Search results for: twombly

Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings, LLC, No. 595-2010 (Del. Supr. Aug. 18, 2011), read Delaware Supreme Court’s en banc opinion here.

Issue Addressed

Whether Delaware should adopt the more stringent standard for motions to dismiss announced in the U.S. Supreme Court’s Twombly and Iqbal opinions.

Short Answer: No. (At least not now).

Why This Decision is Important

Delaware litigators will have no doubt about the standard to apply in a Rule 12(b)(6) motion to dismiss in Delaware now that Delaware’s highest court has spoken on this topic. Before today, however, in the absence of the clarity that this opinion brings, I have written on this blog several times over the last few years about whether the Delaware Court of Chancery had adopted the standard announced by the U.S. Supreme Court opinion in Twombly in 2007 and Iqbal in 2009, for motions to dismiss, in light of the Delaware Rules of Civil Procedure being based on the Federal Rules of Civil Procedure. See, e.g., here. See also compilation of posts about Delaware cases referring to Twombly here.

In the course of posting summaries of all the key Chancery decisions for this blog, I have watched closely for any post-Twombly decisions that may have “announced Delaware’s adoption of the Twombly standard”. Instead of announcements, which were not presented with that type of moniker, I have highlighted recent Chancery decisions here and here that have applied the Twombly standard–but as noted in the summary of a Chancery decision here, at least one Chancery decision this year did not apply the Twombly standard, so I can safely state that Twombly was not uniformly applied as the applicable standard in all Chancery decisions. See cases listed in footnote 14 of this opinion and the Court’s observation in accompanying text that: [only] “various members  of the Court of Chancery have cited …” the Twombly case with approval when adjudicating motions to dismiss.

Brief Overview of Background

The plaintiff in this case, CMC, is a mortgage servicing company that purchased the right to service pooled loans from Morgan Stanley. CMC brought breach of contract claims and related claims based on allegations, for example, that Morgan Stanley misrepresented the quality of the loans that were sold to it. The Court of Chancery dismissed the breach of contract claims without prejudice and dismissed the other claims with prejudice. CMC appealed all dismissals.

Highlights of Legal Analysis

  • The Court explained that:

We have not yet had occasion to address the impact, if any, that the United States Supreme Court’s holdings in Twombly and Iqbal should have on the Delaware standard.

  • This decision would not be the occasion to address that issue, however, because as the Court reasoned:

We decline to use this case as the vehicle to address whether the Twombly-Iqbal holdings affect our governing standard, considering that the parties have not fully and fairly litigated the issue before either the Vice Chancellor or this Court. Instead we emphasize that, until the Court decides otherwise or a change is duly effected through the Civil Rules process, the governing pleading standard in Delaware to survive a motion to dismiss is reasonable “conceivability.”

  • Delaware’s High Court reversed Chancery’s dismissal of the breach of contract claims because instead of determining whether CMC’s complaint “stated a claim that is provable under any reasonably conceivable set of circumstances”, the trial court decided on a substantive basis whether notice was provided in a manner that complied with the applicable contractual requirements.

Microstrategy, Inc. v. Acacia Research Corp., C.A. No. 5735-VCP (Del. Ch. Dec. 30, 2010).

Issues Addressed

This 52-page decision by the Delaware Court of Chancery addressed competing claims regarding breach of a Settlement Agreement. The Court granted in part and denied in part Motions to Dismiss. In particular, the Court dismissed the breach of contract claim; declined to dismiss the breach of representation claim, and allowed the litigation to proceed as to only a limited portion of a fraudulent inducement claim. The court also notes that an integration clause will not bar claims made based on extra-contractual pre-agreement statements unless there is a robust anti-reliance clause as well. (See footnote 101 and related text.)

Very Short Overview

One noteworthy procedural “takeaway” from this case for purposes of this short blog blurb, is the standard used in the Motion to Dismiss. As indicated in the summary of the recent Narrowstep decision authored by the same Vice Chancellor, this decision applies the standard for a Motion to Dismiss that was announced by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56 (2007). Compare the use of that standard with the standard used by the Delaware courts prior to the U.S. Supreme Court’s Twombly decision, as discussed in connection with the recent Narrowstep decision here. See slip op. at 8-11. Note, however, that subsequent to this opinion, in late 2011, the Delaware Supreme Court decided that the “pre-Twombly” standard would apply in Delaware.

Noteworthy 2012 Corporate and Commercial Decisions from Delaware’s Supreme Court and Court of Chancery.

By: Francis G.X. Pileggi and Kevin F. Brady.

Introduction

This is the eighth year that we are providing an annual review of key Delaware corporate and commercial decisions. During 2012, we reviewed and summarized over 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues. (We also provided partial lists of key cases throughout 2012.) Among the decisions with the most far-reaching application and importance during 2012 include those that we are highlighting in this short overview. We are providing links below to the more complete blog summaries, and the actual court rulings, for each of the cases that we highlight below. Prior annual summaries are linked in the right margin of this blog. We welcome comments if readers think we missed a decision that should be included.Photo of the Supreme Court Courthouse in Dover (The Supreme Court’s stately building in Dover is featured in the photo from the Court’s website.)

Top 5 Decisions of 2012

We begin with our selection of the Top Five Cases from 2012. In no particular order, we chose the following decisions as especially noteworthy:

Gatz Properties LLC v. Auriga Capital Corp., No. 148, 2012 (Del. Supr. Nov. 7, 2012) (Per Curiam). Issue Addressed: Delaware’s High Court held that the manager of an LLC violated a contracted-for fiduciary duty that adopted the equitable standard of entire fairness in a conflict of interest transaction between the LLC and its manager. The Supreme Court also declared as dicta, any statements by the trial court that Delaware law imposed default fiduciary duties in the LLC context. Summary available here.

In Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012), in a 110-page opinion, the Delaware Supreme Court upheld the Court of Chancery’s 100-plus page decision awarding over $2 billion in damages based on a breach of fiduciary duty claim in connection with the sale of a company. Delaware’s High Court also upheld an award of attorneys’ fees in the amount of $300 million. Highlights available here. The trial court decision, styled as In re Southern Peru Copper Corporation Shareholder Derivative Litigation, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011), was highlighted on these pages here and here.

South v. Baker, C.A. No. 7294-VCL (Del. Ch. Sept. 25, 2012). Issues Addressed: This decision is a candidate for inclusion in the pantheon of iconic Delaware Court of Chancery opinions addressing the following issues: (1) When derivative plaintiffs and their counsel will be presumptively found to provide inadequate representation resulting in the complaint’s dismissal with prejudice; (2) When dismissal of one derivative suit will not bar another derivative suit involving the same corporation; (3) When a Caremark claim will be dismissed with prejudice if Section 220 is not used beforehand; and (4) How to successfully allege pre-suit demand futility in connection with making a Caremark claim. Summary available here.

In Re: Encore Energy Partners LP Unitholder Litigation, Cons., C.A. No. 6347-VCP (Del. Ch. Aug. 31, 2012). Issue Presented: Whether the terms of an LP Agreement protected the general partner from claims regarding what would otherwise be a self-interested transaction, without breaching any duty owed to its limited partners? Short Answer: Yes. Summary available here.

Soterion Corp. v. Soteria Mezzanine Corp., C.A. No. 6158-VCN (Del. Ch. Oct. 31, 2012). Why This Case is Noteworthy: This decision addresses for the first time in Delaware the applicable standard to determine when the threat of a lawsuit can be tortious interference with prospective business relationships. This opinion also features the rare instance when attorneys’ fees are assessed based on an exception to the American Rule (as compared with Rule 37 for motions to compel). Summary available here.

Honorable Mention goes to the new Practice Guidelines, discussed below, which the Court of Chancery adopted and which provide comprehensive tips and instructions for both procedural matters and substantive discovery obligations that practitioners must follow if they hope to avoid the wrath of the bench.

We also selected the following additional cases from 2012 that deserve special attention:

Supreme Court Decisions

On December 27, 2012, the Delaware Supreme Court overruled in part and remanded a decision of the Court of Chancery which denied a large investor, BVF Partners L.P. (“BVF”), the right to opt-out of a shareholder class action settlement. In the case of In Re Celera Corp. Shareholder Litigation, No. 212, 2012 (Dec. 27, 2012), the Delaware Supreme Court, en banc, addressed the issue raised on appeal by objector-appellant BVF of the Court of Chancery’s certification of plaintiff/appellee New Orleans Employees’ Retirement System (“NOERS”) as class representative in an action challenging the acquisition of Celera Corporation (“Celera”) by Quest Diagnostics, Inc. (“Quest”). BVF also appealed from the Court of Chancery’s approval of a class action settlement without an opt out right for BVF. This decision is likely to have a significant impact on efforts to bring closure to class action settlements of litigation that involve objectors with substantial holdings. Summary available here.

Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 254, 2012 (Del. Supr., July 12, 2012). Our blurb about the Supreme Court’s Order of May 31, 2012 in this case is available here. Highlights of the 138-page Court of Chancery opinion on these pages is available here. Issue Presented: Whether a violation of a confidentiality agreement can be a basis to preclude a hostile tender offer. Short Answer: Yes. The Delaware Supreme Court affirmed the decision of the Delaware Court of Chancery in this expedited appeal. Summary available here.

EMAK Worldwide, Inc. v. Kurz, No. 512, 2011 (Del. Supr., April 17, 2012). Issue Addressed: Whether the Court of Chancery properly granted an interim fee award in a shareholders’ suit which did not produce an immediate monetary benefit. Short Answer: Yes. Summary available here.Cambium Ltd. v. Trilantic Capital Partners, No. 363, 2011 (Del. Supr., Jan. 20, 2012.) This Order of the Delaware Supreme Court applied the recent decision of Delaware’s High Court in the Central Mortgage case in which it clarified that Delaware has not adopted the federal standard for motions to dismiss under Rule of Civil Procedure 12(b)(6) as described in the U.S. Supreme Court’s Twombly and Iqbal decisions, despite the truism that the Delaware Rules of Civil Procedure are generally based on the Federal Rules of Civil Procedure. Highlights available here. A fuller overview is available here. The recent Delaware Supreme Court decision in Central Mortgage taking this position was highlighted here.
 
Court of Chancery Rulings

Shareholder Litigation

Rich v. Fuqi Int’l, Inc., C.A. No. 5653-VCG (Del. Ch. Nov. 5, 2012). Why this opinion is noteworthy: The Delaware Court of Chancery in this summary proceeding reaffirms in this pithy opinion that the Delaware General Corporation Law’s requirement in Section 211 that a shareholders’ meeting must be held annually, will not be suspended due to arguably conflicting provisions of the federal securities laws. That seems counterintuitive in light of the supremacy clause, but the court explains in a scholarly manner why a corporation will not be relieved of its obligation under DGCL Section 211 simply because of federal securities laws or regulations that may also impose certain prerequisites to holding an annual meeting. Summary available here.

In a transcript ruling in Dent v. Ramtron Int’l Corp., C.A. No. 7950-VCP (Del. Ch., November 19, 2012), the Court denied the plaintiff’s motion for a preliminary injunction to enjoin a shareholder vote on a merger between Ramtron and Cypress Semiconductor Corp. Issue Addressed: Whether the Court should preliminarily enjoin a shareholder vote on a merger on allegations that the company’s proxy statement is false and misleading in that the company failed to provide disclosures of financial projections thereby prohibiting the company’s stockholders from making an informed decision on whether to vote in favor of the merger or seek appraisal. (Transcript rulings are often cited in Delaware briefs as persuasive authority.) Summary available here.

Louisiana Municipal Police Employees’ Retirement System v. Lennar Corp., C.A. No. 7314-VCG (Del. Ch. Oct. 5, 2012). Issue Presented: In this summary proceeding, the Court considered whether newspaper articles announcing a federal investigation of the company, together with prior lawsuits that were settled without an admission of fault, satisfy the requisite threshold of “some evidence” to establish a credible basis of wrongdoing needed to allow a books and records demand under DGCL Section 220 to proceed. Short Answer: Not under the facts of this case. Summary available here.

In re Synthes, Inc. S’holder Litig., C.A. No. 6452-CS (Del. Ch. Aug. 17, 2012). Issue Addressed: Whether the controlling stockholder breached its fiduciary duty by refusing to consider an acquisition offer that would have cashed-out all the minority stockholders of Synthes, Inc., but required the controlling stockholder to remain as an investor in Synthes. Short Answer: No. Summary available here.
 
New Jersey Carpenters Pension Fund v. infoGroup, Inc., C.A. No. 5334-VCN (Del. Ch. Aug. 16, 2012). Issue: Can Plaintiff compel the expert report prepared by the company’s counsel for the board in anticipation of litigation? Short Answer: No, based on the facts of this case. Importantly, the Court of Chancery ruled that Rule 26(b)(3) is the standard that applies to determine if a report for the board must be produced as an exception to the work product doctrine—and not the less strenuous standard for board reports in the context of fiduciary litigation when the attorney-client privilege is at issue, in which case the standard used is often traced to Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). See also, Ryan v. Gifford, 2007 WL 4259557, at *3 n.4 (Del. Ch. Nov. 30, 2007). The Court did not follow the Garner test even though in dictum from a 1993 case the Delaware Supreme Court suggested that the Garner standard would govern the discovery of work product materials. See footnote 17. Summary available here.
 
Keyser v. Curtis, C.A. No. 7109-VCN (Del. Ch. July 31, 2012). Issues Presented: (i) In this summary proceeding, the Court considered whether plaintiffs are entitled to a declaration, pursuant to 8 Del. C. § 225, that they comprise the board of directors of Ark Financial Services, Inc.; (ii) whether one of the signatories to the 2011 Written Consent actually owned the shares he purported to hold; (iii) whether a December 13, 2011 written consent purporting to elect the plaintiffs to the Board was valid; and (iv) whether a December 2010 issuance of Ark super-voting stock to Ark’s then sole Board member was invalid. Short Answers: Yes to (i) though (iv). Summary available here.
 

Gentili v. L.O.M. Med. Int’l, Inc., C.A. No. 7600-VCG (Del. Ch. Aug. 17, 2012). Issue: Whether non-unanimous written consents of shareholders were sufficient to thwart a challenge to the election of directors at an annual meeting? Short answer: No. Summary available here.

In Re: Appraisal of Orchard Enterprises, Inc., C.A. No. 5713-CS (Del. Ch. July 18, 2012). Issue Addressed: In this post-trial decision in an appraisal action arising out of a merger, the Court determined the fair value of the shares, relying on the discounted cash flow method of valuation. Summary available here.

Shocking Technologies, Inc. v. Michael, C. A. No. 7164-VCN (Del. Ch. April 10, 2012). Issue Addressed: Whether the Court of Chancery has the inherent authority to remove a director for breach of fiduciary duty, other than via DGCL Section 225? Short answer: The issue was not directly decided, but based on the facts of this case, the Court was not inclined to exercise such an inherent power, if such a power exists, prior to the expedited trial. Summary available here.

In re Delphi Financial Group Shareholder Litigation, Cons. C.A. No. 7144 -VCG (Del. Ch. Mar. 6, 2012). This is the third Delaware Court of Chancery decision in as many weeks that denied injunctive relief, in an expedited opinion, in response to a challenged transaction–despite criticism in two of the cases, of the process and the players, but ultimately leaving it up to the shareholders to decide whether to accept offers of a substantial premium to sell their shares. Summary available here. See In Re El Paso, summarized here, and In Re Micromet, summarized here.

In Re El Paso Corporation Shareholder Litigation, Consol. C. A. No. 6949-CS (Del. Ch. Feb. 29, 2012). Chancellor Strine denied the stockholder plaintiffs request for a preliminary injunction to enjoin a merger between El Paso Corporation and Kinder Morgan, Inc. While the Court in a 33-page opinion, severely criticized the actions of a number of the players, in the end the Chancellor decided to give the shareholders of El Paso the opportunity to decide for themselves if they liked the price being offered to them. Summary available here. The Court’s opinion in this matter marks the second time in the span of only a few months that the Delaware Court of Chancery has strongly criticized Goldman Sachs for conflict of interest issues in multi-billion dollar transactions. The most recent high-profile criticism was in the Court of Chancery’s 100-plus page decision in the Southern Peru Copper case highlighted on these pages here. Our LexisNexis videocast on this opinion is available here.

Dweck v. Nasser, C. A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), found that Dweck, the former CEO, a director and 30% stockholder in Kids International Corporation (“Kids”), and Kevin Taxin, Kids’ President, breached their fiduciary duties of loyalty to Kids by establishing competing companies that usurped Kids’ corporate opportunities and converted Kids’ resources. The Court also imposed liability on an officer of the company for approving the reimbursement with company funds of the personal expenses of his superior. Summary available here.

Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012). Issue Addressed: This opinion addressed the issue of whether representative plaintiffs in a putative class action should be in sanctioned for trading on the basis of confidential information obtained in the litigation. The motion was granted. Summary available here.

Paul v. China MediaExpress Holding, Inc., C.A. No. 6570-VCP (Del. Ch. Jan. 5, 2012). Issues Addressed: (1) Whether a Section 220 case should be stayed pending the outcome of a related federal securities suit; and (2) Whether the shareholder in this case established a proper purpose to inspect books and records under DGCL Section 220. Short Answer: (1) Based on a three-part test as applied to the facts of this case, the Court refused to stay this action in favor of a pending related federal securities suit, even though a motion to stay was also pending in the federal court. (2) In this post-trial opinion, the Court determined that the shareholder established a proper purpose and was entitled to the documents necessary to investigate that proper purpose. Summary available here.

LLC and Other Alternative Entity Litigation

In Feeley v. NHAOCG, LLC , C.A. No. 7304-VCL (Del. Ch. Nov. 28, 2012)(“Feeley IV“), the Delaware Court of Chancery addressed–for the first time since the recent Delaware Supreme Court decision in Gatz Properties v. Auriga Capital, highlighted on these pages here, the issue of default fiduciary duties in the LLC context. (This is the fourth Chancery ruling that we have posted about in the Feeley case.) Highlights available here.

New Media Holding Co., LLC v. Brown, C.A. No. 7516-CS (Del. Ch. Nov. 14, 2012). Issue addressed: Does Delaware have jurisdiction over the manager of a limited liability partnership (LLP) accused of breach of fiduciary duty claims, based on acts taken in the course of his work for the LLP, absent acts taken in Delaware in furtherance of the alleged wrongdoing? Short answer: No. Summary available here.

Feeley v. NHAOCG, LLC, (“Feeley II”), C.A. No. 7304-VCL (Del. Ch. Oct. 12, 2012). This is the second of four Chancery rulings in this case that we highlighted on these pages in 2012. What this case is about: This Delaware Court of Chancery opinion addresses a dispute regarding management and control of an LLC based on an interpretation of the LLC agreement, and deserves extra attention because it is the first opinion to apply DGCL Section 144 to the LLC context. Summary available here.

Policemen’s Annuity and Benefit Fund of Chicago v. DV Realty Advisors LLC, C.A. No. 7204-VCN (Del. Ch. Aug. 16, 2012). Issue Addressed: How to define “good faith” for purposes of a limited partnership agreement that required a good faith determination for removal of a general partner. Short Answer: The Court compared the common law definitions of good faith in the fiduciary context as compared to contract law, and also referred to the definition in the Uniform Commercial Code. See Slip op. at 33 and 34, and footnote 101. Summary available here.

In Re K-Sea Transportation Partners LP Unitholders Litigation, C.A. No. 6301-VCP (Del. Ch. April 4, 2012). The prior Chancery decision in this case was highlighted on these pages here. Issues Addressed: The issues addressed by the Court of Chancery in this matter were whether the fiduciary duty claims and the contractual claims were barred by the provisions in the limited partnership agreement, including whether a provision in the agreement that established a presumption of good faith barred claims for breach of the implied covenant of good faith and fair dealing. Summary available here.

Matthew v. Laudamiel, C.A. No. 5957-VCN (Del. Ch. Feb. 21, 2012). Apparently no prior Delaware law directly addressed the issue of whether the dissolution and cancellation of an LLC transformed derivative claims into direct claims held proportionately by the members of the LLC. The Court concluded that, after the filing of the certificate of cancellation, such claims must be brought in the name of the LLC by a trustee or a receiver appointed under 6 Del. C. Section 18-805, or directly by the LLC, or derivatively by its members after reviving the LLC by obtaining a revocation of its certificate of cancellation. Summary available here.

Gerber v. Enterprise Products Holdings, LLC, et al., C.A. No. 5989-VCN (Del. Ch., Jan. 6, 2012). Issue Addressed: This decision speaks to the limitations imposed by 6 Del. C. § 17-1101 on Delaware courts to address sanctionable conduct by partners and members of alternate entities that have contracted away their fiduciary duties. Summary available here.

Rulings Regarding Practice, Procedure and Jurisdictional Issues (including attorneys’ fees as exception to the American Rule)

Duff v. Innovative Discovery LLC, C.A. No. 7599-VCP (Del. Ch. Dec. 7, 2012).

Issues Addressed: The Court of Chancery addressed the following issues in this opinion: (1) Whether a forum selection clause providing for “sole” jurisdiction in California courts should be honored when a conflicting forum selection clause in a related agreement provided for jurisdiction in Delaware courts; (2) Whether 6 Del. C. § 18-111 provided a basis for equitable jurisdiction when the agreement that gave the Court of Chancery jurisdiction only provided for money damages; (3) Whether reformation as a remedy will be allowed when the complaint did not specifically request reformation but provided notice of the elements of that form of relief.

Court of Chancery Announces Rule Changes, New Discovery Guidelines

On December 4, 2012, the Court of Chancery announced (here) that it is updating Rules 26, 30, 34 and 45 regarding discovery effective January 1, 2013, “to account for modern discovery demands” regarding electronically stored information (“ESI”) and to “bring the Court’s rules in line with current practice.” The Court also announced that it is expanding its Guidelines for Practitioners, originally released in January 2012, to include guidelines regarding discovery and in particular, ESI (the “Discovery Guidelines”). The Practice Guidelines published by the Court of Chancery are entitled: “Guidelines to Help Lawyers Practicing in the Court of Chancery“. They are a quite formidable 28 pages (after a 3-page index.) Kevin Brady, a member of the Court’s Rules Committee, provided a helpful overview of the 28-page Guidelines on these pages here.

Bessenyei v. Vermillion, Inc., C.A. No. 7572-VCN (Del. Ch. Nov. 16, 2012). Issues Addressed: (1) Whether a notarized signature signed in the absence of a notary results in an invalid verification; and (2) Whether knowingly presenting an improperly notarized verification is a basis to dismiss the complaint under Delaware Court of Chancery Rule 41(b). Short Answers: (1) Yes; and (2) Under the circumstances, dismissal of the complaint is appropriate. Summary available here.

In another Delaware “first in the nation,” Vice Chancellor Laster of the Court of Chancery on October 15, 2012, in EORHB, Inc. v. HOA Holdings LLC (C.A. No. 7409-VCL) ordered the parties to “show cause” why computer assisted review should not be used for discovery of electronically stored information (“ESI”) in that matter. After a hearing on a motion for partial summary judgment and a motion to dismiss a counterclaim, Vice Chancellor Laster, sua sponte, raised the issue of computer assisted review in discovery for the balance of the case, saying: “[t]his seems to me to be an ideal non-expedited case in which the parties would benefit from using predictive coding. I would like you all, if you do not want to use predictive coding, to show cause why this is not a case where predictive coding is the way to go.” Transcript at 66.

Coughlin v. South Canaan Cellular Investments LLC, C.A. No. 7202-VCL (Del. Ch. July 6, 2012). Issue Addressed: Whether bad faith exception to American Rule applied to impose attorneys’ fees for litigation tactics. Short Answer: Yes. Summary available here.

Manning v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an important decision of the Delaware Court of Chancery on legal ethics as applied to non-Delaware attorneys who appear before the Court pro hac vice. Issues Addressed: Whether lack of complete candor to the Court in a Motion for Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or (ii) revoke the admission pro hac vice. The Court also addressed standards (articulated in this context for the first time), of candor and full disclosure, regarding potential conflicts, that those seeking admission pro hac vice must now follow. Summary available here.

Advancement and Indemnification Claims

Feeley v. NHAOCG, LLC, (“Feeley III“), is a transcript ruling in a pending Chancery case involving issues that relate to a contest for control, and which has thus far generated two opinions, highlighted on these pages here and here. A transcript of an oral argument in this case has recently been made available, regarding a claim in the case that, as of the date of this transcript, had not yet been the subject of an opinion by the court, but the transcript at pages 66 to 79, reveals “practice tips” about the mechanics of submitting bills in connection with a claim for advancement of legal fees for applicable officers or managers. ( We have often explained on these pages that transcripts of rulings in the Delaware Court of Chancery are often cited in briefs as valid authority).

Danenberg v. Fitracks, C.A. No. 6454-VCL (Del. Ch. Mar. 5, 2012), addressed important issues of advancement and indemnification and established a protocol for resolving the amount of fees payable pursuant to the grant of advancement rights. Summary available here.

Hermelin v. K-V Pharmaceutical Company, C.A. No. 6936-VCG (Del. Ch., Feb. 7, 2012). Issues Addressed: The Court of Chancery addressed an issue of first impression in Delaware regarding: “what evidence is relevant to an inquiry into whether an indemnitee acted in good faith for the purposes of permissive indemnification” under DGCL §§145(a) and (b). The Court also addressed: (1) Whether the former CEO is entitled to mandatory indemnification as a matter of law; (2) Whether additional discovery is required to determine whether the former CEO acted in good faith (in which case he would be entitled to statutorily permissive indemnification pursuant to his rights under an indemnification agreement.) Summary available here.

Request for Appointment of Receiver

Badii v. Metropolitan Hospice Inc., C.A. No. 6192-VCP (March 12, 2012), involves a post-trial decision on an action under 8 Del. C. § 291 for the appointment of a receiver for an insolvent, closely held corporation, Metropolitan Hospice, Inc. (“MHI”) which owed, among other things, approximately $2 million to the IRS for back taxes, penalties, and interest. Summary available here.

Bonus: Practitioners’ Guide with Practice Tips for non-Delaware Lawyers using “local counsel” in Delaware

Supplement: Professor Bainbridge graciously describes our annual review as a “must read”. The Columbia Law School’s new blog on corporate law, called The CLS Blue Sky Blog, reprinted our annual summary on the first day of the blog’s unveiling.

Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, C.A. No. 5140-CS (Del. Ch. Aug. 7, 2012).  This Court of Chancery decision was the result of remand from a decision of the Delaware Supreme Court which was highlighted on these pages here, and which clarified the standard in Delaware for the review by the Court of a motion to dismiss under Rule 12(b)(6) – which the Delaware Supreme Court made clear is not the same as the standard applied based on federal rule of civil procedure 12(b)(6)–even though the Delaware rules of civil procedure are based on the federal rules.  See Cent. Mort. Co. v. Morgan Stanley Mort. Capital Holdings LLC, 27 A.3d 531, 541 (Del. 2011) [hereinafter Central Mortgage II.]

A key issue in this case dealt with those situations in which a amendment to a complaint will relate back to the original complaint for purposes of a statute of limitations analsyis. After remand, the plaintiffs amended their complaint to add new breach of contract and implied covenant claims.

The Court of Chancery explained that the “law of the case” doctrine, and the Delaware Supreme Court opinion left no room to “re-dismiss” the original theories contained in the original complaint that was the subject of a prior appeal.  However, the Court did grant the motion to dismiss the new claims that were included in an amended complaint after the remand, based on the Delaware statute of limitations.

The following key Delaware corporate and commercial decisions from the first four months of 2012 are a follow-up to our summary of the key decisions that we featured from 2011. We highlight on these pages all the corporate and commercial opinions from Delaware’s Supreme Court and Court of Chancery, and we have chosen the following 2012 rulings as being especially noteworthy, as the month of April comes to a close. Comments are welcome if readers think we missed a decision that should be included in this list.Photo of the Supreme Court Courthouse in Dover
Supreme Court Decisions

EMAK Worldwide, Inc. v. Kurz, No. 512, 2011 (Del. Supr., April 17, 2012).  Issue Addressed: Whether the Court of Chancery properly granted an interim fee award in a shareholders’ suit which did not produce an immediate monetary benefit. Short Answer: Yes. Summary available here.  (The Supreme Court’s stately building in Dover is featured at right.)

Cambium Ltd. v. Trilantic Capital Partners, No. 363, 2011 (Del. Supr., Jan. 20, 2012. This Order of the Delaware Supreme Court applied the recent decision of Delaware’s High Court in the Central Mortgage case in which it clarified that Delaware has not adopted the federal standard for motions to dismiss under Rule of Civil Procedure 12(b)(6) as described in the U.S. Supreme Court’s Twombly and Iqbal decisions, despite the truism that the Delaware Rules of Civil Procedure are generally based on the Federal Rules of Civil Procedure. A fuller overview is available here. The recent Delaware Supreme Court decision in Central Mortgage taking this position was highlighted here.

Court of Chancery Rulings

Shocking Technologies, Inc. v. Michael, C. A. No. 7164-VCN (Del. Ch. April 10, 2012). Issue Addressed: Whether the Court of Chancery has the inherent authority to remove a director for breach of fiduciary duty, other than via DGCL Section 225? Short answer:  The issue was not directly decided, but based on the facts of this case, the Court was not inclined to exercise such an inherent power, if such a power exists, prior to the expedited trial. Summary available here.

In Re K-Sea Transportation Partners LP Unitholders Litigation, C.A. No. 6301-VCP (Del. Ch. April 4, 2012). The prior Chancery decision in this case was highlighted on these pages here. Issues Addressed: The issues addressed by the Court of Chancery in this matter were whether the fiduciary duty claims and the contractual claims were barred by the provisions in the limited partnership agreement, including whether a provision in the agreement that established a presumption of good faith barred claims for breach of the implied covenant of good faith and fair dealing. Summary available here.

Manning v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an important decision of the Delaware Court of Chancery on legal ethics as applied to non-Delaware attorneys who appear before the Court pro hac vice. Issues Addressed: Whether lack of complete candor to the Court in a Motion for Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or (ii) revoke the admission pro hac vice. The Court also addressed standards (articulated in this context for the first time), of candor and full disclosure, regarding potential conflicts, that those seeking admission pro hac vice must now follow. Summary available here.

Badii v. Metropolitan Hospice Inc., C.A. No. 6192-VCP (March 12, 2012), involves a post-trial decision on an action under 8 Del. C. § 291 for the appointment of a receiver for an insolvent, closely held corporation, Metropolitan Hospice, Inc. (“MHI”) which owed, among other things, approximately $2 million to the IRS for back taxes, penalties, and interest. Summary available here.

In re Delphi Financial Group Shareholder Litigation, Cons. C.A. No. 7144 -VCG (Del. Ch. Mar. 6, 2012). This is the third Delaware Court of Chancery decision in as many weeks that denied injunctive relief, in an expedited opinion, in response to a challenged transaction–despite criticism in two of the cases, of the process and the players, but ultimately leaving it up to the shareholders to decide whether to accept offers of a substantial premium to sell their shares. Summary available here. See In Re El Paso, summarized here, and In Re Micromet, summarized here.

In Re El Paso Corporation Shareholder Litigation, Consol. C. A. No. 6949-CS (Del. Ch. Feb. 29, 2012). Chancellor Strine denied the stockholder plaintiffs request for a preliminary injunction to enjoin a merger between El Paso Corporation and Kinder Morgan, Inc. While the Court in a 33-page opinion, severely criticized the actions of a number of the players, in the end the Chancellor decided to give the shareholders of El Paso the opportunity to decide for themselves if they liked the price being offered to them. Summary available here. The Court’s opinion in this matter marks the second time in the span of only a few months that the Delaware Court of Chancery has strongly criticized Goldman Sachs for conflict of interest issues in multi-billion dollar transactions. The most recent high-profile criticism was in the Court of Chancery’s 100-plus page decision in the Southern Peru Copper case highlighted on these pages here. Our LexisNexis videocast on this opinion is available here.

Danenberg v. Fitracks, C.A. No. 6454-VCL (Del. Ch. Mar. 5, 2012), addressed important issues of advancement and indemnification and established a protocol for resolving the amount of fees payable pursuant to the grant of advancement rights. Summary available here.

Matthew v. Laudamiel, C.A. No. 5957-VCN (Del. Ch. Feb. 21, 2012). Apparently no prior Delaware law directly addressed the issue of whether the dissolution and cancellation of an LLC transformed derivative claims into direct claims held proportionately by the members of the LLC. The Court concluded that, after the filing of the certificate of cancellation, such claims must be brought in the name of the LLC by a trustee or a receiver appointed under 6 Del. C. Section 18-805, or directly by the LLC, or derivatively by its members after reviving the LLC by obtaining a revocation of its certificate of cancellation. Summary available here.

Hermelin v. K-V Pharmaceutical Company, C.A. No. 6936-VCG (Del. Ch., Feb. 7, 2012). Issues Addressed: The Court of Chancery addressed an issue of first impression in Delaware regarding: “what evidence is relevant to an inquiry into whether an indemnitee acted in good faith for the purposes of permissive indemnification” under DGCL §§145(a) and (b). The Court also addressed: (1) Whether the former CEO is entitled to mandatory indemnification as a matter of law; (2) Whether additional discovery is required to determine whether the former CEO acted in good faith (in which case he would be entitled to statutorily permissive indemnification pursuant to his rights under an indemnification agreement.) Summary available here.

Auriga Capital Corp. v. Gatz Properties LLC, C.A. No. 4390-CS (Del. Ch., Jan. 27, 2012). What this Case is About and Why it is Important: This case establishes a high-water mark in terms of providing the most comprehensive explanation, based on legislative history and a review of Delaware cases, to explain why the default standard in the LLC context is that fiduciary duty principles will apply to managers of an LLC unless those duties are expressly and clearly limited or eliminated in an LLC agreement. Summary available here.

Dweck v. Nasser, C. A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), found that Dweck, the former CEO, a director and 30% stockholder in Kids International Corporation (“Kids”), and Kevin Taxin, Kids’ President, breached their fiduciary duties of loyalty to Kids by establishing competing companies that usurped Kids’ corporate opportunities and converted Kids’ resources. The Court also imposed liability on an officer of the company for approving the reimbursement with company funds of the personal expenses of his superior. Summary available here.

Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012). Issue Addressed: This opinion addressed the issue of whether representative plaintiffs in a putative class action should be in sanctioned for trading on the basis of confidential information obtained in the litigation. The motion was granted. Summary available here.

Gerber v. Enterprise Products Holdings, LLC, et al., C.A. No. 5989-VCN (Del. Ch., Jan. 6, 2012). Issue Addressed: This decision speaks to the limitations imposed by 6 Del. C. § 17-1101 on Delaware courts to address sanctionable conduct by partners and members of alternate entities that have contracted away their fiduciary duties. Summary available here.

Paul v. China MediaExpress Holding, Inc., C.A. No. 6570-VCP (Del. Ch. Jan. 5, 2012). Issues Addressed: (1) Whether a Section 220 case should be stayed pending the outcome of a related federal securities suit; and (2) Whether the shareholder in this case established a proper purpose to inspect books and records under DGCL Section 220. Short Answer: (1) Based on a three-part test as applied to the facts of this case, the Court refused to stay this action in favor of a pending related federal securities suit, even though a motion to stay was also pending in the federal court. (2) In this post-trial opinion, the Court determined that the shareholder established a proper purpose and was entitled to the documents necessary to investigate that proper purpose. Summary available here.

Bonus

An important development during the first 4 months of 2012 was the promulgation by the Court of Chancery of its inaugural Practice Guidelines, highlighted here.

Supplement

The Delaware State Bar Association’s annual seminar on Developments in Corporate and Alternative Entity Law will be presented in Wilmington on May 22 as described in more detail on these pages here.

Postscript: Professor Bainbridge kindly linked to this post on his blog.

Cambium Ltd. v. Trilantic Capital Partners, No. 363, 2011 (Del. Supr, Jan. 20, 2012), read Order here.

This Order of the Delaware Supreme Court applied the recent decision of Delaware’s High Court in the Central Mortgage case in which it clarified that Delaware has not adopted the federal standard for motions to dismiss under Rule of Civil Procedure 12(b)(6) as described in the U.S. Supreme Court’s Twombly and Iqbal decisions, despite the truism that the Delaware Rules of Civil Procedure are generally based on the Federal Rules of Civil Procedure. The recent Delaware Supreme Court decision in Central Mortgage taking this position was highlighted here.  The foregoing summary also includes links to other commentary on this blog about this issue.

The recent Court of Chancery decision in the Winshall case responded to the clarification in the Central Mortgage case, especially in an expansive footnote 23, as noted here.  The Delaware Supreme Court in its Order described the Delaware standard for a motion to dismiss under Rule 12(b)(6) as:

 … a “minimal” one. In Central Mortgage, comparing Delaware’s “conceivability” standard to the federal  “plausibility” standard, this Court explained that the former “is more akin to possibility while the federal plausibility standard falls somewhere beyond mere possibility but short of probability.”

Noteworthy 2011 Corporate and Commercial Decisions from Delaware’s Supreme Court and Court of Chancery.

By:  Francis G.X. Pileggi and Kevin F. Brady.

Introduction

This is the seventh year that we are providing an annual review of key Delaware corporate and commercial decisions. During 2011, we reviewed and summarized approximately 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues.  Among the decisions with the most far-reaching application and importance during 2011 include those that we are highlighting in this short overview.  We are providing links to the more complete blog summaries, and the actual court rulings, for each of the cases that we highlight below. Prior annual summaries are linked in the right margin of this blog.

Top Five Cases from 2011

We begin with the Top Five Cases on corporate and commercial law from Delaware for 2011 and we are glad to see that at least four of them have some support from the bench as these were the cases that four Vice Chancellors highlighted as important decisions in a recent panel presentation that they offered in New York City in early November 2011.  Those cases were the following:  In Re: OPENLANE Shareholders Litigation; In Re: Smurfit Stone Container Corp. Shareholder Litigation; In Re: Southern Peru Copper Corp. Shareholder Litigation and Air Products and Chemicals, Inc. v. Airgas Inc., and Kahn v. Kolberg Kravis Roberts & Co., L.P.

In Re: OPENLANE Shareholders Litigation. In what many commentators referred to as a “sign and consent” transaction, in which the majority shareholders and the board of directors had sufficient control to provide the statutorily required consent, the Court of Chancery determined that the Revlon standard was satisfied and fiduciary duties were not breached notwithstanding the Omnicare case and even without customary safeguards such as a fairness opinion. See fuller summary here.

 In Re: Smurfit Stone Container Corp. Shareholder Litigation. The Court of Chancery denied a motion for preliminary injunction and determined that the Revlon standard applied to a merger for which the consideration was split roughly evenly between cash and stock. See fuller summary here.

In Re: Southern Peru Copper Corp. Shareholder Litigation. In what may be the largest award granted in the Court of Chancery’s venerable history, a judgment was entered for $1.2 billion (later amended to $1.3 billion) for breach of fiduciary duties in connection with an interested transaction. With interest, the total is expected to be $2 billion.  The Court later awarded attorneys’ fees of 15% which amounts to $300 million, in this derivative action. See fuller summary here.

Air Products and Chemicals, Inc. v. Airgas Inc. This magnum opus of over 150-pages in length will be the focus of scholarly analysis for many years to come. For purposes of this short blurb, it ended a year-long takeover battle between two determined companies, with the Court of Chancery ruling, among other things, that the target company was not required to pull its poison pill when the board determined that the offer for the company was too low. See fuller summary here.

Kahn v. Kolberg Kravis Roberts & Co., L.P.  This Delaware Supreme Court decision reversed and remanded an opinion by the Court of Chancery interpreting “a Brophy claim as explained in Pfeiffer.”  The issue before the Court was whether a stockholder had to show that the company had suffered actual harm before  bringing  a breach of loyalty claim that a fiduciary improperly used the company’s material, non-public information (a Brophy claim).  The Supreme Court rejected that part of the Chancery’s decision in Pfeiffer v. Toll which requires a showing of actual harm to the company.  See fuller summary here.

We also selected the following additional noteworthy cases:

Shareholder Litigation

In Re: John Q. Hammons Hotels, Inc. Shareholder Litigation.  Despite the application of the entire fairness standard, the Court concluded that the merger price was entirely fair, the process leading to the transaction was fair, that there was no breach of fiduciary duty, and therefore no claims for aiding and abetting fiduciary duty.  See fuller summary here.

Reis v. Hazelett Strip-Casting Corp.  The Court applied an entire fairness analysis and held that the attempt to cash out minority shareholders via a reverse split was neither the result of a fair process nor did it involve a fair price.  See fuller summary here.

In re: Del Monte Foods Co. Shareholders Litigation. This first of three rulings enjoined a shareholder vote on a premium LBO transaction and the buyers’ deal protection devices.  The Court also held that the advice that the target board received from a financial advisor (who also did work on the deal for the bidder) was so conflicted as to give rise to a likelihood of a breach of fiduciary duty and the Court indicated that the financial advisory firm could face monetary damages due to aiding and abetting the potential breach.  See fuller summary here.

In re: Massey Energy Company Derivative and Class Action Litigation.  The Court declined to enjoin a proposed merger.  The Court noted that the derivative claims that the plaintiffs argued were not being fairly valued as part of the merger, would become assets of the surviving corporation.  The Court reasoned in part that the shareholders should decide for themselves whether to exchange their status as Massey stockholders for a chance to receive value from a third party in an arms-length merger.  See fuller summary here.

Frank v. Elgamal.  This decision exemplifies the different approach taken by different members of the Court in connection with an application for interim fees in a class action.  (Compare the different approach in the Del Monte case.)  See fuller summary here.

Krieger v. Wesco Financial Corp.  This decision determined that holders of common stock were not entitled to appraisal rights under Section 262 when they had the option of electing to receive consideration in the form of publicly traded shares of the acquiring company.  See fuller summary here.

In re: The Goldman Sachs Group, Inc. Shareholder Litigation.  In this first corporate opinion by Vice Chancellor Glasscock, the Court dismissed a derivative action brought against Goldman’s current and former directors based on a failure to make a pre-suit demand.  At issue was Goldman’s allegedly excessive compensation structure.  See fuller summary here.

Contested Director Elections

Genger v. TR Investors, LLC.  In this opinion, the Delaware Supreme Court addresses electronic discovery issues and contested elections for directors involving DGCL Section 225. See fuller summary here.

Johnston v. Pedersen.  This opinion determined that directors breached their fiduciary duties when issuing additional stock and as a result were not entitled to vote in connection with the removal of the incumbent board and the election of the new directors.  See fuller summary here.

Section 220 Cases

King v. VeriFone Holdings, Inc. This Delaware Supreme Court ruling reversed a Chancery decision that found a lack of proper purpose in a suit by a shareholder seeking books and records pursuant to Section 220.  Delaware’s High Court explained that it remains preferable to file Section 220 suits for books and records prior to filing a derivative suit, but holding that such a chronology is not, per se, a fatal flaw in a Section 220 action.  See fuller summary here.

Espinoza v. Hewlett Packard Co. This affirmance of Chancery’s denial of a §220 claim was based on the requested report to the board being protected by the attorney/client privilege.  (This is one of several decisions in this matter.) See fuller summary here.

Graulich v. Dell., Inc.  This is a Section 220 case in which Chancery denied a request for books and records due to the underlying claims being barred by a previous release and due to the shareholder not owning the shares during the period of time for which he was requesting documents.  See fuller summary here.

Alternative Entity Cases

CML V, LLC v. Bax.  This Delaware Supreme Court decision determined that creditors of an insolvent LLC are not given standing by the Delaware LLC Act to pursue derivative claims unlike the analogous situation in the corporate context.  See fuller summary here.

Sanders v. Ohmite Holding, LLC.  This decision clarified the rights of a member of an LLC that demanded books and records of an LLC.  The Court determined that pursuant to Section 18-305 of the Delaware LLC Act a member may seek records for a period prior to becoming a member of the LLC.  See fuller summary here.

Achaian, Inc. v. Leemon Family LLC.  This opinion addressed the transferability of interests of a member of an LLC and specifically whether one member of a Delaware LLC may assign its entire membership interests, including voting rights, to another existing member, notwithstanding the provision in an agreement that requires the consent of all members upon the admission of a new member.  See fuller summary here.

Jurisdictional or Procedural Issues

Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC.  In this decision, a Delaware Supreme Court determined that Delaware would not follow the standards for a motion to dismiss under Rule 12(b)(6) announced by the U.S. Supreme Court in the Twombly or Iqbal opinions.  See fuller summary here.

Hamilton Partners, LP v. Englard.  This decision addressed the issue of personal jurisdiction over directors and interlocking entities, as well as demand futility in the context of a double derivative shareholders suit.  (Although this was decided at the end of 2010, it was important enough to include in this list as it was issued after our deadline for our compilation last year). See fuller summary here.

Encite LLC v. Soni.  This decision rejected a request for an extension of a deadline for submitting expert reports because the Court did not approve an amendment to the Scheduling Order.  See fuller summary here.

Whittington v. Dragon Group.  In this latest iteration of multiple decisions in this long-running saga, the Court examines the doctrine of claim preclusion, issue preclusion and judicial estoppel.  See fuller summary here.

In re: K-Sea Transportation Partners, L.P. Unitholders Litigation.  This decision provides a useful recitation of the standard used in Chancery for deciding whether to grant a motion to expedite proceedings, and it also reviews language in a limited partnership agreement which arguably was an effective waiver of traditional fiduciary duties as allowed by the LP statute.  See fuller summary here.

Sagarra Inversiones, S.L. v. Cemento Portland Valderrivas, S.A.  This ruling determined that the standard of “irreparable harm” granting injunctive relief was not satisfied based on the financial condition of the defendant which was “not poor enough” to convince the Court that a money judgment would not make the plaintiff whole.  (This is one of several decisions in this matter.) See fuller summary here.

ASDC Holdings LLC v. The Richard J. Malauf 2008 All Smiles Grantor Retained Annuity Trust.  This decision discussed the enforceability of forum selection clauses and in particular when those clauses will be enforced despite a related case being filed first in another forum.  See fuller summary here.

Gerber v. ECE Holdings LLC.  This decision discusses the difference between a motion to supplement and a motion to amend a complaint.  See fuller summary here.

Advancement

Fuhlendorf v. Isilon Systems, Inc.  This decision addresses the advancement of fees incurred by officers and directors sued in connection with their corporate roles.  The specific issue in this case was whether the corporation should pay for all of the costs of a Special Master appointed to review the interim application for fees.  The case also discusses the common procedure employed to review disputed monthly legal bills in advancement cases.  See fuller summary here.

Receiver or Dissolution

Pope Investments LLC v. Benda Pharmaceutical Inc.  This decision rejected the application for the appointment of a receiver on the grounds that while the plaintiff demonstrated that the defendant was insolvent, the plaintiff failed to show that “special circumstances existed which would warrant the appointment of a receiver.”  See fuller summary here.

Stephen Mizel Roth IRA v. Laurus U.S. Fund, L.P.  This decision rejected a request to dissolve a limited partnership and refused to appoint a receiver in the context of an investment fund that was in liquidation mode but was not dissolved, nor was it winding-up as that term is used in the statute.  See fuller summary here.

Legal Ethics

BAE Systems Information and Electronics Systems Integration, Inc. v. Lockheed Martin Corp.  This opinion addresses Delaware Lawyers’ Rule of Professional Conduct 3.4(b) and discusses those situations in which a fact witness may be compensated for the “lost time” away from his “day job” suffered while testifying.  See fuller summary here.

Judy v. Preferred Communications Systems, Inc.  This decision addresses the issue of legal ethics involved in determining whether an attorney may assert a retaining lien over the documents of a former or delinquent client.   See fuller summary here.

Common Law v. Statutory Claims

Overdrive, Inc. v. Baker & Taylor, Inc.  In this last formal decision  by Chancellor Chandler, the Court discussed how the Delaware Uniform Trade Secrets Act displaces conflicting tort and other common law claims that are grounded in the same facts which would support the statutory misappropriation of trade secret claims.  See fuller summary here.

Damages for Breach of Agreement to Negotiate in Good Faith

PharmAthene, Inc. v. SIGA Technologies, Inc. This Court of Chancery decision awarded damages for breach of a contractual obligation to negotiate in good faith and fashioned an equitable remedy that required the sharing of profits from the production of a product that the defendant failed to negotiate the license of in good faith. There are several decisions involving contract law by the Court of Chancery in this matter, the most recent ruling denying a motion for reargument. See fuller summary of the most recent decision here.

Postscript

On a final note, the last week of 2011 saw the sudden and sad passing of one of the nation’s foremost experts on alternative entities, Professor Larry Ribstein, who was often cited in opinions of the Delaware Courts. He coined the word “uncorporations” to refer to alternative entities and was the author of many treatises, law review articles and other publications on uncorporations, jurisdictional competition, the business of law firms and related topics involving the intersections of law and business. He was an iconic figure in the law, and the legal profession is better because of his many contributions.

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UPDATE: The Harvard Law School Corporate Governance Blog published this post here. The NACD’s Directorship.com site kindly published this article as a lead story on Jan. 5, 2012, available here. Professor Stephen Bainbridge graciously commented on this summary in his post available here. Professor Joshua Fershee on the Business Law Prof  Blog linked to this summary with kind references here.

In Winshall v. Viacom Int’l., C. A. No. 6074-CS (Del. Ch., Nov. 10, 2011), read opinion here, the Delaware Court of Chancery granted a motion to dismiss a claim for breach of the implied covenant of good faith and fair dealing in a dispute over post-merger earn-out payments. What is also of note for practitioners is that the Chancellor provided some very interesting commentary about the pleading standard for Rule 12(b)(6) motions and the Delaware Supreme Court’s recent decision in Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A. 3d 531, 536 (Del. 2011), a decision that was highlighted on these pages (along with several links to related commentary on this pleading issue), here. See footnote 23 starting on page 10 of the opinion (linked above). Stay tuned for more commentary on this pleading issue in future posts on this blog.

Kevin F. Brady of Connolly Bove Lodge & Hutz LLP provided this summary.

In 2006, Viacom International, Inc., acquired Harmonix Music Systems, Inc., a company best known for creating the music-oriented video games Rock Band and Guitar Hero, through an agreement between Viacom, Harmonix and the selling stockholders of Harmonix (the “Selling Stockholders”), which included the plaintiff, Walter A. Winshall. Viacom promised the Selling Stockholders an up-front payment of $175 million for their shares, as well as the contingent right to receive uncapped earn-out payments based on Harmonix’s financial performance in 2007 and 2008. The merger agreement did not contain any provision governing the operation of Harmonix during the earn-out period, nor did it contain any efforts clause related to the earn-out payments.

In March, 2007, Harmonix entered into a three-year agreement with Electronic Arts, Inc. for the distribution Rock Band wherein Harmonix agreed to pay sales and other fees to EA for the distribution of Rock Band and if EA met a specified “sequel threshold” by earning a certain amount of revenues, it would receive the right to distribute sequels to Rock Band. Rock Band had a very successful launch in November, 2007, so that made it possible for Viacom and Harmonix to renegotiate the terms of the original EA agreement in 2008. The amended EA Agreement broadened and clarified the scope of Rock Band products to which EA had distribution rights — Rock Band 2 (which was released in 2008) and The Beatles: Rock Band (which was under development by Harmonix at the time).

Winshall filed suit alleging, among other things, that Viacom and Harmonix breached their implied covenant of good faith and fair dealing under the Merger Agreement because when they were given the opportunity to renegotiate the EA Agreement, Viacom and Harmonix were obligated to use that opportunity to lower the distribution fees paid to EA in 2008 and, thus, increase the 2008 earn-out payment to the Selling Stockholders.

Under Delaware law, the implied covenant of good faith and fair dealing:

is not a license to rewrite contractual language just because the plaintiff failed to negotiate for protections that, in hindsight, would have made the contract a better deal. Rather, a party may only invoke the protections of the covenant when it is clear from the underlying contract that “the contracting parties would have agreed to proscribe the act later complained of . . . had they thought to negotiate with respect to that matter.

Winshall argued that, because Viacom and Harmonix had the opportunity to increase the amount of the 2008 earn-out payment, Viacom and Harmonix had an implied obligation under the merger agreement to take that opportunity. The Court disagreed finding that Winshall failed to allege facts that supported a reasonable inference that the Selling Stockholders did not get the benefit of their bargain under the merger agreement. The Court also found that Viacom and Harmonix did not impair the Selling Stockholders rights under the merger agreement. Although Viacom and Harmonix did not accept a reduction in 2008 distribution fees, neither did they take action to increase the 2008 fees beyond what was expected under the original EA agreement. Moreover, the Court found that “it was not conceivable that the benefits conferred on Viacom and Harmonix by the renegotiation were offered in exchange for product sales in which the Selling Stockholders had a valid expectancy interest – i.e., sales during 2008.”

Finally, the Court noted that “when a contract confers discretion on one party, the implied covenant of good faith and fair dealing requires that the discretion – such as Viacom’s discretion in controlling Harmonix after the Merger and during the earn-out period – be used reasonably and in good faith… and a party does not act in bad faith by relying on contract provisions for which that party bargained where doing so simply limits advantages to another party.”

BONUS SUPPLEMENT: Professor Stephen Bainbridge provides scholarly insights on this case here.

The recent decision in the case of In re Aspartame Antitrust Litigation from the U.S. District Court for the Eastern District of Pennsylvania, No. 2:06-cv-01732-LDD (E.D. Pa. Oct. 5, 2011), read Order here, awarding more than $500,000 for the costs of e-discovery to the prevailing parties in an antitrust litigation matter, should be in the back pocket of every litigator.

A former associate of Eckert Seamans prepared this summary.

Businesses’ increased dependence on technology has caused the costs associated with litigation to rise—primarily the costs of e-discovery: gathering, searching and producing documents in response to discovery requests. In complex cases, the anticipated cost of discovery directly affects litigation and settlement strategy. Slowly, courts are trending toward allowing prevailing litigants to shift the costs of e-discovery under Federal Rule of Civil Procedure 54(d). The Aspartame decision is one of the first decisions providing exhaustive detail on the topic, from the factors the court will consider in deciding whether to shift costs, to explaining which costs are taxable to the non-prevailing party (and why).

Background

Following the court’s dismissal of plaintiff’s Sherman Antitrust Act price-fixing claims against multiple manufacturers of aspartame-based sweeteners, the defendants (the prevailing parties) applied for costs under Rule 54(d). The Clerk of Court considered the defendants’ application and found a heavy presumption in favor of imposing the costs of discovery on the plaintiffs. The Clerk placed the burden to show that costs should not be taxed on the plaintiffs. The District Court reviewed the Clerk’s decision de novo, and largely affirmed, but excepted some costs from being taxed against the plaintiffs.

Legal Analysis

E-Discovery. The Court provided a thorough analysis of case law on the issue of taxing e-discovery, observing that it “is a new area of law where courts have diverged in their approaches.” Several factors played into the Court’s analysis, including the volume of discovery requested and produced; the complexity of the litigation; the e-discovery methods utilized by the defendants; which parties benefitted from those methods; the “necessity” of the e-discovery methods; whether the costs were those typically incurred lawyers or non-lawyers; and the adequacy of documentation submitted to support the defendants’ bill of costs.

The court taxed the following costs to the plaintiffs, citing Rule 54(d)(1) and 28 U.S.C. § 1920, and noting the “staggering” amount of discovery involved in the case:

Creating a litigation database;
Storing data;
Imaging hard drives;
Deduplicating data;
Hosting electronic data;
Conducting keyword and privilege searches;
Making documents searchable using Optical Character Recognition (OCR) software;
Capturing metadata;
Creating “load” files (requested by the plaintiffs);
Creating CDs and DVDs of the electronic documents;
Data recovery and restoration; and
Technical support.

The Court did not tax the plaintiffs with the costs of “the sophisticated e-discovery program Attenex Document Mapper” and related applications, because they were not “necessary” for searching and filtering purposes, and were mainly used for the convenience of counsel. Costs for Bates-labeling documents were similarly not recoverable by the defendants.

Depositions and Document Reproduction. Again citing 28 U.S.C. § 1920, the Court permitted the taxation of costs for either deposition transcripts or videotapes, but not both. The Court focused on whether the videotaped deposition (which was more expensive than the transcript) appeared to be “reasonably necessary” to the defendants at the time of the deposition. Neither did the Court permit the defendants to recover the shipping and handling costs of the deposition transcripts and videotapes. The defendants were, however, permitted to recover costs for the copying of exhibits used at the depositions.
The Court refused to allow the defendants to recover costs that were not sufficiently itemized, specifically those billed for photocopying and scanning documents, and amounts for “hard drives.”

Conclusion

Litigators must keep detailed records and receipts for all costs associated with e-discovery. In re Aspartame also serves as a warning: seeking exhaustive discovery can be a double-edged sword. Attorneys should confer to properly tailor e-discovery stipulations and orders to avoid unnecessary costs. And most importantly, broad discovery requests should be avoided at all costs (pun intended).

Impact on Delaware

In Delaware, costs are not taxed as freely. Chancery Court Rule 54(d) typically allows a prevailing party to recover “court costs,” which includes filing fees and amounts paid to secure a bond. See Wolfe & Pittenger § 13.02[b]. The Court also has authority under 10 Del. C. § 8906 to tax expert witness fees. Contrary to the ruling in In re Aspartame, the Court of Chancery generally does not permit the taxing of costs incurred for (i) photocopying; (ii) travel; (iii) mail/courier services; (iv) computerized legal research; and (v) transcripts. See Wolfe & Pittenger § 13.02[b].

We do not yet know how much (or whether) In re Aspartame will impact the taxing of costs for prevailing parties in Delaware courts. But Delaware does recognize that the Delaware Rules of Civil Procedure are based on the federal rules, and the Delaware Supreme Court has looked to cases that construe Federal Rule 54(d) as persuasive authority. See Dubroff v. Wren Holdings, LLC, 2011 Del. Ch. LEXIS 164, * 49 (Del. Ch. Oct. 28, 2011). But compare: Recent Delaware Supreme Court decision refusing to apply the U.S. Supreme Court’s interpretation of Rule 12(b)(6) to interpret the Delaware version of the rule), highlighted here.

QVT Fund LP v. Eurohypo Capital Funding LLC, C.A. No. 5881-VCP (Del. Ch. July 8, 2011), read opinion here.

Issues Addressed:  Whether a first-filed lawsuit in German courts would be a sufficient basis to dismiss a Delaware proceeding under either the first-filed rule or  forum non conveniens principles in light of key witnesses being located in Germany and at least some issues being governed by German law.

The Short Answer:  No.

Brief Background

This case was brought against a German bank and its two Delaware subsidiaries.  The bank is the controlling member of both LLCs that were formed in Delaware.  The amended complaint claims breach of contract, breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing, as well as a declaratory judgment under 10 Del. C. Section 6501.

Procedural Posture

The Court applied standard announced in the United States Supreme Court decision in Bell Atlantic v. Twombly, 550 U.S. 544, 555-56 (2007), to this motion to dismiss under Rule 12(b)(6).  As noted previously on this blog, e.g., here, the Delaware Court of Chancery has previously applied the federal standard for motions to dismiss but this and other decisions make it clear that the federal standard governs motions to dismiss under Delaware state law. 

The Court also referred to the familiar rule that if a Court considers matters beyond the complaint in a motion to dismiss, the motion will be treated as one for summary judgment under Rule 56 and the Court must give the parties a reasonable opportunity to take discovery and present all material relevant to the summary judgment motion.  See footnotes 15 through 19 and accompanying text.  However, the Court noted exceptions where the Court may consider documents such as SEC filings which are beyond the complaint but which will not convert a motion to dismiss into one for summary judgment.

Short Overview of Key Rulings

The Court discussed the internal affairs doctrine (“IAD”) and its application to the facts of this case to determine whether certain issues would be governed by Delaware law or German law.  Although the Court found that to a limited extent German law would apply, the Court explained in detail why the primary issues would be governed by Delaware law pursuant to the IAD.

This is also one of the relatively rare decisions which denied a motion to dismiss a claim based on the implied covenant of good faith and fair dealing–and even the Court recognized that such claims are “rarely invoked successfully . . ..”  See footnote 68.

The Court also explains the first-filed rule, otherwise known as the McWane doctrine, based on the Delaware Supreme Court decision in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281, 283 (Del. 1970).  The Court explained that the central questions before the Court require the application of Delaware law and are different from those issues to be decided in the earlier-filed German litigation and thus this case should not be stayed.  The Court also reasoned that the claims in the Delaware action were not substantially or functionally identical to the claims in the German litigation.

The Court also explained why it rejected an argument to dismiss based on forum non conveniens.  In addition to the several factors typically applied, the Court explained that “most corporate litigation in the Court of Chancery involves companies and documents located outside Delaware, and this mere inconvenience, without more, does not warrant a stay or dismissal.”  See footnote 85.