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

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Prof. Larry Hamermesh's article, The Policy Foundations of Delaware Corporate Law, for the current issue of the Columbia Law Review, is available on SSRN here. The suggested citation according to the SSRN site is as follows: Hamermesh, Lawrence A., "The Policy Foundations of Delaware Corporate Law" . Columbia Law Review, Vol. 106, No. 7, November 2006.

Hat tip to Truth on the Market Blog for noting that the article has the distinction of being among the top 10 articles on corporate governance and corporate law downloaded from SSRN in the last 60 days. Congrats, Prof. Larry!

The article is a first-hand analysis of why Delaware's corporate law predominates and how Delaware's role interfaces with efforts of the federal government to increase its regulation of corporate governance. Of course, the article is much more than that, but I encourage you to click on the above link to enjoy the benefits for yourself of  first-class scholarship.

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Courtesy of The Wall Street Journal's Law Blog is a list of the business law cases now pending before the U.S. Supreme Court. Here is the link.

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In Johnson v. Kraft Foods, the U.S. District Court for the District of Kansas recently determined that a request for production of "electronic databases" was not too vague. Courtesy of the Electronic Discovery Law Blog, which also has a link to the full decision, the court reasoned in support of granting a motion to compel e-discovery,  that the requesting party defined the terms, and also noted that definitions were also available from a glossary provided by the Sedona Conference, a working group analogous to a think-tank that has produced much scholary and  forward-thinking work on many aspects of e-discovery. A link to their glossary of terms is also available at the above blog post.

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Prof. Bainbridge comments in a recent post describing the new format of his blog, that at least some members of the Delaware Chancery Court and Delaware Supreme Court are readers of his blog, and we know that his blog comments have been cited in the recent Delaware Chancery Court opinion of Trenwick. ( Trenwick America Litigation Trust  v. Ernst & Young, L.L.P., 906 A.2d 168, 195 n.75 (Del. Ch. 2006). For a summary of the Trenwick case, see this link to my blog post for an article I wrote summarizing the case.) Those jurists are among his blog's intended audience and he is well-positioned as a nationally-prominent corporate law professor to keep the interest of his audience. Thus, it makes eminent sense for me to continue to link to his posts in connection with my more limited focus on this blog, which is primarily to summarize key decisions from Delaware's Chancery Court and Supreme Court. It naturally enriches my blog content to be able to link to his expert blog commentary and other expert corporate law bloggers such as Professors Larry Ribstein (at Ideoblog) and Gordon Smith (at The Conglomerate). Here is the link to the post I refer to by Professor Bainbridge: Professor Bainbridge's Journal: The Fragmentation Bomb that Hit PB.com

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In the case of In Re Primedia, Inc. Derivative Litigation, 2006 WL 3365544 (Del. Ch. Nov. 15, 2006), read opinion here, the Chancery Court presents a "guidebook", based on settled bedrock principles of Delaware law, for the duties of controlling shareholders in an interested transaction. Although the duties of a controlling shareholder are not new at all, this opinion summarizes them neatly and applies them in the context of an intricate web of interlocking entities that the court drilled through with laser-like precision to find the controlling amalgamation of interest. Of course, the result of such a finding is that the defendants will not be entitled to the protection of the Business Judgment Rule. To the contrary, they will need to carry the burden of proving the entire fairness of the transaction in which they stood on both sides of the table. The transaction at issue was the redemption by the corporation of preferred shares owned by the controlling shareholder, at a handsome profit. The corporation, however, was not required to redeem the preferred shares for several more years. The common shareholders did not share in the lucre of the transaction. The court found this case to be squarely within the teaching of the hoary case (and its progeny) of Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971).

Also notable is the extensive discussion in footnote 45 of why the directors were considered by the court to be lacking in independence. Procedurally, the court observed that the motion to dismiss filed was under Rule 12(b)(6) and not based on Rule 23.1, thereby virtually conceding that the director defendants were not independent. In addition, the procedural hurdle of a 12(b)(6) motion is much easier for a plaintiff to overcome compared to a motion under Rule 23.1.

In my view,  a most memorable quote from the end of the court's opinion addresses the point that the breach of the duty of loyalty in this context is considered so important as a matter of public policy, that even if the measure of damages caused by the breach is not entirely clear, the court will be flexible on that element, which ordinarily is an essential component to any case, after a breach is established. Here is the quote that I think is destined to be referred to often as a summary of this key concept:

If the plaintiffs ultimately prove such a breach of the duty of loyalty, this court should not unduly narrow the scope of their recovery.^FN46 Even in a case where transactional damages are not present, a disloyal fiduciary may still be held liable for incidental damages.^FN47 Concerns of equity and deterrence justify “loosen [ing] normally stringent requirements of causation and damages” when a breach of the duty of loyalty is shown.^FN48 As the Delaware Supreme Court long ago noted, the duty of loyalty “does not rest upon the narrow ground of injury or damage to the corporation resulting from a betrayal of confidence, but upon a broader foundation of a wise public policy that, for purposes of removing all temptation, extinguishes all possibility of profit flowing from the breach of confidence imposed by the fiduciary relation.” ^FN49

[For the convenience of the reader, I am including below the footnote contents for the footnotes in the above quote.]

FN46. Thorpe v. CERBCO, Inc., 676 A.2d 436, 445 (Del.1996). FN47. Id. FN48. Id. (quoting Milbank, Tweed, Hadley & McCloy v. Boon, 13 F.3d 537, 543 (2d Cir.1994)).FN49. Guth v. Loft, Inc., 5 A.2d 503, 510 (Del.1939).

 

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In  West Coast Management & Capital, LLC v. Carrier Access Corp., 2006 WL 3337161 (Del. Ch. Nov. 14, 2006), read opinion here, the Chancery Court added to the growing body of cases in which a request for books and records under 8 Del. C. Section 220 was denied. DGCL Section 220 gives a shareholder the right to inspect books and records of a corporation if the purpose for inspection is a proper one. The statute defines proper purpose as any purpose "reasonably related to such person's interest as a stockholder." Although investigation of wrongdoing can be a proper purpose, the plaintiff must prove at trial some credible evidence of wrongdoing sufficient to warrant continued investigation.

The court determined that the shareholder did not have a “proper purpose”. A key to the court's reasoning was a decision of a federal court in Colorado which dismissed a prior stockholder derivative suit by the same plaintiff,  and which the Chancery Court determined estopped the same plaintiff from relitigating the demand futility issue and also precluded the same plaintiff from filing a second derivative complaint. The stated purpose of the plaintiff's Section 220 demand was to obtain information in order to adequately plead demand futility in a proposed second derivative complaint. 

The same plaintiff had previously made a Section 220 demand, without filing suit, but took no action after the company denied the demand as an improper attempt to circumvent a decision by a federal court to deny discovery during the pendency of a Motion to dismiss in a separate proceeding. The instant demand came after the federal suit was dismissed for failure to plead demand futility.

Procedurally, the court made its decision based on a motion under Chancery Court Rule 12(c) for judgment on the pleadings. The court discussed the procedural standard for such a motion in light of the form and manner requirements under DGCL Section 220. The court also referred to the recent Delaware Supreme Court decision of Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006) and Chancery Court Rule 15(aaa), recognizing  that a derivative claim may be dismissed with prejudice as to the named plaintiff but not as to the corporation or its other stockholders.

The court observed that: “what is yet undecided under Delaware law and must be resolved by this court is, in the absence of a dismissal with prejudice to the specific individual derivative plaintiff, whether that plaintiff can file a second case and replead demand futility. That is, in the absence of leave to amend, does a dismissal on demand futility alone operate as a bar to a subsequent suit by the same named plaintiff.” (The court noted that other jurisdictions often use conflicting terms for this concept, such as res judicata, claim preclusion, judicial estoppel, direct estoppel, collateral estoppel and issue preclusion.) The court also discussed that full faith and credit requires a federal court to apply state law on issue preclusion when the original decision is in state court, and although not constitutionally required, the Chancery Court adopts the same policy.

Specifically, the issue in this case was whether the decision by the federal court to dismiss the case “without prejudice” eviscerated the issue preclusion bar to a second suit. The Chancery Court here concluded that regardless of the characterization of the prior dismissal as either with or without prejudice, the same shareholder was estopped from relitigating demand futility because it was actually litigated and determined by the federal district court, and because that determination is binding and preclusive on that shareholder in any subsequent litigation between the parties as a matter of issue preclusion. The court also cites to authority for use of the word estoppel as opposed to issue preclusion alone. The fact that the dismissal was without prejudice simply means that the underlying claim, which belonged to the corporation and not its stockholders, was not adjudicated. The court need did not decide whether the district court order amounted to res judicata or complete claim preclusion. 

The court reasoned in conclusion that:

 “the nature of Section 220 as an independent right does not eliminate the proper purpose requirement. . . . Although investigating wrongdoing is a proper purpose, it must be to some end. Delaware law does not permit Section 220 actions based on an ephemeral purpose, nor will this court impute a purpose absent the plaintiff stating one. Simply put, West Coast must do more than state, in a conclusory manner, a generally accepted proper purpose. West Coast must state a reason for the purpose, i.e., what it will do with  the information, or an end to which that investigation may lead. Here, it is clear that West Coast’s sole purpose and end is to pursue a second derivative suit - - an end barred by issue preclusion.”

The court distinguished this case from a case where there is a “credible showing” of “legitimate issues of wrongdoing,” and the plaintiff is investigating to determine the nature of the wrongdoing and what further actions may be appropriate based on that information. Here the court found that shareholder’s only purpose was to relitigate demand futility and pursue a second derivative complaint, both of which were barred.

Over the last two years or so I have summarized all the published opinions from the Court of Chancery and Delaware Supreme Court on Section 220 for my blog.[Use search function in the margin and insert 220.]  This latest case is a further example that the seemingly simple procedures in DGCL Section 220 are neither mechanically applied nor is the result of their application always obvious. Shareholders have found that they do not satisfy the prerequisites of Section 220 when, after the court's careful analysis it appears, for example, that their purpose is not reasonably related to their status as a shareholder. See, e.g., Polygon Global Opps. Master Fund v. West Corp., 2006 WL 2947486 (Del. Ch. Oct. 12, 2006). The Delaware Supreme Court recently rejected a Section 220 demand after agreeing with the Chancery Court's finding that there was no credible basis for the stated purpose of possible mismanagement that would warrant further investigation. Seinfeld v. Verizon Commc'ns, Inc., 2006 WL 27771558 (Del. Sept. 25, 2006). See also Highland Select Equity Fund, L.P. v. Motient Corp., 906 A.2d. 156 (Del. Ch. 2006)(request denied as overly broad and onerous).

In conclusion, despite the summary nature of a Section 220 proceeding, the court will carefully examine the circumstances in which the demand is made (such as related proceedings in another court or a proxy contest), and the court will closely analyze the relevant background of the shareholder to the extent it sheds light on whether Section 220 is being used for its intended purpose, as opposed to a vehicle for a fishing expedition or to pursue unfounded allegations.

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 B. F. Rich Co., Inc. v. Gray, et al., 2006 WL 33376163(Del. Ch. Nov. 9, 2006), read opinion here. The Chancery Court here addressed a claim brought under DGCL Section 225, regarding a determination of the proper directors and officers of the nominal defendant.  The election by written consent was contested.  The allegation was that the attempt to replace directors and officers by written consent was improper due to the consent being exercised by minor children who allegedly lacked legal authority to vote those shares.  A declaratory judgment was sought on the authority of the minor children to vote shares.  A one day trial was held on March 15, 2006 and this post-trial opinion concluded that the written consents were effective to properly elect  de jure directors and officers.  The defendants wanted the court to consider a “parade of horribles” regarding prior findings of breach of fiduciary duties by the director whose election was contested.  See e.g., In Re Summit Metals, Inc. v. Gray, 2004 WL 1812700 (D.Del. Aug. 6, 2004).

However, the Chancery Court made clear that the scope of a Section 225 action is:  “narrowly limited to the validity of the election or vote and the right to hold office.  Consequently, the court must disregard collateral issues outside of this realm.”(citing Bachmann v. Ontell, 1984 Del. Ch. LEXIS 569, Brown, C. (Nov. 5, 1984)). 

 Moreover the court reasoned that if there were breaches in the future of any duties, the parties could seek appropriate relief at that time.  Otherwise a Section 225 proceeding limits the court to a determination of the validity of the written consents at issue in the particular case before the court.  In reaching its conclusion, the court also was required to review the impact, under the applicable Connecticut law, of a stipulation which affected the authority of the party who had signed the consent on behalf of his minor children.

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Prof. Stephen Bainbridge is a corporate law professor who for some time has had a popular blog available at ProfessorBainbridge.com, but he had taken a self-imposed hiatus for a while during which he redesigned his blog. Now, he is back and the foregoing link is a portal to three (yes, 3) blogs that he writes. In addition to his blog on business law and economics, he has a blog on wines as well as one on cultural commentary. He also has found the time to write 50 law review articles and several books, in addition to his full-time teaching at UCLA Law School. He gives new meaning to the word prolific.

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Prof. Bainbridge has a post here that discusses why Delaware predominates in corporate law and why most major public companies are incorporated in Delaware. Among many reasons referred to in his post on the topic, is the internal affairs doctrine,  and I am flattered to say the good professor links to a case summary on my blog for a summary of that concept. Here is the post of mine that Prof. B. refers to in his post.

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Prof. Hillary A. Sale wrote the lead article in the current issue of The Business Lawyer,  the ABA publication of the Business Law Section.  I am sure it is destined to be read and cited often. My copy came in the mail yesterday. The article is entitled: Independent Directors as Securities Monitors, 61 Bus. Law. 1375 (2006). Footnote 4 compares the SEC-approved NYSE definition of independent director with the more nuanced Delaware definition that divides the matter into director interest and director independence. Prof. Sale cites for this distinction the case of  In re: The Limited, Inc., S'hlders Litig., 2002 WL 537692 (Del. Ch.)(reviewing individual directors under interest and independence standards). Of course, I cannot do the article justice in this short post. The article discusses the SEC's focus on independent directors and a stated intent to hold them more accountable.

Anyone who advises independent directors of public companies will want to study this article. I am not aware of the The Business Lawyer  publication being available online, but if any reader knows otherwise, please let me know.

UPDATE:Thanks to the comment from Steve noted below (no last name given), who reminds us that the ABA eventually makes articles from The Business Lawyer available online, at least to members, though the current issue is not yet online. There is a link to the ABA's Business Law section in the right margin of this blog. Thanks, Steve. Also, I am not sure it is the same version of the article, but SSRN has a copy at this link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=900458.

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As reported in the Wilmington News Journal  today, a company based in Louisville, Kentucky has been formed with the stated purpose of protecting one's reputation on the Internet.  I predict it will have an increasing demand for its services. Called "ReputationDefender", it promises to scour the Web for hurtful references and work to have them erased. In times past, libelous comments made in passing, casual conversation may have been soon forgotten after limited circulation. Now, however, with YouTube, blog posts and comments on blogs, My Space, Facebook, etc., many fail to realize that  defamatory comments on websites, even if  later erased, remain on the Internet with some level of permanency. I hope I never need their services, but it is useful to know that such a service purports to be available.

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Best wishes to my readers for a Happy Thanksgiving. I was blessed to have a relaxing and enjoyable day with my extended family  locally. I have much to be thankful for, and after watching the story of the pilgrims who came on the Mayflower, according to a movie on The History Channel, we have come a long way in this country since their landing here in the year 1620 (though of course the Jamestown settlement in 1607 came first). The hardship the first settlers endured is staggering and especially for the pilgrims, it is amazing that one of the main reasons they endured that hardship was to avoid religious persecution in both England and the Netherlands.

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Prof. Ribstein has a characteristically thoughtful post, including links to other sources, that discusses SEC activity regarding shareholder democracy matters. Why am I including this on a blog about Delaware law? The good professor explains more eloquently than I, that such efforts are often thinly-veiled attempts to have the camel of federal control place its nose in the tent of corporate law dominance by the states. Thus, Delaware needs to watch this debate closely. Here is the link: Ideoblog: Alan Murray on "shareholder democracy"

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I hope my readers will forgive this very short off-topic announcement, but I simply want to congratulate my big brother, Sen. Dominic F. Pileggi, who was chosen by his caucus on Nov. 20, 2006 to be the new Majority Leader of the Pennsylvania Senate. Of course I am proud of my big brother and wanted to share my exultation. Here is a non-familial connection with this blog: his Senatorial District is contiguous with the State of Delaware. Here is a link for more details: http://www.senatorpileggi.com/press-2006/112006-leadership.htm

 

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Prof. Gordon Smith has a few comments about the passing of Milton Friedman, the Nobel prize winning economist. Of course, business law requires at least a passing familiarity with economics. Gordon quotes from one of Friedman's books that supports the practical insight that political freedom and economics are inextricably connected. Here is the link to his further commentary: Conglomerate Blog: Business, Law, Economics & Society

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As I am "current" on my summaries of business law opinions issued by the Delaware Chancery Court and Delaware Supreme Court (the 2 courts whose key corporate and commercial opinions I primarily summarize on this blog, as soon as I can after they are published), I will very briefly summarize,  during this Sunday afternoon break from my preparation for a TRO, a decision from the Delaware Superior Court and one from the Bankruptcy Court for the District of Delaware that should be of interest to those who read this blog for business litigation cases.

In the case of In Re: Alterra Heathcare Corp., (Bankr., D. Del., Oct. 16, 2006), read opinion here , Chief Judge Walrath addressed the issue of what documents can remain under seal when filed with the court. Relying on section 107(a) of the Bankruptcy Code, she ordered documents previously filed under seal to be made public, and discussed the policy reasons, and legal authorities, that supported her decision not to keep private the terms of settlements made in connection with a plan of reorganization. By comparison, see the link here for my blog summary of a Delaware Chancery Court decision from last year addressing a similar issue in the context of a case under DGCL Section 220.( Astute readers may notice that the Chancery Court opinion linked above involved the same parties for which the Delaware Supreme Court recently issued the much-heralded opinion sounding the death knell for a separate, stand-alone duty of good faith in the context of a director's fiduciary duty. See my blog post on Stone v. Ritter, here.)

 In Hettinger v. Board of Trustees of the Delaware Technical and Community College, (Del. Super., Sept. 27, 2006), read opinion here, the Delaware Superior Court summarizes the policy rationale behind the "workplace compromise" that allows employees to make claims against employers within a confined and structured system called "workers compensation" (instead of a regular tort claim),  as opposed to the Dickensian system prevalent for centuries that in most cases prevented an employee injured on the job from collecting any money from his or her employer for that injury. This case involved an employee who was injured while she was walking back to her office at the end of the day after a nearby meeting. The court discusses those instances where it is not always clear if the injury occurred "in the course of employment".

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In AIG v. Barbizet, et al., (Del Ch., July 11, 2006), read opinion here, the Delaware Chancery Court explains the requirements of pre-suit demand under Rule 23.1 as well as Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) and its progeny, in light of DGCL Section 141(a). The court  found that demand was excused due to the lack of independence by a majority of the board. In particular, the director defendants lacked independence due to their close ties to Francois Pinault, also an interested party. The court examines the relevant facts, which are of necessity case-specific, to support its reasoning. However, the motion to dismiss was granted with respect to a wholly-owned subsidiary that played no role in the events that form the basis of the claims. [ Most readers will notice that I am current on my summaries of Chancery  Court opinions and the most recent opinions on the court's website are more recent than this case. I am not sure why I did not include this case in prior summaries, but in any event here it is.]

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Preamble: The focus of this blog is on Delaware business litigation. Though I primarily summarize Chancery Court and Supreme Court cases as well as related cases and commentary, once in a while a topic of overarching import to all lawyers is included.

Courtesy of law professor Glenn Reynolds' Instapundit  blog, is a link to a story in today's National Review Online  about a federal judge who was impeached in the 1980s based on bribery charges. He is accused of taking $150,000 in return for commuting a sentence for convicted felons. Here is the link:  Byron York on Alcee Hastings on National Review Online. Most  readers of this blog would be interested in the details of an intricate FBI sting operation, described in the article at the above link, that would warrant the rare impeachment of a federal judge, and his removal from the bench after a trial in the U.S. Senate.

That same judge is now a U.S. Congressman. (Yes, a member of the same body that voted to impeach him). He is now serving with many of the same members who supported his impeachment in the 1980s (at the time, and once again, when the Congress was controlled by democrats.) There is a chance that he may be the next Chair of the House Intelligence Committee. So, it is possible that he is not qualified to be a federal judge, but  he may qualify to hold one of the most sensitive positions in the U.S. government. The above article also describes how Rep. Conyers, who led the impeachment effort, addressed the accusations at the time that the impeachment was fueled in part by racism.

POSTSCRIPT:   I want to add a link to an article in the publication called The Futurist, also via Glenn Reynolds' blog noted above, which provides a thoughtful analysis of 10 major reasons why the U.S. will continue to be the world's only superpower by the year 2030. Regardless of its impact on the position of the U.S. in the world, the integrity of our judiciary and government officials in general is, in my view, a key to the future well-being of our country.

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In Carrow  v. Arnold, (Del. Ch., Oct. 31, 2006), read opinion here , the Delaware Chancery Court denied a claim for rescission of an agreement for real estate. In the process, it addressed issues of parol evidence, the fraud exception to the parol evidence rule and the concept of  integration clauses. It then granted summary judgment on a counterclaim for specific performance. In this 27-page opinion, these theories were applied after a careful discussion of detailed facts.

The facts of this case, at first blush, encourage sympathy. An older farmer sold his 200-plus acre farm to a somewhat aggressive developer, but  the farmer failed to have his lawyer review it before he signed the agreement. The farmer argued that he was the victim of fraud and wanted to introduce oral statements of the developer in support of his argument. The court determined that neither the ambiguity nor the fraud exception to the inadmissibility of parol evidence applied here, especially as the alleged oral statements prior to the written agreement were inconsistent with the written agreement. The court noted that the absence of an integration clause is not determinative of this issue.

One Key Point of Case: The court reasoned that fraudulent inducement will not be allowed as a defense to a contract where, as here, a party had ample opportunity to review the agreement and identify the offending terms, but failed to change the very terms of the agreement on which the fraud claim is based. (Or, he should have refused to sign it.) That is, the complaining party should have refused to agree to the offending terms, and it was too late after ithe agreement was signed to claim fraud based simply on prior, allegedly inconsistent, oral statements of the other party.

My own commentary: Even though the hapless plaintiff here did not bother to hire a lawyer, nonetheless, in my view the court will not be inclined to serve as a refuge for people who make ill-conceived or plainly wrong decisions. This is especially true when the court deals with sophisticated parties, but we see here in this case that it is also true  where "average" adults are acting at arm's length and one party in hindsight wishes things had been done differently. Some refer to the Chancery Court as the court to go to for situations that are just "not fair' but one should not assume that every situation that is simply "not fair" will be "fixed" by the "magic wand" of the chancellor. Rather, any relief generally  must be based on recognized equitable or legal principles.

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This post includes a bevy of recent cases as a way of allowing me to "catch up" on recent summaries of Chancery Court cases that I could not post due to a hectic schedule over the last few weeks. With this post, I am "up to date" on my current summaries of the key business litigation decisions from the Delaware Court of Chancery and Delaware Supreme Court (though there are relevant cases from other courts I have in my "to do" folder).

 It has been almost 2 years since I started these summaries on this blog, so the search function of this blog now allows for a convenient way to find cases from these courts on key topics from approximately the last 2 years.

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Smith v. McGee, (Del. Ch. Oct. 16, 2006), read opinion here. This  Chancery Court case discusses the concept of equitable tolling of statutes of limitations.  The Court notes that the three (3) year statute of limitations for breach of fiduciary duty, fraud, and conversion pursuant to 10 Del. C. §3106 begins to run at the time of the alleged wrongful act being committed.  The Court also notes that statute of limitations are applied to equitable claims only by analogy and may be suspended under several tolling theories which are threefold: (1) inherently unknowable injuries; (2) equitable tolling and (3) fraudulent concealment. 

Salem Church (Delaware) Associates v. New Castle County, (Del. Ch. Oct. 6, 2006), read opinion  here. This Chancery Court opinion discusses  the doctrine of exhaustion which is a pre-condition for a finding of ripeness.  The exhaustion doctrine provides that where a remedy before an administrative agency is provided, relief must be sought by exhausting this remedy before the courts with either review any action by the agency or provide an independent remedy.  This doctrine is judicially created. See Levinson v. Delaware Compensation Rating Bureau, Inc., 616 A.2d 1182 (Del. 1992). The Court noted that unlike the County, which has a procedure, the State of Delaware does not have an administrative procedure to challenge “inverse condemnation,” thus the Court allowed the claim to proceed in Chancery Court instead of Superior Court due to the “clean-up doctrine” in connection with the other equitable claims pending. 

Quereguan v. New Castle County, (Del. Ch. Sept. 22, 2006), read opinion here. This letter opinion addressed a Motion to Join under Chancery Court Rule 20(a).  Previous opinions in this case were summarized on this blog.

 

Krahmer v. Christie’s, Inc., (Del. Ch. Oct. 17, 2006), read opinion here. This Chancery Court  case involved the attempt by a purchaser of a painting at auction to have the transaction rescinded based on the fraudulent representation that it was an original work of art from a painter named Frank Weston Benson.  The Court previously denied the claim for negligent misrepresentation in a decision summarized on this blog. This case granted Summary Judgment to the defendant on a fraud claim. 

 

In Re: Tele-Communications, Inc. Consol. S’holders Litig., (Del. Ch. Oct. 11, 2006), read opinion here. This Chancery Court case addresses Chancery Court Rule 25(a) which provides for the substitution of a party ninety days after the party's death is suggested upon the record.  The Court notes that the rule is permissive and grants the Court discretion to deny a Motion to Substitute even when made in compliance with the rule.  The Court denied the motion in this case due to the “unreasonable and inexcusable delay” that would result in prejudice against the estate due to the passage of at least  fifteen (15) months after actual notice of death before presenting a claim to the estate. 

 

Abbey v. Skokos, (Del. Ch. Oct. 10, 2006), read opinion here. This Chancery case involves appraisal rights. Plaintiff also alleged that the chairman of the company involved made fraudulent representations and induced the plaintiff to invest $4 million.  Once the investment was made, the plaintiff alleges that the chairman suggested that the investment be made via an affiliated entity.  The allegation is that the affiliated entity was a sham entity and was used for the purpose of preventing the plaintiff from interfering with a potential merger. The plaintiff asks the Court to disregard the existence of the affiliated entity and to declare him  a stockholder in the primary entity.  The goal of that remedy would be to allow the plaintiff to assert his appraisal rights. This is a letter opinion on a Motion to Dismiss.

 

In essence, the plaintiff asks the Court to apply principles of “ reverse veil piercing” and to address breaches of fiduciary duties, loyalty and good faith. However, the Court did not address the substantive issues and instead granted a motion to stay based on principles of comity in light of a previously filed New York action where all parties present in this case are likewise present and all the issues in both the Delaware and New York actions arose from the “common nucleus of operative facts.”  Thus, despite the internal affairs doctrine, the New York court will be deciding this case, presumably based on Delaware law.

 

 

 

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Shamrock Holdings v. Arenson, 2006 WL 280293 (D.Del., Sept. 29, 2006), read opinion here. Relying on Chancery Court and Delaware Supreme Court precedent, the U.S. District Court for the District of Delaware discussed the distinction between a direct and a derivative claim and particularly the unjust enrichment exception to the analysis described in Tooley v. Donaldson Lufkin & Jenrette, Inc., 845 A.2d 1031,1039 (Del. 2004).  See In Re Cencom Cable Income Partners, 2000 WL 130629 at *5 (Del. Ch., Jan. 27, 2000). (Delaware Court of Chancery held that “the potential inclusion of culpable parties in the class due relief may affect the distinction between the derivative and direct claims.”) See generally DGCL Section 141(a).

In Cencom, then-Vice Chancellor, and now Chief Justice, Steele reasoned that when all the non-defendants constituted the complaining partners, and all the defendants constituted the only remaining partners of the entity, there was no policy reason to require derivative pleading. Id. at *3. He also recognized the need for flexibility when applying corporate precedents to alternative entities. Id. at *2.

 In the Shamrock case, Chief Judge Robinson, cited Cencom, supra, and the recent Delaware Supreme Court decision in Gentile v. Rossette, 2006 WL 2388934 at *1 (Del., Aug. 17, 2006), to conclude that a direct claim could be pursued against the parties who participated in the sale of operating units of the LLC involved.

The Court observed that the LLC at issue had effectively been dissolved. The court also appeared persuaded by the argument that the majority members of the LLC who would be among the beneficiaries of a derivative action would “be unjustly enriched” from any derivative action recovery.  The Court quoted Cencom, supra, as follows “superimposing derivative pleading requirements upon the claims will needlessly delay ultimate substantive resolution and serve no useful or meaningful public policy purpose. Cencom at *3.”

 

The Court  rejected the argument that an exculpation provision in the LLC agreement that did not protect from liability acts done in bad faith could also be used as a basis for a breach of contract claim due to alleged acts of bad faith.

 

 

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The American Bar Association issued a press release a few days ago to publicize an ABA Ethics Opinion that states, in sum, that an attorney who receives a document with metadata from another party, may review that metadata. Hat tip to Robert Ambrogi. Here is Ambrogi's post about it: Law.com - Inside Opinions: Legal Blogs. For those who want to read the whole ABA Opinion, click here.

Thus, if  someone sends a document with metadata to the opposing side's attorney in a matter, and does not scrub the metadata from the document before sending it, the other attorney--under the ABA Model Rules--is not required to refrain from viewing the cornucopia of information about the document in the metadata. For those who do not realize the issues raised by metadata, you are now on notice that you better learn fast. For a quick overview of metadata and its interface with legal ethics, see Jim Calloway's January 2006 post.

Although the ABA Ethics Opinion refers to any routine email with an attached document, for example, this issue arises in the e-discovery context because metadata is often sought regarding the electronic version of documents that are subject to discovery--information that is not available on mere "hard copies".

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Bakerman v. Sidney Frank Importing Co., Inc., (Del. Ch., Oct. 16, 2006), read opinion here . The Chancery Court, in this 57 page opinion, which was submitted on Aug. 31 and originally decided on Aug. 10, 2006 includes a good discussion of the pre-suit "demand excused" analysis under Chancery Court Rule 23.1 with the familiar two-pronged test in Aronson v. Lewis, 473 A.2d 805 (Del.1984). See also Rales v. Blasband, 634 A.2d 927, 931 (Del.1993). 

Also discussed was the Court’s unwillingness to weigh the interests the directors had in one entity compared with their interests in the entity on the other side of the table in a contested transaction, when conducting an analysis of independence at the pleading stage, citing cases such as Harvard Finance Partners v. Huzienga, 751 A.2d 879, 888 (Del. Ch. 1999). Also noted was the distinction between a burden a plaintiff bears to plead a reasonable doubt as to director disinterest under Rule 23.1 compared with the ultimate burden to demonstrate director interest later in the litigation through admissible evidence. Id.

Noteworthy about this case is a discussion of the validity of a consent based on failure to disclose  material facts (a material omission) as well as coercion or duress in connection with threatened termination of employment.  The Court discusses when such threats may constitute coercion.  The Court found that the threat of litigation was a form of coercion despite an alleged ethics violation by an attorney due to his holding of a 5% membership interest in the client’s business. 

Regarding the threat of termination of employment, the Court noted that Delaware “possibly” recognizes a covenant of good faith and fair dealing in at-will employment, (citing Reiver v. Murdoch and Walsh, P.E., 625 F. Supp. 998,1014 (D. Del. 1985)), although the applicable New York law did not.  (New York law applied in this case to that issue.) Nonetheless, the Chancery Court held that an employer’s threat to terminate an at-will employee in order to obtain a release of claims is subject to a standard apparently more stringent than ordinary contract principles (citing New York Cases). 

 The Court concluded that the threat to terminate the employee (who was an in-house lawyer) in order to obtain his consent, arguably constituted a wrongful act amounting to coercion. The Court noted that it raised a sufficient question as to the voluntariness of  consent given especially since the employee was allowed only one half-hour to examine the consent and he was neither represented nor encouraged to consult with counsel. 

The Court also discussed the other elements of economic duress being an analysis of whether the wrongful act overrode the will of the party and also whether the coercive conduct creates or takes advantage of an exigent circumstance such that the victim could not reasonably be expected to resist and seek timely legal relief to protect his interest. In addition, the Court considered acquiescence and whether, if it occurred, it cleansed the coercion. 

 Part of the opinion also includes a discussion of the distinction between a direct versus a derivative claim as well as a helpful description of the foundation for a claim based on a breach of the implied covenant of good faith and fair dealing. 

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Much has been written on this blog about e-discovery in general and the new Federal Rules on e-discovery in particular--which will become effective on Dec. 1, 2006. Craig Williams and Robert Ambrogi have a podcast, which is similar to an audioclip available via the Internet, which is a good discussion of key parts of the new rule that will impact every litigator. Even if not strictly applicable to the state courts, it will be hard for the state courts to ignore the impact of the new e-discovery rules, especially in Delaware, where the state rules of civil procedure are based on the Federal rules. Here is the link to the podcast on the blog called May It Please The Court: WLF | May it Please the Court Law Weblog of legal news and observations, including a quote of the day and daily updates

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In Stone v. Ritter, (Del. Supr., Nov. 6, 2006), the Delaware Supreme Court  yesterday clarified its position on whether "good faith" is a separate stand-alone duty, in the same way as loyalty and due care are. Read opinion here.

Prof. Gordon Smith suggests that the court "drove a stake" in the concept of a stand alone duty of good faith. See his comments here. The money quote from the Delaware High Court's decision as selected by Gordon follows:

It is important, in this context, to clarify a doctrinal issue that is critical to understanding fiduciary liability under Caremark as we construe that case. The phraseology used in Caremark and that we employ here—describing the lack of good faith as a "necessary condition to liability"—is deliberate. The purpose of that formulation is to communicate that a failure to act in good faith is not conduct that results, ipso facto, in the direct imposition of fiduciary liability. The failure to act in good faith may result in liability because the requirement to act in good faith "is a subsidiary element[,]" i.e., a condition, "of the fundamental duty of loyalty." It follows that because a showing of bad faith conduct, in the sense described in Disney and Caremark, is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.

This view of a failure to act in good faith results in two additional doctrinal consequences. First, although good faith may be described colloquially as part of a "triad" of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly. The second doctrinal consequence is that the fiduciary duty of loyalty is not limited to cases involving a financial or other cognizable fiduciary conflict of interest. It also encompasses cases where the fiduciary fails to act in good faith. As the Court of Chancery aptly put it in Guttman, "[a] director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation's best interest."

Several weeks ago after an all-day seminar on the concept of good faith in Delaware jurisprudence,  I blogged here  about some members of the panel who rejected the view of good faith as a stand-alone duty. It appears that, after the opinion of yesterday, they were prescient.

UPDATE: Prof. Eric Chiappinelli has also commented on the case. His comments are here.

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In Bryan v. Doar, (Del. Supr., Nov. 6, 2006), read opinion here, the Delaware Supreme Court determined that a bankruptcy trustee did not have standing to appeal a decision of the Chancery Court in light of the trustee abjuring substitution under Rule 25(c) as a formal party in the case at the trial level. In addition, the trustee lacked standing to appeal because of his decision not to intervene as a party at the trial level. 

The case started in 2000 as a claim against directors of Ingersoll International, which later went into bankruptcy. After the Plan of Liquidation was approved, and the stay lifted, the creditor trustee was empowered to prosecute the lawsuit. If the trustee decided not to pursue the lawsuit, the Plan allowed the original plaintiffs to pursue it.  The Chancery Court granted a Motion to Dismiss for failure to prosecute.

The trial court found that failure to prosecute the case for 7 months after the Plan was confirmed was unreasonable and prejudicial. In ordering the dismissal, the Chancery Court also noted that the trustee and the original plaintiffs were acting in concert with the same attorney. The trustee tried to pursue the appeal in his own name, and the original plaintiff decline the opportunity to file a separate appeal. The court relied on precedent that a non-party does not have standing to appeal.

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In JW Acquisitions, LLC v. Shulman, (Del. Ch., Oct 25. 2006),  read opinion here , the Chancery Court addressed how a summary proceeding under the DGCL interfaces with related proceedings among the same or similar parties pending in other states. This 17-page opinion could be the answer to a bar exam question on esoteric aspects of civil procedure. The purpose of the suit was to have securities registered under DGCL Section 158. One issue was the effect of a "first filed" suit in New York, the dismissal of which was on appeal, and the impact this Delaware summary proceeding would have if certain facts were determined at trial in Delaware, and the New York case also proceeded.The court accepted the Defendants' proffered "order of judgment" which gave the plaintiffs substantially all they asked for without a trial, and without any factual determinations that might have either collateral estoppel or res judicata effect.  One issue was: what collateral estoppel or res judicata effect a summary proceeding under the DGCL has on other cases?The court observed that it was a very fact specific matter and referred to the case of Technicolor International II, Inc. v. Johnston,  1997 WL 538671 at *8 (Del. Ch.).

Key reasoning: In allowing the order of judgment requested by the Defendants without the need for the court to make any factual determinations, and without the need for a trial, and without waiting to see what happened in the New York case,  the Chancery Court reasoned that  Delaware has a powerful interest in the orderly internal affairs and governance of its corporations which should not be defeated by continued uncertainty due to cases proceeding in a foreign forum.

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In Wyeth v. Impax Labs., Inc., 2006 WL 3091331 (D. Del. Oct. 26, 2006) , the U.S. District Court for the District of Delaware denied a request that a party produce metadata with the original format of data, relying on the court's Default Standards which describe a TIFF image as sufficient. Hat tip to the Electronic Discovery Law Blog which provides a fuller summary of the case and a link to the whole decision, here: Relying on Delaware's Default Standards, Court Holds Production in Native Format with Metadata Not Required : Electronic Discovery Law

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In Energy  Partners, Ltd. v. Stone Energy Corp., (Del. Ch., Oct. 11, 2006), read opinion here,  the Chancery Court addressed whether the issue presented was ripe in the context of an expedited trial to interpret provisions of a merger agreement that was attacked on several fronts, including a third party that made a hostile tender offer after the merger agreement was signed. Thus, one issue raised was the tension between fiduciary duties and the contract terms that arguable impacted those duties. The opinion is also filled with contract interpretation principles.

Importantly, the opinion also discusses the duties of a buyer's board of directors in a transaction (as compared to the more common discussion of the duties of a seller of a company).

This was a lightening fast decision. The complaint was filed on Aug. 28. The trial was held on Sept. 22. A ruling from the bench was made Sept. 27. This Oct. 11 opinion addressed a motion for reargument as well as explaining in 44-pages, the reasoning for the decision.

The court analyzed when a claim is justiciable under the Declaratory Judgment Act and concluded that some claims were not yet ripe. Although the court did determine that one party  to the merger agreement could explore the tender offer in good faith notwithstanding  the terms of the agreement, it declined to rule on other issues of interpretation, reasoning that:

In such an important area of the law, this Court must carefully evaluate policy implications and legal determinations, which can only be sufficiently explored in relation to a discrete set of facts. Adjudication of Plaintiffs’ claims in such a sparse factual setting also runs the risk of wasting resources of both the Court and the parties. This Court is reluctant to suggest or encourage preenforcement review of each and every action of a director in the context of competing acquisition proposals. Lacking concrete and substantial facts and recognizing the importance and complexity of the issues presented, I do not find sufficient immediacy and justification in the present circumstances to warrant the exercise of my discretion under 10 Del. C. § 6506 to consider the issuance of a declaratory judgment....

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