Sequoia Presidential Yacht Group LLC v. FE Partners, LLC, C.A. No. 8270-VCG (Del. Ch. June 12, 2014).
Issue Addressed: This letter ruling provides a useful review of the Delaware Usury Statute relating to the maximum interest rate permitted by law to be charged by a lender, as well as the maximum rate that may be charged by an unlicensed lender. This Delaware Court of Chancery ruling also examines whether post-judgment interest rates are controlled by the statutory rate when it is different than the contractual rate of interest agreed to by the parties. The court concludes in this decision that the contract between the parties in which they lawfully agreed to a post-judgment interest rate will control, as opposed to the statutory rate of post-judgment interest.
SPX Corp. v. Garda USA, Inc., Del. Supr., No. 332, 2013 (June 16, 2014).
Issue Presented: Whether the standard of ”manifest disregard of the law” was met such that an arbitration award should be vacated? Answer: Not in this case. Thus, a rare reversal of the Court of Chancery by this en banc panel of the Delaware Supreme Court, reinstated the arbitration award that Chancery had vacated.
This succinct and compact opinion from Delaware’s high court reasoned that the arbitrator, in this post-closing purchase price adjustment dispute, interpreted the relevant contract provisions in a manner that may have been wrong, but it “was not without a basis in the contract and the parties’ submissions.” Therefore, under the “manifest disregard” standard, the award was not subject to vacatur.
The court observed that the review of an arbitration award is “one of the narrowest standards of judicial review in all of American jurisprudence.” See fn. 15. The court explained that: “As long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced that he committed serious error does not suffice to overturn his decision.” See fn. 23.
The Delaware Arbitration Act at Section 5714 tracks the Federal Arbitration Act at Section 10(a)(4), and the Delaware courts often follow the federal cases construing the similar provision. The high threshold was not met in this case because the court found that there was a difference in interpretation of the contract as opposed to a refusal to apply a known principle.
Biolase, Inc. v. Oracle Partners, L.P., Del. Supr., No. 270, 2014 (Del. Ch. June 12, 2014).
Issue Addressed: Whether a director may resign by an oral statement alone, pursuant to DGCL Section 141(b). Answer: Yes.
This decision is the result of an expedited appeal based on an expedited Chancery proceeding to determine the valid composition of the board of directors of Biolase, Inc. pursuant to 8 Del. C. § 225.
The key background facts include a board meeting that was held by telephone during which, as planned previously, two of the directors resigned orally. Later that same day, the CEO was surprised to learn that the two new directors who took the place of the resigning directors were aligned with a faction that sought his ouster, and at that point the CEO began to question the validity of the oral resignation.
There were a few “problem facts” for the challengers of the oral resignation. For example, a Form 8-K that was filed with the SEC stated, in essence, that the oral resignations were not effective–but one problem with that Form 8-K was that a press release was attached which stated, inconsistently, that the two board members had resigned. The Court of Chancery determined that one of the two oral resignations was effective.
Key Issues Addressed: (1) Whether DGCL Section 141(b) is a permissive statute that does not require a director to resign in writing; and (2) Whether the Court of Chancery abused its discretion by denying Oracle an award of attorneys’ fees even though Oracle never made the argument seeking the fee award in its trial briefs or post-trial arguments.
The court upheld the reasoning of the trial court even though the standard of review for legal determinations, including the interpretation of a statute, is de novo.
The statutory provision in Section 141(b) that “any director may resign at any time upon notice given in writing or by electronic transmission to the corporation,” was interpreted as permissive and not requiring written notification. The court cited to a long list of prior decisions in which oral resignations were recognized. See footnote 8.
One of the unsuccessful arguments was that because two directors were appointed to fill one vacancy, there was no logical way to determine which of the two directors the board intended to fill the one vacancy. However, the Delaware Supreme Court determined that the trial court used an orderly and deductive reasoning process to determine that, based on the draft minutes of the board meeting, the vacancy was filled in the order that the names appeared in the minutes.
Lastly, regarding the issue of attorneys’ fees, the Delaware Supreme Court determined that the claim for attorneys’ fees needed to be included in pre-trial briefs and in post-trial arguments. Because the argument for attorneys’ fees was not included in the pre-trial or post-trial briefs, the argument was waived. See footnote 16. The court also rejected the supplemental argument that the issue of awarding attorneys’ fees should be done in piecemeal fashion and only addressed after the entry of a final judgment.
It remains noteworthy to mention that this expedited appeal, including this final written opinion from the Supreme Court, all transpired within a few short weeks.
The Harvard Law School Corporate Governance Blog has a helpful post that collects court decisions outside of Delaware that have upheld forum selection clauses in corporate bylaws. Of course, we know that they have been upheld already in Delaware. The post also provides data on the increasing number of public companies that are including these provisions in their bylaws.
Miller v. National Land Partners, LLC, C.A. No. 7977-VCG (Del. Ch. June. 11, 2014).
The Delaware Court of Chancery explains in this 42-page opinion why it granted reformation of a contract in order to insert terms that the Court found the parties intended to include in their written document, but which they inadvertently left out. The controlling legal standard was described in the opinion as follows:
This Court may reform a contract when a ‘written instrument fails to express the [parties'] real agreement or transaction.’ To achieve reformation, the movant must demonstrate either mutual mistake of the contracting parties, or a unilateral mistake by one contracting party and knowing silence by the other. In cases of mutual mistake, the movant must demonstrate, by clear and convincing evidence, that ‘the parties’ actual (oral) agreement was not accurately reflected in their executed written contract.’ To satisfy this burden, the movant ‘must persuade the Court of the precise, orally-agreed-to terms that it seeks to have judicially inserted into the contract.’ (footnotes 109-112 omitted).
This case exemplifies why the outcome of cases like these are not predictable even when the law is clear, because how the law is applied will depend on which witness(es) the court finds credible–or not, and which facts the court will find to be determinative.
Crothall v. Zimmerman, C.A. No. 608, 2013 (Del. Ch. June 9, 2014).
This Delaware Supreme Court decision features a rare reversal of the Court of Chancery, and determined that the award of attorneys’ fees was improvidently granted because there was no corporate benefit in this derivative action. There was no corporate benefit, the Delaware high court reasoned, because there was no final judgment. Prior to a final judgment, the derivative plaintiff sold his shares, which led to the dismissal of the case. This situation should be distinguished from other cases where the defendant took action to make the case moot before a prior judgment. The Court of Chancery allowed the attorney for the former plaintiff to intervene in order to seek counsel fees.
However, the Supreme Court noted that, although it did not directly rule on the intervention, it was “odd” and “troubling” to permit a lawyer in a representative action to recover from the company in circumstances where the stockholder rendered his claim moot.
The rule announced in this decision that can be applied to future cases is that: “A plaintiff who generates a favorable trial court decision on a closely contested issue of corporate governance but then abandons his claim, and renders the decision moot before it becomes final, has not created a corporate benefit, he has merely caused uncertainty.”
The reasoning of the court is that no corporate benefit was created because any benefit that might have been possible by continuing the suit to a final, appealable judgment, disappeared when the derivative plaintiff abandoned his lawsuit. Therefore the former attorney for that plaintiff was not entitled to any fee award. Nor did that counsel identify any cases in Delaware which held that a plaintiff’s attorneys are entitled to fees for creating a corporate benefit when the plaintiff (as opposed to the defendant) took action that mooted the claims, caused their dismissal, and prevented the entry of a final judgment.
Zimmerman v. Customers Bank, Del. Super., No. 668, 2013 (June 10, 2014).
This Delaware Supreme Court decision addresses the rules for confession of judgment in Delaware. The Court determined that the requirement for an affidavit in Rule 58.1, is not needed to confess judgment against a non-resident after a hearing before the Superior Court based on Superior Court Rule 58.2. See also 10 Del.C. § 2306(c).
Al Jazeera America, LLC v. AT&T Services, Inc., Del. Supr., No. 600, 2013, appeal dismissed (May 30, 2014). The Delaware Supreme Court in this short Order dismissed a pending interlocutory appeal on the issue of what documents filed with the court may be withheld from the public based on the confidentiality provisions and conditions in Court of Chancery Rule 5.1. The decision was promptly by a reported settlement of the underlying litigation between the parties, but the dispute is not finished.
On June 5, 2014, the Court of Chancery, as a follow up to the Supreme Court’s Order, allowed for a stay of the implementation of its earlier decision requiring disclosure of the pleadings already filed, pending its ruling on an anticipated motion by Al Jazeera to expunge the record in light of the settlement that the parties expect to finalize soon.
The Court of Chancery now must decide if its prior decision to require disclosure of most of the contents of the prior filings in this contractual dispute between the parties should be implemented in light of the settlement–or if the disclosure of pleadings already filed should be required despite the recent settlement. Frank Reynolds of Thomson Reuters provides a helpful overview of the case.
Professor Gordon Smith has co-authored an article on “Fiduciary Discretion” that addresses, for example, the gaps in contracts in which fiduciary duties apply. The good professor has a post about it that includes the following introduction to the article:
Discretion is an important feature of all contractual relationships. In this Article, we rely on incomplete contract theory to motivate our study of discretion, with particular attention to fiduciary relationships. We make two contributions to the substantial literature on fiduciary law. First, we describe the role of fiduciary law as “boundary enforcement,” and we urge courts to honor the appropriate exercise of discretion by fiduciaries, even when the beneficiary or the judge might perceive a preferable action after the fact. Second, we answer the question, how should a court define the boundaries of fiduciary discretion? We observe that courts often define these boundaries by reference to industry customs and social norms. We also defend this as the most sensible and coherent approach to boundary enforcement.
This is practical scholarship that has practical applicability especially for agreements governing alternative entities in which fiduciary duties apply by default unless expressly waived. The formal citation for the article is: D. Gordon Smith & Jordan C. Lee, Fiduciary Discretion, 75 Ohio St. L. J. 609 (2014)
Rizk v. TractManager, Inc., C.A. No. 9073-ML (Del. Ch. May 30, 2014).
This Court of Chancery Master’s Report decided cross-motions for summary judgment involving indemnification and advancement. The most noteworthy aspects of the opinion include the analysis of the phrase “by reason of the fact” which is a statutory prerequisite for advancement and indemnification pursuant to DGCL Section 145.
DGCL Section 145 provides advancement and indemnification to directors and officers if certain prerequisites are satisfied. These rights are granted to support the public policy of encouraging qualified persons to serve as corporate directors and officers, who would be more willing to serve knowing that they will have the protection and financial support of the corporation if they are sued.
The bylaws in this case mirror the language of Section 145 and allow for indemnification when a person is made a party to an actual or threatened action “by reason of the fact” that he or she is a director or officer of the company. The corollary also provides a right to be paid by the company for the “expenses incurred in defending any such proceeding in advance of its final disposition, subject to an undertaking required by DGCL” (i.e.: advancement).
The court observed that the phrase “by reason of the fact” has been the subject of many decisions by Delaware courts. It is well established that a claim or a proceeding: “is by reason of the fact” that one was a corporate officer if there is a nexus or causal connection between the underlying proceeding and one’s official capacity. See footnote 34.
Moreover, the “necessary causal connection is established if the corporate powers were used or necessary for the commission of the alleged misconduct, even if the cause of action does not specify a claim for breach of fiduciary duty.” (emphasis added). The “by reason of the fact” standard is interpreted broadly in favor of advancement in order to further the goals of Section 145. See footnotes 35 and 36.
However, it has been emphasized by the Delaware courts that the phrase “by reason of the fact . . . should not be construed so as to draw within its ambit every claim brought against an officer or a director ….” In the context of a dispute related to an employment agreement, a corporation seeking to avoid advancement on the basis that this phrase does not apply must show that the claims “clearly involve a specific and limited contractual obligation without any nexus or causal connection to official duties.” See footnotes 42 and 43.
The Court of Chancery has previously ruled that advancement rights do not arise when the parties are litigating issues that do not involve “the exercise of judgment, discretion or decision-making authority on behalf of the corporation.” See footnote 47.
Importantly, the court cited to a prior Chancery ruling in which advancement was denied when the underlying claim had been adjudicated, and the claim ultimately may not have been indemnifiable. See Haseotes v. Cumberland Farms, Inc., C.A. No. 4921 (Del. Ch. July 23, 1996) (Transcript) at 5-8.
Postscript: In some ways, Section 145 has some analogous similarities to DGCL Section 220 to the extent that despite the terms of the statute being relatively simple and hundreds of cases over the years interpreting each of the statutes, new cases are regularly filed which purport to address nuances or applications of nuances to new facts which have not previously been decided.