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

 In the Matter of the Philadelphia Stock Exchange, Inc., (Del. Supr., March 27, 2008), read opinion here, the Delaware Supreme Court (two days ago) affirmed the Chancery Court's decision to both approve the class action settlement in the case as well as upholding the trial court's bifurcation of the settlement proceedings to address an objector's argument that the settlement proceeds were not fairly distributed among the class members. In its 44-page opinion, the Supreme Court addresses the long list of substantive and procedural objections to the settlement. Some of the objections, which the court refers to as "multitudinous" and a "plethora", were waived for not having been fairly presented to the Chancery Court, and others were rejected after careful analysis and reference, for example, to Delaware and federal cases that have allowed bifurcation to consider a settlement as a whole, and a separate proceeding to address allocation among class members. Prior Chancery Court decisions in this case were summarized here and here. One of the prior Chancery decisions in this case was cited in a recent ethics article, here, that  I published about the attorney/client relationship among class members and their lawyers.

UPDATE: For those interested in what the entrance to the Delaware Supreme Court Building in Dover looks like, below is a photo of it that I obtained free from the Internet via flickr and the Creative Commons license, by someone who is identified only as katicabogar.

• Print
• Comments
• Trackbacks

In Reddy v. MKBS Company Limited, (Del. Supr., March 3, 2008), read opinion here, the Delaware Supreme Court  (yesterday) affirmed a Chancery Court decision, summarized here,  finding that an attempt to "cancel" shares, whether via the certificates representing those shares or the shares themselves, did not comply with statutory and related requirements. Both courts also addressed the difference between "void" and "voidable" stock.  The money quote follows:

The cancellation of those shares could only be accomplished by complying with the procedure mandated by 8 Del. C. § 242—a written charter amendment, authorized by the board of directors, approved by the shareholders, and filed with the Delaware Secretary of State. Reddy concedes that those requirements are applicable to cancellations of stock, and that no charter amendment for either MKBS company was ever effected.

• Print
• Comments
• Trackbacks

In Schoon v. Smith, (Del. Supr., Feb. 12, 2008), read opinion here, the Delaware Supreme Court ruled yesterday that a director qua director may not sue fellow directors of a corporation derivatively. This may sound esoteric for some, but any time the Delaware Supreme Court decides an issue that relates to the duties and/or rights of directors of a Delaware corporation, most serious students of corporate law and Delaware litigation pull up their socks and pay attention. Three prior decisions by the Chancery Court regarding litigation between (at least some of) the parties in this case were summarized here, here and here. 

 Fortunately for me, we have the benefit of a prompt and insightful comment on the case here, that comes to us courtesy of Steven M. Haas of Hunton and Williams LLP via the Harvard Corporate Governance Law Blog.

Does a Director Qua Director Have Standing to Sue Derivatively? No, so said the Delaware Supreme Court yesterday in Schoon v. Smith. The Supreme Court affirmed the Court of Chancery’s little-noticed ruling last year that dismissed a derivative claim brought by a director against the company’s other directors, including its controlling stockholder. The plaintiff-director, who was not a stockholder of the company, charged his fellow directors with, among other things, breach of fiduciary duty and unjust enrichment. The court held that, notwithstanding the equitable origins of derivative suits, the issue of director standing today is best left to the legislature. “Although the Delaware General Assembly has the prerogative to confer standing upon directors by statute,” the court wrote, “it has not chosen to do so.” Rejecting the American Law Institute Principles that give individual directors standing to sue on behalf of their corporations, the court continued that, “[b]ecause a stockholder derivative action is available to redress any breach of fiduciary duty, we decline to extend the doctrine of equitable standing to allow a director to bring a similar action.” The court concluded, however, by leaving itself a little room to permit directors to bring derivative suits, but only where the failure to do so would result in a “complete failure of justice”—a seemingly high standard.

As a practical matter, the decision is unlikely to have much significance because most directors are also stockholders. But the decision is still significant and may draw criticism with respect to its implications for corporate governance and director duties. In particular, the court noted that the concept of being an “independent director” does not mandate “a duty to sue on behalf of the corporation.”

UPDATE: Here is a post on the case by Professor Bainbridge who was kind enough to link to this post but more importantly he provides a prescient excerpt from his treatise on Corporation Law and Economics that addresses the same issue decided by the court in this opinion.

 

• Print
• Comments
• Trackbacks (1)

  As I have done for opinions issued in 2005 and 2006, I have prepared a review here of key corporate and commercial decisions from the Delaware Chancery Court and Delaware Supreme Court during the year 2007. See my two prior yearly summaries here. The summary was prepared as an article that was published in the Jan. 16, 2008 edition of The Delaware Law Weekly . There is a necessary subjectivity in the cases that I selected from among the 200 or so that I summarized on these pages during 2007. It is not uncommon for the  courts' decisions to be 50 to 60 (or more) pages each, and many of the opinions could easily be (and have been) the subject of separate articles in their own right. Thus, in order to cover 20 or 30 noteworthy cases in a short article, one is limited to mostly identifying the issues raised in the decisions so that an interested reader will be directed to the full opinion. (Most of the decisions are noteworthy, but it would not be practical to include them all in a short overview. Remember, they are all still available on this blog.)  I also did not spend much time on some of the more well-known cases that have already received widespread attention.

The second link above will lead you to the 2005 overview that appeared in the publication called The Delaware Corporate Litigation Reporter, as well as the 2006 review that appeared in a Bloomberg publication called the Corporate Law Report.

UPDATE:  Fortunately for me, Prof. Bainbridge graciously linked here to my summary.

UPDATE II: Today I am doubly fortunate. Prof. Ribstein kindly linked here to my summary.

 

• Print
• Comments
• Trackbacks (3)

In Home Paramount Pest Control  v. Gibbs, (Del. Supr., Jan. 17, 2008), read opinion here, the Delaware Supreme Court addressed the judicial recusal standard in the context of a hearing officer for an administrative agency. Here is the quote that recites the two-part test for recusal and the reasoning behind the rule:

The requirement that judges be impartial is a fundamental
principle of the administration of justice .... As a matter of due
process, a litigant is entitled to neutrality on the part of the
presiding judge but the standards governing disqualification also
require the appearance of impartiality.
* * *
When faced with a claim of personal bias or prejudice
under [Canon 3 C(1) of the Delaware Code of Judicial Conduct]
the judge is required to engage in a two-part analysis. First, he
must, as a matter of subjective belief, be satisfied that he can
proceed to hear the cause free of bias or prejudice concerning that
party. Second, even if the judge believes that he has no bias,
situations may arise where, actual bias aside, there is the
appearance of bias sufficient to cause doubt as to the judge’s
impartiality.

This Court reviews the subjective part of the ... test for abuse of discretion. We review de novo the objective determination of whether there is an appearance of bias.

• Print
• Comments
• Trackbacks

In Matulich v. Aegis Communications Group, Inc., (Del. Supr., Jan. 15, 2007), read opinion here, the Delaware Supreme Court today affirmed a Chancery Court decision, summarized here. Delaware's High Court explained the difference between a contract right of preferred shareholders to consent to a merger (see DGCL Section 212(b)), and the statutory right to vote on a merger pursuant to the short-form merger procedure in DGCL Section 253 that requires that the parent own 90% of the voting shares. The appellant shareholder argued that the short-form merger procedure was not available because the preferred shareholders had voting rights and if those  shares were included, then the parent would not have 90% of the shares eligible to vote on the merger.

 If done correctly, the short-form merger procedure in Section 253 eliminates exposure to an entire fairness scrutiny. The preferred shares in dispute were issued pursuant to a DGCL Section 151(a) Certificate of Designation and expressly withheld any voting rights from the preferred shares, as compared with "blocking approval". In those situations where the issuing document is silent on the topic, the preferred shareholders would have the same voting rights as the holders of common shares. But the court found the contractual terms here to be unambiguous and not susceptible to different reasonable interpretations, thus agreeing with the Chancery Court's dismissal under Rule 12(b)(6).

 

• Print
• Comments
• Trackbacks

As I have done for opinions issued in 2005 and 2006, I have prepared a review of key corporate and commercial decisions from the Delaware Chancery Court and Delaware Supreme Court during the year 2007. See my two prior yearly summaries here. I have arranged to submit this year's overview to The Delaware Law Weekly and I should let them publish it before I post it on this blog in about a week or so. There is a necessary subjectivity in the cases that I selected from among the 200 or so that I summarized on these pages during 2007. It is not uncommon for the decisions to be 50 to 60 (or more) pages each, and many of the opinions could easily be (and have been) the subject of separate articles in their own right. Thus, in order to cover 20 or 30 noteworthy cases in a short article one is limited to mostly identifying the issues raised in the decisions so that an interested reader will be made aware of the full opinion. (Most of the decisions are noteworthy, but it would not be practical to include them all in a short overview. Remember, they are all still available on this blog.)  I also did not spend much time on some of the more well-known cases that have already received widespread attention.

The link above will lead you to the 2005 overview that appeared in the subscription-only publication called The Delaware Corporate Litigation Reporter, as well as the 2006 review that appeared in a Bloomberg publication called the Corporate Law Report.

Best wishes to all my readers and your families for a happy and healthy and fruitful New Year.

• Print
• Comments
• Trackbacks

 Alaska Electrical Pension Fund v. Brown, et al., (Del. Supr., Dec. 21, 2007), read opinion here. The best summary of this Delaware Supreme Court decision is supplied by the Court in the introductory paragraphs of its opinion:

"[The Court decides] ... whether an out-of-state litigant should be awarded attorneys' fees and expenses in connection with a settlement of a Delaware corporate class action. Appellant, Alaska ... had filed a class action in California, alleging substantially the same claims as those alleged in the Delaware action. The Delaware plaintiffs agreed to settle their claims after they had negotiated a $7 per share increase in the disputed transaction. Appellant did not agree to settle at that price, and the price later increased another $9 per share."

"Applying settled Delaware law, the Court of Chancery presumed that the Delaware action contributed to the initial price increase, and the court awarded fees to the Delaware plaintiffs. The Court of Chancery denied appellant a presumption of causation as to either the first or the second price increase. We hold that the Court of Chancery was correct  with respect to the first price increase. But, because appellant was the only litigant opposing the transaction at the time of the second price increase, appellant was entitled to a presumption of causation. Accordingly, we remand this matter for further consideration of the attorneys' fees and expenses, if any, that should be awarded to appellant."

The Chancery Court's decision was the subject of my short blog post here.

• Print
• Comments
• Trackbacks

IMO Pankowski, (Del. Supr., Dec. 4, 2007), read opinion here.  In this opinion, the Delaware Supreme Court imposed a penalty for, among many other things, notarizing a signature of a person who is not present at the time of the notarization.

• Print
• Comments
• Trackbacks

In Leatherbury v. Greenspun, (Del. Supr., Nov. 30, 2007), read opinion here, the Delaware Supreme Court ruled yesterday that a statutory provision that required notice to be sent by "certified mail, return receipt requested", was not satisfied by notice that was only sent by Federal Express. The statute allowed for the statute of limitations to be be tolled by 90 days after the specified statutory notice was sent. The net result of this ruling is that the complaint was filed after the statute of limitations had expired.

This is how the court summarized the holding:

 

A plaintiff may toll the running of the two-year statute of limitations for ninety days by sending a   Notice of Intent to investigate only by certified mail, return receipt requested. We further hold that the term “certified mail” does not include delivery through private carriers, such as delivery by Federal Express.

Footnote 16 in the High Court's opinion cites to cases where the Delaware courts have also invalidated service of process that was not sent via certified mail, return receipt requesed, as required by statute.

This opinion includes jewels of general statutory construction principles, and the reaffirmation by the court that it will apply the plain meaning of an unambiguous statute even if it may lead to an "unfortunate result". It will not act as a "super-legislature" by venturing beyond the boundaries of the judicial branch of government to provide allegedly necessary corrections or amplifications to a statute.

 

• Print
• Comments
• Trackbacks

In Hildreth v. Castle Dental Centers, Inc., (Del. Supr., Nov. 15, 2007), read opinion here, the Delaware Supreme Court affirmed the Chancery Court ruling in an action contesting the appraisal of preferred shares  in a merger. This case did not involve the typical valuation issues in an appraisal case. The plaintiff agreed on the total merger price. The dispute was based on the fact that preferred shares, that were convertible into common shares, were treated as if they were already converted, even though the corporation failed to authorize a sufficient number of common shares necessary to cover the full number of preferred shares that could be converted into common. The plaintiff wanted the merger price to be divided only among the total of authorized shares--as opposed to the number of convertible preferred shares that exceeded the total number of authorized shares.

  Delaware's high court based its reasoning on two key points. First, despite the failure to have adequate common shares, like other contracts, the failure of one part of a contract does not invalidate the whole contract.  In addition, it was not alleged that the issuance did not comply with DGCL Section 151. Thus, the court rejected the argument that the preferred shares were void. Second, the court determined that there are many ways to value preferred shares and the method used by the merger agreement was permissible.

 

• Print
• Comments
• Trackbacks

In Lehman Brothers Bank FSB v. State Bank Commissioner, (Del. Supr., Nov. 7, 2007), read opinion here, the Delaware Supreme Court, in a 43-page decision (that includes a thorough analysis of the factual and legal issues that I will not be discussing in this short blurb), upheld the Delaware franchise tax imposed on banks. Its analysis included a discussion of the Commerce Clause and Due Process Clause of the U.S. Constitution. This is a very important decision on many levels and I hope to supplement this short summary in the near future.

• Print
• Comments
• Trackbacks

In Appriva Shareholder Litigation Company, LLC v. EV3, Inc., et al., (Del. Supr., Nov. 1, 2007), read opinion here,  the Delaware Supreme Court reversed two decisions of the Superior Court  that were consolidated on appeal, in connection with a dispute related to a merger.  The consolidated cases were filed by shareholders of the acquired company. The trial court, in separate decisions by different judges, determined that both plaintiffs lacked standing to prosecute their respective actions separately and were contractually obligated to prosecute their claims jointly. The opinion is 34 pages in length in its original format. It would be an appropriate subject of a bar exam question on civil procedure issues. I will highlight only a few key aspects of the ruling that should be instructive to business litigators.

Delaware's high court addressed several issues: First, the court determined that it was reversible error for the trial court to convert a motion to dismiss under Rule 12(b)(6) into a Rule 56 motion for summary judgment without providing an opportunity to present pertinent evidentiary material. Moreover, the high court ruled that it was error for the trial court, sua sponte,  to convert a motion to dismiss under Rule 12(b)(6) into a Rule 56 motion for summary judgment without affording the parties adequate notice or a reasonable opportunity to respond as required by Rule 56.

In addition, the court determined that it was reversible error to choose between two differing interpretations of ambiguous documents, in a motion to dismiss under Rule 12(b)(6). In addition to incorrectly relying on only one reasonable  interpretation of the agreement in deciding a motion to dismiss, the trial court failed to allow extrinsic evidence.

 Finally, under Rule 17, upon remand, the Supreme Court ruled that if it is determined that the plaintiffs did not have standing, then they shall have an opportunity to cure any defects pursuant to that rule. The high court noted that Rule 17 states that "[n]o action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest" after a reasonable time has been allowed to permit a substitution. The court added that the purpose of Rule 17 is to "prevent forefeiture when determination of the proper party to sue is difficult or when an understandable mistake has been made."

• Print
• Comments
• Trackbacks

In Bryant v. Bayhealth Medical Center, Inc., (Del. Supr., Oct. 18, 2007), read opinion here, the Delaware Supreme Court decided two procedural issues of practical importance to lawyers engaging in business litigation. First, where the statute of limitations expired on May 1, and on that date a paper copy of a complaint was filed with the court instead of having it eFiled as required, the Supreme Court held that the statutory deadline was tolled by the paper filing in light of the eFiling occuring the next day. This was so even though the Superior Court rule of civil procedure required a suit to be commenced by both a complaint and a praecipe, unlike the applicable Chancery Court rule and unlike the applicable Federal Rule of Civil Procedure. In addition, in this reversal of the Superior Court's grant of summary judgment, the Supreme Court reasoned that Rule 36 cannot be used to decide ultimate legal issues in the case when by failing to reply withing the 30 day deadline, matters subject to a request  for admission under Rule 36 are deemed admitted.

• Print
• Comments
• Trackbacks

 B. F. Rich Co. v. Gray,  (Del. Supr., Sept. 11, 2007), read opinion here, is a rare decision of the Delaware Supreme Court to the extent that it reverses and remands a Chancery Court decision.  (The Chancery Court's decision was summarized on this blog here.) There is nothing unusual about the Delaware courts applying the law of another state as this one does, but since this blog focuses on Delaware law, I do not want to spend too much time on this 31-page opinion. The law of another state was applied to determine the validity of a written consent on behalf of minors (who were residents of that other state),  in a Section 225 dispute.

 I think the Court's own summary of the case, from the opinion itself, serves my purpose here in describing enough about the case that the interested reader can download the entire opinion at the link above for his or her reading pleasure. Here is how the court summarized the case:

Two minor children, who reside in Connecticut, own 49% of the stock of a Delaware corporation. The father of those minor children voted that stock to gain operational control of that corporation without having first been appointed as guardian of his children’s estate (property). A Connecticut statute requires the appointment of a guardian of a minor’s estate where a parent receives or uses property of the minor child having a value exceeding $10,000. The value of the minor children’s shares exceeds $10,000. The sole question of substance on this appeal is whether the father’s voting of the minor children’s shares constituted a “use” of those shares within the meaning of the Connecticut guardianship statute, thus requiring the appointment of a guardian of the minor children’s estate to vote the shares. We hold that the father’s voting of those shares constituted a “use” of the shares within the meaning of that statute. As a consequence, the voting of the children’s shares by anyone other than a court-appointed guardian was invalid, with the result that less than a majority of the corporation’s shares were validly voted and the written consent action had no legal force. Because the Court of Chancery reached a contrary result, we reverse and remand.

• Print
• Comments
• Trackbacks

In Mahani v. EDIX Media Group, Inc., (Del. Supr., Sept. 4,  2007), read opinion here, the Delaware Supreme Court affirmed a decision of the Chancery Court awarding attorneys' fees based on a contract provision between the parties to the case. Mahani appealed based on the arguments that the trial court did not: (i) consider the reasonableness of the amount of fees, and (ii) did not give ample weight to the fact that there was only a partial victory in the trial court. The Chief Justice, writing for the Delaware Supreme Court, distinguished the contractual and statutory bases for awarding fees, and reasoned that:

...the reasonableness of attorneys’ fees and other expenses in a contractual fee shifting case “should be assessed by reference to legal services purchased by those fees, not by reference to the degree of success achieved in the litigation.”

The cases Mahani cites are inapposite because they are statutory fee shifting cases, in which the court awarded the prevailing parties’ attorneys’ fees and expenses in proportion to their success as an incentive for other attorneys to prosecute cases that enforce legislative goals. EDIX’s award for the full amount of its attorneys’ fees and other expenses cannot be considered unreasonable because the Chancellor properly weighed all the factors in DLRPC 1.5(a). The Chancellor, we believe, correctly concluded that “[t]he amount involved in litigation and results obtained [were] only two of many factors to be considered,” and, indeed, he placed considerable weight on the time and labor necessary for EDIX to prepare the case for trial.

The trial court's decision on fees was summarized on my blog here. The trial court's main opinion was summarized here, in which the Chancery Court quotes from the argot of famed rapper "50 Cent".

• Print
• Comments
• Trackbacks

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.

• Print
• Comments (2)
• Trackbacks

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.

• Print
• Comments
• Trackbacks

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.]

• Print
• Comments
• Trackbacks

In Urena v. Capano Homes, Inc., (Del. Supr., July 17, 2007), read opinion here, the Delaware Supreme Court applied the general rule that an employee of an independent contractor cannot make a claim against the general contractor for injuries suffered on a job site. There are exceptions but they did not apply here. The court also rejected a claim by an employee of the independent contractor against the general contractor for allegedly negligent selection of the independent contractor by the general contractor.

• Print
• Comments
• Trackbacks

In Grabowski v.  Mangler, (Del. Supr., July 9, 2007), read opinion here, the Delaware Supreme Court today issued an opinion that addresses a matter of importance to many businesses: horseplay  or practical jokes and the liability that may arise from employees who engage in it. This blog focuses on corporate and commercial law, but even though the topic of this case is not within the traditional confines of that subject area, employee-related issues are among the biggest concerns of many of my business clients (and thus, I trust, will be of great interest to many business lawyers).

 For the first time, the Delaware Supreme Court adopted a new test, in this opinion, to determine when a co-employee's conduct constituted horseplay of such a character that it was outside the course and scope of employment--and therefore, outside the normal rule that such conduct would be within the realm of worker's compensation. This new Delaware rule is based on the work found in volume 1A of the treatise by Professor Arthur Larson entitled, appropriately enough,  The Law of Workmen's Compensation, at section 23.01 For those interested in this topic, I commend the reading of the court's analysis and application of Professor Larsen's test, as made available at the above link.

• Print
• Comments
• Trackbacks

In Wright v. Moore, (Del. Supr., July 2, 2007), read opinion here, the Delaware Supreme Court addressed the issue of admissibility of settlement evidence. Although considered in the context of a trial, most litigators at one time or another have had to confront the conundrum of dealing with at least portions of settlement discussions or settlement agreements finding their way into submissions of an opposing party that are sent to the court. But if settlement discussions or settlement agreements are inadmissible, a client will undoubtedly ask, how can the other side include a reference to them in documents filed with the court?

This opinion of the Delaware Supreme Court now provides helpful insight into the contours of Rule 408 of the Rules of Evidence (the Delaware rule is based on the federal rule), in the context of a trial, though the court's analysis will also be useful, one hopes, in the pre-trial trenches.

• Print
• Comments
• Trackbacks

In AT & T Corp. v. Clarendon American Insurance Co., et al., ( Del. Supr., July 2, 2007), read opinion here, the Delaware Supreme Court reversed a decision by the Superior Court on coverage claims that were denied by the trial court and the D & O carriers based on a definition of the term "loss". Because the court based its decision on California law, and this blog is focuses on Delaware law, I will only quote from the Supreme Court's introductory summary of the case, and commend the reading of the whole case to the extent it provides insight into the court's analysis in the event that a similar issue would be addressed in the future based on Delaware law. Here is the summary of the case from the court's opinion:

 

AT&T Corp. (“AT&T”) appeals from a judgment of the Superior Court dismissing this action brought by AT&T against several insurance carriers (the “D&O insurers”).

Those carriers issued Director and Officer (“D&O”) policies insuring At Home Corporation (“At Home”) and At Home’s directors and officers. AT&T, as At Home’s largest shareholder, designated ten of its employees to serve as At Home directors.2 At Home later declared bankruptcy, and thereafter, AT&T and the At Home Directors were sued jointly and severally for billions of dollars in damages. Being insolvent, At Home could not indemnify the At Home Directors for any liability and litigation costs resulting from those lawsuits (the “Underlying Litigation”). Accordingly, the At Home Directors requested the D&O insurers to advance their defense costs. The D&O insurers refused, taking the position that the At Home Directors had not incurred a covered “Loss” under the D&O policies. The At Home Directors then turned to AT&T for assistance in paying defense costs, settlements and judgments in the Underlying Litigation. AT&T agreed to do so, in exchange for which the At Home Directors assigned to AT&T their breach of contract claims against the D&O insurers.AT&T then sued the D&O insurers in the Superior Court, both as assignee of its At Home director-employees, and as subrogee to those directors’ coverage claims against the D&O insurers for defense costs and indemnification relating to the Underlying Actions.3 The D&O insurers moved to dismiss AT&T’s amended complaint on the grounds (inter alia) that: (1) the At Home Directors had suffered no “Loss” needed to trigger the D&O coverage, and (2) AT&T could not prevail on its equitable subrogation claim, because when it indemnified the At Home Directors, AT&T acted as a “volunteer.” Applying California law, the Superior Court upheld both of the D&O insurers’ contentions and dismissed the complaint....[W]e reverse.

• Print
• Comments
• Trackbacks

Prof. Larry Ribstein just published a "must read" short article here on the Harvard Corporate Governance Blog with insightful commentary on the recent Delaware Supreme Court decision in North American Catholic  Educational Foundation, Inc. v. Gheewalla , summarized here on this blog.   Here is the good professor's own summary of his post.

For anyone interested in the intersection of Delaware corporate law and the zone of insolvency, his analysis and the links he provides to related sources and writings on the topic, should be read by anyone who wants to know the latest thinking on the issues related to the duties of directors of insolvent companies and the rights of creditors against those directors. Coincidentally and parenthetically, I posted here earlier this week, an analysis by one of my bankruptcy partners, Dan Astin, on the contrast between recent federal court decisions in Delaware on the topic of  "deepening insolvency"  and the most recent Delaware Chancery Court decision on the issue.

• Print
• Comments
• Trackbacks

The Delaware Supreme Court, in two opinions published this month, addressed issues of attorney conduct that should be of broad interest.

In the case of In Re Abbott, read opinion here, the Delaware Supreme Court addressed the propriety of rhetorical extremes contained in a brief, that the trial court had stricken sua sponte, after concluding that the arguments crossed the line of acceptable conduct.  The Supreme Court affirmed. Delaware's high court quoted verbatim from some of the language it found objectionable and reasoned that certain conduct is so unprofessional that it becomes unethical as well, in this case violating Rule 8.4(d) which prohibits professional misconduct that is prejudicial to the administration of justice. (An issue not addressed by the court, but which most lawyers should ask, is whether such conduct  among lawyers as occurred in this case, outside the context of litigation, could also violate the ethical rules.)

 The  high court found that the arguments in the brief went beyond “merely” unprofessional, and that the rules were violated because the pleadings filed with the court contained “unnecessary invective and rhetoric, and were obnoxious [as well as] unnecessarily sarcastic and strident in tone.” The court noted that the duty to the tribunal takes precedence over the interests of a client. Former U.S. Supreme Court Justice Sandra Day O’Connor was quoted in the opinion saying that “incivility disserves the client because it wastes time and energy - - time that is billed to the client at hundreds of dollars an hour, and energy that is better spent working on the case than working over the opponent.” The Supreme Court cited a prior opinion of 15 years ago when it stated that “simply put, insulting conduct toward opposing counsel, and disparaging a court’s integrity are unacceptable by any standard.” The court further reasoned that “zealous advocacy never requires disruptive, disrespectful, degrading or disparaging rhetoric. The use of such rhetoric crosses the line from acceptable forceful advocacy into unethical conduct that violates the Delaware Lawyers’ Rules of Professional Conduct.” Thus, the Delaware Supreme Court is now on record as ruling that disrespectful, degrading or disparaging rhetoric  violates the ethical rules that apply to lawyers. Although beyond the scope of the opinion, I mention as an aside, the truism incorporated in the rules that the assistants of lawyers are not permitted to violate the rules that the lawyers themselves are required to uphold.

Separately, this month the Delaware Supreme Court found that a Pennsylvania lawyer who did not have an office in Delaware, was still improperly "practicing law in Delaware" when she provided advice to Delaware clients and  engaged in other patterns of behavior that  "established a systematic and continuous presence in Delaware for the practice of law in violation of Rule 5.5(b)". In Re Tonwe, read opinion here. The court's penalties included a permanent prohibition against being admitted pro hac vice in any Delaware proceeding.

• Print
• Comments
• Trackbacks

Prof. Stephen Bainbridge compiles here excerpts from his own writings, and those of others, regarding the issues addressed in the recent Delaware Supreme Court decision rejecting a direct claim by creditors against directors of an insolvent corporation in North American Catholic Programming, Inc. v. Gheewalla, summarized here on my blog. In addition, the good professor refers to the generally related Delaware Chancery Court decision in Trenwick summarized here in which the court rejected a claim for "deepening insolvency". His post is must reading for corporate and bankruptcy lawyers who need to have command of the nuances of this cutting edge topic.

• Print
• Comments
• Trackbacks

The Delaware Legislature recently amended the Delaware State Constitution to allow the SEC to ask the Delaware Supreme Court to answer questions of Delaware law. Previously, Delaware's high court was only procedurally authorized to accept certified questions of Delaware law from  trial courts in Delaware and Federal Courts around the country, as well as the high courts of each state. Here is a front page article from the local paper, the News Journal of Wilmington, Delaware,  on May 19, 2007, with more background details.

UPDATE: Wow. My post was cited here by The Wall Street Journal Law Blog.

UPDATE II:  Here is a post by Prof. Gordon Smith with a link to the actual text of the amendment and his observation that this may be the most important development in Delaware law in the over 100 years since Delaware took over from New Jersey as a favored home for corporations. Also, here is insightful commentary from Prof. Stephen Bainbridge with links to his related writings on the topic as well as links to Prof. Ribstein's commentary on this key matter.

• Print
• Comments
• Trackbacks

In North American Catholic Educational Programming  Foundation, Inc.  v. Gheewhalla, (Del. Supr., May 18, 2007), read opinion here, the Delaware Supreme Court upheld the Chancery Court's determination that creditors of a Delaware corporation do not have a direct claim against directors of an insolvent corporation, or one in the zone of insolvency,  for breach of fiduciary duty. Professor Bainbridge comments on this important decision here. This decision will be of great interest to both corporate lawyers and litigators as well as bankruptcy lawyers. I hope to write more on it later.

Notably, in its opinion the Delaware Supreme Court cites to the writings of Professor Bainbridge on the topic (as the Chancery Court has done as well in its opinions.) Compare the Chancery Court's Trenwick decision (no claim for "deepening insolvency") here, and the link here to the Chancery Court opinion that was affirmed yesterday by the Delaware Supreme Court. Professor Ribstein, whose writings were also cited by the Delaware Supreme Court in this opinion, has a blog post here on the opinion.

P.S. I try not to distract readers of this blog with any "off message" posts outside the limited scope of this blog, but I hope you will indulge me this small expression of joy. My youngest brother was ordained today as a priest for the Diocese of Wilmington. I am very proud of him and I hope he has many happy years ahead of him as a priest. I hope his prayers for me carry extra weight now.

• Print
• Comments (1)
• Trackbacks

In Seaford Golf and Country Club v. E.I. duPont de Nemours and Co., (Del. Supr., May 15, 2007), read opinion here, the Delaware Supreme Court reviewed a trial court decision interpreting a contract. The trial court opinion was based on stipulated facts without a trial. One of the issues in the case involved the interpretation of the word "plant" (as in industrial facility),  that was not defined in the agreement and that was otherwise of uncertain meaning as it was used in the agreement. In such case, the high court observed that it was appropriate to refer to dictionary definitions. However, the parties submitted different dictionary definitions that were inconsistent, so that was not helpful. In sum, the court remanded for a fuller factual record, such as depositions of the parties who entered into the agreement in order to produce testimony as to their intent.

• Print
• Comments
• Trackbacks

In Parfi Holding AB v. Mirror Image Internet, Inc., (Del. Supr., May 9, 2007), read opinion here,  the Delaware Supreme Court ruled that the Chancery Court could not require an attorney to submit a "non-withdrawable entry of appearance". Though the high court was understanding of the trial court's frustration with the incredible torpor with which this case was prosecuted (or not prosecuted), and the long history of this case was replete with reasons why the trial court did not want to allow more delay due to attorneys withdrawing, the Supreme Court cited the Delaware Rules of Professional Conduct that require an attorney to withdraw in certain circumstances. Citations in the opinion to prior decisions of the Supreme Court highlight that in the many years that this case has been litigated, the merits have not been addressed. The initial claims involved a minority shareholder making claims against the majority shareholder, but due to arbitration claims in Sweden, and a stay of the litigation in the meantime, and withdraw of prior counsel, the merits have not been litigated. The case was remanded with instructions to allow an entry of appearance without ruling in advance on any possible, future motions to withdraw of counsel.

UPDATE: On May 17, 2007, the court issued a revised opinion here.

• Print
• Comments
• Trackbacks

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

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

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

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

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

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

• Print
• Comments (2)
• Trackbacks

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

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

• Print
• Comments
• Trackbacks

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

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

• Print
• Comments
• Trackbacks

Courtesy of Mark Saltzburg, a member of the Delaware Bar now working in the northern Virginia office  of the Squire Sanders firm, we have a summary of remarks made by Delaware Supreme Court Chief Justice Myron Steele at the Spring meeting  last week in D.C. of the Business Law Section of the American Bar Association, concerning developments in Delaware corporate law and recent Delaware Supreme Court cases. Here is Mark's summary:

First, Chief Justice Steele noted that the Delaware Supreme Court had just heard argument in the Trenwick America Litigation Trust litigation that may result in a decision on whether creditors may bring a cause of action for violation of fiduciary duty where a company deepens its insolvency in a way that further damages creditors after any residual interest of shareholders is out of the picture.� Typically, fiduciary duties are only owed by directors to shareholders and not to creditors. Steele noted, however, that in an earlier decision by former Delaware Court of Chancery Chancellor William Allen in the Credit Lyonnais case, the court commented that directors may owe creditors a fiduciary duty where a company is in the vicinity of insolvency.

Second, Steele discussed whether the Delaware courts will hold directors to a higher standard of judicial review based on the background and training of a director. He rhetorically asked the question of whether the Delaware courts have moved away from a group analysis of fiduciary duty.� He noted that, in the recent Emerging Communications case, the court appeared to hold a director with an investment banking background to a higher standard and he noted that, in the recent Disney executive compensation litigation, the court examined the conduct of the board on a director by director basis. Steele said that neither case heralds a move away from the traditional Delaware analysis of the board as a whole. He said there is no separate standard based on the training and background of a director. He said, however, that courts would apply conceptual nuance based on the participation of a board member.�

Third, Steele noted that while the Delaware courts provide for different procedural standards in litigation depending on the insider status or outsider status of directors, the Delaware courts take the view that to be an insider is a not a crime, it is a status.� He noted that insiders often bring advantages to a board of strategic advice and familiarity with the business. He said that to take a different view would be to risk leaving a board bereft of those board members with the best expertise and knowledge of the business.

Fourth, Chief Justice Steele noted that, in the stock-option back-dating cases currently before the Delaware Court of Chancery (at the trial court level), the cases will likely involve issues of lack of good faith by board members involved. He noted that past Delaware jurisprudence on the issue of good faith, including the Disney case, indicate that two prongs of analysis will be important in such cases: 1) whether directors intentionally used inside knowledge in such a way as to preclude them from acting loyally and in good faith, and 2) whether directors concealed information. Steele further commented that lack of good faith, while difficult to define with precision, has evolved to mean that a director consciously disregards a known duty.

Finally, Steele noted that, in the case Stone v. Ritter (also referred to as AmSouth), the Delaware courts had embellished the oversight concept of directors' duties first enunciated in the earlier Caremark decision. He noted that the directors in the case were directors of a bank who were alleged to have failed to supervise or develop processes to monitor employee conduct which resulted in the imposition of a $50 million fine on the bank. The court dismissed the case on the grounds that no sufficient claim was plead in the complaint. Steele noted that the complaint was dismissed because it failed to allege that there was an utter failure to install an information monitoring system and because there was no evidence that directors disregarded any red flags that might amount to a conscious disregard of fiduciary duties.

UPDATE: Compare recent comments, by coincidence, just posted here by Prof. Bainbridge on both the Stone v. Ritter and Caremark cases.

UPDATE II: The good professor follows up with insightful commentary here.

• Print
• Comments
• Trackbacks

In DaimlerChrysler Corporation v. Delaware Department of Insurance, (Del. Supr. Mar. 2, 2007), read opinion here, the Delaware Supreme Court provides an example of how quickly it can act when the circumstances warrant. This March 2 decision reversed a decision of the trial court dated Feb. 27.

The case involves the review by the Superior Court of a decision by the Delaware Insurance Commissioner. The Superior Court refused to stay a decision of the Delaware Insurance Commissioner pending its review,  in connection with the approval of an insurance company acquisition (i.e., Arrowpoint Capital's acquisition of Royal Indemnity Co.) The Commissioner did not allow the policyholder, DaimlerChrysler,  to participate in the hearing, but the Commissioner stayed his decision in order to allow DaimlerChrysler an orderly opportunity to seek judicial relief. The Superior Court refused to stay the Commissioner's decision pending review, but did certify an interlocutory appeal to the Supreme Court.

The Supreme Court accepted the interlocutory appeal and reversed the Superior Court. The Supreme Court ordered both a stay of the Commissioner's decision and ordered that the Superior Court conduct expedited proceedings to consider the appeal of the Commissioner's decision. In the process, the high court discussed the factors to be considered for interlocutory appeals as well as the criteria for granting a stay pending an appeal.

UPDATE: The case settled at some point after this decision was published.

• Print
• Comments
• Trackbacks

In The State of Sao Paulo of the Federative Republic of Brazil v. The American Tobacco Company, (Del Supr., Feb. 23, 2007), read opinion here, (yes, that is the correct spelling of the plaintiff's name), the Delaware Supreme Court affirmed the Delaware Superior Court's decision to reject the claim of the foreign governments of Brazil and Panama to hold tobacco companies liable for the medical costs those countries incurred to treat  and care for certain citizens of those countries due to the health problems allegedly resulting from those citizens' use of the tobacco products.

• Print
• Comments
• Trackbacks

Fitzgerald v. Vishay Intertechnology Inc., (Del. Supr., Jan. 24, 2007), read decision  here .

This Supreme Court Order dismissed the appeal by someone who was not a party to the proceedings below. The appellant filed an appeal from the October 25, 2005 order of the Chancery Court which enjoined a class of plaintiff shareholders from prosecuting an action pending in the Superior Court of California, the claims in which were released by a Delaware class action by the October 25, 2005 order. The appellant, despite notification, did not object to the settlement and the settlement hearing both on and prior to the October 25, 2005 order approving the settlement. The court rejected the appellant’s argument that he should be permitted to appeal the Court of Chancery judgment on the sole ground that he was a member of the plaintiff class affected by the decision below, even though he did not object to the settlement. 

The Supreme Court noted that a non-party to an action generally has no standing to take an appeal to the Delaware Supreme Court despite the fact that the non-party may have an interest in the outcome of the litigation (citing Townsend v. Griffith, 570 A.2d 1157, 1158 (Del. 1990) and Bryan v. Doar). The Bryan case was summarized on this blog here.

 

• Print