I am in the middle of expedited TRO proceedings, thus my blogging will likely be very light for the next few days. Although there are a few recent decisions I want to post about, as most readers will understand, when briefing and prepping for a TRO there is not much time for other things. Happy Halloween.
According to the Wall Street Journal's front page article in this weekend's edition, not since the 1970's overseas bribery scandal have so many public corporations been in trouble at the same time. Of course there is a Delaware component to this pervasive story, especially to the extent that backdating of stock options triggers the fiduciary duties of directors and officers. Prof. Ribstein has some commentary on it. See the link here.
Prof. Ribstein has a thoughtful post on what he calls the "shareholder democracy sham" and how those efforts interface with the "battle for control" (my words) between states like Delaware and the SEC (as well as the federal courts) over corporate governance issues. Here is the link: Ideoblog: The "shareholder democracy" scam. Here is a excerpt from his post:
Despite all the complaints about state law, there is scant evidence that federal control of corporate governance would be any better. Delaware must compete actively and continue to innovate to maintain its dominance against all the other states. Within that system firms themselves can experiment, as they have, for example, with majority voting for directors. The reformers would replace that system with a one-size-fits-all federal system in which interest groups, particularly including unions, contend and corporate policy shifts with the political winds.
For those who think uniformity when they see federal, consider how, in the AFSCME decision, one federal court has thrown the SEC's shareholder proposal rule into chaos while the political forces line up in Washington.
This sort of thing doesn't happen in Delaware. The second principle is about who controls our modern corporations. The reformers like to shout about "shareholder democracy" as if it meant anything. But the question is which shareholders. It's no accident that the AFSCME case was brought by a union. Corporate elections are unions' last opportunity to shore up their declining clout. Unions already have secured an extensive executive compensation disclosure rule to whip up populist resentment about executive pay. The next step is to create a mechanism to bring that resentment to bear in corporate elections. It should be obvious to anybody who cares to look past the rhetoric that the unions are seeking bargaining leverage on behalf of their members, and to ensure their own survival. They are not seeking to represent the interests of investors generally. Their ideal is the sclerotic European firm, with its labor representatives on the board.
None of this is to say that current corporate governance is perfect and that there are no agency costs. More shareholder power is indeed an answer to unresponsive entrenched managers. But there are viable alternatives to union dominance, including hedge funds and private equity. We don't see reformers, unions (or for that matter incumbent managers) lining up to defend these shareholders because they might actually want to make more money for the rest of us. Instead we see calls for more federal regulation of these shareholders.
So peek behind the "shareholder democracy" rhetoric and we see what Levitt and the rest of his "reformer" mob have on their minds: federal control of corporate law, turning corporate governance into a political battle between unions and managers, and a rich market for consultants on "good governance."
In Dewey Beach Lions Club v. Longacre, et al., (Del. Ch., Oct. 11, 2006), read opinion here , the Chancery Court ruled on a post-trial "bill of costs" pursuant to Chancery Court Rule 54(d). This is the sort of practical letter opinion that I like to refer to as a useful reference tool for the business litigator's "tool box". The court observed the limited scope of this rule, which does not cover attorneys' fees, and the rule was distinguished from the costs that might be covered in light of a separate contractual basis for awarding costs.
Notable about this letter opinion on costs was the discussion of the costs incurred due to the requirement that all cases in Chancery Court must be eFiled, and all pleadings must be sent to the court via eFiling. Thus the costs incurred as a result of using the required vendor for eFiling, LexisNexis File & Serve, were taxed to the losing party to the extent that they were for required for eFiling, but the prevailing party was careful not to request reimbursement for services by LexisNexis that were not required, such as a case history report.
The blog called Concurring Opinions has a post on a recent arbitration decision concerning compensation for the former CEO of MassMutual, as well as what questions about the board's duties are raised regarding the terms of the CEO's employment contract that may impinge the board's oversight role. See link here:Concurring Opinions: CEOs, Just Cause, and $$$$
Darian Ibrahim at the Conglomerate blog, has a thought-provoking post, and has generated equally probing comments, on the topic of imposing liability on individual directors as opposed to the whole board, especially in light of the Delaware Supreme Court's Disney decision. Here is the link:Conglomerate Blog: Business, Law, Economics & Society
In Polygon Global Opportunities Master Fund v. West Corp., 2006 WL 2947486 (Del. Ch., October 12, 2006), read opinion here, the Delaware Chancery Court addressed another request for books and records under DGCL Section 220 by a hedge fund and found it wanting, as explained in this thoroughly reasoned opinion. For another recent Chancery decision, Highland Select, denying a Section 220 request by an equity fund, due at least in part to the request being overly burdensome in scope, see the summary on this blog here. In that Highland case, trial was held about 6 weeks after the complaint was filed.
I have summarized about 30 Delaware decisions on DGCL Section 220 demands on this blog over the last 18 months or so (which can be searched by inserting "220" in the search box at the right margin of this blog). One theme that I see is that an enormous amount of time and money can be spent in an effort to obtain books and records under DGCL Section 220 without success. To look at the statute one might think it is a rather pedestrian procedure to follow in order for a shareholder to obtain books and records of the corporation in which she owns shares, but the cases suggest that it requires careful observance of the statutory requirements, which do not all lend themselves to mathematical precision.
This case involved a trial that took place about 2 months after the complaint was filed. To state the obvious, the limited scope of the trial was for the purpose of determining entitlement to the documents sought--something that in the ordinary case one would obtain in routine discovery.
The court noted that the plaintiff hedge fund often invested in arbitrage situations and in this case heavily invested in the defendant corporation following the announcement of a going private transaction. The stated purpose of the demand under 220 was to: (i) value their stock; (ii) determine whether to seek appraisal; (iii) investigate breaches of duty; and (iv) communicate with other stockholders.
The court found no entitlement in this case under Section 220 because the plaintiff: (i) had already obtained "all necessary, essential and sufficient" data to determine whether to seek appraisal; (ii) did not have a proper purpose to investigate wrongdoing; and (iii) did not seek a stockholder list for a proper purpose.
Notably, after suit was filed, the court asked the plaintiff to "prepare a chart" linking :(i) the documents sought with (ii) the proper purpose for each document sought, as asserted in the demand for records (resulting in a pared-down list prior to trial).
The court made clear that valuation of shares is a proper purpose for a Section 220 demand, especially in the context of determining whether to pursue an appraisal--but if the data is already available in the public domain (e.g., in an SEC filing) the Section 220 claim may be obviated. It was also made clear that SEC Rule 13e-3 requires, as here, more data about valuation in a going private transaction than would otherwise be available. This highlights the different lens through which a demand involving a public company will be viewed as opposed to a closely-held one. Although there is no per se rule that a Section 220 claim for valuation purposes may be mooted in a squeeze-out merger subject to disclosures under SEC Rule 13e-3, in this case that was the result.
It was also made clear (as stated in many cases) that a Section 220 case is not a substitute for normal discovery in a regular lawsuit, nor will it be allowed as a substitute for discovery in a subsequent appraisal action. The scope of documents available in regular discovery under Rule 34 is much different than the scope of documents available under Section 220 (citations omitted).
Referring to DGCL Section 327 and related cases, the court emphasized the important public policy against "the evil of purchasing stock in order to attack a transaction which occurred prior to the purchase of the stock" (citations omitted)(i.e., purchasing a basis for litigation). Due to the claim here that the investigation into wrongdoing related to an event prior to the purchase of stock, the court observed that the plaintiff did not have standing for a derivative claim; nor did it have standing to make allegations based on entire fairness.
Regarding its alleged interest in communication with other stockholders, though the burden is on the corporation in this type of request to establish an improper purpose for the request of a stockholder list, and is rarely denied, here the reason for the request was based on the 2 prior reasons which were rejected by the court. (e.g., the list was not requested for a proxy solicitation but merely to "share" what it got from the Section 220 case and to inquire about anyone else who might be seeking appraisals.) In sum, on this point, the court said that simply because a stockholder may communicate with other stockholders based on Federal Securities Laws, that fact in and of itself does not support a proper purpose under Section 220.
Though it might be tempting to do so, I don't think this case can be read as imposing a higher hurdle for hedge funds making a Section 220 demand. Rather, the relevant background of the stockholder, to the extent it provides insight into the stockholder's intent in buying the stock, and its "end-game", will be part of the court's analysis of whether the requirement of a "proper purpose" has been satisfied.
If this blog format lent itself to footnotes, I would add one in closing here, but instead I will mention this aside as a final sentence. As a human interest anecdote, few people have the pleasure of seeing in a court's opinion in a case that one has argued, that the court has cited to an article or a treatise that one has written in the same case (especially when that same lawyer prevailed). So it is in this case that my friend Michael Pittenger was on the winning side, and the court in its opinion cited to a leading treatise that Mike co-authored, titled: Donald Wolfe and Michael Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery (2006). It must make victory even sweeter. Congratulations, Mike.
In Rohn Industries, Inc. v. Platinum Equity, LLC, (Del. Supr., October 20, 2006), read opinion here , the Delaware Supreme Court addressed a contract interpretation question that applied New York law. It is not uncommon for Delaware courts to apply the law of other states. This case involved the appeal of a judgment entered after trial, based on a finding that one party's subjective good faith was an adequate basis to terminate the contract in light of a clause that allowed termination if the party had a good faith belief, prior to closing, that it would be subject to asbestos liability. In sum, the Supreme Court found that there was also a requirement based on contract law principles, including the Restatement (Second) of Contracts, that there be an objectively reasonable basis for the party to believe it would be subject to liability, in order for the good faith belief to suffice.
A link to the 73-page Grasso decision yesterday in New York is provided by The CorporateCounsel.net Blog. In the summary judgment decision the court found a violation of the duty of due care. Here is the link to the blog: TheCorporateCounsel.net Blog. For Prof. Ribstein's initial view of the decision, see here.
Prof. Hillary A. Sale presented the 22nd Annual F.G. Pileggi Distinguished Lecture in Law earlier this morning in Wilmington, Delaware, to members of the Delaware judiciary, the Delaware bar and members of academia. She provided insightful commentary on the decision by former Chancellor Allen in the case of In Re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del.Ch. 1996). For a short summary of her presentation see here and here. Her presentation will be the basis for a law review article in The Delaware Journal of Corporate Law. Her insights on the role of the board to provide oversight and monitoring is especially noteworthy in light of recent corporate scandals, including most recently, backdating of options. Updated summary here.
Steve Jakubowski of the Bankruptcy Litigation Blog has a reflective post which serves as an example of why blogging by lawyers is worthwhile and why the legal profession is much better because of people like Steve. Plus, I am grateful that he includes me in such august company as other more notable lawyers who are bloggers. Here is the link: Bankruptcy Litigation Blog: Grandpa's Reflections on a Year of Bankruptcy Blogging
The 22nd Annual Francis G. Pileggi Distinguished Lecture in Law will be held on October 20 at 8:00a.m. at the Hotel duPont in Wilmington, Delaware. This year's lecturer is Prof. Hillary Sale, a nationally prominent corporate law expert. The lecture is approved for one-hour of free CLE for both Delaware and Pennsylvania attorneys. Prof. Sale's presentation: "Caremark: A Tale of Two Fiduciaries" comes on the 10th anniversary of the Court of Chancery decision by retired Chancellor William T. Allen titled In re Caremark International Inc. Derivative Litigation. The famous decision dramatically focused attention on directors' roles in implementing corporate compliance programs. More details are available here (including a number to rsvp, though seating is limited) .
In Commonwealth Construction Co. v. Cornerstone Fellowship Baptist Church, Inc., (Del. Super., Oct. 3, 2006), read opinion here, the Superior Court addressed core construction law issues. Every contractor should read this decision that contains extensive analysis of key provisions of a commonly used AIA Agreement. In the decision, the court determined that the owner waived its right to sue for failing to give the proper notice pursuant to the terms of the Agreement. Moreover, the court found that the contractor was within its rights to file a mechanics lien, as well as a breach of contract claim (as part of the same lawsuit) because the contractor did follow the procedures set forth in the Agreement. Although the court’s decision is 44 pages long, and space does not permit me to include all of the extensive details in this short summary, I will try to highlight what I view as some of the key aspects of the decision.
The court addressed issues arising out of a 1997 version of the Standard Form of Agreement Between Owner and Contractor (“Agreement”) (A101) promulgated by the American Institute of Architects (“AIA”). Also included in the court’s decision was a discussion of the General Conditions of the Contract, AIA document A201-1997. Of course, the contract documents included drawings, specifications and other modifications or amendments. The court gave an extensive analysis of Change Orders (“CO”) which of course initially began as Change Order Proposals (“COP”). The court noted that the Agreement required that Change Order Proposals were initiated by the contractor by sending a Request For Information (“RFI”) to the design professional, who in this case was a P.E. The RFI was submitted when the contractor thought that the drawings or the intent of the design were not clear, or where changes to the design were necessary during actual construction. When the contractor received a response to the RFI that required a change to the scope of work, the contractor drafted a COP which was sent to the design professional for review. Once the owner approved the COP it became a final Change Order, which would formally modify the Agreement.
The total contract price involved was approximately $2.3 million and the court observed that there were a total of 181 RFI’s; 155 COP’s which resulted in 119 CO’s. One witness testified at trial that a project of similar size would generally have only approximately 60 RFI’s; 50 COP’s and perhaps 20 CO’s.
The key procedures required under the Agreement regarding disputes began with Section 4.4.1 of the General Conditions which required that any claims arising under the Agreement should be submitted first to the architect. The court noted that even though the architect was considered the representative of the owner, there were safeguards in Section 4.2.12 against abuse by the architect. Section 4.4.1 also provided that an initial decision by the architect was required as a condition precedent to mediation, arbitration or litigation of any claims between the contractor and the owner arising prior to the date final payment was due. Although the contractor submitted several claims for non-payment, the court noted the special treatment given to mechanics’ liens under Section 4.4.8 which allowed a party to file a mechanics’ lien prior to the resolution of any claims by the architect.
The court noted that Section 9.7.1 allowed the contractor to stop work when it was not being paid if certain provisions were met. Section 2.2.1 also allowed the contractor to stop work if the owner did not provide reasonable evidence of financial ability to make future payments under the Agreement. This was key here because the contractor heard that the owner was having financial trouble and the owner was not reassuring.
The court summarized the key requirements under the mechanics’ lien law pursuant to 25 Del. C. Section 2712(b). The court cited other decisions that recognized some flexibility in the requirements by noting that even though the statute is strictly construed, the court will not “unreasonably interpret” the statute if it was substantially complied with when suit was filed. (However, in my view, one would not be well-served to rely too heavily on a broad application of that comment.) The court observed that demolition work is usually not with the scope of a mechanics’ lien, and there also were issues about the proper commencement date for the work, which is a trigger for the timetable when a lien must be filed. The owner waived these defenses, however, due to the failure of the owner to raise those issues until after the non-jury trial.
One of the most noteworthy aspects of this decision is that the court construed the failure to first submit a claim to the architect pursuant to Section 4.4.1 of the AIA Agreement to be a material breach of the Agreement that, therefore, barred the party failing to comply with that provision from pursuing any remedies in a lawsuit.
The court recited the basic principle of contract law which is that in order for a party to seek damages for breach of contract, that party must first establish its own substantial compliance with the contract. This is unlike a small or minor breach. If a breach is material, however, it will excuse a non-breaching party from performance.
There are many more facts and details in the lengthy decision by the court, but in this very small space available I have summarized the key aspects which should be remembered by any contractor who wants to be prepared to collect on a job where it is not paid by the owner.
In addition, especially notable about this case is a footnote indicating that an oral ruling in this matter was made from the bench on January 23, 2006, in which the Chancellor denied a motion to dismiss based on the following reasoning: the defendant here was a third-party beneficiary to the merger agreement in dispute, and therefore would be deemed to have consented to the forum selection clause in that agreement being litigated in the case.
Also of importance was the Court’s discussion of subject matter jurisdiction with reference to DGCL Section 111(a)(2) (granting jurisdiction for interpretation of the validity of any documents relating to the sale or creation of stock or options relating thereto); as well as 10 Del .C. Section 341 (granting the Chancery Court jurisdiction to hear and determine all matters and causes in equity); and 10 Del. C. Section 342 (the Court of Chancery shall not have jurisdiction to determine any matter wherein sufficient remedy may be had by common law or statute before any other Court or jurisdiction of this state).
The Court noted three basic ways in which it can have subject matter jurisdiction: (1) One or more of the claims is equitable in character; (2) The plaintiff requests relief that is equitable in nature; or (3) If subject matter jurisdiction is conferred by statute.
UPDATE: Dan Tin, Esq. just brought to my attention the following article he wrote about forum selection clauses: Tan, Daniel S., "Damages for Breach of Forum Selection Clauses, Principled Remedies, and Control of International Litigation" . Texas International Law Journal, Vol. 40, p. 623, 2005. Available at SSRN: http://ssrn.com/abstract=628581
In Premier Parks, Inc. v. TIG Insurance Co., read opinion here, the Delaware Superior Court addressed cross-motions for summary judgment on counterclaims. The initial claim was a declaratory judgment action by the insurance company to seek a ruling that it was only liable to pay an allocated share of a global settlement entered into by Six Flags Inc. (formerly known as Premier Parks Inc.) in connection with a class action civil rights lawsuit. Based on a choice of law provision, the court applied the substantive law of
The court found based on
Based on
In sum, the court found that TIG was estopped from denying Six Flags coverage for the full amount of the settlement and because TIG could not meet their burden of allocating the settlement between covered and noncovered claims, they would be responsible for the total amount of the negotiated settlement. Six Flags had asked TIG for approval of a settlement amount but the response from TIG was in essence, unreasonable.
The court also required TIG to pay all of the attorneys’ fees incurred by Six Flags and that they would be estopped from asserting any defenses under their “reservation of rights letter” because of the “course of dealing” that had been engaged in for many years between Six Flags and the claims administrator for TIG which regardless of the terms of the policy gave much leeway to Six Flags in choosing counsel especially in large, high value, high exposure cases. The Court relied on
Despite that “historical” course of dealing which always resulted in consent to Six Flags’ prior choice of counsel and prompt response to inquiries, it was not until more than eight months after the request in this case that TIG responded to the efforts of Six Flags to seek approval for the choice of a large law firm in this matter, and then after that period of eight months they belated said that they would not cover the bills for that law firm.
The court reasoned that when an insured is a defendant in high stakes litigation and requests specialized counsel, an insurer has the duty to respond in a timely manner and that waiting eight months for a reply was not reasonable. Moreover, Six Flags was entitled to rely on prior course of dealings in which TIG approved its choice of counsel in high stakes litigation. The court also noted that the only firm that TIG did approve for this matter was not qualified for the type of case involved and was not even able to serve in a minimal local counsel role.In my recent column for The Delaware Law Weekly, I wrote a short summary of the holding in the recent Chancery Court decision in Trenwick, which held that there is no cause of action in Delaware for "deepening insolvency". The full article is here.
In Sanders v. Cseh, et al., (Del. Super., Sept. 22, 2006), read opinion here, the Delaware Superior Court addressed the standard under Rule 60(b) that needs to be satisfied before a default judgment will be vacated due to "excusable neglect" or related reasons under the rule. The court had no sympathy for the insurance company that missed the deadline by more than 18 months, for an answer to be filed.
This is a useful case to have in the toolbox of a business litigator. Hopefully it would only be needed in order to defend a Rule 60(b) motion instead of filing one.
Prof. Bainbridge provides the memo that Warren Buffet sent this year to his managers. It provides useful insights into how the Oracle of Omaha encourages his colleagues to "do the right thing". More importantly, and this applies to so many areas, he tells them not to do something simply because "everyone else is doing it". My father used to tell me all the time not to be caught in the trap of that verbal crutch. Here is the link:ProfessorBainbridge.com: Warren Buffet's Memo
Prof. Bainbridge has a post today about Delaware's dominance of corporate governance, and a link to Prof. Larry Hamermesh's new article in the Columbia Law Review on the topic. Here is the link:ProfessorBainbridge.com: Delaware's Dominance
Although the New Jersey Supreme Court has suspended the ruling pending its further review of the matter, the New Jersey Committee that regulates attorney conduct recently decided that the designation of "Super Lawyer" violates the NJ Rules applicable to lawyers. In my regular ethics column that I write for the national publication of the American Inns of Court, The Bencher, I discuss it in more detail. The full article is here.
Many blog posts here have summarized recent cases from the Delaware courts involving the duties of controlling shareholders who attempt to buy the remaining shares of a company. In the past few days, the business press has prominently featured a current example of that situation. The Dolan family owns a controlling interest in the publicly-traded company Cablevision Systems, and they want to take it private. Predictably, a lawsuit has been filed to challenge the transaction. For interesting commentary, and links to sources on the matter, see Adam Savett's blog called "Lies, Damn Lies and Forward Looking Statements". Here is the link: Lies, Damn Lies, & Forward Looking Statements
This blog focuses on business litigation cases primarily from the Delaware Chancery Court and Delaware Supreme Court (and my summaries of those cases are fairly up to date), but once in a while I feel compelled to take note of decisions around the country that might be of interest generally to lawyers who handle business litigation cases and their clients. Courtesy of California Employment Lawyer Stephen Hogie, comes a discussion (with links to cases) of the "ministerial exception" which is often used by courts to defer to religious institutions in matters of their internal affairs. For example, he refers to the case of a novice who was preparing to become a nun, but was dismissed from the program--apparently around the time she found out that she had breast cancer. The court did not want to get into the business of second-guessing religious orders when they determine who should or should not become nun, but of course the dividing line for what is a matter of decisionmaking based on the religous beliefs of a particular minister or religion, and what might be an unfair employment practice, is not always clear. Here is the link to the story and the related cases: blog.myspace.com/calif_employee_lawyer
On Prof. Larry Ribstein's Ideoblog recently, he linked to a comment by Timothy Glynn about the internal affairs doctrine. Here is the link: Ideoblog.
Larry has written extensively on the topic and has a new article on point in the works. They both refer to the very recent denial by the U.S. Supreme Court of cert to review a California case dealing with whether the internal affairs doctrine applies or whether California blue sky law applies to a dispute involving insiders of a Delaware corporation based in California. The latest pronouncement in Delaware on this issue was the 2005 decision of the Chancery Court, as affirmed by the Delaware Supreme Court in a case called Examen, Inc. v. VantagePoint Venture Partners, summarized here on this blog.
Also referenced by Glynn is a separate California case on the issue that is now on review by the California Supreme Court. See Glynn's post here: Concurring Opinions.
Last year, Craig Williams posted on his blog called May It Please the Court about a California case that did follow Delaware's view of the internal affairs doctrine. Here is the link: MayItPleaseTheCourt .
In W.L. Gore & Associates, Inc. v. Wu, read opinion here, the Chancery Court addressed the right by a former employer, W.L. Gore & Associates, to restrict the use of its trade secrets by a former employee. The factual background of this case is very involved and is also set forth in two prior opinions of the court that can be found at the following citations: WL Gore & Associates v. Wu, 2005 WL 311998 (Del. Ch. Nov. 14, 2005) (“Gore I”); WL Gore & Associates v. Wu, 2006 WL 905346 (Del. Ch. Mar. 30, 2006) ("Gore II"). The most recent decision of the court was heavily influenced by the demonstrably contradictory statements of
Also noted about this case is that the public version of the published opinion is redacted and excludes many confidential trade secret details that are referred to in the opinion.
One important part of the opinion is that the court, relying on many decisions from other states, determined that even in the absence of a current covenant-not-to-compete, the court had the authority to “limit a defendant working in a particular field if his doing so poses a substantial risk of the inevitable disclosure of trade secrets.” (emphasis mine.) The court cited other decisions from other jurisdictions that prohibited a former employee with trade secrets from working in any relevant industry that may allow a competitor to obtain such trade secrets. In this case the court found that it would be very difficult for
The court discussed the principle that--especially as it relates to the rights of preferred shareholders which are governed generally by contract law--to allow a fiduciary duty claim to co-exist in parallel with an implied contractual claim, would undermine the primacy of contract law over fiduciary duty law in matters involving the essentially contractual rights and obligations of preferred stockholders. (citing Rale v. Bershad, 1998
The court denied the request for more records and determined that the stockholder:
“failed to sufficiently articulate why the additional documents are either necessary or essential to her concededly proper purpose and thus failed to meet the standard under 8 Del. C. Section 220. "
In a previous opinion, the Chancery Court denied a Motion to Stay the Section 220 case in favor of the investigation being conducted by the company’s Special Litigation Committee. See
The court noted the somewhat unique procedural posture of the motion, styled as one to compel, in a Section 220 case in which the defendant has conceded the propriety of the Section 220 demand and has already furnished substantial documentation. Thus, the motion required the court to consider issues that usually arise in the course of a substantive Section 220 trial. The court summarized the limited nature of a proceeding to consider a demand for books and records to which one is entitled, if the prerequisites of Section 220 have been satisfied. That is, “when a books and records action is brought with the goal of evaluating a possible derivative suit, the books and records that satisfy the [220] action are those that are required to prepare a well pleaded complaint. Of course, this means that Section 220 is not meant as a replacement for discovery under [Rule] 34.” (emphasis mine.)
In denying the request for additional documents, the court observed: “that a document would be potentially discoverable under Rule 34 does not make it necessary and essential under Section 220” (emphasis mine.) This is another example, among others summarized on this blog, that a Section 220 case is not always a simple matter.
Jim Hamilton's blog has a post about the former Chancellor of the Delaware Chancery Court, William Allen, who, at a recent seminar, commented on the duties of controlling shareholders. Here is the link:Jim Hamilton's World of Securities Regulation
In the case of In Re: PNB Holding Co. Shareholders Litigation, read opinion here, the Chancery Court, in a 76-page opinion conducts a thoughtful analysis of many merger-related issues which time and space will only allow me to identify in brief.
This case addressed both equitable claims and an appraisal under DGCL Section 262 in connection with a merger that had the effect of reducing the number of shareholders from approximately 300 to less than 75 in order to qualify for a conversion to an S Corporation. The court allowed the equitable claims to be prosecuted by those who did not vote for the merger but who accepted the merger consideration. The court found that as long as they did not vote for the merger, the acceptance of the merger consideration did not amount to waiver by acquiescence.
The court determined that the entire fairness standard applied because the directors were not independent to the extent that their personal gain from the transaction was not shared by all shareholders. However, the court determined that the case of Kahn v. Lynch, 638 A.2d 1110 (Del. 1994), which applies to a controlling stockholder merger, did not apply. The plaintiffs attempted to argue that the shares owned by the directors and their families should be considered a controlling group, but the court was not convinced. Although the court recognized that a shareholder or group of shareholders can be considered controlling under certain circumstances, even if they own less than 50%, and the court discussed cases so holding, the facts of this case do not support such a conclusion.
The court also observed that despite the directors being conflicted, and therefore bound to demonstrate that the merger was fair to the departing stockholders, they failed to use any “cleansing device” such as: (1) approval by a special committee of independent directors, or (2) an informed “majority of the minority” vote, which might otherwise allow the transaction to benefit from the deferential business judgment rule. The court reviewed the disclosure claims by the plaintiffs but rejected them. The court also discussed what it viewed as imperfections (my word) in the applicability of the Lynch case, supra, to controlling shareholders transactions when cleansing devices are applied.
A thorough analysis of the expert valuations was discussed, and the court relied, among other things, on the iconic valuation treatises of
In Daystar Construction Management, Inc. v.
In Lundeen v. Pricewaterhousecoopers, LLC, read opinion here , the Delaware Superior Court found a failure to establish negligent representation by an accounting firm in connection with the sale of a business, and therefore granted summary judgment. The court reasoned that there must be proof that false data was both provided and that it was material, in order to succeed on a claim for negligent misrepresentation. The court ruled that neither of those requirements were satisfied here. Moreover, the court did not view the evidence as supporting a claim that the financial statements at issue were materially misrepresented.
UPDATE: The Delaware Supreme Court affirmed this decision in an Order here. The High Court also upheld the trial court's decision to exclude an expert report that was offered about 6 months late, as well as excluding expert deposition testimony that exceeded the scope of the expert's report. Reminder: If the opposing side tries to introduce an expert report late, cite the foregoing case. See also related case: Coleman v. PricewaterhouseCoopers, LLC, 902 A.2d 1102 (Del. 2006).
In Quereguan v.
(1) Motion for Reargument [see here for summary on this blog of prior decision for which reargument was sought]; (2) A Motion to Sever (to allegedly avoid confusion due to the various parties and claims); and (3) A Motion to Transfer the Case to Superior Court.
Most of these issues were addressed in the prior court decision of Quereguan v.
The court noted that it frequently tries complicated cases involving multiple claims against multiple defendants and that this particular case was not especially challenging. Lastly, the court observed that it clearly had jurisdiction over claims for specific performance and even if only money damages were sought, the Chancery Court has jurisdiction to adjudicate legal claims under the “clean-up doctrine.” That doctrine serves to: avoid piecemeal litigation, conserve scarce judicial resources, as well as limit costs to litigants and the public. The doctrine also serves to decrease the risk of inconsistent verdicts by retaining jurisdiction over some portion of a controversy if it will allow for a resolution of the whole controversy even though that may involve the grant of a purely legal remedy such as a money judgment.
Yesterday I attended an all-day symposium titled: " The Third Annual Symposium on the Law of Delaware Business Entities--Good Faith After Disney: The Role of Good Faith in Organizational Relations in Delaware Business Entities." (Yes, it is a long title, but it was worth it.) The event was "emceed" by Prof. Ann Conaway of Widener University Law School and featured leading experts from Delaware and across the country, as well as 2 members of the Delaware Court of Chancery and 2 members of the Delaware Supreme Court (including the Chancellor and the Chief Justice.)
Among the insights were the differences between good faith in the fiduciary context compared with the purely contractual context. Another key point, by at least some of the jurists and commentators: Despite reference in some opinions to fiduciary duties of directors as including a triad of: loyalty, due care and good faith, the Disney opinions made it clear that no pronouncement was being made on whether "good faith" was a separate duty, nor--many argued yesterday--is there any basis in the DGCL for a separate duty. In my view, the consensus of most panel members can me summarized in this way: Good faith in the fiduciary context is neither a "stand-alone" nor an independent "duty" but rather is part of the other fiduciary duties and is often used as a rhetorical device to describe other aspects of fiduciary duty. One indication of this is the general recognition that there is no separate cause of action for "breach of good faith" (whatever that is, though there are many definitions, especially when compared to "bad faith".) Of course there is much more to say on this point, and for 7 whole hours yesterday all aspects of this issue were discussed, but this is just a short post on the "headlines".
Coincidentally, yesterday on the Conglomerate blog, Usha Rodriques posted her observations and statistics about the Delaware judiciary being more prolific and more involved in seminars and in writing law review articles than most state judges. She cited statistics that Delaware jurists from the Chancery Court and Supreme Court have published 50 articles over the past 16 years (35 of them since 2000), not including all the seminars around the country at which they make presentations. I will leave it to others with better math skills to apply those numbers to the fact that there are only 5 members of the Chancery Court and 5 members of the Supreme Court. Still more, each of these courts routinely publish formal opinions that can average 50 or more pages, and often longer. In essence, many of their routine opinions are very similar to law review articles themselves ( Note that the Chancery Court's last Disney opinion was over 170 pages long). Can anyone cite similar statistics from other state judges--especially in proportion to the smaller number of total judges in Delaware compared to most states?