Chancery Analyzes Statutory Basis for Validity of Bylaws and Director Action

Sinchareonkul v. Fahnemann, C.A. No. 10543-VCL (Del. Ch. Jan. 22, 2015).

Several aspects of this Court of Chancery opinion make it noteworthy.  First, this declaratory judgment action seeking to invalidate bylaws that confer disproportionate voting power on certain directors, addresses the various provisions of the DGCL which animate and authorize bylaws and the limitations on the scope of bylaws in general.  This analysis of course can be useful in connection with any bylaw challenge, such as fee-shifting bylaws which were not at issue in this case. The Court also recites the truism that corporate action must be twice-tested: Once to determine compliance with the DGCL and once to address equitable principles.

Second, the court provides a thorough explanation of the prerequisites for seeking expedited proceedings which are routinely granted when there is a colorable claim that also includes irreparable harm in the absence of expedition.

Third, the court provides an exemplary doctrinal analysis of the authority of directors, the rights of directors and the prerequisites for valid board action. This includes a reference to an article in the current issue of The Business Lawyer, the hard copy of which arrived in the mail this week. The co-authors of the article are the Vice Chancellor who wrote this opinion and his former colleague at a premier Delaware law firm. See J. Travis Laster and John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 70  Bus. Law. 33 (2014/2015).

Although not one of the aspects that makes this pithy Chancery opinion noteworthy, the court discusses the procedural prerequisites for standing required to file suit, as opposed to the necessary elements of a cause of action.

Interview with Chancellor Bouchard of the Delaware Court of Chancery

Chancellor Andre Bouchard of the Delaware Court of Chancery was interviewed yesterday by a publication called Town Square Delaware about the transition from corporate litigator to jurist, and related questions. The exchanges of questions and answers provides a helpful insight for those who may not be familiar with His Honor.

Chancery Provides Practical Advice on How To Handle Pre-Trial Stipulations When Parties Cannot Agree

Itron, Inc. v. Consert, Inc., C.A. No. 7720-VCL (Del. Ch. Jan. 15, 2015).

Why this Case is Worth Reading: The Court of Chancery in this opinion provides very explicit guidance on a procedure to follow if parties are unable to agree on the required stipulations that must be entered into pursuant to Rule 16 as part of a proposed pre-trial order that must be submitted to the Court.

In addition, practical pronouncements of the law are provided regarding the factors that will be considered by the court to determine whether responses to interrogatories will be treated as admissions for purposes of trial.  Lastly, although it may seem self-evident, the court examines and addresses the analysis that applies to responses to requests for admissions for determining when those responses can be used as stipulated admissions for purposes of a proposed pre-trial order pursuant to Rule 16.

The court’s treatment of Court of Chancery Rules 16, 33 and 36 are useful references not only for those who practice Delaware corporate litigation but also for Delaware litigators in general.

Chancery Applies New Statute Allowing for 20 Year Contractual Statute of Limitations

Bear Stearns Mortgage Funding Trust v. EMC Mortgage LLC, C.A. No. 7701-VCL (Del. Ch. Jan. 12, 2015)

This decision is noteworthy for its discussion of a recently passed Delaware statute that allows parties to a contract to agree to establish their own statute of limitations of not more than 20 years for filing a breach of contract claim.  See 10 Del. C. 8106(c).  This case is also noteworthy for being one of the rare creatures known as the grant of a motion for reargument under Court of Chancery Rule 59(f).

The reasons for this rare grant of such a motion, according to this opinion, are several.  First, the new statute regarding statute of limitations, Section 8106(c), became effective on August 1, 2014, before the court’s ruling on the motion to dismiss in this case.  In addition, the court determined that a case not cited by the parties and not considered by the court also should have been considered.  See Saudi Basic Industries Corp. v. Mobile Yanbu Petrochemical Co., Inc., 866 A.2d 1 (Del. 2005).

This opinion also features a useful discussion of when the presumption against retroactivity of a statute will apply.  See page 25.

The court described the somewhat circuitous borrowing statute which applies when a party seeks to take advantage of a longer Delaware statute of limitations to bring a claim that would be time-barred under the law of the jurisdiction governing the claim.

A final note of esoteric interest: an Amicus Curiae Brief was filed in this matter.  See footnote 14.

Appeal Pending on Ability of Independent Directors to Be Dismissed Early in Suit

Two recent cases involving the ability of independent directors to be dismissed early in a case involving a challenged transaction are the subject of two separate interlocutory appeals from Chancery to the Delaware Supreme Court. Frank Reynolds of Thomson Reuters frames the question in his helpful article about the cases in the following manner:

The novel question Delaware’s Supreme Court must decide is whether two shields that normally protect disinterested directors from ordinary breach-of-duty charges — the business-judgment rule and an exculpatory clause in the company charter — effectively gave them a get-out-of-trial free card or whether they must prove their innocence.

The two Chancery opinions appealed from are: In re Cornerstone Therapeutics Stockholder Litig., No. 8922, 2014 WL 4418169 (Del. Ch. Sept. 10, 2014) and In re Zhongpin Inc. Stockholders Litig., No. 7393, 2014 WL 7335920 (Del. Ch. Dec. 23, 2014). This is a cutting edge issue in Delaware corporate litigation.


Chancery Addresses Attorney’s Charging Lien

Zutrau v. Jansing and ICE Systems, Inc., C.A. No. 7457-VCP (Dec. 8, 2014). This blog post should be of interest to lawyers who want to be paid for their services. Even if the court harshly rejects a good faith argument, or the client is unhappy with the result, most lawyers still need to earn a living and need to be paid regardless if the client achieves the result she hoped for and even if the court belittles the best efforts of the lawyer based on the facts presented.

The Court of Chancery issued two letter rulings in this matter on the same date. The more interesting of the two December 8, 2014, letter rulings–for those lawyers who are not independently wealthy–was a decision addressing the charging lien of the attorney who withdrew shortly after the trial.

The court recognized that the Delaware Supreme Court recently held that a charging lien was well established in common law, and even though Delaware has no relevant statute, Delaware recognizes the right of an attorney to assert a charging lien.  The reasoning behind the charging lien rests on the theory that one should not be permitted to profit by the result of litigation without satisfying the monetary demand of his attorney.  In addition:  “An attorney’s special or charging lien is an equitable right to have costs advanced and attorney’s fees secured by the judgment entered in the suit wherein the costs were advanced and the fee earned.

In connection with deciding the charging lien, the court addressed the fee agreement between the client and the attorney seeking the entry of a charging lien, as well as the appropriate amount of the fees subject to the charging lien, and whether the costs of an expert retained on behalf of the plaintiff should be included in the amount of the lien.

The other decision was a 22-page ruling (which followed a post-trial opinion on July 31, 2014, as well as a damages order of the same date). That decision addressed a pro se motion which the court considered as a motion to amend the judgment under Chancery Rule 59(e) or in the alternative, a motion for a new trial under Rule 59(a), but also considered the plaintiff’s suggestion that the motion should be reviewed as one for reargument under Rule 59(f).  The court also interpreted the pro se motion as one under Rule 15(b) seeking to amend the pleadings, as well as a request for a stay pursuant to Rule 62(b).  Because the court decided the other motions, the request for a stay pending the disposition of the motion was considered moot.


Chancery Allows Appraisal Arbitrageurs

In re: Appraisal of, Consol., C.A. No. 8173-VCG (Jan. 5, 2015), and Merion Capital v. BMC Software, C.A. No. 8900–VCG (Del. Ch. Jan. 5, 2015).

This case is important because it expands the number and type of eligible stockholders who can satisfy the statutory prerequisites for seeking an appraisal of their stock following a cash-out merger.  This case involves those who buy stock of a company after that company has announced a merger.  They buy the stock when they think that it is worth more than the merger price and thereafter file suit to ask the Court of Chancery to determine “fair value” of the stock.

One attractive feature of the Delaware appraisal statute is that it provides for interest to be compounded quarterly for both pre-judgment and post-judgment interest at 5% above the Federal Reserve discount rate.  Compared to current interest rates that are very low, many financial analysts regard this as a more profitable return on investment than if the cash price were accepted and otherwise invested.

The facts of this case involve the issue of whether or not the plaintiff had proof that his stock was not voted in favor of the merger.  Due to issues with the broker not following instructions and delay in putting the stock in the name of the stockholder, it was difficult to prove if the current holders shares had voted against the merger.  The court held that in both cases the plaintiff was not required to prove that its newly acquired shares voted against the merger.  Based on the facts of this case, in light of the number of shares that had not voted for the merger, it was mathematically impossible for more shares to demand appraisal than were qualified.

The same plaintiff, Merion Capital, was involved in both cases referenced above.  All the facts were slightly different in both cases due to timing issues and the lack of cooperation by the broker, but the common issue was whether the plaintiffs’ shares were voted in favor of the merger.

Despite this opinion, there is still a risk that, depending on the total number of shares compared to the total number that voted against the merger, that the result could be different if on a mathematical level there were more shares for which an appraisal was sought than voted against the merger.

Chancery Limits Restrictions on Confidentiality of Section 220 Production

The Ravenswood Investment Company, L.P. v. Winmill & Co. Incorporated,
C.A. No. 7048-VCN (Del. Ch. Dec. 31, 2014). This Chancery ruling limited the number of years that documents produced pursuant to DGCL Section 220 would need to be kept confidential. In addition, the court rejected the request that the receiving party indemnify the company for any violation of law committed by the receiving party which related to the use of the documents produced.

This decision did not cite to the Delaware Supreme Court’s Treppel decision of a few days earlier, highlighted on these pages, in which the high court allowed a forum selection requirement to be imposed as a pre-condition of producing records under Section 220. Prior Chancery decisions in this case were highlighted on these pages.

This is yet another example of how Section 220 cases, despite the apparent simplicity of the statute, can become protracted and expensive endeavors. Section 220 actions often prove to be neither for the faint-hearted nor for those with meager financial stamina.

Chancery Denies Injunction Based on Revlon Claim

In re: Family Dollar Stores, Inc. Stockholder Litigation, C.A. No. 9985-CB (Del. Ch. Dec. 19, 2014).

This opinion is useful for its discussion of the enhanced scrutiny standard of review for breach of fiduciary duty claims under the Revlon standard.

This opinion by the Delaware Court of Chancery found that the Revlon standard was triggered by sale of control in connection with a merger between Family Dollar Stores, Inc. and Dollar Tree, Inc.  The stockholders of Family Tree sought a preliminary injunction to enjoin a vote on the merger because an offer had been made by a third company, Dollar General, Inc., which the stockholders argued was not taken seriously by the board of Family Dollar Stores.

The Chancellor found that the Revlon standard applied to the sale of control based on the fact that 75% of the consideration was to be paid in cash and 25% to be paid in the common stock of the acquiring company, Dollar Tree.

The motion for preliminary injunction was denied because the Chancellor found that the stockholders failed to demonstrate a reasonable probability of success on the claims, and neither demonstrated the existence of irreparable harm nor that the balance of the equities favored the relief they sought.

In connection with the Revlon analysis, the court addressed the role that the motivation of the board plays.  For example the court must look at the possibility that personal interests short of pure self-dealing had influenced the board to lock a bid or to steer a deal to one bidder rather than another.  The court must consider whether the board was motivated to act for a proper end before determining whether the means used were a reasonable way to advance the end.

The court quickly dispensed with the argument that the board abdicated its responsibility by allowing the CEO to conduct much of the negotiations during the sale process with minimal supervision.  Instead, the court noted that the board created an advisory committee that oversaw and was actively engaged in the sale process and received regular updates from the CEO.  The board was engaged in making important decisions with the full understanding of the options and the rationale for the decisions.  Moreover, the plaintiffs did not identify any material information that was kept from the board.

Interestingly, the court cited a decision of the Delaware Supreme Court issued a few hours before the instant opinion was issued, on the same day, which also addressed Revlon standards.  The court quoted the Supreme Court opinion in C&J Energy Services, Inc. v. City of Miami General Employees and Sanitation Employees Retirement Trust, highlighted on these pages here, for the following statement of the Revlon principle:  “Under Revlon, a board of directors may, as the Board did here, ‘pursue the transaction it reasonably views as most valuable to stockholders, so long as the transaction is subject to an effective market check under circumstances in which any bidder interested in paying more has a reasonable opportunity to do so.’”

The Chancellor also rejected the claims that the members of the board breached their fiduciary duty by failing to disclose in the Proxy several items of information that the plaintiffs claim were material.  The court concluded that those disclosure claims were without merit because they were either “speculation, self-flagellation, or immaterial minutiae.”  The court’s conclusion was based on settled Delaware law that:  “When directors solicit stockholder action, they must disclose fully and fairly all material information within the board’s control.  Information is material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”  (See footnote 126 and 127).

Subsequently the court, in a separate letter opinion, denied a motion for interlocutory appeal.

Chancery Enforces Receivership Order for Insurance Company

In the Matter of the Liquidation of Freestone Insurance Company, C.A. No. 9574-VCL (Del. Ch. Dec. 24, 2014). This Chancery opinion enforces a prior Receivership Order appointing the Delaware Insurance Commissioner as a receiver for an insurance company, and requires the bank holding the assets of the insurance company to transfer the assets to the Insurance Commissioner without withholding any amounts for potential future claims or attorneys’ fees. This may seem like an esoteric form of corporate litigation but an important one nonetheless.