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

In Abrons v. Maree, read opinion here , the Chancery Court rejected a request for a preliminary injunction to stop the tender offer of a controlling shareholder for the remaining shares it did not own. The court reviewed the prerequisites for a P.I., and after determining that there was no likelihood of success on the merits, did not need to reach the other prerequisites. The claims addressed were that the controlling shareholder failed to make necessary disclosures about the details of the offer.

The court analyzed the argument that the wrong tax rate was used for projections and that the special committee may not have reviewed all the relevant details. The court noted that materiality should not be confused with misleading disclosures and  reasoned that:

The court analyzed also whether the proper standard of review was entire fairness or whether the Silconix line of cases applied (  See, In Re Siliconix S'hldrs Litigation, 2001 WL 716787 (Del. Ch., June 19, 2001), for the line of cases supporting the view that the entire fairness standard does not apply to a non-coercive tender or exchange to acquire shares from a minority). The court also noted that in a short-form merger under DGCL Section 253, when one party already owns 90% of the stock, the only remedy is appraisal under DGCL Section 262.

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 The case of In Re: Grupo Dos Chiles, LLC, read opinion here, is an example of the rare exception to the general rule (known as the American rule)  that each party “pays his own way” in a lawsuit, regardless of victory. This is a “cleanup letter opinion” following the main opinion previously summarized here on this blog, the formal caption for which is:  In Re:  Grupo Dos Chiles, LLC, 2006 WL 668443 (Del. Ch., Mar. 10, 2006).  The opinion issued in March of 2006 concluded that the petitioner and respondent were members of an LLC and that the LLC was not properly returned to good standing by the unilateral payment by one member of past due Delaware franchise taxes.  The petitioner moved for an award of attorneys’ fees pursuant to the bad faith exception to the American Rule.  In this August 2006 letter opinion the court grants to the petitioner 75% of the attorneys’ fees incurred  by the petitioner in the case—payable by the respondent.  The opinion discusses the general rule that even the prevailing party usually must pay for its own fees, but the court discusses the several exceptions to that rule.

 The court cites other cases that have found the bad faith exception to apply where parties have changed their testimony to suit their needs or when parties mislead the court, but also noted that the court does not invoke the bad faith exception lightly and imposes a stringent evidentiary burden of producing clear evidence of bad faith conduct on the party seeking an award of fees.

  In this case, the court in a polite manner basically described the reasons why the testimony of the parties against whom attorneys’ fees were assessed, was simply not believable.  The court described the testimony, which changed over time, as contrary to common sense and “not consistent with the operative reality.”  In sum, the court found that the ever changing testimony of the party against whom attorneys’ fees were assessed satisfied two components of bad faith:  (1) The position was “so strained and wholly at odds with the operative reality” that it fell outside the bounds of good faith advocacy (citing Rule 11); and, (2) Respondents could not in good faith aver, under oath, facts directly opposite to those they averred in the Virginia litigation nor could they, with impunity, change their testimony to suit their needs in this litigation.  The Court held that “Respondents’ violations of these fundamental tenets rise to the level of intentional bad faith conduct that justifies an award of attorneys’ fees under the bad faith exception to the American rule.”

 The court also awarded costs pursuant to Chancery Court Rule 54(d) to the prevailing party (which would not otherwise cover attorneys’ fees). Moreover, pursuant to Section 4734 of Title 10 of the Delaware Code, the court concluded that the order awarding fees and costs should be entered “in the same manner and form and in the same books and indexes as judgments and orders entered in the Superior Court.” (Ouch).

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 In Advanced Litigation, LLC v. Herzka, read opinion here, the Chancery Court decided a motion for summary judgment involving claims for misappropriation of trade secrets and conversion, as well as a counterclaim and third-party complaint for unjust enrichment and violation of the Delaware Wage Payment and Collection Act, 19 Del. C. Sections 1101 through 1115 (“DWPCA”).  The court previously had granted a motion for dismissal of claims against the defendants based on a Rule 41(b) determination of failure to prosecute, as well as an entry of judgment against the plaintiff on one of the counterclaims.  Subsequently the defendants amended their counterclaims to add an additional party and to pursue their claims for wages earned under the DWPCA.

 The court determined that there were genuine issues of material fact that barred summary judgment on the following key issues:  (1) Whether the claimant was an employee or an independent contractor; (2) Whether under Section 1103(b) of the DWPCA, the employer had “reasonable grounds” to dispute claims such that statutory penalties of attorneys’ fees and liquidated damages would apply; and, (3) Whether the spouse of the named counterclaim defendant was a “manager” as that term is used in the DWPCA.  Thus, the motion for summary judgment against the spouse as a defendant liable under the Delaware Wage Payment and Collection Act was denied.  This case also includes a good discussion of the applicable standards for satisfying the prerequisites for a motion for summary judgment.  For example, the court emphasized that a party opposing summary judgment “may not rest upon the mere allegations or denials of [their] pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial.  If [the party] does not so respond, summary judgment, if appropriate, shall be entered against [them]. “ (citing Chancery Court Rule 56(e)).  The court also emphasized that it “maintains the discretion to deny summary judgment if it decides that a more thorough development of the record would clarify the law or its application.” 

Lastly, the court discussed the concept of “the law of the case” as being established when a specific legal principle is applied to an issue presented by facts which remain constant throughout the subsequent course of the litigation and once addressed in a procedurally appropriate way by a court, it is generally held to be the “law of that case” and will not be disturbed by the court unless compelling reasons to do so appear.  However, the “law of the case doctrine” is neither inflexible nor an absolute bar to reconsideration of a prior decision that is “clearly wrong, produces an injustice, or should be revisited because of changed circumstances. “ Moreover, the doctrine does not have the same finality of res judicata as it only applies to litigated issues and does not reach issues which could have been but were not litigated.

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In  Bedrock Technologies, LLC v. Earthwater Technology International, Inc., read opinion here, the Chancery Court employs a short letter opinion to provide instructional tips for practitioners on the procedural distinction between a motion to dismiss and a motion for summary judgment.  In essence, the court advised that a party needs to decide whether it will rest on the pleadings to file a motion to dismiss--or if it will seek a broader scope of argument for a motion for summary judgment, which will then open the door to the likely right of the opposing party to engage in discovery before the court can rule on the motion.

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  Also important was a reference in footnote 7 to a decision by the U.S. Court of Appeals for the 7^th Circuit involving the same parties, and which the Chancery Court waited for before rendering its own decision.  That 7^th Circuit decision is International Airport Centers LLC v. Citrin, 455 F.3d 749, 751-52 (7^th 2006).  The 7^th Circuit decision drew somewhat humorous commentary from the court in connection with the 7^th Circuit’s predictable decision that:

 Simply because the advancement claim is based on litigation in federal court (or any other foreign jurisdiction) the claimant need not present the advancement claim in that proceeding--as opposed to the well recognized procedure of presenting the advancement claim in a summary proceeding before the Delaware Court of Chancery.

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In Wynnefield Partners Cap Value L.P. v. Niagara Corporation, read opinion here, the Chancery Court decided a motion for a stay pending an appeal of a prior decision summarized here,  which granted a demand for documents under Section 220 of the DGCL.  The movant argued that the appeal would be moot unless a stay was granted pending the appeal.  The Motion for Stay was denied with the only exception that the court required a Confidentiality Agreement “for attorneys’ eyes only” be put in place pending the appeal.

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Our local newspaper, The Wilmington News Journal,  published an article today by Maureen Milford that provides an overview of the Chancery Court's jurisdiction. It includes a question and answer session with Chancellor Chandler as well as highlights of some well-known cases decided over the last few years, such as Disney, Hewlett-Packard and Tyson Foods. It also includes a not very well known case that I won about 15 years ago.

 I am the only lawyer quoted in the article. Here is a copy (you may need to expand the copy to see the small font). One knows that there are many miles on  one's odometer when an article quotes you about a case won 15 years ago. The case involved getting a constructive trust for someone who made a bid on real estate but the mortgage broker my client used bought the property  for himself in cash, though the court ordered it returned to my client.

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In Seinfeld v. Verizon Communications, read opinion  here, the Delaware Supreme Court  on September 25 provided clarification for the requirements of DGCL Section 220. Describing what the court referred to as well-settled prerequisites that must be satisfied before a shareholder can successfully demand books and records of a corporation, the high court affirmed the Chancery Court's decision denying inspection.

The Chancery Court decision was summarized on my blog  here . This was a long and expensive fruitless  fight for a shareholder who was seeking data to support a claim that some Verizon executives received excess compensation and/or were paid more than provided in their contract. See also another recent decision summarized  here ,  that denied inspection under DGCL Section 220 due to the request being overly broad. The Supreme Court often instructs litigants to use DGCL 220 to obtain details before filing a complaint, but this case is a good example that a demand under Section 220 is not a simple matter and can be a costly and unproductive exercise if not done carefully and correctly.

Here is a key quote from the court's decision:

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In Benge v. Oak Grove Motor Court, Inc., read opinion  here,  the Chancery Court addressed a rather unusual issue: What is the deadline to transfer a case to the proper court when the case was dismissed for lack of  subject matter jurisdiction--but was appealed without a stay of the order being in place? That is, does the appeal automatically toll the normal deadline of 60 days within which the transfer must be made?

Bottom line: the court did not need to decide the issue directly but offered this guidance for anyone whose case is dismissed from Chancery Court due to lack of subject matter jurisdiction, and wants to know when the transfer to (usually ) Superior Court should be made:

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In Superior Vision Service, Inc. v. ReliaStar Life Insurance Company,  read opinion here, the Chancery Court ruled that where shareholders of a closely-held corporation negotiated a formal agreement not to issue dividends, one party who refused to amend the agreement due to changed circumstances some period afterwards, could not be forced to amend the agreement based on a claimed breach of the implied covenant of good faith and fair dealing.

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 In Wilcox & Fetzer, Ltd. v. Corbett & Wilcox, read opinion  here , the Chancery Court was presented with the following somewhat unusual question:

 ...may Corbett & Wilcox compel Plaintiff Wilcox & Fetzer, Ltd. to arbitrate pursuant to an arbitration clause contained in an agreement to which the former is not a signatory.

Answer: Yes.

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This week I will be on a trade mission with a delegation from the State of Delaware in connection with the opening of a trade office in Italy to promote trade between the State of Delaware and businesses in Italy. I will be away most of the week of Sept. 24 and my schedule will not allow much, if any, blogging this week.

 I have a large number of  Delaware case summaries that I hope to post as soon as possible upon my return. "Ciao".

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 This blog focuses on business litigation and related topics. To the extent businesses are often landowners concerned with liability based on real estate they own, the following opinion is notable.

 In Butler v. Newark Country Club,  read opinion  here , the Delaware Supreme Court very recently issued an opinion of importance to landowners who might be subject to claims from children who trespass and are then injured on that property. This decision involved an 8 year old who drowned when thin ice gave way on an irrigation pond at a country club where the unfortunate youngster was trespassing.  Here is the money quote from the Supreme Court's affirmance of the Superior Court:

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The Electronic Discovery Blog posts about a recent federal decision that imposed penalties on a party for failure to reasonably investigate the location of electronic data and other discovery deficiencies. Here is the link: Failure to Conduct Reasonable Investigation for Responsive Documents and Other Discovery Abuses Warrant Adverse Inference Instruction : Electronic Discovery Law

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In Bowen v. E.I. duPont de Nemours & Co., Inc., read opinion here , the Delaware Supreme Court , in a opinion issued only a few days ago, upheld the exclusion by the trial court of experts who did not meet the Daubert  test. Analyzing Daubert and  Delaware Rule of Evidence 702 the court recognized that decisions to bar experts are often case dispositive. The court listed the applicable factors that the trial court needs to apply as a gatekeeper, as follows:

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 This blog focuses on Delaware corporate and commercial law and I try to confine my posts to matters related to those business litigation topics, but everyone should be interested in world affairs and I am moved from within to share observations on important world events. I have posted earlier on the insights of corporate law professor Steve Bainbridge regarding the imbroglio over the recent university lecture of Pope Benedict XVI. For  a comprehensive review of what the Pope actually said, see the following link to Larry Backer: Law at the End of the Day: On Benedict XVI, Islam and the Politics of Abusive Discourse.  He quotes extensivley from the text of the Pope's speech and provides detailed background and context. One observation of his that I found enlightening was the analogy of the reaction of some to the inversion of an abusive relationship. Here is a quote about  the type of relationship that might be analogous to the reaction of some to the Pope's speech:

The essence of an abusive relationship is inversion. In a domestic context it goes something like this: the victim must do everything in her power to please the aggressor. If she fails in even one task, say setting dinner out immediately before the aggressor’s return from work, she will be beaten. She is reminded that the beating is her fault, she enraged the aggressor by failing in her duties and thus forced him to beat her. How much worse, then, and how much more deserved a beating she merits, were she ever to tell the aggressor that he is a violent man prone to get his way only by threats of violence and resort to actual violence. Indeed, such a statement from her would be provocative at best and surely will make matters worse by inflaming the passions of the aggressor so that the cycle of violence will only intensify as a result of her actions.

The reaction of many people follows a well worn pattern. They form opinions before they have reviewed all the relevant facts. This includes many in the mainstream press.  However I am happy to say that my "hometown newspaper",  the Wilmington News Journal, showed great insight and courage with its editorial today on the topic. Here is an excerpt from the editorial:

The point is that the pope said it is unreasonable to convert people at gunpoint. Something is dreadfully wrong with our age if this is considered a controversial stand.

Here is the link to the whole editorial:www.delawareonline.com/apps/pbcs.dll/article

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In American Trucking Association, Inc. v. Delaware River Joint Toll Bridge Commission,  read opinion here, the U.S. Court of Appeals for the Third Circuit last month upheld the decision of the trial court which rejected the claims of various trucking companies that were challenging the increase in tolls on certain bridges that traverse the Delaware River between the states of New Jersey and Pennsylvania. The appeals court applied the U.S. Supreme Court cases that determine when a particular statute allows for a private cause of action (which differs in small but important ways from the issue of standing). The court engaged in extensive review of legislative history and had this gem of an insight: The comments of one legislator on the floor of Congress do not necessarily represent the intent of  both houses of the entire legislative body on a particular statute.   Here  is an article that discusses the case.

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In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, read opinion here , the Delaware Chancery court rejected a direct claim by a creditor against directors  of a company allegedly in the "zone of insolvency" who were supposedly  beholden to Goldman Sachs due to its source of funding. The court held:

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In Haddock v. Zimmerman, read online here, the Delaware Supreme Court addressed the following issues of importance to business litigation practitioners (and granted an unusual reversal of an interlocutory judgment of the Chancery Court):

(i) Unless clearly stated in the order, a dismissal "without prejudice" does not automatically allow one to file an amended complaint (See generally Chancery Court Rule 15aaa.);

(ii)  A "dismissal without prejudice"  is a final judgment for purposes of appeal (but not for purposes of res judicata);

(iii) If a new disinterested board of directors is installed after the original complaint is filed but before the amended complaint is filed, a determination of the issue of whether "demand is excused" under Chancery Court Rule 23.1 (and in light of DGCL Section 141(a)),  is at least in part based on whether the counts of the complaint at issue are "validly in litigation" as that phrase is defined.

Here is the money quote:

"dismissal without prejudice and without explicit leave to amend operates as a final judgment. We approve the Court of Chancery’s rationale in Harris v. Carter, 582 A.2d 222 (Del. Ch. 1990). 

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Gordon Smith posts on his Conglomerate blog about the continuing tug of war between federal and state regulation in corporate law, and in particular Larry Ribstein's recent commentary. Also excerpted and discussed is the recent law review article by Vice Chancellor Leo Strine, Jr., on the issue. See Leo E. Strine, Jr., Toward a True Corporate Republic: A Traditionalist Response to Bebchuk's Solution for Improving Corporate America, 119 HARV. L. REV. 1759, 1778-79 (2006). Here is the link: Conglomerate Blog: Business, Law, Economics & Society

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The Electronic Discovery Law Blog posts about a decision this month from the Southern District of New York which refused to shift the cost of restoring emails that should have been preserved from the outset of the litigation. The case involves an analysis of the Zubulake factors, as well as discussion about the parameters of search terms requested. Here is the link to a copy of the full decision and insightful case commentary:Party Not Entitled to Shift Costs of Restoring Emails that were Converted to Inaccessible Format After Duty to Preserve was Triggered : Electronic Discovery Law

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Although this blog is focused on Delaware business law, the comments of a nationally prominent corporate law professor, often cited on this blog, are relevant to anyone concerned about important issues of our time. Reminiscent in some ways of the last part of  the Roman Empire, in my own view, some of the events in world affairs today are indicative of different civilizations fighting for primacy or survival. In any event, the link below by the good professor comments on the recent speech of Pope Benedict XVI during his trip to Germany with references to "post-Christian Europe" (see the "dictatorship of relativism") and the tensions among Islam and other religions/societies. These topics and the speech may be esoteric to some, but the professor states that the text of the Pope's speech "rewards close scrutiny". Here is the link: ProfessorBainbridge.com: Benedict's Speech at Regensburg

UPDATE: Here is a link to Prof. Bainbridge's update on the pope's non-apology and other comments on  the situation.www.professorbainbridge.com/2006/09/the_popes_nonap.html.  I for one do not think the pope needs to, nor should he, apologize. He was merely giving historical context for his view that violence should never be justified as a means of spreading one's religion. It should not be his fault if others misinterpret the intent of his speech--especially even after he tries to clarify it. Where is their outrage when others chant "death the West" and the like.

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The Wall Street Journal Law Blog has a post entitled "Sexy M&A Litigation in Delaware" about the recent lawsuit filed in Chancery Court in an attempt to undo the merger agreement between Advo and Valassis. The Court gave them an expedited trial date of Dec. 11, and would have given an even sooner trial date if not for the court's kindness in allowing the parties and their lawyers to enjoy the Thanksgiving holiday with their families. Here is the link:Law Blog ? Sexy M&A Litigation On Tap In Delaware

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In Re: Fuqua Industries, Inc. Shareholder Litigation (Sachnoff & Weaver, Ltd. v. Abrams ), read opinion  here , the Chancery Court  on September 7, 2006 addressed  a fee dispute arising from the extensive litigation in the Fuqua Industries matter that lasted from 1991 through 2006. In his opinion, Chancellor Chandler refers to the many reported decisions in that case. The specific issue in this decision had to do with the class representative of this class action also being a lawyer and also seeking legal fees for at least some of the services that he performed in the case. 

In sum, the court refused to honor the agreement to pay fees (if one ever existed, although the court did not rule on that issue) based on established Delaware case law, as well as Rules of Professional Conduct 1.5 and 1.7 which prevent an attorney who serves as a class representative from also serving as the attorney for the class. See   Goodrich, 1993 WL 94456, at *2 (citing Emerald Partners v. Berlin, 564 A.2d 670, 676-80 (Del. Ch. 1989)). See also Goodrich v. E.F. Hutton Group, Inc., 681 A.2d 1039, 1045 (Del. 1996).

The court was displeased that the details of such an arrangement were not brought to its attention when the class settlement and attorneys’ fees claimed for the class counsel was approved in the past in this case. The policy reasons, in addition to Rules 1.5 and 1.7, are that an attorney for the class has a conflict when the issue involves the amount of attorneys’ fees to be paid because the amount of attorneys’ fees paid is directly at odds with attaining the highest possible amount for the class. Rule 1.5  deals with reasonable fees and includes provisions for sharing fees with lawyers in another firm in which case the consent of the client is required but in this case the class did not consent to attorneys’ fees being paid to the class representative.  Rule 1.7 addresses conflicts of interest  between concurrent clients and the court determined that the rule is violated when a class representative is also the attorney for the class.

Although it may dicta, it is memorable that the court noted that even though the Chancellor  was doubtful that an agreement ever existed regarding fee splitting, the court made it clear that:

“it would, for example, seem unlikely that a court of equity would entertain a law firm’s argument that an illegal and unethical contract it had entered into should be held unenforceable, thereby enriching the firm that had conspired to commit a fraud on the Court and the stockholder class in the first place. In such circumstances, it seems more likely that a court would order disgorgement of all of the attorneys’ fees awarded to the offending law firm.” (emphasis in original)(Slip op. at 18).

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In Cahall v. Thomas, read opinion here , the Delaware Supreme Court determined that Rule 68 does not allow for costs to be awarded if an offer of judgment was jointly made to 2 parties without apportioning the amount of the offer between them. The court reasoned that: "Superior Court Civil Rule 68 provides that where a timely offer of judgment is not accepted prior to trial and the 'judgment finally obtained by the offeree is not more favorable than the offer, the offeree must pay the costs incurred after the making of the offer.'”

In sum, the court determined that the joint parties should not be required to figure out what amount each would receive from the offer, in order to effectuate the purpose of the rule.

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For those interested in a cutting edge discussion by leading corporate law scholars, you will want to follow the online debate this week between Prof. Gordon Smith and Prof. Steve Bainbridge on the blog called Pointof Law, regarding the issue of relative control of shareholders v. directors. Here is a concluding paragraph from the first post: "The brevity required by this forum does not allow for a complete explication of the case for increased shareholder participation in corporate governance, but I hope that this post will serve as a useful starting point for our debate. As noted above, the central issue of contemporary corporate governance debates is whether the current regime of "director primacy" should be modified. Arrow identified the tension between authority and responsibility, but this is only a starting point, not a conclusion. Acknowledging that tension does not tell us where to draw the lines." Here is the link to the site where the debate will take place: PointofLaw.com | PointOfLaw Featured Discussion.

STILL MORE: Prof. Lynn Stout joins the debate with a paper addressing the dynamics between shareholders and directors. Prof. Bainbridge posts about it with a link to her article. Here is the hyperlink:www.professorbainbridge.com/2006/09/stout_on_shareh.html

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This article discusses 2 recent Chancery Court decisions that provided creative remedies to address improprieties by the 90% owner and the 50% owner of equity in 2 separate closely-held entities.

Chancery Court Rulings Highlight Flexibility of Equitable Relief Available, Delaware Law Weekly, July 2006

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Prof. Bainbridge comments about his article (with a link to it), that discusses the intersection of corporate law and Catholicism on such matters as the alter ego doctrine and related topics having to do with what church property is subject to judgments. Here is the link to his post: ProfessorBainbridge.com: on the road

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Prof. Gordon Smith comments on the matter that has been prominently written about in The Wall Street Journal all this week: the imbroglio in the boardroom at HP as a result of an investigation into a leak of information and the use of pretexting by private investigators hired by the board chairwoman to get personal phone records of directors. Pretexting is impersonating another person to obtain private information about them without their authority. Sounds like old fashioned deceit and lying to me, and is expressly criminalized in many states. Of course there is a need for appropriate confidentiality in board meetings, but in my view there is a limit to what should or can be kept confidential. I am thinking of Section 220 of the DGCL which gives shareholders the right to certain key information about a company, including in some instances board related data. I realize that once data is obtained under Section 220, it is often kept from the public at large and that the leaked board-related details at HP are alleged to have been made public, but I am not aware of anything in the nature of trade secrets being published in the papers. Here is the link to the good professor's take on the matter: Conglomerate Blog: Business, Law, Economics & Society

UPDATE: Prof. Bainbridge comments on other Delaware law aspects of the matter and the inability of the board to eject a director (a power given to shareholders) but they may demote a director  from chairperson. Here is the link: www.professorbainbridge.com/2006/09/can_hps_board_o.html

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The Trade Secrets Blog of the Womble firm posts about a Texas federal court decision that addresses the intersection of fiduciary duty and trade secret law in connection with departing employees. The decision found that fiduciary duties were breached when the employees were planning their departure prior to leaving and included revealing confidential data (trade secrets) to third parties. Here is the link: Trade Secrets Blog: Trade Secrets and Fiduciary Duties (Pacer Req'd)

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Prof. Ribstein provides his take on the backdating story sweeping the nation. Here is the link: Ideoblog: Backdating assumptions

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In Gentile  v. Rossette, read opinion here, the Delaware Supreme Court, in a rare reversal, disagreed with the Chancery Court's view of a claim as derivative only. The Court summarized it this way:

The issue presented on this appeal is one purely of law: can SinglePoint’s former minority stockholders bring a direct claim against the fiduciaries responsible for the debt conversion transaction complained of, or is such a claim exclusively derivative? We hold, for the reasons discussed herein, that the claim is not exclusively derivative and can be brought by the (former) minority shareholders directly.

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In Facchina v. Malley, read opinion  here , the Chancery Court addressed the issue of: "who is the managing member of the nominal defendant  Child Care of Irvine, LLC? " (The LLC  apparently was not represented in the case.)  The entity originally formed was a corporation, which later merged into the LLC.  A Shareholders' Agreement had been entered into before the merger into the LLC, and the Court noted that regardless of the name, if the parties agreed to be governed by such a document, even if the nomenclature was not appropriate, that such an agreement could be binding on the LLC members since the label is not important (citing 6 Del. C. Section 18-101(7)).

 One of the issues in the case, based in part on the misnamed document, was whether control of the entity was determined by a "head count" or "majority equity ownership". Regardless of the title, the Court viewed the real issue as one of control, as opposed to who got to be called a manager. Importantly, at footnote 8, the Court observed, without deciding, that Section 18-401 and Section 18-101(10) of the Delaware LLC Act could be read as "providing that a limited liability company without an operating agreement cannot have a "manager"". The Court did not need to decide that issue due to the majority interest of one of the parties and the provision of the LLC Act that provides for management of the LLC, "unless otherwise provided" in an LLC agreement, to be vested in the members according to the current percentage of their interest in the profits of the LLC. See Section 18-402.

The Court applied the internal affairs doctrine to the issue of who controlled the Delaware LLC, regardless of its place of operations. The Court also addressed the defenses alleged of waiver, estoppel and acquiescence, none of which were availing, and noted that the parties did not raise any differences between Delaware or California law on those defenses.

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In Acciptier Life Sciences Fund, L.P. v. Helfer, et al., read opinion  here ,  the Delaware Chancery Court refused to exercise its equitable powers to grant relief to a shareholder who did not read diligently the notice of a shareholders' meeting that was arguably  "slipped in" to the 7th paragraph of a 34 paragraph press release. The notice was given pursuant to a bylaw provision that required 10 days' notice before a shareholders' meeting, and that time period was also when nominations to the board needed to be made. The plaintiff was a hedge fund that was a major shareholder and they "simply missed" that part of the press release. Though  they were sophisticated analysts that followed the company, in fairness to them there was no specific mention in the caption or in any subheadings of the press release to indicate that the press release, which announced recent financial statistics, would also include the 10-day notice of a shareholders' meeting. Thus, they  also missed the deadline to nominate new members of the board.

 There is an important equitable principle recited in the highly regarded case of  Schnell v. Chris-Craft , 285 A.2d 437 (Del. 1971) , and its progeny,  that  a corporation may not take action towards its stockholders which, though legally possible, would be inequitable--especially to the extent it manipulates timetables to cut short the time available for shareholders to conduct a proxy contest. In sum, the Court found that the facts of the present case did not rise to the level required to apply that principle. Though the Court did not approve of the less that conspicuous notice in the press release, it found that a diligent reading, especially by sophisticated hedge fund analysts, would have resulted in seeing the notice. Along the way, the Court  also made important legal insights. For example, it found that the principles of "constructive notice" relied on by defendants, to the extent the notice was also contained in SEC filings, did not apply.

The Court also noted that the "buried facts" doctrine, such as failing to provide adequate disclosure by including an important fact in a footnote on the next to last page of a prospectus, did not apply here. Nor did the  Court think that federal law was necessary to resolve the issues, though it observed that the same action or omission can be the basis for both common law claims or equitable relief, and securities law claims, both of which can be made independently. In footnote 38 the Court noted that conduct violative of the federal securities law may also breach the implied covenant of good faith and fair dealing, or other Delaware law.

 Without being glib, the Court was persuaded by the fact that a careful reading of the press release by the sophisticated hedge fund managers could have avoided the whole dispute. Of equal importance in my view is the discussion of the landmark Schnell case and its progeny, and a further clarification of the factual situation where the Court will not apply the principles enshrined in that decision.

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Best wishes for a Happy Labor Day. I want to take a few minutes to make some  pithy observations about work on this day of the worker. From my office window this morning I watched a few minutes of the Labor Day Parade making its way through Rodney Square in downtown Wilmington, Delaware. It reminded me of the progress of the average worker's plot in life. I am not suggesting that more progress is not needed, but compared to 100 years or so ago, when a 6-day  week and 12-hour  days  in dangerous conditions were common--even for children--without much remedy for workers injured on the job, most people have better working conditions and at least have more holidays than they did 100 years ago. Of course, I work 6 days or more a week and often work 12 hours or more a day, but at least it is in an air-conditioned office.

Compared to my grandfathers who both came here with small change in their pocket as teenagers with few skills and no jobs waiting for them, but who worked for a few dollars a day at menial jobs and were thankful for the work, I have no room to complain. In part because few employers would hire Italian immigrants, they both eventually formed their own businesses and became quite prosperous. In light of  the discrimination and harsh work conditions which they overcame, I am thankful to be the beneficiary of their heroic efforts.

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In   Blue Chip Capital Fund II v. Tubergen, read opinion  here , a  minority preferred stockholder survived a motion to dismiss involving a claim that the board violated the company's certificate of incorporation when, after the sale of substantially all of the company's assets, "it distributed an inflated amount of the proceeds to the holders of a class of preferred stock which included the company's controller". The Chancery Court found that the contract claims could allow a full recovery, so there was no need to pursue the secondary fiduciary claims. The Court also addressed the less than frequently opined upon attributes of Section 281 of the DGCL.

Specifically, Section 281(b)(i) of the DGCL prescribes a statutory scheme for distributing assets of a dissolved corporation that has not elected to comply the the procedures of Sections 280 and 281(a). The statutory framework, in sum, allows one to follow a procedure to address claims from potential creditors, for example, by following a non-judicial method of setting aside estimated reserves or alternatively, seeking a judicial blessing of adequacy, for example, when the assets remaining of a dissolved corporation may not cover all contingent liabilities. At this early stage, the Court could not conclude under Secdtion 281(b)(i) that the provision for creditor claims satisfied the contractual rights of the preferred stockholders.

The Court also observed the Section 281(b)(i) is designed to protect the interests of creditors and says nothing about the rights and interests of preferred stockholders (citations to footnotes omitted here). In the case of In Re Delta Holdings, Inc., 2004 Del Ch. LEXIS 104 at *36, the Chancery Court held that  Section 281(b)(i) of the DGCL did not require a company to set aside an amount to cover all potential contingent claims.

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In the decision styled: In re: Opinion of the Justices,  read online here, the Delaware Supreme Court answered a legal question presented by the Governor of Delaware. This is a well-grounded but seldom used Delaware exception to the general prohibition against advisory opinions. Based on a scholarly analysis of the Delaware Constitution the high court  found that the county was exempt from a residency requirement in the Constitution that applied to some state officials. The opinion is also  a useful guide to statutory construction in general, and for those interested in history, gives some added insight into why Delaware required that certain positions be held by  Delaware residents. When one realizes that Delaware was, once upon a time, part of the "three lower counties" of  the Commonwealth of Pennsylvania, and in pre-colonial times the Governor of Pennsylvania could appoint Pennsylvanians for Delaware public positions, the existing  requirement is more understandably viewed as important at the time that Delaware gained its "independence" from Pennsylvania. In fact, Delaware still celebrates the day it won independence from Pennsylvania and this case is an indication that it is still a key aspect of Delaware politics and public policy.

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In Lehman Capital v. Lofland, read opinion here, the Delaware Supreme Court determined that dismissal of a complaint with prejudice was too harsh a penalty, based on the facts of the case, for failure to comply with a discovery order and related pre-trial failings. After recounting an almost nightmarish pre-trial morass of missed deadlines, difficult client relationships, and lack of pre-trial preparation, Delaware's high court determined that less punitive sanctions would be more appropriate. The Court also provided specific examples of other less harsh penalties that the trial court could have employed. The Court held that sanctions were appropriate for failure to comply with the rules of discovery and lack of compliance with orders of the court, but there was an absence in the record of sufficient willfulness or conscious disregard on the part of the client as opposed to counsel.

The Court emphasized the distinction between failure to comply with trial court orders that are based on the "willful or conscious disregard" of the client--compared with lack of compliance due to omissions of the lawyer. The case was remanded with instructions that the trial court enter judgment in the amount of an "offer of judgment" (that was made but not replied to by the plaintiff). In addition the Court, based on Superior Court Rule 37(b)(2) ordered the trial judge to award attorneys' fees to the defendant, including the fees for the appeal, and that the trial judge should determine what portion of those fees should be paid by the client and what portion should be paid by the attorney. 

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