I summarized several recent Chancery Court cases that denied requests for books and records pursuant to DGCL Section 220 in an article for Delaware Law Weekly in their Dec. 13, 2006 issue. Here is a link to the article.
In Louisiana Municipal Police Employee Retirement System v. Crawford, (Del. Ch., Feb. 23, 2007), 2007 WL 582510, read opinion here, the Chancery Court issued a 41-page opinion that will generate many pages of commentary regarding the core issues of Delaware corporate law that were addressed in connection with the injunction imposed by the Court, postponing the merger of CVS and Caremark.
I do not have time to provide commentary today on this recent opinion, but I refer you to the Memorandum by the law firm of Potter Anderson & Corroon which has a helpful summary of the case and which Memorandum can be found on the Harvard Corporate Governance Blog. Their Memorandum points out a key part of the ruling as follows: "... the Court treated a special dividend and a stock for stock merger as an integrated transaction and concluded that the Caremark stockholders were entitled to appraisal rights."
UPDATE: Prof. Gordon Smith provides his analysis of the case here, including a link to his article about the doctrine of "independent legal significance" and it applicability to this case.
UPDATE II: On March 16, 2007 USA TODAY reported that Caremark shareholders approved the Caremark/CVS merger.
APPELLATE HISTORY: The Delaware Supreme Court denied a request for interlocutory review in Express Scripts, Inc. v.
Professor Bainbridge collects commentary of others as well as his own scholarly insights regarding shareholder activism as it relates to executive compensation and similar issues. Here is the link. The good professor is largely skeptical of the motives of some of the pension funds, for example.
For another viewpoint, see Jay Eisenhofer and Gregg Levin, Investor Litigation in the U.S.--The System is Working, 22 Securities Reform Act Litigation Reporter 618 (Feb. 2007) (I have not yet seen a copy of the article online, but here is the link to the publisher, and also you could call the publisher at 202-462-5755.) Jay often represents pension funds and similarly situated shareholders in securities litigation.
Weiss v. Weiss, (Del. Ch., Feb. 15, 2007), 2007 WL 522290, read opinion here, is a Chancery Court decision that I post on this blog for its useful insights into, and pronouncements about, statutory construction principles in general. Although it deals with Section 4503 of Title 12 of the Delaware Code related to the Uniform Transfers to Minors Act, and the challenge to the delegation of a custodian in connection with the change in beneficiary form for the IRA of the mother of the disinherited son, here are a few principles that I gleaned from the decision that I think have broad application in business litigation cases:
1) summary judgment is a procedurally appropriate method for the court to make an early determination regarding interpretation of an arguably ambiguous statute, compared to contractual ambiguity that often requires a trial to resolve factual issues.
2) if a literal interpretation of a statute would cause a result inconsistent with the general statutory intention, the general intent must prevail. If a literal interpretation of the words of the statute would lead to an unreasonable or an absurd result, then ambiguity is likely present.
3) the legislature is presumed to know the common law and a court should not assume that a statute was intended to change the common law beyond what is clearly expressed or expressly implied in the legislative language used.
In this case, the court concluded that allowing a delegation of the power to nominate a custodian was most consistent with the legislative intent and analogous common law, such as cases construing "powers of appointment".
For my regular ethics column in the Jan/Feb 2007 issue of The Bencher, I summarized an opinion of the San Diego County Bar Association that determined that an unsolicited email should not be given the same confidentiality of an email from a client to his or her lawyer. Here is the article.
Broc Romanek on the Harvard Corporate Governance Blog analyzes the number of hours, on average, that a board member should typically spend preparing for board meetings. He contends that about one hour of board-related reading should be done beforehand for every hour of actual attendance at a board or board-committee meeting. He calculates that to be about 200 hours per year, on average, and he explains how he arrives at that number. This, of course, argues against a busy person serving on too many boards at once. It is also useful data in connection with discussions about the duty of care required of board members.
In Perlegos v. Atmel Corporation, (Del. Ch., Feb. 8, 2007), 2007 WL 475453, read opinion here, the Chancery Court addressed issues under DGCL Section 211 regarding the calling, and cancellation of, a special meeting of stockholders as well as a determination of who the company's rightful directors are based on the provisions for a summary proceeding under DGCL Section 225. The initial complaint also included a demand under DGCL Section 220 but that claim was later withdrawn.
There are many quotable nuggets of bedrock Delaware legal principles in this case. The factual background of the case could make a good made-for-TV-movie. It involves the firing by non-management directors, of the co-founder and chairman of the board, after the investigation by a special committee of improper travel expenditures.
This decision also serves as a useful guide for how an independent committee of non-management directors, with independent counsel and independent advisors, employing careful processes and thorough investigation, will be given appropriate deference by the court for authorized actions taken by it. See footnote 147 of the court's opinion (citing Brehm v. Eisner, 746 A.2d 244, 264, n. 66(Del. 2000)). The court observed that the Special Committee's reliance on their experts was reasonable and reasonable efforts were made to base a decision on the material facts that were available after an investigation that lasted 8 months and that the court determined was the product of a rational process. Though the process was not perfect, the court stated that it need not be perfect.
The Westlaw format of the case is 32 pages long, so I will highlight a few of the more notable excerpts while I highly recommend downloading the whole case at the link above for a "real page-turner" of an opinion.
An imbroglio followed the calling of a Special Meeting of Stockholders by the chairman who was later fired. Although it was disputed whether he called the meeting to retaliate for his firing, the court held that he called the meeting as chairman pursuant to the bylaws. However, once the board fired the "old" chairman, the "new" chairman cancelled the Special Meeting.
An order was sought pursuant to DGCL Section 211 requiring that the special meeting of stockholders be held as noticed originally, based on the relevant section of the bylaws. The court determined that the new chairman was technically authorized to cancel it but that the new chairman and the new board lacked the proper and sufficient reasons to do so. See footnote 176 (noting the court's authority to rescind or nullify a corporate action that may have been technically legal but that was done for an inequitable purpose)(citing Stahl v. Apple Bancorp, Inc., 579 A.2d 1115, 1121(Del. 1990) and Schell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971)). This, of course, is a famous paradigmatic aspect of Chancery Court's capacious arsenal of remedies.
Several statements of fundamental principles of shareholder rights under Delaware law were recited in the opinion. For example, if it was determined that the meeting was cancelled for the "primary purpose" of interfering with shareholder action, the directors would be required to establish "compelling justification" for the cancellation, relying on the seminal case of Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 661-62 (Del. Ch. 1988). The Blasius case is famous for emphasizing the importance that Delaware courts place on the "shareholder franchise". This is the money quote from page 659 of Blasius:
"A stockholder's vote is one of the most fundamental rights of owning stock. Although such a vote may be seen as a 'vestige or ritual of little practical importance', it is clear that it is the 'ideological underpinning upon which the legitimacy of directorial power rests.'
Moreover, the court in the current case added that:
"Along with the right to vote, the forum in which shareholders exercise this right plays a fundamentally important role in the corporate governance structure established under the DGCL. In short, a stockholders' meeting is an important event on the corporate calendar."
In the instant case, it was not merely a postponement of the meeting that was problematic, but rather, the result of the cancellation of the meeting was that it prevented the stockholders "from voting on the removal of the Director Defendants until the next scheduled annual meeting" (about 9 months later). Thus, the court ruled that the special meeting must be held.
Somewhat asymmetrically (perhaps), the firing of the chairman was also upheld. What was not clear from the ruling (and was not necessary to the court's ruling) was whether the ousted chairman had enough votes to regain power at the meeting of shareholders. That is another story for another day.
UPDATE: Prof. Chiappinelli has an insightful post here about the case.
Courtesy of a link on the blog of Gregory P. Joseph, is a guide for judges prepared by the Federal Judicial Center on the topic of electronic discovery. Here is the 33 page document.
It provides an overview of the basic background as well as terminology--and if it is good enough for the FJC to use it to educate judges, it cannot hurt to cite it at least for rudimentary issues in e-discovery.
On this (approximately) Second Anniversary of my creation of this blog, I want to thank Kevin O'Keefe of LexBlog , and his crew, for their technical and related support that makes this blog possible. Any lawyer intererested in blogging should consider contacting Kevin as one of their first steps in the process. He was kind enough to post about my happy experiences with blogging in a post here.
In Those Certain Underwriters at Lloyd's, et al. v. National Installment Insurance Services, Inc., et al., (Del. Ch. Feb. 8, 2007), 2007 WL 458534, read opinion here, the Chancery Court granted in part a motion for partial summary judgement regarding the liability of an insurance broker. See revised opinion dated April 16, 2007 at: 2007 WL 1207106 (Del. Ch., April 16, 2007).
Procedurally, the court conducted a thorough analysis of the standard for summary judgement motions that would be useful to include in a business litigator's "toolbox". For example, the court made it clear that partial summary judgement under Rule 56(c) was possible on issues of liability alone even where there is a genuine issue of fact as to the amount of damages--that would require a trial on damages. The court also denied a cross-motion for summary judgement that was based on the argument that damages could not be proven--at least at this stage.
The court, on the other hand, explained some policy reasons applicable to some situations when summary judgement should be precluded. For example, Rule 56 should not be applied where the legal questions presented need to be assessed in the more "highly textured factual setting of a trial" (citations omitted). Moreover, the court has discretion to deny a motion for summary judgement when it decides that a "more thorough development of the record would clarify the law or its application" (citations omitted).
Here, negligent (or equitable) misrepresentation and simple negligence was alleged against an insurance broker regarding the insurance procured. Here is a money quote on the liability of an insurance broker:
"An agent, employed to effect insurance, must exercise such reasonable skill and ordinary diligence as may fairly be expected from a person in his profession or situation, in doing what is necessary to effect a policy, in seeing that it effectively covers the property to be insured, in selecting the insurer and so on. As a general rule, a broker or agent who, with a view to compensation for his services undertakes to procure insurance on the property of another, but fails to do so with reasonable diligence and in the exercise of due care, or produces a void or defective policy is personally liable to his principal for any damages resulting there from". (citations omitted).
Here the court found liability for the breach of the broker's duty to communicate a material limitation of coverage in the policy procured.
The New York Times, had an article here, yesterday that summarized a study indicating that activist hedge funds that take aggressive roles in corporate governance issues often have a positive long-term impact that results in increasing shareholder value for the "average" investor. This may be a useful study, perhaps, to cite for hedge funds seeking, for example, to obtain books and records in an action under DGCL Section 220, when issues of "proper purpose" are contested.
Courtesy of Kevin O'Keefe, here is a discussion, with links to useful sources, on the current debate regarding the impact of law blogs, especially by law professors, on legal scholarship and on traditional law reviews. I have also observed that many of the major law reviews are starting their own blogs to "keep up".
In AHS New Mexico Holdings, Inc. v. Healthsource, Inc., (Del. Ch., Feb. 2, 2007), 2007 WL 431051, read opinion here, the Chancery Court addressed cross-motions for summary judgment based on a complaint and a counterclaim in connection with a stock purchase agreement that related to a post-closing purchase price adjustment and issues as to what claims were subject to binding arbitration. The parties had consented to the jurisdiction of the Chancery Court. AHS filed a complaint to obtain specific performance of the terms of the agreement. Because the parties contested the assertions of each other regarding disputed facts, Chancery Court Rule 56(h) does not apply.
The court discussed familiar standards for summary judgment as well as reciting Delaware's "objective" theory of contract analysis, viewing it from the perspective of an independent and reasonable third party, as well as noting the truism that simply because the parties' disagree on the meaning of a contract does not make it ambiguous. Only if the court determines the contract is ambiguous would it consider extrinsic evidence to assess the parties' intentions. Although the court denied both motions, it did determine based on Rule 56(d) that certain facts were deemed established for purposes of further proceedings in the case.
In Country Life Homes, Inc. v. Shaffer, (Del. Ch., Jan. 31, 2007), 2007 WL 333075, read opinion here, the Chancery Court addressed an issue of "competing arbitration awards" and determined that the first decision would prevail. The buyers of a home signed a construction agreement that included an arbitration clause and they later signed a warranty agreement that also provided for arbitration by a different arbitration service. The arbitrator selected pursuant to the warranty agreement (the second agreement), rendered his decision first and found in favor of the builder on claims regarding the construction of the house. A few weeks later, an arbitrator who heard claims based on the first agreement rendered his decision in favor of the homeowners. Arguably the decisions of each arbitrator, though reaching different conclusions, covered the same claims.
The court reasoned that when 2 conflicting agreements between the same parties on the same subject matter exist, the newer agreement will control to the extent that the new contract is inconsistent with the old one. (citation omitted to case law and to Corbin's treatise on contracts in which he describes the new contract as "both a rescission and discharge by substitution" of the old one.) Here the court noted a recent decision giving the arbitrator the power to decide arbitrability if the parties simply incorporate the rules of the arbitration service, such as the AAA. See James & Jackson LLC v. Willie Gary LLC, 906 A.2d 76, 80 (Del. Ch. 2006).
The court also discussed the Delaware statutes for "confirming" arbitration awards, or modifying them and/or vacating them under 10 Del. C. Sections 5713; 5714 or 5715, as well as the public policy that favors upholding decisions by arbitrators in binding arbitrations. See footnote 17.
In sum, because the parties agreed that the first arbitrator's award was final and binding, the decision of the second arbitrator was beyond his powers to grant, thus giving res judicata effect to the first arbitration decision.
In a closing footnote the court recognized that the result might be unsettling due in part to the conclusion in the court's opinion being impacted by the better administration by the arbitration service that scheduled the hearing faster and rendered a decision sooner (even though the second decision was from the arbitration service where the first claim was filed.)
This case underscores the uneven handling of claims by the various ADR providers such as the AAA, which in my view also emphasizes the need for a few drafting tips to be observed when drafting arbitration clauses:
(i) do not become a hostage to the arbitration service provider. (For example, in this case, if the provider was faster in handling and scheduling the claim, and rendering a decision, that decision may have prevailed.)
(ii) consider your own timetable for scheduling the arbitration hearing and use your own procedure for selecting the arbitrator;
(iii) do not simply incorporate the rules of the AAA, for example. As noted in the Willie Gary case, supra, such wholesale use of the AAA rules, for example, may prevent the court from granting expedited injunctive relief--and this case provides a striking example of why service providers such as the AAA, in my opinion, are ill-suited for providing expedited treatment of an urgent matter and how, in my humble view, their lack of administrative speed can have an adverse impact on one's case.
Yes, one might conclude that the use of an independent arbitrator (such as a retired judge, for example), may be more effective that the use of an ADR service company.
Creative Research Manufacturing v. Advanced Bio-Deliver LLC, (Del. Ch. Jan. 30, 2007), 2007 WL 286735, read opinion here, is a Chancery Court decision that chronicles in sordid detail the result of a difficult client going through a series of lawyers and ultimately suffering a default judgement, with no legal representation in the end, due to a failure to comply with court orders. The court initially did not award damages and ordered a further hearing pursuant to Rule 55(b), but the defendant did not appear for that hearing, at which time a final judgment was entered.
Notable is the court's discussion of various Motions to Withdraw by attorneys for the defendant based on the following Rules of Professional Conduct: 1.16(a)(1); (b)(4); (b)(5); (b)(6) and (b)(7) -- as well as based on the client's insistence upon taking action or not taking action with which counsel had a fundamental disagreement.
The court also awarded attorneys' fees as an exception to the American Rule as well as post-judgment interest pursuant to 6 Del. C. Section 2301(a). The court noted the current applicable interest rate as 11.25% (based on the Federal Reserve discount rate of 6.25% plus 5%.)
In Cypress Associates, LLC v. Sunnyside Cogeneration Associates Project, (Del. Ch., Jan. 17, 2007), read opinion here, the Chancery Court was called upon to interpret agreements under Utah law, but the most notable parts of the decision dealt with procedural issues under Delaware law. In particular, the court allowed an amendment to an answer only on the condition that the defendant pay for the attorneys fees' incurred by the plaintiff for the relevant part of the time charges incurred for its filing of a Motion for Judgment on the Pleadings. The parties had both filed such cross-motions under Chancery Court Rule 12(c).
The court acknowledged that Chancery Court Rule 15(aaa) only applies to amendments of complaints, but if it applied to amendments of answers it likely would have barred the amendment sought here.
Substantively, although Utah law applied, the court also observed that there was a factual issue that precluded judgment on the pleadings regarding an issue of the reasonableness of refusing to consent to a transaction--but the court noted in footnote 21 at least two Delaware cases stating that a party may properly withhold consent to a transaction only when the decision is made for a legitimate business purpose.
In Rhodes v. SilkRoad Equity, LLC, (Del. Ch., Jan. 17, 2007), read opinion here, the Chancery Court addressed a curious procedural issue. The plaintiff moved to dismiss one of the counts of the Verified Amended Complaint, for slander, in light of filing the same claim in a later action in North Carolina. The court observed that the exact rule applicable was not quite clear, but that Chancery Court Rule 41(a)(2) and 15(a) helped to inform the court's discretion.
The unusual nature of this motion was that the plaintiff sought to continue with the action, but wanted to dismiss one of its claims--a motion opposed by the defendant. Rule 41(a)(2) on its face applies to the voluntary dismissal of an action--as opposed to a single claim within an action. Rather, partial dismissal of an action should be treated as an amendment under Rule 15(a).
In sum, the court acknowledged the general rule that "litigation should be confined to the forum in which it is first commenced", and reasoned also that there was a significant risk of inconsistent results in light of the counterclaim in Delaware, if the issue was decided in North Carolina, and the absence of any justification to split the case into two separate fora.
Prof. Ribstein posts on the Harvard Corporate Goverance Blog here with commentary on Marty Lipton's recent remarks about current corporate governance issues.
For more up-to-the-minute insights, here is a post by the good professor today that includes a reference to the front page story in today's Wall Street Journal on backdating investigations by the federal government.
In Louisiana Municipal Police Employees' Retirement System v. Crawford, (Del. Ch., Feb. 13, 2007), read letter opinion here, and read Bloomberg summary here, Chancellor Chandler enjoined a vote in order to give shareholders more time to consider a competing bid. There will be much more written about this case, but I wanted to add this tidbit for now.
UPDATE: See the Chancery Court's more complete decision of Feb. 23 at this link.
Courtesy of Prof. Bainbridge's blog, here is commentary on the recent Redwood decision by U.S. 7th Circuit Court of Appeals Judge Frank Easterbrook, regarding deposition practice that His Honor found contemptible enough to state that it would have been acceptable for the party who was the subject of abuse to walk out. This is an important observation in my view, because the rules in Delaware, based on the Federal Rules of Civil Procedure, prohibit one from instructing a client not to answer a question except for very limited reasons, such as privilege, and the only other option is to stop the deposition to file a Motion for Protective Order. This case is a concrete example of the need to avoid letting the emotions of clients control the lawyers, as opposed to the following the decorum prescribed by the rules, in a deposition.
It is not always easy to draw the line between what has become part of the "rough and tumble" of a deposition, as opposed to what abusive behavior rises to the level that justifies someone walking out of the deposition. Now, Judge Easterbrook has given us a concrete example to help business litigators answer that question. We have written before on this blog about litigation practice, and notably Judge Easterbrook refers in his opinion to the high (low?) watermark in deposition practice as discussed by the Delaware Supreme Court in Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34, 52-57 (Del. 1994). The Redwood decision linked about is useful reading for every litigator that takes or defends depositions.
Former Delaware Supreme Court Chief Justice E. Norman Veasey and Christine T. DiGuglielmo wrote the lead article in The Business Lawyer publication that just arrived today in the mail. Their article is titled: The Tensions, Stresses, and Professional Responsibilities of the Lawyer for the Corporation, 62 Bus. Law. 1 (Nov. 2006). Though the current issue is not yet online, here is the online location for the publication. Copious footnotes provide caselaw (often from Delaware) and other authoritative sources for corporate law topics and the law of lawyering.
The authors provide a scholarly and practical commentary on the need for corporate lawyers to "remember who their client is" while acknowledging the difficulty in being "caught in the middle" between, for example, an overbearing CEO and the Board. The many useful points in the article include tips on best practices for preparing "minutes of board meetings", especially in the context of an uptick in the number of suits demanding books and records pursuant to DGCL Section 220.
In FGC Holdings Ltd. v. Teltronics, Inc., (Del. Ch., Jan. 22, 2007), read opinion here, the Chancery Court awarded partial attorneys' fees in a case that challenged a director's seat via expedited proceedings under Section 225. The detailed facts of the case are set out in a prior opinion found at the following citation: 2005 Del. Ch. LEXIS 140 (Sept. 14, 2005).
The court noted that the award of attorneys' fees is an exception to the American Rule that provides for each party to bear its own fees. The exception applies to egregious behavior when one party acts in bad faith, fraudulently, negligently, oppresively, frivolously, vexatiously, wantonly or oppressively.
The court also observed that 10 Del. C. Section 5106 allows the court, in its discretion, to award attorneys' fees where equity so provides (case citation from footnote 15 omitted.) Of course, this is separate from costs that can be awarded pursuant to Chancery Court Rule 54(d) which were also awarded in this case.
Examples of why the court also awarded attorneys fees include: (i) continuing, baseless insistence that the trial did not involve a section 225 claim and that plaintiff's did not prevail; and (ii) opposition to a motion to amend the pleadings to conform to the evidence presented at trial.
Multi-Fineline Electronix, Inc. v. WBL Corp. Ltd., (Del. Ch., Feb. 2, 2007), 2007 WL 431050, read entire opinion here. This Chancery Court decision rejected claims by a corporation against its controlling shareholder based on lack of personal jurisdiction in Delaware over the shareholder who resided in Singapore, and due also to lack of justiciability (i.e., absence of ripeness and mootness). The claim was that the shareholder breached its fiduciary duty in connection with its vote concerning a certain transaction.
The court observed that motions under Rule 12(b)(2) challenging personal jurisdiction require a review of both proper statutory service and due process. Although Delaware courts generally enforce clauses agreeing to personal jurisdiction in Delaware, which waives the due process analysis, here the agreement involved did not cover disputes of the type asserted. Nor was there any specific or general long-arm jurisdiction under 10 Del. C. Section 3104.
In granting a motion to dismiss under Rule 12(b)(2), the court observed that neither ownership of stock in a Delaware corporation nor contracting with a Delaware corporation, ipso facto, is sufficient to impose personal jurisdiction over a person or entity in Delaware.
Dolphin Ltd. P'ship I, L.P. v. Gupta, et al., (Del. Ch. , Jan. 22, 2007), 2007 WL 315864, read letter-opinion here . This Chancery Court case discussed the factors the court considers in a Motion to Consolidate pursuant to Chancery Court Rule 42(a). The two cases involved were both derivative claims and the court discussed the interplay between Rules 12(b)(6) and 23.1 as well as the potentially perverse result that might ensue in not being able to consider in one proceeding the different claims against the same parties based on the same set of operative facts--if the cases were not consolidated.
Express Scripts, Inc. v. Crawford, (Del. Ch., Jan. 25, 2007), read opinion here. This Chancery Court letter opinion denies a Motion to Disqualify that was filed based on Rule 1.9 of the Delaware Lawyers' Rules of Professional Conduct. The court explains the policy reasons behind the rule and the need to compare: (i) what confidential information was disclosed by the former client, with (ii) the potential prejudice to the opposing party in the current case due to disqualification of his counsel. Weighing against the movant here was its delay in bringing the motion (in the context of expedited litigation) and the prejudice that would befall the party whose counsel would be disqualified--although the court cited to other Delaware cases that disqualified attorneys on the eve of trial.
The photo below is of the front of the New Castle County Courthouse in Wilmington where the Delaware Chancery Court presides on the top floor.
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In light of the focus of this blog including the summary of key Chancery Court cases, it is appropriate to show readers one of the three public locations where the work of the court is done. The photo is courtesy of my daughter, Gianna, and was taken on Sunday, Feb. 11, 2007. The New Castle County Courthouse is the workspace for other Delaware courts also. There are separate courthouses in Kent County and Sussex County where the Chancery Court hears cases. Courtesy of Gordon Smith, we have a photo of the classic Chancery Court Courthouse in Georgetown, Sussex County:
I plan to post photos in the future of the Delaware Supreme Court building in Dover as well as the Courthouse in Kent County where the Chancery Court also hears cases.
As an aside, at about the end of January, I was up to date with my highlights of the cases published by the courts I cover on this blog, but to give you an idea of how prolific the Chancery Court and Supreme Court are in Delaware, within the last 2 weeks or so, the courts have issued about 20 decisions/opinions, which I would roughly estimate to be approximately 1,000 pages of scholarly text and copious footnotes that I need to read and highlight for this blog. I hope to be up to date again by the end of this weekend or shortly thereafter.
Fonds de Regulation et de Controle Cafe Cacao v. Lion Capital Management, LLC, et al., (Del. Ch., Jan. 22, 2007), 2007 WL 315863, read opinion here . In this case, the Chancery Court dealt with a dispute over who owned how many shares of a closely held corporation that had been duly formed and operating for some time. The documentation regarding who owned how many shares was at odds with what were allegedly oral understandings.
The plaintiff failed to carry its burden of proof. Much of the trial was conducted in French with translations done contemporaneously, and which inclined the court to rely more on documentary evidence.
The court recited the controlling factors:
In general, an issuance of stock without receipt by the company of valid consideration is void. This court has long held that directors are required to place a value upon consideration, but equally longstanding precedent holds that this valuation need not be formally recorded. (citations omitted.)
Fitzgerald v. Vishay Intertechnology Inc., (Del. Supr., Jan. 24, 2007), read decision here .
This Supreme Court Order dismissed the appeal by someone who was not a party to the proceedings below. The appellant filed an appeal from the October 25, 2005 order of the Chancery Court which enjoined a class of plaintiff shareholders from prosecuting an action pending in the Superior Court of California, the claims in which were released by a Delaware class action by the October 25, 2005 order. The appellant, despite notification, did not object to the settlement and the settlement hearing both on and prior to the October 25, 2005 order approving the settlement. The court rejected the appellant’s argument that he should be permitted to appeal the Court of Chancery judgment on the sole ground that he was a member of the plaintiff class affected by the decision below, even though he did not object to the settlement.
The Supreme Court noted that a non-party to an action generally has no standing to take an appeal to the Delaware Supreme Court despite the fact that the non-party may have an interest in the outcome of the litigation (citing Townsend v. Griffith, 570 A.2d 1157, 1158 (Del. 1990) and Bryan v. Doar). The Bryan case was summarized on this blog here.
In Re William Lyons Homes Shareholder Litigation, (Del. Ch., Jan. 18, 2007), read opinion here . This Chancery Court opinion denied a Motion for Reargument pursuant to Rule 59 regarding a claim by California counsel for a share of attorney's fees awarded to Delaware counsel. The trial court's initial opinion was summarized on this blog here.
This blog post refers to two separate cases issued on Feb. 6, 2007 by Chancellor Chandler.
In Ryan v. Gifford, (Del. Ch., Feb. 6, 2007), 2007 WL 416162, read opinion here , Chancellor Chandler issued a 38 page opinion denying a motion to dismiss certain claims alleging that approving or accepting backdating of options was a violation of the duty of care and loyalty especially as they were in violation of a shareholder approved Stock Option Plan. Also addressed by the court was the important topic of the "internal affairs doctrine". The court refused to defer to similar pending litigation in California.
Prof. Bainbridge here, and Prof. Ribstein here, have already commented on the case in a more scholarly way than I can. This is the first authoritative decision on backdating of options, a topic about which much has been written in the mainstream and specialty press, including blogs of course.
The same day, Chancellor Chandler issued a separate 77-page decision in a separate case, titled:
In Re Tyson Foods, Inc. Consolidated Shareholder Litigation, (Del. Ch., Feb. 6, 2007), 2007 WL 416132, read opinion here, regarding "spring-loaded stock options" (and many other issues), that Prof. Bainbridge also discusses here. Prof. Ribstein also has scholarly commentary on the opinion here. Spring-loaded options are options granted prior to the public disclosure of material inside information.
The court cites to both Ribstein's blog and Bainbridge's blog in the opinion for their prior analysis of the issue.
For those with an appetite for this topic, like the writer of this blog that focuses on decisions from the Chancery Court, the commentary by 2 of the leading corporate law experts in the country, within 24 hours of a decision being published, is like an "all you can eat buffet". Moreover, in a sense, they are making the job of this blogger easier by providing expert analysis on these cases that I can simply link to, at least initially, instead of making the time (between paying clients) as soon as the opinion is published, to read over 120 pages of substantive legal reasoning by the court and then comment on it. The scholarly insights of Ribstein and Bainbridge on these 2 cases is more than the average reader has time to digest in a day or so anyway, and they provide exemplary insight on these cases until my schedule allows me to come back to provide my own commentary (if my comments are even necessary and if I have the time to do so at all.)
UPDATE: Prof. Ribstein provides more analysis on materiality as it relates to backdating here.
UPDATE II: The Harvard Corporate Governance Blog has on post here on Feb. 13 that links to a memo from the Wachtell Lipton firm "interpreting" the above 2 decisions by the Chancellor.
In AT & T v. Farady Capital, (Del. Supr., Feb. 5, 2007), read opinion here , the Delaware Supreme Court interpreted the word "claim" in the context of a policy affording certain coverage for directors and officers. The high court reversed and remanded a ruling by the Delaware Superior Court, directing the trial court to apply the term "claim" to each cause of action as opposed to deeming the entire litigation collectively as one claim. The opinion did not include any determination about how the decision would apply to several causes of action that were based on the same set of operative facts.
Niagra Falls Holding LLC v. Eureka VIII, LLC (Del. Supr., Jan. 19, 2007), read decision here .
This one-page Order from the Delaware Supreme Court affirmed the Chancery Court’s decision in this matter which was summarized here. The summary at the foregoing link to the Chancery Court opinion provides more detail of course, but in sum, the trial court removed one of two 50% owner/members of an LLC as a remedy for that member's breach of the LLC Agreement.
Knight v. Caremark Rx, Inc., (Del. Ch., Jan. 12, 2007), read opinion here . This case was decided under Alabama law and based on that law and the interpretation of a settlement agreement and release, the court determined that the plaintiff had waived its right to exercise stock options reportedly worth $35 million.
The current issue of American Lawyer magazine quotes one of the Vice Chancellors as saying (perhaps jokingly) that he uses Maalox before he begins his analysis of requests for attorneys' fees. Here is the blurb.
In Edix Media Group, Inc. v. Mahani, (Del. Ch., Jan. 25, 2007), read opinion here, the Chancery Court awarded fees to the prevailing party, after trial, in a covenant not to compete dispute based on a contract clause that required one party to "indemnify and hold harmless" the other party from any costs related to enforcement/breach of the agreement. The post-trial decision on the merits was summarized on my blog here.
The court addressed the analysis for fees awarded based on contractual provisions, as compared to other contexts. Although the court allowed for consideration of unequal bargaining power, in this case, the court found that there was no provision that required the fees to be "reasonable" but in any event the court blamed the losing party for responsibility for many of the fees incurred due to the risk that the losing party took in going to trial in the face of evidence of likely liability.
Courtesy of Prof. Bainbridge comes a short video clip of a deposition which could be used for training witnesses on how not to answer questions. If you are not offended by foul language, wait until the end of the clip for what most will find quite entertaining. Here is the link.
Hough Associates Inc. v. Hall , (Del. Ch. Jan. 17, 2007), read opinion here. This Chancery Court decision reaffirmed the enforceability of covenants-not-to-compete. The court also clarified the willingness of Delaware courts to hold responsible the new employer of an employee bound by a covenant-not-to-compete when that new employer tortiously interferes with the contractual rights of the former employer who seeks to enforce a covenant-not-to-compete.
The court enforced the agreement which was for three years and within a 50-mile radius. Hough successfully established that its former employee, Hall, breached the Non-Competition Agreement by accepting a nearly identical position with a new employer for work at a DuPont facility that was nearly identical to the work that was being performed while employed by Hough. The employee was also found to be breaching the agreement by soliciting other employees from Hough to work for the new employer. Hough also successfully alleged that the new employer tortiously interfered with the contractual relationship between Hough and Hall set forth in the Non-Competition Agreement by hiring Hall and by conspiring with him to deprive Hough of the ability to profit from Hall’s experience.
Procedurally, the court’s ruling was on a motion for preliminary injunction. The expedited discovery was completed six weeks after the complaint was filed and oral argument on the motion was held two weeks thereafter.
Initially, the court determined that an arbitration clause in a contemporaneous Stock Purchase Agreement, did not apply to the separate and independent Non-Competition Agreement which did not have a similar arbitration clause.
The court addressed basic contract enforceability principles in general and in particular as they relate to covenants-not-to-compete. (See pages 33 and 34.) The court also noted at footnote 74 that in Delaware, continued employment is satisfactory consideration for an at will employee’s agreement to a restrictive covenant.
The court also noted at footnotes 93 and 94 that the inability to calculate damages with precision is one method to establish irreparable harm and that a contractual stipulation of irreparable harm is sufficient to demonstrate irreparable harm.
This 50-page decision has much more to commend to it, and anyone with a case involving a covenant-not-to-compete would be well served by a careful reading of this opinion that provides an updated recitation of Delaware law on the enforceability of restrictive covenants against both the ex-employee and the new employer.
Dryden v. Estate of Joseph Gallucio, Jr., (Del. Ch. Jan. 11, 2007), read opinion here .
This Chancery Court post-trial letter opinion addresses a dispute between the ex-wife of the decedent and his widow over the scope of commitments the decedent made to his ex-wife relating to their divorce, and the appropriate remedy, if any, for his failure to meet his obligations at the time of his death. The ex-wife, Dryden, sought the imposition of a constructive trust over the proceeds of a life insurance policy paid to the decedent’s second wife upon the decedent’s death. The estate of the decedent cannot satisfy the claims of the ex-wife.
The court described a constructive trust as an equitable remedy often employed for unjust enrichment. The court determined that the ex-wife was entitled to the proceeds of the policy because the decedent was contractually obligated to make her the beneficiary but he failed to do so.
In footnote 15, the court determined that even though the Family Court has exclusive jurisdiction over matters involving former spouses, the court reasoned that such jurisdiction granted to the Family Court, did not deprive Chancery Court of its traditional equitable jurisdiction over claims such as those involving unjust enrichment.
The court also interpreted a settlement agreement between the decedent and his ex-wife regarding their divorce, and applied the hornbook contract interpretation principle requiring:
Where possible, an interpretation of all the provisions of an agreement “in a way that gives effect to every term of the instrument, and that, if possible, reconciles all of the provisions of the instrument when read as a whole.”
The court interpreted that divorce settlement agreement to mean that the alimony provision would conclude with the death of the decedent or his first wife or her remarriage. The court further reasoned that a constructive trust over a separate account was not appropriate even though it was unjust for the second wife to retain the benefits of the account and despite the fact that it was an obligation of the estate which the estate is unable to satisfy. The structural problem in the argument of the ex-wife is that she did not have an equitable claim to the account and the requirement for a constructive trust was not satisfied because there were no specific identifiable proceeds from which the ex-wife could trace equitable ownership.
However, other remedies were available. The court determined that a transfer of assets by the decedent so that they would be out of the reach of his ex-wife, while she was a creditor, satisfied the requirements of the Fraudulent Transfer Act pursuant to Chapter 13 of Title 6 of the Delaware Code.
The court discusses the various prerequisites of the Fraudulent Transfer Act and reasoned that the decedent acted with the actual intent to hinder his ex-wife, as a creditor with a claim, when he established a new account with his new wife. Even though the ex-wife did not prove either insolvency at the time of the transfer or that the transfer was of substantially all of the assets of the decedent, “the transfer made it highly unlikely that the decedent would be able to meet his obligations to his ex-wife.”
Because the court found an actual intent to hinder the creditor, the court held that it was unnecessary to explore whether the decedent was insolvent at the time of the transfer, and therefore, the burden of proving his solvency and the fairness of the transfer shifted to the recipient.
Moreover, the court rejected an argument of latches based on the understandable human explanation that the ex-wife did not want to litigate with her former husband while he was suffering from cancer. The defendant also failed to meet her burden of demonstrating that any delay in bringing the action was either unreasonable or that it had prejudiced her.
UPDATE: Here the court denies a Motion for Reargument.
In Shea v. Matassa, (Del. Supr., Feb. 1, 2007), read opinion here , the Delaware Supreme Court refused to create dram shop liability by common law. That is, they determined that it was the province of the legislature to create liability for retail sellers of alcoholic beverages who serve inebriated patrons who then cause harm due to their intoxication. The court reached the same conclusion regarding similar issues surrounding social hosts' liability for serving alcohol. The court discusses the many public policy issues involved and the arguments on both sides--which are beyond the scope of this blog. However, to the extent it may be considered business litigation as it impacts on the liability of some businesses, it was appropriate to mention it on this blog.
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