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

In the case titled: In Re Last Will and Testament of Palecki, 2007 WL 1229498 ( Del. Ch., April 26, 2007 ), read opinion here,  the Chancery Court provides a thorough discussion of statutory construction principles and the danger of the judicial branch encroaching into the province of the legislature. Although this case involved the application of statutes to determine the validity of a Codicil to a Will, the reasoning and the far-reaching statements of the proper role of the judiciary in the implementation of the public policy expressed by statute can be very useful in other cases of statutory construction.

 The Chancery Court makes ample use in this case of quotes from former U.S. Supreme Court Chief Justice John Marshall and current U.S. Supreme Court Justice Antonin Scalia. The Chancery Court creates many quotable excerpts of its own that make this opinion recommended reading for any student of government interested in the interfacing between the judicial and legislative branches of government--and statutory construction principles in general. 

What follows are a few money quotes that help to explain the very limited circumstances when a court should consider the result from a plain reading of a statute to be so absurd, that the court concluds there "must be a scrivenor's error" by the legislature, so that the statute "really doesn't say what the legislature meant to say." Here is a quote from both the court's opinion and from C.J. Marshall:

For one thing, the interpretive maxim that permits a court to eschew a literal reading of a textually-unambiguous statute on the grounds that the literal reading produces absurd results has to be used with great caution and delicacy, lest the judiciary's own sense of appropriate public policy outcomes usurp the powers entrusted to the elected legislative branch. For that reason, courts will only refuse to give effect to a linguistically faithful reading of a clear statute in the most extreme circumstances. As Chief Justice Marshall explained nearly two centuries ago, "[I]f ... the plain meaning of a provision, not contradicted by any other provision in the same instrument, is to be disregarded, because we believe the framers of that instrument could not intend what they say, it must be one in which the absurdity and injustice of applying the provision to the case, would be so monstrous, that all mankind would, without hesitation, unite in rejecting the application."  [FN1]

Here is another gem from Justice Scalia in footnote 46 of the opinion:

 "[T]he sine qua non of any 'scrivener's error' doctrine, it seems to me, is that the meaning genuinely intended but inadequately expressed must be absolutely clear; otherwise we might be rewriting the statute rather than correcting a technical mistake." X-Citement Video, 513 U.S. at 82 (Scalia, J., dissenting).

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In Viking Pump Inc. v. LIberty Mutual Insurance Co., (Del. Ch., April 13, 2007), the Chancery Court, in a letter ruling, read here,  agreed to clarify a minor point in its recent opinion, summarized here, but refused to excise certain facts that one party considered privileged but that were expressly stipulated by the parties to be part of the basis on which they wanted the court to decide the summary judgment motion. Here is the revised opinion.

 Although the court said that the "at-issue" exception to the attorney-client privilege was implicated, the court's decision was based on the stipulation of the parties that expressly submitted the facts and documents in question as a basis for the court's opinion. The court said, however, that nothing in its opinion relieved the parties of other aspects of the confidentiality agreements they entered into.

Possible Practice Tip: If one does not want what one thinks is privileged or confidential information to be part of the court's decision, do not include it in a set of stipulated facts without first making it clear that you consider it part of the documents and data filed under seal and to be withheld from public view. See generally, Chancery Court Rule 5(g). The court in this letter ruling cites to case law that makes it clear that the presumption is to make court records open to the public. Although there are Chancery Court decisions that do keep trade secrets, for example, out of the published version of an opinion, if a litigant wants privileged data or documents filed under seal to be kept out of a published opinion, care must be taken in how that data is presented to the court.

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Prof. J. Robert Brown posts here on his blog called The Race to The Bottom about the restriction in Section 402 of the Sarbanes Oxley Act on loans by a company to its officers, compared with the generally deferential review under Delaware's business judgment rule, of such dealings between a corporation and its management when proper procedures are followed by an independent board that approves such transactions. It is worth reading. (He does not refer directly in his post to the interfacing between that SOX section and advancement of fees pursuant to an advancement and indemnification agreement, but that is another topic for another day.)

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The Default Standards for Electronic Discovery in the U.S. District Court for the District of Delaware have been updated to reflect the recent amendments to the Federal Rules of Civil Procedure. Kevin Brady and I are publishing a short article in the next week or so on the topic. Until then, here is a redlined version to show the changes compared to the original Default Standards.

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Once again, for the 6th year in a row, Delaware ranked first among all the states based on a survey by the U.S. Chamber of Commerce of each state's legal climate/court system, as reported today by The Wall Street Journal Law  Blog  here, with links to the actual survey results.  (Of course, the motto for Delaware for as long as anyone can remember has always been:  "The First State".)

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As reported earlier here, the well-known attorney Willie Gary had requested fees of over $100 million as sanctions against Motorola for their alleged violation of a sequestration order that allegedly was the cause of a mistrial. Recently, a Florida judge awarded him $22.9 million, as reported here by The Wall Street Journal Law Blog. Someone calculated that amount to be over $2,000 per hour based on the fee request. Of course, Motorola is appealing. (The initial link in this blog post includes citations to recent Delaware Chancery Court and Delaware Supreme Court decisions that I prevailed in on behalf of Willie Gary's  business interests.)

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Prof. Larry Ribstein provides scholarly analysis here on the Harvard Corporate Governance Blog about the new North Dakota Publicly Traded Corporation Act which is seen as an attempt to take "corporate business" away from Delaware, with provisions that read like a wish list for supporters of more shareholders' rights. The good professor describes the Act in detail, including an explanation of why it might be hard with one statute to duplicate the 200 years of Delaware case law as well as to duplicate overnight Delaware's experienced judiciary and experienced corporate bar.

UPDATE: Prof. Larry Hamermesh adds his analysis here.

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Ideoblog here features a mind-stretching, learned debate on the future of the global law firm, addressing such topics and whether the rules should change to allow these firms to be publicly traded. The exchange is among Professors Larry Ribstein, Milton Regan and Bruce MacEwen.

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Gordon Smith writes here about an article in today's The Wall Street Journal that describes the successful efforts by a bankruptcy trustee in collecting money from outside directors of a bankrupt company, and why in that case it was a perfect storm for imposing liability on outside directors. One practical observation, for example, is that they were the only "deep pockets" left.

Notable about the article is a quote from Michael Klausner who co-authored an article last year in the Stanford Law Review which found only 13 cases in 25 years in which outside directors of public companies had made out of pocket payments. The perfect storm (depending on your perspective) for outside directors to pay personally, occurs, according to Klausner, "when a company's insolvent, insurance is inadequate, the directors have access to considerable wealth, and the merits of the case are reasonable." The article does not address directly any interfacing between these findings of Klausner and the observance of "defensive" practices such as a board with a majority of independent members who have followed all the necessary procedures in order to enjoy the protection of the business judgement rule. Here is a reference on my blog to a recent Delaware case that found directors liable who purported to be acting as outside (non-employee) directors.

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Delaware's judiciary has a good reputation among lawyers and other constituencies. I am certain one would never see anything in Delaware such as that indicated in the below cartoon by Charles Fincher of www.lawcomix.com:

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Dittrick v. Shalfant, 2007 WL 1039548 (Del. Ch., Apr. 4, 2007), read opinion here.  This Chancery Court case involved an action for specific performance of an installment land sale contract for the purchase of a home.  The facts are somewhat involved, but for purposes of this summary I will highlight what I regard to be a memorable principle reiterated in this decision.  The most important aspect of this opinion is that the Court granted specific performance even though the agreement was missing the applicable interest rate.  Specific performance of a contract to purchase real property requires that the parties have agreed to “essential terms of the contract.” 

The Court found that Section 2301(a) of Title 6 of the Delaware Code provided the interest rate.  That statute provides as follows:  “Where there is no expressed contract rate, the legal rate of interest shall be 5% over the Federal Reserve discount rate.”  Thus, the Court reasoned that it was not applying the missing essential term of an agreement but rather the missing term was supplied by statute.

Moreover, the Court refused to apply the doctrine of unclean hands to bar an otherwise valid claim of relief where the doctrine would work an inequitable result.  So too, the Court did not find the type of fraud “or sharp practice” on the part of the litigant against whom the defense of unclean hands was presented.  Lastly, and of equal importance, the Court found that because of the substantial payments that had been made on the house, if specific performance was not granted a forfeiture would occur.  The Court relied on the equitable maxim that “equity  abhors a forfeiture.”  Thus, the Court noted that “it is not obliged to permit a party to get the advantages which a forfeiture would give him" and it will disregard a forfeiture occasioned by failure to comply with the very letter of an agreement, when it has been substantially performed.

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Viking Pump, Inc. v. Liberty Mutual Insurance Company, 2007 WL 1039542 (Del. Ch. Apr. 2, 2007), read opinion here. I will briefly highlight only a few key points in the comprehensive and thorough opinion which chronicles the history of a dispute that covers an entire generation. There are many money quotes in this lengthy opinion, which was based on New York substantive law. I will focus only on my personal favorites. Procedurally, the Court was presented with cross motions for summary judgment pursuant to Rule 56(h). Noteworthy are the cases cited at footnote 76, where the Court treated the cross motions for summary judgment as a submission for a judgment on the merits. The Court applied New York law which considers subsequent course of conduct by the parties as the most persuasive evidence of the agreed upon intention of the parties especially when the contract is ambiguous. (See footnote 88.)

Moreover, the Court discussed the principles involved with an insurance company's notice of a "reservation of rights" and the outer time limit on the effectiveness of a general reservation of rights and the requirement of an insurance company to “inform its insurers of claims decisions and to do so in a reasonably prompt and informative manner that allows insureds to protect their rights by pursuing other courses of action. When an insurer fails to provide a timely disclaimer of liability it cannot later deny that liability. If an insurance company defends a claim on the condition that it reserves the right to disclaim liability at a later date, it must inform the insured as soon as practicable after it has ascertained facts upon which it bases its reservation. Here the Court concluded that after Liberty obtained all the information it needed, it failed to disclaim liability based on those answers and therefore its reservation of rights letter became ineffective.

UPDATE: See here for blog post about updated opinion and clarifying letter from the court.

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Holman v. Northwest Broadcasting, L.P., 2002 WL 1074770 (Del. Ch., March 29, 2007), read opinion here. This Chancery Court decision involved a demand for books and records from a limited partnership under Section 17-305 of Title 6 of the Delaware Code, which is the analogue to Section 220 of the DGCL (Title 8 of the Delaware Code) regarding a demand for books and records by a shareholder in a corporation. In this case, the parties agreed that Holman complied with all of the procedural formalities for the inspection demand, but disagreed about whether he had a proper purpose. The Court looked to Section 220 and the cases interpreting it for guidance.

The Court emphasized that even if the “technical requirements” for a demand are met and there is a proper purpose, it is important to remember that “the scope of such relief will typically be limited only to the inspection of those books and records that are necessary and essential to the satisfaction of the stated purpose.” Citing to other cases, the Court stated clearly that the valuation of one’s interest is a proper purpose for the inspection of books and records. For purposes of valuation in the context of a demand for books and records, distinction is drawn between publicly traded companies and closely held companies. This was a closely held company, but if it were a public held company, a demand will be denied if necessary information is available publicly. In this case, there was a prior demand for books and records which was resolved based on a settlement agreement and there was also an issue about what was covered in the prior settlement.

Although the Court allowed the records requested for valuation purposes, the Court found that there was not “credible evidence of wrongdoing by current management” sufficient to support a demand for books and records to investigate wrongdoing. Thus, the Court denied the demand in that respect. For valuation purposes, the Court required the production of supplemental information regarding executive compensation, “disaggregated into cash, non-cash and performance-based remuneration, received by the three most highly compensated employees since the year 2000 and on a yearly basis."

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Prof. Larry Ribstein blogs here  about the recent "Say on Pay" legislation that recently passed the U.S. House. Of course, there are many aspects of this bill and much has (and will be) written about it, but one key aspect in particular for Delaware law  is the tension between state and federal regulation of corporate law.

Also commenting on the topic are Professors Gordon Smith and Stephen Bainbridge.

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This post has relevance to this blog because it is based on a post from a nationally prominent corporate law professor and it is about a topic so fundamental that it should be of interest to most readers. So, here is a quote, via Professor Bainbridge, with several insights by the scholarly law professor Rick Garnett, regarding this week's U.S. Supreme Court decision, with reference to anti-Catholicism as the "last acceptable prejudice":

A chill wind from Rome . . ."

. . . is what a number of bloggers and commentators perceive in the partial-birth-abortion decision.  I suppose I should not be surprised by this line, but -- I admit -- I'm disappointed.  And then there's this, from the Philadelphia Inquirer (which characterizes as "activist" a decision that declines to invalidate a measure which has always enjoyed broad and bipartisan support or to read broadly a precedent which invalidated an earlier law which also enjoyed broad and bipartisan support):

My point here is not to vent about the "last acceptable prejudice" .  What's irritating, to me, as a lawyer, about the cartoon is the claim that it is as Catholics -- i.e., because they are Catholics, and not because they think, as intelligent and engaged lawyers, that the Constitution does not disable legislatures entirely from regulating what most people (not just Catholics, fideists, and sexists) regard as a particularly gruesome abortion procedure  -- that the five Justices who voted to uphold the ban.

Not only that . . .

More striking, and sad, for me, is what the cartoon suggests, and reveals, about the state and future of debate about moral questions.  Look at the faces of the dissenting Justices -- quizzical, sad, bewildered, as if to say, "what are these guys talking about?" -- while the majority are smug and complacent.  And why shouldn't they be?  They didn't have to think or reason; only to put on their mitres!

It is, increasingly, thought to be enough to discredit an argument or position -- any argument or position -- merely to note that the person who makes it is a religious believer, and to write off any moral argument with which one disagrees as "religious."  (This practice, of course, does not run both ways:  arguments against torture, the death penalty, race discrimination, and income inequality are "secular"; arguments against partial-birth abortion or the creation of embryos for research are "religious.")  It appears, increasingly, that arguments whose trajectory is not in line with the standard liberal / autonomy / choice line are not only rejected, but declared not to be permissible arguments. 

And now, apparently, even words whose use suggests the embrace of certain premises are out of bounds.  In Justice Ginsburg's dissent, she took the time to complain that there was something improper, and threatening, about the majority's use of words like "abortion doctor" and "unborn child"; but, of course, the use of these words represents an argument.  To rule out the words is to rule out, as illegitimate, the argument they reflect.

I have long understood that many (most, probably) of my friends -- decent, intelligent, thoughtful people -- disagree with me about abortion (and constitutional law).  This is true, I understand, of many of my co-bloggers and Prawfsblawg readers.   I don't think, though -- at least, I try hard not to think -- that their disagreement is merely a product of their funny-hat choice.

Here is more.

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 In Deloitte & Touche USA LLP v. Lamela, 2007 WL 1114075 (Del. Ch., April 6,2007), read opinion here, the Chancery Court applied Florida's substantive law to address whether a 2-year covenant not to compete should be extended to cover the full 2 years, in light of the competition that allegedly occurred after the employment terminated. The Florida statute bases enforcement on legitimate business interests instead of a "contract enforcement" approach.  This opinion addressed cross motions for summary judgment, and the court required further factual development. Two prior decisions have been issued by the court in this case, one of them granting a a partial injunction based on the Delaware procedural rules for such relief. See summaries  here and here on my blog.

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In Estate of Carpenter v. Dinneen, 2007 WL 1114082 (Del. Ch., April 11, 2007), read opinion here, the Chancery Court examined the fiduciary duties of a person who held a Power of Attorney (POA) for her elderly mother, and how those duties could be limited by contract (i.e., by the POA itself.) This case involves a wealthy member of the DuPont family  who died last year, and claims by her estate against several  of her longtime "personal employees" who allege, in their counterclaims, that the decedent promised them certain benefits in exchange for their continuing employment. In the course of deciding various competing motions, the court addressed whether someone holding a POA can tortiously interfere with contractual relations if the person for whom they are an agent is a party to the contract (i.e., can someone who is a party to the contract tortiously interfere with it). The court also addressed whether an oral agreement can be enforced against a decedent  (or her estate) when an oral promise to give a testamentary gift  allegedly was made but when that bequest was not part of the decedent's formal written Will. (Answer: maybe--it depends.)

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Courtesy of the TheCorporateCounsel.net Blog's Broc Romanek, here is a link to the newest edition of TIAA-CREF's recently published policy statement on Corporate Governance Standards. Included is a podcast with John Wilcox, the giant pension fund's  VP for Corporate Governance. Among other things, they push for more of the following: director independence, shareholder access, disclosure of executive compensation and majority voting.

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Courtesy of The Wall Street Journal Law Blog, here is a story about a lawyer who is seeking fees of $11,000 per hour in connection with a mistrial apparently resulting from (or related to) the violation of a sequestration order imposed on witnesses. Relevance to this blog: While we often write here about Chancery Court cases that deal with applications for attorneys fees in class actions or derivative cases, the real reason I include this story, (apart from its entertainment value on a topic that interests all lawyers and their clients), is that the lawyer involved, Willie Gary,  is someone I handled expedited business litigation for last year, which resulted in a reported decision by both the Chancery Court and the Delaware Supreme Court, as summarized here,  in Willie Gary, LLC v. James & Jackson, LLC. (As an aside, I admit that it was fun to meet on his private jet --photos linked in the WSJ  Blog story above--when he flew into Wilmington).

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For those litigators interested in the latest e-discovery  developments (which should be all litigators), I recommend the article appearing today on the E-Discovery Law Blog here about an imbroglio playing out in San Francisco federal court involving the Oracle Corp. securities class action. E-discovery of audio data (think: voicemails) are at the cutting edge of discovery that all good lawyers should learn about.

The dispute involves relevant audio files that appear to have vanished. One of the issues is whether a party to a suit has an obligation to alert non-parties to save evidence. See In re Oracle Securities Litigation, No. C01-988MJJ.  See generally,  In re Oracle Derivative Litigation, 867 A.2d 904 (Del. Ch. 2004).

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Courtesy of the Electronic Discovery Law Blog, is the report of a recent federal court decision that imposed the penalty of an adverse inference instruction against a plaintiff in an employment discrimination case who disposed of her computer that "crashed" , after the case started, even though it had relevant information, and without trying to recover the data.

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In Gatz v. Ponsoldt, (Del. Supr., April 16, 2007), read opinion here,  the Delaware Supreme Court, en banc, reversed a decision of the Chancery Court (summarized on this blog here,  and cited as Gatz v. Ponsoldt, 2006 WL 1510467 (Del. Ch. 2006)), on the basis that the claim presented was not exclusively derivative and, therefore, could be brought directly. The prior procedural history of the case is somewhat lengthy, but most recently the Chancery Court had dismissed the case for not satisfying the pre-suit demand requirements of Rule 23.1 as required for derivative cases.

This opinion issued today emphasizes that the Chancery Court's decision was based (naturally) on "then-existing case law" but after that Chancery opinion was issued, the Delaware Supreme Court decided Gentile v. Rossette, 906 A.2d. 91 (Del. 2006), summarized on this blog here, which, as the Supreme Court wrote at page 2:

 "bore importantly on the issue of whether the dismissed claims were derivative, direct or both. Having heard the parties on the impact of Rossette, we conclude that the claims before us are not exclusively derivative and could be brought directly."

Today's opinion by the High Court is 35-pages long and it deserves much more thorough discussion and analysis than the press of client matters will allow me to perform now, but I wanted to make this very important decision that came out today available for those who have the time to download and read the whole decision at the above link. I am confident that many learned colleagues and professors will provide insightful commentary soon, and I plan to link that commentary to this blog soon after it appears.

UPDATE: Fortunately, Professor Bainbridge provides here thoughtful insights on the case, including quotes and commentary about the references by the court to equity's elevation of substance over form, as compared with prior writings by Justice Jacobs (the author of this case) and Vice Chancellor Strine on the topic, as well as reference to prior Delaware cases recognizing the  "equal dignity" of different parts of the DGCL.

UPDATE II: Thanks for the learned and helpful comments by readers posted below.

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In Rizzo v. Joseph Rizzo and Sons Construction Co., Inc., 2007 WL 1114079 (Del. Ch., April 10, 2007), read opinion here, the Chancery Court addressed a Motion to Dismiss under Chancery Court Rule 12(b)(1) for lack of subject matter jurisdiction. The specific issue in the motion dealt with whether the court had equitable jurisdiction over a claim for ejectment. Although the court found that the "clean-up doctrine" would  apply,  the decision relied on a separate basis for equitable jurisdiction.

Namely, Section 18-1001 of  the Delaware Limited Liability Company Act, 6 Del. C. Section 18-1001, specifically allows a member of an LLC to bring a derivative action on behalf of an LLC in Chancery Court. Just as derivative claims on behalf of a corporation for money damages are clearly based on historical equitable jurisdiction, so too, Chancery Court has jurisdiction over a derivative claim involving an LLC even if the remedy sought is a legal one, such as ejectment, as opposed to an equitable remedy. Moreover, the court observed that ejectment in this case was sought  based on an alleged breach of fiduciary duty (unfair dealing) by the managers and members controlling the LLC, which of course is an traditionally equitable claim for which the court has broad flexibility in fashioning a remedy. (The court commented in a final footnote, without deciding, about how this reasoning would apply to the statute that gives the Justice of the Peace Court apparently exclusive jurisdiction over summary possession actions for commercial leases. See 25 Del. C. 5701.)

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Courtesy of The Wall Street Journal Law Blog  here is a link to the entire 390-page Report of the Special Litigation Committee of CA, in connection with a pending derivative case against CA (formerly known as Computer Associates) in the Delaware Court of Chancery. Notably, the report concludes that certain claims should proceed against the founder of the company.

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Professor Gordon Smith writes here about how Vice Chancellor Leo Strine, Jr.'s recent  Chancery Court opinion in the Netsmart case, briefly highlighted here on this blog, describes the famous Business Judgment Rule in comparison to the Revlon duties of a director in the context of the sale of a company. Professor Stephen Bainbridge joins the discussion  with links and reference to his prior writings on the topic. For those interested in these important aspects of Delaware law, one would hard pressed to find better commentary on these issues.

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Courtesy of Professor Bainbridge is a story about a lawyer and a law firm that did not understand blogs or the blogosphere. By sending a letter demanding a retraction in reply to what they thought was a defamatory post or comment about a client, they unintentionally triggered a viral spreading of both the demand letter and the story about the letter among a multitude of bloggers and readers,  with the net result being that the law firm and lawyer looked silly at best--and all sympathy now lies with the original blogger. So too, the allegedly defamatory statement is now known by a much larger audience. Lesson: fail to understand the blogosphere at your own peril.

UPDATE: I am flattered to say that Carolyn Elefant linked to this post in her commentary about this story in her daily blog watch on law.com here on April 12 (in addition to linking to Prof. Bainbridge's post.)

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The always erudite Steve Jakubowski provides commentary here  on his Bankruptcy Litigation Blog about a recent decision by Judge Scheindlin (of e-discovery fame), regarding her decision to dissolve a stay pending appeal of a plan confirmation in connection with the Adelphia bankruptcy case. It is a useful lesson on several aspects of litigation, including why one should not seek  a stay and/or an appeal if one is not prepared to post the necessary bond.

Here is an excerpt from his post--and from the court's decision:

Judge Scheindlin realized, as she put it, that the bondholders "used the Court to obtain bargaining leverage to extract a better deal for their client with no intention of ever posting a reasonable bond."  "[Their] inconsistent positions," she found, "have had an impact on judicial integrity and have prejudiced Appellees."  "Such behavior," she observed, "is cynical at best and unprincipled at worst."  ACC Bondholder Group v. Adelphia Comm. Corp. (In re Adelphia Comm. Corp.), 07-1172 (S.D.N.Y. 4/2/2007) (pdf at p.14 n.33).

As an aside, Steve's blog is a standard by which other lawyers should measure their blogs. Also, notable is the eulogy about his mother that he posted about here last year, which was one of the most moving and inspirational writings I have ever read. Although it was especially touching for me since it followed my own saintly mother's passing (which I still mourn), I am willing to bet that it will also be an emotional tear-jerker for most thoughtful and sensitive people. I highly recommend it for motivational reading.

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Abrams v. Sachnoff and Weaver, Ltd. (Del. Supr., April 4, 2007), read Order here. This Delaware Supreme Court Order affirmed the Chancery Court’s decision regarding attorneys’ fees for representative plaintiffs and a separate “plaintiff’s award” but acknowledged a conflict due to the relation between the representative plaintiff and her attorneys.  Read my short summary of  the prior Chancery Court decision here.

Note also the recent amendment here  to the Chancery Court Rules of  Procedure in light of the Chancery Court decision in this case last year. The amended rules  now require an affidavit to be filed in derivative and class actions to certify that they plaintiff is not receiving any special remuneration "under the table" (my words) and that there is no conflict between plaintiff's counsel and the representative plaintiff. In the above case, the representative plaintiff's husband was a lawyer who wanted legal fees for his work on the case, and after his wife died, the husband substituted himself as the plaintiff. The Chancery Court decision and the Supreme Court's order above describe the litany of issues that such a situation raises and why those situations must be avoided.

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Highland Select Equity Fund v. Motient Corp., (Del. Ch., March 14, 2007), read opinion here.  In this decision, upon remand from the Delaware Supreme Court, the Chancery Court clarified two questions that the Delaware Supreme Court required clarification on  regarding a prior Chancery decision in this case involving DGCL Section 220. The original Chancery Court decision was summarized here.

The Supreme Court asked the Chancery Court to clarify whether “all of Highland’s actual purposes were improper and if so, what were Highland’s actual purposes and why did they preclude relief under Section 220." The Chancery Court explained that the starting point of its analysis was the initial demand letter that “suffers from such extreme overbreath that it is impossible to conclude that it was drawn in a good faith effort to comply with the clear, controlling authority of the Delaware Supreme Court. That letter spanned 25 single spaced pages . . ..” (citing Security First Corporation v. U.S. Die Casting and Development Co., 687 A.2d 563, 570 (Del. 1997)). The Chancery Court also listed five other factors why it concluded that the use of the Section 220 process  by the plaintiff in this case  was designed for some purpose other than to exercise the legitimate right of a stockholder.

Moreover, the Chancery Court emphasized that its opinion must be understood in the context in which Highland pressed its demand. For example, the Court’s reasoning was based on the circumstances existing during the course of the litigation. In this connection, the existence of the impending proxy contest was a substantial factor. As the court quoted from its original opinion:

“Recent experience teaches that the potential for abuse is very much alive when the Section 220 demand is made - - as this one is - - in the context of an impending proxy contest. While a Section 220 books and records action is a summary proceeding that demands prompt attention from this court, it can be difficult to process from start to finish from a schedule that accommodates the foreshortened time frame of an ongoing proxy fight. This is especially true when a stockholder makes a broad demand and expects to be able to publicly disclose in its proximate materials otherwise confidential documents or information obtained from the corporation after trial.”

 The Chancery Court emphasized that in the context of such a demand, it is essential to the orderly process of the court that the stockholder make a “narrowly tailored, good faith demand in compliance with the clearly established precedent of the Delaware Supreme Court” (citing Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1034-35 (Del. 1996)). The Supreme Court  on April 4 upheld this clarification in a short  Order.

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L & W Insurance Inc. v. Harrington, (Del. Ch., March 12, 2007), read opinion here.  In this Chancery Court action, the Court denied a Motion for Preliminary Injunction to enforce non-solicitation covenants contained in an employment contract due to the prior material breach by the former employer seeking enforcement. It is notable that there was no clause in the agreement that prohibited post-termination competition, as opposed to post-termination solicitation of former clients. 

 The procedural timing is illustrative and provides insight into how these matters are scheduled often times in Chancery Court where injunctive relief is sought. The complaint was filed on February 9. On February 13 the Court heard argument on a Motion for TRO. Although that motion was denied, the Court allowed for expedited scheduling to consider a preliminary injunction request. The Court heard argument on that Motion for Preliminary Injunction on February 21.

The context of the request for injunctive relief, in light of a mandatory arbitration clause, was whether there would be a likelihood of success on the claims that would be presented to arbitration. The 33-page decision includes helpful descriptions of the prerequisites for obtaining injunctive relief in the context of mandatory arbitration.

The Court noted that because the underlining dispute was subject to mandatory arbitration “the analysis of the merits of the underlying claims may be more limited and requires the party to establish a reasonable probability that its arbitration position is sound and that it will be irreparably injured in the interim before the arbitration is concluded."

The Court found that the former employer materially breached the Employment Agreement by withholding certain commissions from the paycheck of the former employee, prior to the employee’s resignation, and therefore, was not entitled to enforcement of the agreement that it breached.

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Courtesy of the blog called  Adam Smith, Esq., is a thought-provoking commentary applying game theory to practicing law. Worth reading.

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Gordon Smith at The Congomerate blog writes that the offer that Kerkorian just made for Chrysler does not trigger Revlon duties under Delaware law for at least  2 reasons: One, Chrysler is part of a German company and so Delaware law likely will not apply. Two, it is only a division of a larger company and therefore, as it only involves the spinoff of a subsidiary, Revlon is not triggered. The good professor ends his post with a citation to the following  Delaware Chancery Court decision: Cf.  In re Toys "R'' Us, Inc. Shareholder Litigation, 877 A.2d 975 (Del.Ch. 2005).

SUPPLEMENT: Elizabeth Nowicki of the Truth on the Market blog provides insightful commentary about when the Revlon duty (to maximize shareholder value when the company is for sale),  applies in the context of a sale to a strategic buyer, but when the same company is sold to a private equity firm, the entire fairness standard is applied (to the extent it involves the board being on both sides of the transaction when they negotiate to keep their jobs after the purchase by a private equity firm, as opposed to a strategic competitor in which they likely will lose their jobs.) She supplements her commentary with remarks on the topic by Vice Chancellor Leo Strine, Jr. of the Delaware Chancery Court  who was on a panel at the recent Tulane Corporate Law seminar. 

STILL MORE: A long list of colorful quotes from His Honor at the  Tulane seminar are captured here by the WSJ's Deal Journal blog.

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In  Korn v. New Castle County, (Del. Supr., March 30, 2007, revised April 17, 2007), read opinion here,  the Delaware Supreme Court reversed the Chancery Court, and  the High Court ruled that the "common benefit" exception to the American Rule would apply in Delaware to allow attorneys' fees to be awarded to a taxpayer who successfully argued that New Castle County was improperly amassing surplus funds. After suit was filed, those surplus funds were used to pay certain current expenses. The "common benefit" basis for awarding fees is often used in  business enterprise litigation where, for example, a shareholder recovers funds that benefit the entire corporation.

The court noted that the equitable principle on which the common fund exception is based, is that all members of a class should not be unjustly enriched by the efforts of one person. This exception that allows fees to be awarded, requires that: (i) the claim be meritorious when filed; (ii) the action benefit an identifiable group; and (iii) the benefit be causally related to the lawsuit. There is a rebuttable presumption that if action is taken by the defendant that moots the complaint, then the benefit was causally related to the lawsuit, as here. The case was remanded to Chancery Court for a determination of an amount of legal fees to be awarded that would be reasonable in relation to the benefit conferred.

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In Troy Corp. v. Schoon, (Del. Ch., March 26, 2007), 2007 WL 949441, read opinion here, the Chancery Court reiterated the settled Delaware jurisprudence that forum selection clauses are enforceable but that in order to achieve their purpose, if they are meant to be exclusive, they must clearly express that intent unequivocally. The clause in this case was unequivocal in stating that the parties agreed to choose as an exclusive forum the federal court for the Southern District of New York. In this Motion to Dismiss under Rule 12(b)(3), however, the issue was joined because the complaint filed did not raise an issue of federal jurisdiction. The Chancery Court was compelled to make an unusual analysis--for a state court--about whether a federal court had jurisdiction over a particular dispute. Reasoning that there was no federal court jurisdiction (based on diversity or otherwise), and the agreement not having provided for an alternative forum, the court concluded based on the facts presented that Delaware state court was a permissible forum to adjudicate the dispute.

One lesson to be learned from this decision, especially for those drafting forum selection clauses, is that they must provide for an alternative court in the chosen state if, as in this case, the only court chosen did not have subject matter jurisdiction over the dispute.  Another example  for avoiding the result in this case arises from the following hypothetical:  if an agreement only provided for Chancery Court as a forum, it would be possible, depending on the type of claim asserted,  that the court would not have equitable jurisdiction--which cannot be created by consent of the parties--as opposed to personal jurisdiction--much like federal subject matter jurisdiction cannot be conferred by the parties. Thus, if the drafter wanted to be certain that all disputes would remain in Delaware courts, the drafter should allow for an alternative Delaware court if Chancery did not have equitable jurisdiction.

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Courtesy of The Wall Street Journal Law Blog is a commentary on the U.S. Supreme Court's decision very recently in Massachusetts v. EPA. In particular the linked blog post quotes Justice Breyer as saying recently that he thought that Justice Scalia was the best writer on the court. As if to provide an example, the WSJ Blog gives us an excerpt from the above decision in what has been referred to as the "flatulence footnote". It is worth a read.

As an aside, these 5-4 decisions from the High Court remind me that if the brightest legal minds in the country cannot agree on the interpretation of a particular statute, and the dissenters write that the majority's view "defies common sense", it gives comfort to mere mortals who might have a reasonable disagreement about legal anlaysis on a particular issue.

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Courtesy of The Wall Street Journal Law Blog is a story about some students at top law schools who are trying to convince the nation's largest law firms to change their "sweat shop" practices and allow a better quality of life for associates. Perhaps this is a variation of some top corporations telling law firms who they should hire for diversity reasons. There are many aspects of this story that could fill volumes, from basic economics to the fact that law school graduates, mostly very young, will be paid by these firms annual salaries that are in the top few percentiles of annual income compared to what the rest of the country makes. Plenty of other occupations require hard toil for long hours, 6 or 7 days a week: think restaurant operators and most owners of small service businesses. However, most of them do not make the type of salary that law school graduates make at large law firms, no matter how many hours they work--certainly not starting on their first day on the job. In any event, most large law firms should be able to expect hard work in exchange for the large sums they pay their associates. Yes, many large firms have a pressure cooker environment and not unlike other aspects of most high-paying jobs of the working class, many aspects of it are unfair and not conducive to a relaxed lifestyle.There are many similarities to the Dickensian factories and manual labor occupations of yesteryear that demanded slave-like working hours, but one difference is that nobody is forcing these law school graduates to accept the large salaries if they do not like the working conditions and most can easily obtain other jobs, at salaries far above the average wage in this country, with less stress and unpleasantries--if they chose to do so.

UPDATE: Law students who think the following cartoon by Charles Fincher of www.lawcomix.com is not a possible reflection of reality, figuratively, might want to do more due diligence:

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Levy v. Sterling Holding Company LLC, (D.Del., Feb. 23, 2007), read opinion here.  In this decision of the United States District Court for the District of Delaware, the court agreed with the Securities and Exchange Commission that the stock conversion completed as part of a spin off of Fairchild Semiconductor Corp. was not an illegal short-swing trading under federal securities laws.  The court granted summary judgment to National Semiconductor Corp. and Sterling Holding Corp. and dismissed the shareholders suit.

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