In the Matter of the Rehabilitation of Indemnity Insurance Corp., C.A. No 8601-VCL (Del. Ch. Feb. 19, 2014). Takeaway: This succinct letter ruling from the Court of Chancery provides one of many examples of why a motion to disqualify counsel based on alleged violations of the Delaware Lawyers’ Rules of Professional Conduct, such as for an alleged conflict of interest based on Rule 1.9, is often a fool’s errand–at least in state court. Other examples abound. See, e.g., prior examples here and here.
In sum, this decision made quick work of dueling motions based on the high threshold that was not met for such motions. Namely, violation of the rules of professional conduct applicable to lawyers is usually not sufficient, ipso facto, to disqualify a lawyer from representing a party in a pending matter. The same approach does not apply in other courts in other states. The reasoning in Delaware is that the agency of the Delaware Supreme Court known as the Office of Disciplinary Counsel is the proper forum where issues of violations by lawyers of the rules of legal ethics are investigated and enforced–not in the courtroom. In addition, the Court of Chancery is often skeptical of the tactical motives for filing such motions.
Stated another way, a motion to disqualify counsel based on an alleged violation of legal ethics will not prevail in Delaware unless the following standard is satisfied:
“Absent misconduct which taints the proceedings, thereby obstructing the orderly administration of justice, there is no independent right of counsel to challenge another lawyer’s alleged breach of the Rules [of legal ethics] outside of a disciplinary proceeding.” Slip op. at 3 (citation omitted). That is, a violation of the rules of professional conduct does not suffice to disqualify an attorney. Rather, the litigant “must show that the conflict prejudiced the fairness of the proceeding, not merely a violation of the Rules had occurred.” Id. (citation omitted). Clear enough?
Bottom line: Motions to disqualify counsel from representing a client in a pending matter, based on an alleged ethical violation, usually fail in Delaware state courts.
Vichi v. Koninklijke Philips Electronics, N.V., C. A. No. 2578-VCP (Del. Ch. Feb. 18, 2014). Why is this case noteworthy: Although the practical application of this decision to the average litigator is not likely to be widespread, this Court of Chancery opinion is notable for a few less conventional reasons. For example, it has the distinction of being–perhaps–the longest opinion in the more than 200 year history of the court. Weighing in at 182 pages in the slip opinion format, we will not attempt to summarize it in a medium designed for more pithy highlights (even though it is not uncommon for Chancery opinions to approach or exceed 100 pages.) In its simplest form, this opinion is the latest iteration of seven-years of litigation to collect on a loan of 200 million Euros based on fraud and related claims. [Yes, that is the correct spelling of the defendant company.]
Suffice it to say that it is worth reading for many reasons–on your own time, for those who may enjoy the painful description of a largely unsuccessful and undoubtedly very expensive effort to recoup an unpaid loan. In addition, for example, Italophiles will enjoy the analysis of Italian law by a Delaware jurist. Prior Chancery decisions in this case, which also applied Italian, Dutch and English law, were highlight on these pages.
Huff Fund Investment Partnership v. CKx, Inc., C.A. No. 6844-VCG (Del. Ch. Feb. 12, 2014).
Why this case is noteworthy: The Court of Chancery addresses the issue of potential “rent-seekers” who may seek to benefit from the application of statutory interest on the amount the Court determines to be the value of stock in a statutory appraisal, and the limited ability of the respondent company (or the Court), to “toll” the accrual of that interest–even if the respondent company were to offer payment pending post-trial motions and prior to a final settlement.
This pithy Court of Chancery letter ruling addresses the public policy behind the legal rate of interest that applies in statutory appraisal proceedings, to the value of stock determined by the Court, based on DGCL Section 262(h). The Court explained that Section 262(h) expresses the General Assembly’s determination that the:
… appropriate way to compensate appraisal petitioners for their lost investment opportunity, and to prevent the respondent corporation from being unjustly enriched by the use of petitioner’s capital … is to award them interest in the amount of five percent over the Federal Reserve discount rate through the payment of a final judgment.
The statute gives the Court very limited discretion to deviate from the application of that rate, absent unusual circumstances not present in this case. Prior Chancery decisions that provide background facts in this case (involving the popular American Idol TV show), were highlighted on these pages.
The Court’s discussion arose in the context of its rejection of the equivalent of an “offer of judgment” to pay the petitioner pursuant to the court’s prior appraisal ruling (which is the subject of pending motions) in order to “stay” the accrual of interest while pending motions are being considered by the court. The statute did not give the Court that type of discretion based on the facts of this case–in addition to the reality that the Court of Chancery does not have the equivalent of Rule 68 of the Superior Court which allows a party to limit the adverse effects of a final judgment. That option is not available, as a matter of right, in the Court of Chancery.
Parker v. State, Del. Supr., No. 38, 2013 (Feb. 5, 2014).
Takeaway: The Delaware Supreme Court in this case of first impression applies Rules 104 and 901 of the Delaware Rules of Evidence to determine the standard in Delaware for introduction into evidence at trial of social media entries, such as Facebook. Even in corporate and commercial litigation, this enunciation of the applicable standards for introducing this type of evidence suggests that this opinion be included in the business litigator’s tool box.
Issues of Delaware corporate law often arise in connection with bankruptcy cases around the country, and now there is a formal procedure to certify those questions to ask the Delaware Supreme Court to address them in an authoritative manner. Professor Verity Winship has written an article on the topic which she describes as follows:
It is the only piece I know of that addresses a cutting edge issue in Delaware corporate law: how thorny issues of Delaware law are resolved when they arise in complex bankruptcy proceedings. Last fall, the Delaware legislature took the final steps to permit bankruptcy courts from across the country to certify questions of law to the Delaware Supreme Court. This piece provides a concise and timely analysis of this innovation, putting it into the context of bankruptcy certification nationwide and the Delaware experience with certification.
The article is available at this link. By way of example only, we highlighted a decision a few years ago on these pages that addresses an important issue about the fiduciary duty of an officer of a Delaware corporation prior to any definitive ruling on the issue by the Delaware Supreme Court.
Professor Eric A. Chiappinelli is the McDonald Professor of Law at Texas Tech University and has published the second of a trilogy of articles on the topic of personal jurisdiction that Delaware exercises by statute over those who serve as directors of Delaware corporations. In this latest article, entitled The Underappreciated Importance of Personal Jurisdiction in Delaware’s Success, he argues that:
… Delaware’s role as the center of stockholder litigation, which is currently threatened, has been rooted in two unique but unconstitutional approaches to personal jurisdiction over fiduciaries. Delaware is using several aggressive techniques to entice and coerce stockholder litigation to be filed exclusively in Delaware. However, until Delaware addresses serious problems with its personal jurisdiction statute, its other attempts to retain caseflow will ultimately be ineffective.
The Harvard Law School Corporate Governance Forum published a revised version of our annual list of top ten corporate decisions from Delaware’s Supreme Court and Court of Chancery. Yes, we are thrilled. For those readers who think other cases should have made it on the top ten list, we welcome suggestions for additions or “honorable mentions”. Of course there are more than 10 important cases that were decided in Delaware in 2013, so feel free to review the 200 or so Delaware corporate and commercial cases we highlighted on these pages last year and let us know if you would nominate different cases.
Guhan Subramanian is the Joseph Flom Professor of Law and Business at the Harvard Law School. He prepared a post on the Harvard Law School Corporate Governance Forum based on his lecture delivered at the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. The beginning of his post is excerpted below:
In November 2013, I delivered the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. My lecture, entitled “Delaware’s Choice,” presented four uncontested facts from my prior research: (1) in the 1980s, federal courts established the principle that Section 203 must give bidders a “meaningful opportunity for success” in order to withstand scrutiny under the Supremacy Clause of the U.S. Constitution; (2) federal courts upheld Section 203 at the time, based on empirical evidence from 1985-1988 purporting to show that Section 203 did in fact give bidders a meaningful opportunity for success; (3) between 1990 and 2010, not a single bidder was able to achieve the 85% threshold required by Section 203, thereby calling into question whether Section 203 has in fact given bidders a meaningful opportunity for success; and (4) perhaps most damning, the original evidence that the courts relied upon to conclude that Section 203 gave bidders a meaningful opportunity for success was seriously flawed—so flawed, in fact, that even this original evidence supports the opposite conclusion: that Section 203 did not give bidders a meaningful opportunity for success.
I concluded my lecture with three questions for the audience:
- (1) Is the constitutionality of Section 203 settled law?
- (2) If not, would a bidder be well-advised to challenge the constitutionality of Section 203 the next time it becomes a binding constraint in a takeover situation?
- (3) And if yes, what, if anything, should Delaware do to avoid this challenge?
I, along with numerous prominent academics and practitioners, believe the answer to the first question is no. Professor Joe Grundfest of Stanford Law School told the Wall Street Journal: “Lawyers now have the data they need to renew a constitutional battle over these sorts of state takeover laws.” Professor Steve Bainbridge of UCLA Law School wrote on his popular blog: “I agree that the article’s data calls into question the empirical grounding of the Delaware trilogy. To that extent, I agree that the validity of the Delaware statute could be challenged.”
OTK Associates, LLC v. Friedman, C.A. No. 8447-VCL (Del. Ch. Feb. 5, 2014). A few takeaways from this Court of Chancery opinion involving a challenged recapitalization of Morgans Hotel Group by investor Ron Burkle include the following:
(i) if the court finds a breach of the duty of loyalty by a director, the absence of specific damages to the beneficiary will not prevent the claim from proceeding, and the court will be far-reaching and creative in an effort to find a way to impose a penalty on the faithless fiduciary. See, e.g., Thorpe v. CERBCO, Inc., 676 A.2d 436 (Del. 1996).
(ii) the court found that well-known investor Ron Burkle had effective control of the Morgans Hotel Group and his allegedly heavy-handed orchestration of the disputed transaction filled more than half of the 47-page opinion, a rather routine length of a Chancery decision. Point: when the court devotes that much space to the details of alleged wrongdoing, the result will not be favorable for the defendant.
(iii) the test in Braddock v. Zimmerman, 906 A.2d 776, 786 (Del. 1996), is applied to determine how Rule 23.1 interfaces with a new independent board that is in place at the time of an amended complaint, as compared to the board in place when the original complaint was filed.
(iv) the court refused to enforce a New York forum selection clause governed by New York law, in one of the agreements involved in this case. One claim was that the agreement was unenforceable due to the breach of fiduciary duties that were governed by Delaware law. The court used the analogy of a non-Delaware forum selection clause in a merger agreement not restricting shareholders suing sell-side fiduciaries in Delaware for breach of fiduciary duty claims based on that merger agreement.
(v) this case provides a helpful example of those instances where the exculpation provisions of DGCL Section 102(b)(7) would not support a summary dismissal of claims against directors. That is, this case presented sufficient facts to rebut the business judgment rule and called into question the disinterestedness and independence of the board. Importantly also, the entire fairness standard applied and based on the specific allegations, it was not possible to hold at this stage of the proceedings that the claims solely implicate a duty of care.
Professor Eric Talley, Professor of Law at UC Berkeley, has asked that I provide information about a survey he is conducting to help law schools better tailor their training of business lawyers. (The good professor presented the 24th Annual Pileggi Lecture in Delaware.)
Professor Bainbridge has the details about the survey on his blog already so I direct you to that site for the particulars.