreements can, and often do, provide greater protection than enjoyed under either the Certificate of Incorporation, the bylaws or the insurance provided by the corporation.
The court distinguished contractual indemnification with what it described as "common law indemnification" which was defined as "a general right of reimbursement for debts owed to third parties by the [indemnifier] as a secondarily-liable party."
Common law indemnification contemplates the accrual of a cause of action after the party seeking indemnification has made payment to the third party and the dispute with that party is finally concluded.
Kevin O'Keefe posts about a source for bloggers on legal and ethical issues. Here is the link:
LexBlog Blog : Law and ethics for bloggers : List of resources
No, it is not related (yet) to any corporate decision by the Delaware courts, but it is a post by a nationally prominent corporate law professor on a topic of familiarity to anyone who reads about popular culture. For those interested in authoritative sources that debunk the myths in the popular book and upcoming Da Vinci Code movie, see this link:
ProfessorBainbridge.com: Da Vinci Code
Larry Ribstein has a primer on the issue of whether it is wise to criminalize agency costs, or put another way, should bad management, even if it is very bad, be criminalized? Here is a link to his scholarly analysis about applying the criminal justice system to corporate agency costs:
Ideoblog: The special problems of criminalizing agency costs
Gordon Smith comments on the upcoming decision expected soon from the Delaware Supreme Court in the Disney case. Here is the link:
Conglomerate Blog: Business, Law, Economics & Society
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