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

Here is yesterday's decision from the Delaware Supreme Court that serves as a reminder that Delaware's highest court takes very seriously its role as enforcer of the ethics rules that apply to lawyers.

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In Patel v. Dimple, 2007 WL 2353155 (Del. Ch., Aug. 16, 2007), read opinion here, the Chancery Court addressed the situation where both parties had "unclean hands". The court explained that the familiar "unclean hands doctrine", often used as an equitable defense, is not intended to determine "whose hands are dirtier". Rather, the court can use it to avoid assisting parties who schemed to enter into an illicit deal. ( See footnotes 26 to 28). In this case, the parties conspired to enter into an agreement that was designed to skirt the prerequisites--that they otherwise could not satisfy--in order to obtain a license from the applicable state agency to open a liquor store.  The court refused to enforce the agreement which would have resulted in rewarding one of the parties to the illicit agreement with a windfall for his misdeed.

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On the theory that all lawyers should have an interest in the composition of our profession (i.e., who goes in and who comes out of our law schools), a recent post here by Prof. Bainbridge tells us what the U.S. Civil Rights Commission thinks of current affirmative action trends in law school admission policies. The post provides a link to the full report of the Commission, but here is a quote from its Chairman:

"Race-based admissions have been found to harm minority law students by setting them up for failure.  Law schools that continue to use racial preferences despite this evidence should at least disclose the risks of academic mismatch to minority student applicants."

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Here is a case update from the Electronic Discovery Law blog about a group of lawyers involved in the  Qualcomm v. Broadcom trial in federal court in California, who  are now suffering a "world of hurt" for not being in control of e-discovery issues, as evidenced by their apparent failure to search for and produce about 200,000 emails until several months after trial. The foregoing post links to background details including the "Order to Show Cause" issued by the court that requires them to explain why they should not incur the court's wrath. The court noted their apparent failure to use basic search terms to look for emails from key witnesses.

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 Diedenhofen-Lennartz v. Diedenhofen, 2007 WL 2296828 (Del. Ch., Aug. 8, 2007), read opinion here.  This case involves a Motion to Dismiss in favor of earlier-filed actions already pending in the courts of Germany, Canada and California, based on the familiar McWane doctrine.  [McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., 263 A.2d 281 (Del. 1970).]  The Court explains in great detail the intricate and multi-faceted aspects of the parties’ disputes and the multiple pending lawsuits among the same parties in various jurisdictions and countries.

However, the Court imposed restrictions on the defendant to avoid making the plaintiff suffer from what the Court referred to as “gamesmanship.”  The Court was clear not to premise its ruling on forum non conveniens grounds.  Thus, the Court did not need to address the serious policy considerations, based on which Chancery has refused to defer to similar pending cases in other jurisdictions when important issues of Delaware law were at stake, as recently analysed in decisions such as Ryan v. Gifford, 918 A.2d 341, 349-50 (Del. Ch. 2007) (See brief summary of case on blog here).  One of the restrictions that the Chancery Court imposed as part of its decision to stay this matter is that the defendant, who is a Delaware resident, submit to the personal jurisdiction of the courts in Canada and Germany, in which cases against defendant are pending, and which the defendant argued are the fora which should be given preference instead of the current Chancery case proceeding.  The Court also required that the defendant accept the determinations of those courts as to where the plaintiffs’ claims should proceed.  The Court provided for those terms in its order so that the defendant would not gain any unfair delay by “having this Court defer to previously filed litigation, only then to claim she (defendant in the Chancery case) cannot be sued in those fora.” 

One of the considerations by the Court in its McWane analysis was the extensive documentation that was in German and the alleged challenges that would be encountered in the contested translations in terms of many of the provisions of the agreement at issue, and how those provisions interfaced with the applicable German legal concepts.

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Here is a summary by Professor Bainbridge for the book he is writing on Director Primacy.

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CBOT Holdings, Inc. v. Chicago Board Options Exchange, Inc., 2007 WL 2296355 (Del. Ch., Aug. 3, 2007), read opinion here.  Please note that a separate decision between the same parties was issued by the Chancery Court on the same date, denying injunctive relief, and that cite is 2007 WL 2296356 (Del. Ch., Aug. 3, 2007), read opinion here.  I will refer to them here as “CBOT I” and “CBOT II.”

In CBOT I, the Court addressed issues that arose out of the proposed demutualization of interests held by members of the Chicago Board Options Exchange, Inc. (the “CBOE”) an entity formed in 1972 and initially funded by The Board of Trade of the City of Chicago, Inc. (“CBOT”) and its membership.

In connection with a proposed acquisition of CBOT by the Chicago Mercantile Exchange Holdings, Inc. (“CME”), full members of the CBOT argue that they have lost the opportunity to share in the bounty to be harvested from the demutualization of CBOE.  There are many more procedural and factual aspects of this case that for purposes of this short blog blurb I will not delve into.  For purposes of this blog post I want to focus on what I view as the key issue that distinguishes this case.  In connection with the proposed combination, an application was filed with the SEC concerning an interpretation of the charter.  The SEC has plenary and pervasive power to determine issues related to exchange membership pursuant to the Securities Exchange Act. 

Nonetheless, the Chancery Court determined that the jurisdiction of the SEC does not extend to resolution of state law contractual issues and fiduciary duty claims that exist here.  Notwithstanding the Court’s conclusion that it had the authority and the ability to interpret the contract issues and fiduciary duty claims, based on considerations of efficiency and judicial economy, it determined that the resolution of the “economic rights” claims was best stayed pending the completion of the review by the SEC of the proposed combination.  The Court reasoned further that:  “Significantly, a stay would enable the Court to assess more accurately how, and if, the SEC’s decision on the proposed rule change affects the Court’s calculus on the economic rights claims.”  Thus, the Court stayed the action pending the decision by the SEC as to whether the CBOT-CME transaction impacts the rights of the members as addressed in the agreement that is alleged to have been breached.  The Court further explained:  “The decision [to stay this case] is rooted less in deference to the SEC’s exclusive jurisdiction to review and improve proposed rule changes under the Exchange Act and more in recognition of the practical concerns of conserving judicial resources and avoiding unnecessary speculation about the outcome of the administrative process until such time as the SEC provides its resolution of the question of how, for purposes of its statutory responsibility, CBOT-CME merger affects the eligibility of CBOT members to qualify for purposes of the Exercise Right.”

In the separate CBOT II case, the Court declined a request for a temporary restraining order to enjoin the enforcement of a new rule filed with the SEC in connection with the merger with CME and the request that “temporary membership status” be provided.  This second opinion issued on the same day provides a practical and useful comparison of the standards and prerequisites for a TRO as opposed to a request for a preliminary injunction on a fuller record.  See, e.g., footnotes 5 through 11.  The Court reviewed all of the factors that must be satisfied for a TRO and after addressing each one, found that one of the primary determining factors that weighed against granting the TRO was the “reasonable expectation that any material and adverse consequences that may be suffered by the plaintiffs or the class members can be duly compensated through a monetary award that ultimately persuades the court that a temporary restraining order is not warranted.”

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In Gamles Corp. v. Gibson, (Del. Supr., August 7, 2007),  read opinion here, the Delaware Supreme Court discusses the procedure for attaching wages to collect a judgement as well as the date in Delaware when a judgment can expire if not collected.

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In Mercier v. Inter-Tel (Delaware), Incorporated, 2007 WL 2332454 (Del. Ch. Aug. 14, 2007), read opinion here, the Chancery Court provides a veritable "mini-textbook" on the Delaware corporate law that applies to the review of actions taken by directors in connection with shareholder votes on a merger, especially when no serious entrenchment claim exists. This opinion arguably writes a new chapter in Delaware corporate law that clarifies the applicable standards in reviewing board behavior when an imminent shareholder meeting is postponed in connection with a proposed merger.  There is far too much to say about this “law review article of a court decision” than can be shortly summarized in a blog post, but try we shall to the extent we can do so without making paying clients wait.

In this opinion, the Court denied a request for a preliminary injunction and explained in great detail the circumstances under which:  “well-motivated independent directors may reschedule an imminent special meeting at which the stockholders are to consider an all cash, all shares offer from a third-party acquiror.”  The Court began the opinion by summarizing its approach in determining the standard of review that it would apply.  The Court explained that: 

“ . . . consistent with the directional teaching of cases like MM Companies, Inc. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003) . . . the Blasius standard should be reformulated in a manner consistent with using it as a genuine standard of review that is useful for the determination of cases, rather than as an after-the-fact label placed on a result.  Such a reformulation would be consistent with prior decisions recognizing the substantial overlap between the redundancy of the Blasius and Unocal standards, and would have the added benefit of creating a less prolix list of standards of review.”

The Court paid respect to the Delaware Supreme Court’s recent decision in Liquid Audio and also employed the “compelling justification” standard from Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), within the context of an appropriate  review based on Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), of director conduct that affects a corporate election touching on corporate control. 

In sum, the Court concluded that:  “The plaintiff’s request for preliminary injunction application based on the contrary assumption - - that directors have no discretion as fiduciaries to reschedule a vote once a stockholder meeting is imminent and the directors know that the vote won’t go their way if it is held as originally scheduled - - is denied.”

The specific equitable claim presented was whether the postponement by the Special Committee of a special shareholders meeting on the same morning that it was scheduled, was equitably justified or whether there were inequitable motivations for the Special Committee seeking a delay.  In its effort to determine the applicable standard of review that would apply to the equitable claim, the Court struggled with the argument by the plaintiff that the “compelling justification” standard of Blasius should apply based on the allegation that the postponement of the meeting by the Special Committee was flouting the will of the majority of shareholders.  In the course of its analysis, the Court  discussed the recent decision of In Re:  MONY Group, Inc. Shareholders Litigation, 853 A.2d 661 (Del. Ch. 2004). 

At page 27 of the Westlaw version of this Mercier opinion, the Court explained in detail why the traditional Blasius standard should not apply to its review of the director actions in this case.  In sum, the Court explained that: 

“The primary purpose of the Inter-Tel board was not to disenfranchise its stockholders.  Rather, it was to give the stockholders more time to deliberate before exercising their right to vote.  Because the Special Committee did not preclude stockholders from making a free and uncoerced choice about the Merger, its decision to reschedule the meeting does not invoke Blasius at all.”

Moreover, the Court explained that the “Special Committee has demonstrated a compelling justification for its action, even if that standard applies.”  The Court went on to explain when compelling circumstances are present such as when independent directors believe that:  (1) The stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests; (2) Information useful to the stockholders’ decisionmaking process has not been considered adequately or not yet been publicly disclosed; and (3) If the stockholders vote no, the acquiror will walk away without making a higher bid and that the opportunity to receive the bid will be irretrievably lost.

The Court observed the real world economic reality that the reason stockholders invest in companies is for the following purpose:

"to make moolah, cash, ching, green, scratch, cabbage, benjamins - - to obtain that which Americans have more words for than Eskimos have for snow - - money.  When directors act for the purpose of preserving what the directors believe in good faith to be a value-maximizing offer, they act for a compelling reason in the corporate context.  Of course, that does not mean that they have unlimited freedom to advance that purpose.  But that is a question about the fit between the means they employ, not the end they are seeking to achieve.”

 Here  is another take on the case from the Harvard Corporate Governance Blog. Here is another analysis also posted on  the same foregoing blog, by a few highly respected Delaware lawyers. Here again is another post about the case from the Harvard blog.

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In Re: infoUSA, Inc. Shareholders Litigation, 2007 WL 2332543 (Del. Ch., Aug. 13, 2007), read opinion here.[updated/revised opinion here.]  This Chancery Court decision serves as a veritable “litigator’s guide” on how to successfully plead a derivative case to challenge allegedly excessive executive compensation.  The opinion also provides a very practical “step by step tutorial” on how to draft a complaint to successfully allege a breach of fiduciary duty.

This is one of those cases where there is so much “meaty” hard core corporate law analysis, that it is challenging to briefly summarize it in a blog post without leaving out at least some "good stuff". 

The court begins the opinion by describing the complaint as testing “the boundaries of the business judgment rule, the protection offered to defendant directors by Court of Chancery Rule 23.1, and the procedural rules by which a plaintiff brings a derivative complaint.”  The complaint went into extensive detail to provide a basis for allegations of self-dealing in connection with what the court described as “extravagances [that] included the lease of aircraft and office space for personal use, the provision of a yacht, and the collection of luxury and collectible cars that would leave James Bond green with envy.”  Among the requests for relief were an effort to recover derivatively the benefits expropriated from the company by the CEO.  The court conducts an extensive analysis of the pre-suit demand requirement and demand futility under both Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984) and Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993).

Although the court was critical of various deficiencies in the complaint, the court found that there were sufficient allegations to demonstrate that a majority of the directors were neither sufficiently disinterested nor independent enough to consider objectively a demand upon the board and thus demand was excused. 

Similarly, under the separate, different standard under Rule 12(b)(6) for a Motion to Dismiss, the court found sufficient facts alleged to state a claim on which relief could be granted.  The court lauded the plaintiffs for obtaining details as a factual basis for their allegations through the use of DGCL Section 220.  Among the counts in the complaint in addition to breach of fiduciary duty for self-dealing and excessive compensation, the complaint alleged that the challenged transactions were void based on DGCL Section 144 in light of the absence of approval by either disinterested directors or a vote of disinterested shareholders--or transactions that were not fair to the company. In addition, the complaint sought to avoid stock options granted, in light of DGCL Section 157.

At pages 11 and 12 of the Westlaw version of the opinion, the court provides a “how to guide” for plaintiffs to plead a derivative claim for allegedly excessive executive compensation.  The court emphasizes that the question of “how much is too much” is a question “far better suited to the boardroom to the courtroom."  Nonetheless, the court instructs lawyers preparing such complaints as follows: 

“Therefore, a skilled litigant and particularly a derivative plaintiff, recognizing the institutional advantages and competency of the judiciary reflected in our law, places before the Court allegations that question not the merits of a director’s decision, a matter about which a judge may have little to say, but allegations that call into doubt the motivations or the good faith of those charged with making the decision.”

The court explains the two ways that a plaintiff can show pre-suit demand is excused due to the lack of objectivity of a director.  First, a plaintiff can show that a given director is personally interested in the outcome of the litigation in that the director will personally benefit or suffer as a result of the lawsuit (though simply being named as a defendant is not enough).  Second, a plaintiff may challenge a director’s independence by putting forward specific allegations that raise a reasonable inference that a given director is dominated through a “close personal or familial relationship or through force of will,” or is so beholden to an interested director that his or her discretion would be sterilized.  See cases cited at footnotes 31 through 35 explaining the detailed basis for establishing the prerequisite that a majority of directors is either interested or lacking in independence.  This analysis must be done on a detailed, fact-intensive, director-by-director basis in light of the composition of the board at the time that a complaint is filed.

The Court’s opinion also provides a practical “how to guide” that is indispensable for lawyers who engage in business litigation to the extent that it explains in detail the successful method to prepare a complaint for a breach of fiduciary duty. 

The court teaches as follows:

“An ideal complaint - - to say nothing of subsequent briefing - - would [i] separately address each challenged transaction; [ii] specifically mention whether the transaction was or was not approved by the board of directors (and provide the composition of the board; [iii] describe the purported consideration received by the company for the transaction, if known; [iv] and then conclude with an explanation of why the transaction could not have been made in good faith.”

But, the court observed that: “Rule 8(a) does not demand, however, that plaintiffs present a paragon of the well organized complaint.”

I want to note two classic “money quotes” regarding the Business Judgment Rule.  Here they are: 

“The rule does not require the Court to bless the conclusion of a director that is self-evidently nonsense on stilts, nor does it protect a board that looks into the sun and names it the moon.”

Moreover, the court continued:  “Where, as here, the directors sought shareholder approval of an amendment to a stock option plan that could potentially enrich themselves and their patron, their concern for complete and honest disclosure should make Caesar appear positively casual about his wife’s infidelity.”

In closing, the last nugget that I subjectively selected for this short blog post is from footnote 82 where the Court acknowledges that even though demand was excused, one part of the complaint presents a direct claim for relief by shareholders.  Specifically, the court noted that:  “Where a disclosure claim states that a shareholder was denied the opportunity to exercise a fully-informed vote, the claim is direct, and where a significant shareholder’s interest is increased at the sole expense of the minority, such a claim is individual in nature and entitles plaintiffs to at least nominal damage.  See In Re:  J.P. Morgan and Co.  S’holder Litig., 906 A.2d 766, 772-776 (Del. 2006) [compare dilution claim] [See blog summary here of the J.P. Morgan case].

 UPDATE: Here is a March 2008 letter opinion in this case, courtesy of The Delaware Business Litigation Report, in which the court agreed to stay the case pending the review and determination of a Special Litigation Committee (SLC). The Chancery Court decided that it was not too late to form an SLC after the court ruled that pre-suit demand was excused. The citation is: In Re InfoUSA, Inc. Shareholders Litigation, 2008 WL 762482 (Del. Ch., Mar. 17, 2008). The court only stayed the case until June 30, 2008 and based on the court's introductory description of this case's "sordid history", I expect that we will be reading future opinions regarding this saga in the months to come.

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Bankruptcy attorney, scholar, friend and all-around good person, Steve Jakubowski, posts here on his Bankruptcy Litigation Blog, about a follow-up to the recent Delaware Supreme Court's affirmance (see post here), of the Chancery Court's Trenwick decision (see post here), and based on other court decisions in other jurisdictions as well as several articles, analyzes whether "deepening insolvency", though dead in Delaware as a cause of action, may live on as a "measure of damages". He concludes his thorough analysis as follows:

"... while the death knell tolls for "deepening insolvency" as an independent cause of action, confusion continues to reign over whether damages for "deepening insolvency" exist, and if so, under what circumstances."

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Here is an article in today's Wall Street Journal about attorneys who now charge $1,000 per hour --or more.

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Prof. Christine Hurt announces here at the Conglomerate  blog  an upcoming presentation in October at her University of Illinois College of Law, entitled: "The Mystery of Delaware Law's Success", and sponsored by the Illinois Program in Business Law and Policy, of which Prof. Hurt is Director.

 Among the presenters are our very own Chancery William Chandler, III, of the Delaware Court of Chancery, as well as Prof. Larry Ribstein of Ideoblog  fame.  More details are available here.

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Merrill Lynch F.S.B. v. Campbell, 2007 WL 2069867 (Del. Ch., July 2007), read opinion here.  This case involved a trustee who brought a declaratory judgment action seeking judicial confirmation of its conduct in connection with its administration of a trust. The beneficiary – settlor counterclaimed alleging that the trustee used fraud and misrepresentation to induce her to enter into the Trust Agreement and that the investment strategy failed to meet the prevailing standard of care, and that the trustee improperly withdrew funds from the trust to pay the trustee’s legal fees. The court found that notwithstanding what appeared to be egregious conduct, the two year statute of limitations made the misrepresentation and fraud claims against the trustee time-barred. However the court denied the Motion to Dismiss and allowed to proceed the counterclaims against the trustee that it failed to meet the prevailing standard of care and that it improperly incurred legal fees to be paid by the trust, as these were not claims that could be dismissed pursuant to Chancery Court Rule 12(b)(6).  

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 U.S. v. BDO Seidman, LLP, (7th Cir., July 2007), read opinion here.

 This case addresses the “common interest doctrine” which is often confused with the attorney/client privilege, but is an essential concept to grasp especially for multi-party litigation. It is, in effect, an exception to the rule that no attorney/client privilege attaches to communications between a client and an attorney in the presence of a third person. In effect, the common interest doctrine extends the attorney/client privilege to otherwise non-confidential communications in limited circumstances. The common interest doctrine will apply only “where the parties undertake a joint effort with respect to a common legal interest, and the doctrine is limited strictly to those communications made to further an ongoing enterprise. Moreover, communications need not be made in anticipation of litigation to fall within the common interest doctrine. (See footnote 6.) The court found that a memorandum that two joint venturers, BDO and Jenkens & Gilchrist, who consulted with their respective in house counsel, and also the outside counsel BDO  hired with respect to the legality of a proposed financial course of action they would recommend to their common clients-- was within the scope of the common interest doctrine. Moreover, the common interest doctrine cannot be waived without the consent of all the parties and the voluntary disclosure by one member of a joint venture does not waive it with respect to the other member of the joint venture.

Delaware has addressed the topic, e.g.,  in American Legacy Foundation v. Lorillard Tobacco Co.,  2004 WL 2521289 (Del. Ch. 2004) (discussing attorney/client privilege waiver and common interest doctrine--also called "joint defense doctrine"). See generally, Jenkins v. Bartlett, (7th Cir. U.S. Ct. App., April 23, 2007), read opinion here, which explained that :

"... there is an exception to the general rule that the presence of a third party will defeat a claim of privilege when that third party is present to assist the attorney in rendering legal services. (citation omitted)."

"... This exception applies both to agents of the attorney, such as paralegals, investigators, secretaries and members of the office staff responsible for transmitting messages between the attorney and client, and to outside experts engaged 'to assist the attorney in providing legal services to the client', such as accountants, interpreters.... Additionally, this exception reaches retained experts, other than those hired to testify, when the expert assists the attorney by transmitting or interpreting client communications to the attorney or formulating opinions for the lawyer based on the client's communications. (citation omitted)."

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The Delaware Supreme Court in a two-page Order issued on Aug. 14, 2007, (read here), affirmed the Chancery Court's Trenwick decision of last year (summarized here and  here on this blog), thus sounding the death knell in Delaware for the claim of "deepening insolvency" and casting aspersions on the concept of  "the zone of involvency". See Trenwick America Litigation Trust v. Ernst & Young, L.L.P.,  2006  WL 2333201 ( Del. Ch. 2006).

Here is an insightful commentary by Bob Eisenbach on his Business Bankruptcy Blog about the deeper implications of this confirmation of the Chancery Court's opinion. [Query the impact of  the Supreme Court's affirmance on a federal decision (or the impact, if any, of the federal decision) that post-dated the Chancery decision and which was briefly summarized here.]

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In the case of In Re Tyson Foods, Inc. Consolidated Shareholder Litig., (Del. Ch., August 15, 2007), read opinion here, the Chancery Court once again allowed the claim in this case involving spring-loading of stock options to proceed. (Hat Tip: Kurt Heyman). This decision denied a Motion for Judgment on the Pleadings under Chancery Court Rule 12(c). The previous decision in this same case denied a motion to dismiss, and allowed the same claim to proceed under that different procedural standard. In Re Tyson Foods, Inc. Consol. S'holder Litig., 919 A.2d. 563 (Del. Ch. 2007)(copy of  earlier Feb. 2007 decision available at short blog post here where I also discussed a related case.)

The court discusses the different standard of review for a Motion to Dismiss as opposed to a Rule 12(c) Motion, and what documents outside the pleadings are appropriately considered under Chancery Court Rule 12(c).

There are many "money quotes" in this opinion. I will include some now and later will add more. One that is especially memorable deals with the court 's criticisim of the proxy statements at issue, which the court described as displaying "an uncanny parsimony with the truth...[and] raised an inference that directors engaged in later dissembling to hide earlier subterfuge."

The court emphasized that the fiduciary duties of loyalty, good faith and candor were not adorned by the Delaware Supreme Court with half-hearted adjectives. Instead:

"Directors should not take a seat at the board table prepared to offer only conditional loyalty, tolerable good faith, reasonable disinterest or formalistic candor."

In sum, the court concluded that the "pleadings support an inference not only that the defendants engaged in self-dealing, but that they attempted to hide their conduct from their stockholders."

Here  is an insightful, perceptive analysis of the case from Kevin LaCroix on his D & O Diary blog.

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Professor Bainbridge announces his latest article, which is must reading for those interested in Delaware corporate law. The title of the law review article available on SSRN  is : The Convergence of Good Faith and Oversight.

Here is the abstract:

In Stone v. Ritter, 911 A.2d 362 (Del. 2006), two important strands of Delaware corporate law converged; namely, the concept of good faith and the duty of directors to monitor the corporation's employees for law compliance. As to the former, Stone puts to rest any remaining question as to whether acting in bad faith is an independent basis of liability under Delaware corporate law, stating that "although good faith may be described colloquially as part of a ‘triad' of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly." 911 A.2d at 370. Nevertheless, this holding may not matter much, because the Stone court makes clear that acts taken in bad faith breach the duty of loyalty. As a result, instead of being split out as a separate fiduciary duty, good faith has been subsumed by loyalty. In this sense, Stone looks like a compromise between those scholars and jurists who wanted to elevate good faith to being part of a triad of fiduciary duties and those who did not, with the former losing as a matter of form, and the latter losing as a matter of substance.

As to the duty of oversight, Stone confirmed former Chancellor William Allen's dicta in Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), that the fiduciary duty of care of corporate directors includes an obligation for directors to take some affirmative law compliance measures. In Stone, the Delaware Supreme Court confirmed "that Caremark articulates the necessary conditions for assessing director oversight liability." Stone, 911 A.2d at 365.

This article argues that the convergence of good faith and oversight is one of those unfortunate marriages that leaves both sides worse off. New and unnecessary doctrinal uncertainties have been created. This article identifies those uncertainties and suggests how they should be resolved.

Here is one of my short posts on the Stone v. Ritter case where one can download the opinion.

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Much has been written in the popular and trade press about the recent conviction in Chicago of Lord Black in connection with his Hollinger entities. Here is a report of the conviction by The Wall Street Journal Law Blog.  Though not mentioned in most of the recent reports about the Chicago trial, Lord Black lost important civil cases in Delaware. Here is a summary of the Delaware Supreme Court's decision affirming the Chancery Court's ruling. Courtesy of ProfessorBainbridge.com, here are a few excerpts from the Chancery Court's findings of fact:

Hollinger Intern., Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004),  made the following findings of fact:

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I am on vacation the week of August 13, so I will use some posts which I have compiled and that may not be as time-sensitive--as I am fairly up to date with my summaries of  key opinions issued by the Delaware Chancery Court and Delaware Supreme Court on corporate and commercial law topics of interest to the business litigation lawyer.

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Courtesy of The Wall Street Journal Law Blog, here is a story about the recent decision in Boston awarding $101 million for what is a low-water mark in the annals of the American criminal justice system. I am accustomed to the heft of the Chancery Court and Delaware Supreme Court decisions I summarize on this blog, but the 223-page opinion linked by the WSJ Blog above might give one an indication of the momentous nature of this attempt by the court to give justice to the truly unfortunate victims of prosecutorial misconduct. This story makes the recent Duke lacrosse case seem like a mere pecadillo. Here is a summary from the WSJ Blog:

For sheer dramatic value, it’s hard to beat yesterday’s ruling in a Boston wrongful-conviction case that accused the FBI of framing four men for the 1965 murder of Edward Deegan. The men all served decades in prison for the murder; two died behind bars.

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In Re RNI Wind Down Corp., 2007 WL 1970850, 369 B.R. 174 (Bankr. D. Del., July 2007). This blog often discusses Chancery Court and  Delaware Supreme Court decisions on the issue of advancement and indemnification. This case involved a claim by a former officer of RNI, a debtor with a Chapter 11 case pending, who filed a proof of claim for advancement and indemnification of legal expenses incurred in connection with the SEC investigation of the RNI  and certain officers and directors. The Bankruptcy Court in Delaware found that the advancement and indemnification claims should proceed and  were not subject to disallowance under Bankruptcy Code Section 502(e)(1)(B). A more detailed summary of this overlapping of corporate law principles and bankruptcy principles is available at the Delaware Business Bankruptcy Report here. 

UPDATE: Thanks to Tom Horan of Morris James for the updated citation to the B.R. above.

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 Electronic Discovery and the Business Judgment Rule are topics that are often the focus of posts on this blog. Now we have an article that addresses the intersection of those key topics, here. Delaware lawyers Kevin F. Brady and Matthew M. Greenberg recently wrote an article in the National Law Journal that addresses a situation that would allow for the protection of the Business Judgment Rule when a “litigation hold” was appropriately and timely implemented in connection with subsequent claims of a failure to preserve electronic data. 

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In Law  Debenture Trust Company of New York v. Petrohawk Energy Corp., 2007 WL  2248150 (Del. Ch., August  1, 2007), read opinion here, the Chancery Court rejected an attempt to specifically enforce the terms of an Indenture as interpreted by one of the parties. The court applied New York law regarding contract interpretation principles that were not dissimilar to Delaware law. There are several interpretations by the court of the Delaware General Corporation Law that are instructive, such as who has standing to contest the proper seating/election of directors.

 However, I think there are two procedural and jurisdictional aspects of this case that are most useful for the "toolbox" of those who engage in business litigation. First, the defendants filed a Motion to Dismiss under Rule 12(b)(6) but because they included documents and other material outside the scope of the pleadings, that would be beyond the scope of Rule 12(b)(6), and because a minor factual issue was raised, the court allowed limited discovery into that issue as well as supplemental briefing.
The other aspect of this case that I thought was of practical value for future reference was the jurisdictional argument. The court had doubts that a claim for specific performance that essentially requested only a monetary award was a sound basis for equitable jurisdiction. However, the  court found an independent basis for equitable jurisdiction in Section 111 of Title 8 of the Delaware Code which grants the Chancery Court jurisdiction to interpret the Delaware General Corporation Law (DGCL) as well as to interpret merger agreements -- both of which were issues present here. In fact, there were several sections of the DGCL that the court examined  regarding the procedural aspects of a merger, and their impact on the formation of a new board, but that I did not include in this short blurb.

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I write an Ethics Column for the national publication of the American Inns of Court called The Bencher. Here is my column in the current issue that I just received today. It summarizes two recent decisions dealing with attorney conduct. One case involves deposition conduct and the other case I review addresses the contents of a brief written by a lawyer.

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The National Law Journal  has a cover story on Vice Chancellor Strine here in its July 30 issue. It covers similar ground on Chancery Court cases that were mentioned in a recent Wall Street Journal article that I blogged about here.

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Ropp v. King, (Del. Ch., July 25, 2007), read opinion here. The Chancery Court considered an appeal from a decision by the Delaware Securities Commissioner on an issue of first impression in Delaware. The opinion involved a procedure where the Delaware Securities Commissioner, who is part of the Delaware Attorney General's office. brings a complaint and also appoints a deputy to conduct the hearing. In this matter, the deputy issued a decision that the Commissioner did not favor and wanted to appeal. The Chancery Court determined after careful analysis of the applicable procedures and standards, that the Commissioner could not, in effect, appeal his own decision.

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 Greystone Digital Technology, Inc. v. Alvarez, 2007 WL 2088859 (Del. Ch. July 20, 2007), read opinion here.. This case involved a Motion for Default Judgment pursuant to Chancery Court Rule 55(b) based on allegations that the defendant failed to “fully participate in the litigation and comply with certain orders of the court.” The court described the entry of a default judgment as an extreme remedy that is disfavored and that is within the discretion of the court and not mandatory. Despite other penalties that had been imposed in this case, the court did not find the prerequisite of “willful or conscious disregard for the rules of the court" that would otherwise be required for such a drastic penalty.

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In Thompson v. The Williams Companies, Inc.,  2007 WL 2215953 (Del. Ch., July 31, 2007), read opinion here, the Chancery Court rejected claims that conditions imposed on a non-officer, non-director employee as prerequisites to advancement  were contrary to public policy in Delaware, and rather found that they were neither arbitrary nor in violation of the implied duty of good faith and fair dealing. The court allowed the conditions primarily because the bylaws granting the advancement right expressly permitted the board to establish whatever conditions in its discretion it deemed appropriate before granting advancement rights. The court reasoned that the security required by the board was rationally related to protecting the interests of the corporation. By contrast, the court used an example of demanding security in an amount 5 times greater than the amount advanced, as a condition that would have been clearly arbitrary.

 The court distinguished this restricted advancement right with the more common, broader advancement provisions as discussed in Delaware Supreme Court decisions such as Tafeen (summarized here on this blog.) By using the search function in the right margin, one can find many advancement decisions summarized on this blog, but a key theme that ties this case in with others is that the court used basic contract interpretation principles to interpret the bylaw that  was at issue in this case.

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Friendly Ghost Enterprises, LLC v. McWilliams, 2007 WL 2198767 (Del. Ch., July 27, 2007), read opinion here. It is unusual but not unprecedented for the Chancery Court to change its opinion based on a Motion for Reargument pursuant to Chancery Court Rule 59(f). This is one of those rare cases. In sum, the court conceded that it construed too narrowly the decision of  Parfi Holding AB v. Mirror Image Internet, Inc., 817 A.2d 149 (Del. 2002), cert. denied  538 U.S. 1032 (2003)("Parfi I"), in light of the following decisions: Parfi Holding AB v. Mirror Image Internet, Inc., 842 A.2d 1245 (Del. Ch. 2004)("Parfi II"), aff'd in pertinent part, 2007 WL 1451506 (Del Ch., May 17, 2007)("Parfi III"). (A short blog summary of Parfi III can be read here.) In Parfi III, the Delaware Supreme Court clarified that: " Parfi I did not address, directly or indirectly, the trial court's inherent authority to control its docket or the propriety of it staying the Delaware action."

 Here, the court initially allowed arbitration and Chancery Court proceedings to be pursued at the same time, in light of requests for the appointment of a custodian and dissolution--which are considered summary proceedings under the DGCL, (see footnote 6), and that such actions "lie at the core of the [Chancery] Court's responsibilities under the Delaware General Corporation Law and the arbitration provision was not as clear as one might hope."

 Nonetheless, the court concluded after reargument that it would be more efficient, and more consistent with the Parfi decisions, to stay the Chancery action and allow the arbitration to proceed.

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Many lawyers have been in situations where the below cartoon would be fitting--at least in a figurative sense. (Courtesy of Charles Fincher at  lawcomix.com).

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The Chancery Court applies Rule 11 penalties and the bad faith exception to the American Rule on attorneys fees, inter alia,  in Fairthorne Maintenance Corp. v. Ramunno, (Del. Ch., July 20,. 2007), read opinion here.

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 I am involved in a case dealing with a federal statute that allows the township in Pennsylvania that I represent to impose a landing fee on airlines (not passengers) at the Philadelphia International Airport, based on the fact that the vast majority of the airport is within my client's jurisdictional boundaries. The statute is Section 40116(c) of Title 49 of the U.S. Code. The airlines have a different view of the statute.  It seems to be one of those cases where a judge will need to decide. It is a classic statutory interpretation issue. For those interested, here is the article that appeared in a local paper today about the multi-faceted aspects of this matter.

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 O’Connell v. Radwyn Apartments, L.P. (Delaware County, Pennsylvania, Court of Common Pleas, June 7, 2007)(Pagano, J.), read opinion here.. This decision by the trial court in Pennsylvania of general jurisdiction is a practical summary of the standards of liability for landlords in Pennsylvania. The general rule in Pennsylvania is that a landlord is liable for a tenant’s injuries only if the landlord knew or should have known of a dangerous condition of the property or if the landlord could have discovered it with reasonable care. Summary judgment was granted in this case because the court found that the defendants had neither constructive knowledge of any dangerous condition nor did they have actual notice of any dangerous condition. There was no violation of a duty to warn nor was there a violation of a duty to conduct inspections. Thus the court found that there could be no liability based on the facts of the case.

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This blog focuses on summarizing the business law decisions of Delaware courts, but because members of the judiciary for the state courts in Delaware are appointed by the governor, it is relevant to be aware of what is happening in the race for a new governor and lieutenant governor to be elected in November 2008. Here is a short article by Celia Cohen about certain aspects of those races from the online publication called Delaware Grapevine.

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