Delaware Proposes New Fee-Shifting and Forum Selection Legislation

Legislation is being proposed to ask the Delaware Legislature to limit the ability of corporations to adopt fee-shifting provisions in their charter and bylaws, but to provide additional support for adopting forum selection clauses in those same corporate documents. The proposed legislation is available at this link. A memo describing the policy analysis on which the proposal is based has also been provided by a cross section of Delaware lawyers representing the major constituencies involved, such as shareholders, directors and corporations. Also available is a FAQ with answers to the most likely questions about the proposed bill.

Most readers are aware that the Corporation Law Section of the Delaware State Bar Association annually proposes amendments to the Delaware General Corporation Law for the Delaware Legislature to pass, in order to refine the DGCL on a regular basis and to make sure it adapts to changes in the marketplace. My first hand experience is that those “routine” amendments are often passed by the Delaware Legislature “routinely”. This is so because the process works well and has a long track record of benefitting the state. If the proposals for amendments to the DGCL ever backfired on the legislators–as a political matter, not necessarily a legal matter, then the next proposed bill to amend the DGCL would not pass as easily the following year. That risk, however, has not come to pass for many decades, if ever.

The proposed legislation about fee-shifting bylaws and forum selection provisions in corporate charters or bylaws may be sui generis, though. Most amendments to the DGCL that are presented to the Delaware Legislature are not controversial and pass without debate. This one is different. The proposed legislation linked above is a result of the ATP case, styled as ATP Tour, Inc. v. Deutscher Tennis Bund, Del. Supr., No. 534, 2013 (May 8, 2014), highlighted here on these pages, in which the Delaware Supreme Court upheld the facial validity of fee-shifting bylaws for a non-stock corporation. Many legal commentators read that decision to apply to stock corporations as well. Not everyone agreed.

Last year, before the June 30 close of the legislature’s term, legislation was proposed to prohibit stock corporations from adopting fee-shifting bylaws. The DuPont Company and other large companies as well as the U.S. Chamber of Commerce opposed the legislation that was proposed last year to limit fee-shifting bylaws. Institutional investors and shareholder-rights groups supported the proposal. Law professors lined up on both sides of the debate. In light of the short amount of time available last year before the close of the legislative session, and the strong lobbies on both sides of the issue, the legislature deferred consideration until the 2015 legislative session.

Unlike routine amendments to the DGCL, this proposed legislation confronts powerful lobbyists on both sides of the issue. Thus, this proposal may be more akin to typical legislation in which the final version of the bill that is passed is not always similar to the first version of the bill that was introduced. The only certainty about this proposed bill, is that it will generate an enormous amount of commentary and discussion. I would not expect a final outcome until the last day of the session on June 30.

If some legislation is passed that ultimately limits the ability of a corporation to adopt fee-shifting bylaws, an interesting issue will be the impact, if any, that the legislation will have on those companies that already adopted fee-shifting provisions. Generally, there is a prohibition against ex post facto laws. Stay tuned.

SUPPLEMENT: Professor Stephen Bainbridge, one of the nation’s foremost corporate law scholars, has written three commentaries already within the one business day since this proposal surfaced, including links to his prolific scholarship on the topic of fee-shifting and forum selection provisions in corporate organic documents. Each of the following titles is hyperlinked to his corresponding post: An Open Letter to the Delaware Legislature on Fee-Shifting Bylaws; Open Letter to the Delaware Legislature on Forum Selection Bylaws; Delaware Legislative Proposals on Fee-Shifting and Forum Selection Bylaws.

SUPPLEMENT II: Professor Larry Hamermesh, Director of the Institute of Delaware Corporate and Business Law, provides scholarly and insightful analysis on the issue of the potential retroactive impact of the proposed legislation on existing fee-shifting bylaws. If the proposed legislation is passed, this may be one of the first issues litigated.

Chancery Decides: Expert Witness Must Be Individual–Not Entity

In Re: Dole Food Co., Inc., Stockholder Litigation, Cons., CA. No. 8703-VCL (Del. Ch. Feb. 27, 2015). This Delaware Court of Chancery opinion concluded after careful reasoning that in order to serve as an expert witness, one must have a body and a brain and, therefore, a corporation as an entity cannot serve as an expert. This opinion provides a useful review of the rules of evidence that require a human being to serve as a witness, and the truism that a corporation can only act through its agents, but a witness cannot act through an agent, or if stated differently, a witness cannot testify through a proxy. For example, due to its incorporeal nature, a corporation cannot satisfy the statutory requirement that a person take an oath “with uplifted hand.”

The court described the corporation as being a purely metaphysical creature, despite other contexts in which the law “appropriately personifies corporations.” In this context the net result is that the expert witness who was an agent of the corporation was entitled to testify on its own behalf.

My initial reaction is that this holding is not necessarily inconsistent with the recent Supreme Court decision in Hobby Lobby, and related observations by legal experts such as Professor Bainbridge who have observed that based on the “reverse veil piercing theory”, and other theories, an entity controlled by a natural person may be considered to be acting through that entity for purposes of expressing or complying with individual religious beliefs.

This decision is a small aspect of a consolidated case now in the middle of trial on both appraisal and fiduciary claims in connection with a going private transaction involving Dole.

Chancery Allows Law Firm to Intervene for Purposes of Collecting Fees

Sutherland v. Sutherland, C.A. No. 2399-VCN (Del. Ch. Feb. 27, 2015). This Chancery letter ruling should be of interest to all lawyers to the extent that it permitted a law firm to intervene in a case in order to assert a “charging lien” to allow it to collect attorneys’ fees that it incurred in excess of $760,000 for work previously done on the case. Prior Delaware cases have recognized the right to a charging lien by an attorney as a basis for the attorney to collect fees, but this is the first Delaware decision that has allowed a law firm to intervene under Court of Chancery Rule 24 as a means of securing payment for work that it had previously done in corporate litigation.

Many prior decisions in this long running litigation between these parties have been highlighted on this blog, and they can be searched by inserting the case name in the search box in the right margin, but suffice it for these purposes to say that this matter  competes for one of the longest running internecine battles involving complicated issues of corporate law in connection with a family owned business in which there were challenges to control and challenges to the manner in which the part of the family that was managing the company was running it.

The law firm that filed the motion to intervene for purposes of asserting an attorney charging lien, Katten Muchin Rosenman, LLP, cannot likely expect full payment for its lien because the amount of the lien for unpaid fees is over $760,000, but the amount of fees awarded to the plaintiff in this case is only $275,000.

Delaware Issue of First Impression: Statutory Appraisal Rights Not Waived

Halpin v. Riverstone National, Inc., C.A. No. 9796-VCG (Del. Ch. Feb. 26, 2015).

This Court of Chancery opinion addressed an issue of first impression in Delaware:  whether common stockholders can by contract ex ante, waive the right to seek statutory appraisal in the case of a squeeze out merger of the corporation.  This issue must be distinguished from the issue of whether the holders of preferred stock can waive appraisal rights ex ante, by contract, which this court has found that they may do.

This case involved an agreement signed by stockholders involved in this case that provided for “drag-along” rights in the case of a change of control, including the right to compel the minority stockholders to vote in favor of certain change in control transactions.  The agreement provided that a favorable vote would make the minority stockholders ineligible for appraisal rights.

The court determined that it did not need to address the issue of whether common stockholders, ex ante, may contractually waive their appraisal rights that are otherwise provided by statute.  The court did not need to reach that question because it reasoned that the unambiguous language of the stockholders agreement at issue only provides for drag-along rights to be exercised prospectively, and not after a merger has been accomplished.  The court found that the corporation did not properly invoke the required vote that would have allowed it to enforce the rights at issue even if a waiver were theoretically enforceable.  Therefore, the court determined that there was no waiver.

Postscript: Legislation that will be proposed shortly by the Delaware State Bar Association will publicly support appraisal arbitrage, a cutting edge development in corporate litigation.

Chancery Applies Conflicting Provisions in Parties’ Agreements

3850 & 3860 Colonial Blvd., LLC v. Griffin, C.A. No. 9575-VCN (Feb. 26, 2015). Despite the odd caption, this Delaware Chancery decision’s usefulness for the toolbox of a litigator is derived from its analysis of a few perennial issues in commercial litigation: (i) when related contracts between the same or affiliated parties have conflicting provisions, which provisions control? (ii) when one contract has an arbitration provision but another does not, is the dispute subject to arbitration? (iii) one of my favorites: when can a non-signatory be bound by the terms of a contract? Of course, many of my readers know that under some circumstances, the Court of Chancery has bound non-signatories to the terms of an agreement.

Details of Litigation Funding Protected as Work Product

Carlyle Investment Management LLC v. Moonmouth Company S.A., C.A. No. 7841-VCP (Del. Ch. Feb. 24, 2015). This  Delaware Court of Chancery opinion decided an issue of first impression: whether funding agreements for litigation are protected under the work-product privilege.

In the course of its analysis, the court traced the original of the work-product doctrine to the United States Supreme Court decision in Hickman v. Taylor, 329 U.S. 495 (1947), which was codified in Court of Chancery Rule 26(b)(3), which states the current iteration of the Delaware work-product rule.

Instead of the “primary purpose” test, Delaware applies “the because of litigation test,” which analyzes why a document was created, to determine the applicability of the work-product protection. The primary purpose test has been rejected in Delaware for purposes of determining the applicability of the work-product doctrine.

The court reasoned that in order to obtain funding for litigation, the claim holder would need to convince the funder of one’s version of the merits of the case and these discussions would almost certainly involve “lawyers’ mental impressions, theories and strategies about the case,” which were “only prepared ‘because of’ the litigation.” See footnote 58. Similarly, the financing terms might also reflect an analysis of the merits of the case. Likewise, Delaware courts have found the amount of litigation reserve, such as what an insurance company might allocate, is protected because it would reveal the mental impressions and conclusions of an attorney regarding a claim, much like settlement considerations would. See footnotes 60 and 61.

Because there was no controlling decision on this issue under either Guernsey or Delaware law, the court found no conflict of law analysis to be necessary, and therefore applied the law of Delaware to this discovery dispute.

Finally, the court observed that there are exceptions to the work-product protection when a party can “demonstrate substantial need of the materials in the preparation of their case and that they are unable without undue hardship to obtain the substantial equivalent of the materials by other means.” See Ct.Ch.R. 26(b)(3). Thus, one should remember that even documents protected by the work-product protection could conceivably be subject to production.

Chancery Rejects Request for Specific Performance of Oral Agreement

Pulieri v. Boardwalk Properties, LLC, C.A. No. 9886-CB (Del. Ch. Feb. 18, 2015).

This Court of Chancery decision provides a primer on specific performance, unjust enrichment, laches and the rule against perpetuities, and also provides another reminder, as if any reminder was needed, that oral agreements are difficult to enforce, especially when the transfer involves real estate valued at several million dollars.  Compare generally, Grunstein v. Silva, 2014 WL 4473641 (Del. Ch. Sept. 5, 2014).

Similar to the indeterminacy in corporate litigation often described by corporate law scholars when referring to Delaware, this case is an example of the indeterminacy in commercial litigation, to the extent that the result of applying the law to a specific set of facts is not always predictable with any degree of certainty.

The prerequisites for specific performance are listed at pages 11 and 12 of the slip opinion, but in my view, the application of the law of specific performance to particular circumstances cannot always be easily predicted because, in my view, Chancery will either grant or deny this specific type of equitable relief based on the personal belief of the particular jurist in terms of the opinion of that jurist regarding which side is more able to tug at the equitable heartstrings of the court.

Rule of Evidence 202 regarding judicial notice of pleadings in courts of this state is discussed to the extent of its limited scope.  See footnote 24.

The elements of unjust enrichment were discussed but notable is the discussion about why the exception for “inherently unknowable injuries” did not apply to toll the three-year statute of limitations for this claim, which was several years past the statute.

Also noteworthy is the aspect of laches that may require a claim for breach of contract to be brought before the three-year limitation especially when the claim includes a request for specific performance.

Lastly, the always popular “rule against perpetuities” was discussed and applied to bar the enforcement of an agreement for the transfer of real estate that had no end date and could conceivably extend beyond several centuries for its exercise of a particular term.  Because of that bar, the court did not address the Statute of Frauds argument.

Standard for Motion for Clarification

This short opinion in the ongoing matter of Gore v. Al Jazeera America Holdings I, Inc., C.A. No. 10040-VCG (Del. Ch. Feb. 19, 2015), is notable for its recitation of the standard governing a motion for clarification pursuant to Court of Chancery Rule 59(f).  In footnote 1, the Court states that “A motion for clarification may be granted where the Court’s ruling is unclear, and such a motion is treated, procedurally as a motion for reargument under Court of Chancery Rule 59(f).”

Leading Plaintiff in Deal Litigation

Readers of these pages are aware that over 90% of major deals are the subject of litigation challenging various aspects of mergers. Tom Hals of Reuters provides an insightful article about a plaintiff who often appears in many such suits, which make up a large number of the cases that are filed in the Delaware Court of Chancery. The article also features quotes from members of the Delaware bench regarding some of these cases. Recommended reading.

Chancery Addresses Fiduciary Duty and Appraisal Claims in Dole Case

In re Dole Food Co.. Stockholder Litig., No. 8703; In re Appraisal of Dole Food Co., No. 9079, order denying motion for summary judgment filed (Del. Ch. Jan. 21, 2015). The Delaware Court of Chancery is scheduled imminently to hear claims in connection with the going-private transaction of Dole, now that the Delaware Supreme Court denied an interlocutory appeal. This is cutting-edge Delaware corporate litigation regarding the duty of directors related to a change in control, in addition to valuation/appraisal issues. Frank Reynolds penned an article that provides a helpful overview, at this link.

In re Dole Food Co. Stockholder Litigation, No. 8703, trial scheduled (Del. Ch. Feb. 23, 2015); In re Appraisal of Dole Food Co., No. 9079, trial scheduled (Del. Ch. Feb. 23, 2015).