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.
United Technologies Corp. v. Treppel, Del. Supr., No. 127, 2014 (Dec. 23, 2014). This Delaware Supreme Court decision reversed a Chancery decision on the issue of whether a company could insist as a prerequisite, prior to producing documents pursuant to DGCL Section 220, that any suits arising from the documents be filed only in a court within the State of Delaware. This is one of several reversals of the Court of Chancery in recent weeks by Delaware’s high court. Such reversals were a rarity in the past, but perhaps with the new Chief Justice, a former Chancellor of the Court of Chancery, as well as a majority of new justices now constituting the Delaware Supreme Court (compared to this time last year), we may continue to see more reversals than in the past?
The high court’s reasoning behind this latest reversal is that DGCL Section 220 gives the Court of Chancery authority to impose conditions on the production of books and records, and thus concluded that it was error for the trial court to hold that it lacked the authority to impose the requested forum restrictions. The Supreme Court remanded so that Chancery could consider whether, in its discretion, it should impose the requested restrictions based on the facts of this particular case.
An added bonus is the court’s discussion of the fact that it found relevant that the company adopted a forum selection bylaw after this Section 220 suit was filed, and the court rejected the argument that the bylaw was not binding because it was adopted after the plaintiff bought his stock. See footnotes 39 to 41 and accompanying text.
Holley v. Nipro Diagnostics, Inc., C.A. No. 9679-VCN (Del. Ch. Dec. 23, 2014). This Delaware Court of Chancery decision addresses nuanced aspects of advancement and indemnification pursuant to DGCL section 145, regarding a request for the payment by the company of attorneys’ fees incurred by directors and officers who are sued in their official corporate capacity. This opinion clarifies Delaware law on some concepts that may be counterintuitive.
The court begins this 34-page opinion with what I will paraphrase as “here we go again” with a tinge of possible exasperation to the extent that a company is challenging its obligation to advance fees incurred by a former director. The author of this post (along with others in his firm) represented the company in this case so I will try to be objective in highlighting a few bullet points about those parts of the opinion that might be of widespread applicability for those engaged in this type of corporate litigation (without expressing my view about whether I agree with the result).
- Although the first-filed [McWane] doctrine is generally applicable to summary proceedings such as this, the court must weigh the McWane comity factors with the need for expeditious resolution of summary proceedings.
- The requirement that in order for advancement to be available, the underlying suit against the director must have been “by reason of the fact” of his corporate position, can be determined (at least in this case) as a matter of law on a motion for partial summary judgment.
- Even if an insider trading claim does not involve any official corporate actions or personal profit by a director, it may still satisfy the prerequisite of “by reason of the fact” for purposes of an advancement action.
- Even if a director pleads guilty to insider trading, and the agreement granting indemnification excludes coverage for insider trading (in a carve-out), advancement may still be granted, especially if the carve-out may be read to limit indemnification for some claims but not clearly limiting advancement for those same claims.
- This is so because there is no clear bar to advancement in Delaware even if indemnification is theoretically impossible for the same claims for which advancement is sought. See footnote 40 and accompanying text.
- The requisite undertaking that must precede advancement does not need to be renewed or repeated at every stage of related proceedings even if they began with an investigation instead of litigation.
- Although the DGCL does not require advancement, if advancement is provided but the agreement providing it attempts to unduly restrict coverage of certain claims, it may impermissibly conflict with the DGCL.
- Even those who plead guilty, and admitted that they did not act in the best interests of the company, may under some circumstances be eligible for indemnification, and therefore pleading guilty per se will not bar advancement nor would it be contrary to public policy to provide advancement to someone who pled guilty to the same claims for which he seeks advancement (if I understand this decision correctly based on the facts of this case.)
- The court noted at page 32 of the slip opinion that Section 145(a) has a good faith requirement for indemnification (not advancement) if a director, for example, is convicted (which is not a per se disqualification), but Section 145(c) has no such prerequisite, in connection with indemnification for a director or officer who has been “successful or otherwise” in defending a claim.
Postscript: As the Chair of the Indemnification Subcommittee of the ABA Business and Corporate Litigation Committee of the ABA Business Law Section, I am the co-author (with colleagues at my firm, Gary Lipkin and Aimee Czachorowski), of a book chapter that highlights all the key cases around the country on indemnification and advancement of directors and officers, for an annual ABA publication entitled: Recent Developments in Business and Corporate Litigation (2 volumes). I submitted the draft of the chapter a few weeks ago for the 2015 edition, so if I decide that this case is important enough to include in that chapter, it may need to wait for next year’s edition.
C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, Del. Supr., No. 655/657, 2014 (Dec. 19, 2014). This Delaware Supreme Court opinion is noteworthy because it clarifies the version of fiduciary duties known as the Revlon standard that apply to a board of directors when they are selling their company, or there is a change in control. Elaboration follows but a shorthand reference for this opinion is that a formal auction is not required to satisfy the Revlon standard as long as other bidders have an opportunity to bid. It also features a rare reversal of the Court of Chancery, and clarifies the standard that Chancery must follow when granting a mandatory injunction.
This case involved a transaction between C&J Energy Services, Inc. and Nabors Industries Ltd. Of course the factual details are important, and the first 25 pages of the decision described the facts extensively. Suffice it to say for purposes of this short blog post that the selling company was found to include a board with a majority of independent and disinterested directors.
One unusual procedural aspect of this decision is that the appeal was based on a bench decision, without a formal opinion. The bench decision and order were entered shortly before Thanksgiving on Nov. 25, 2014, and the appellate briefing and oral argument, as well as this 38-page opinion, were concluded by Dec. 19, 2014. That is fast work.
The parts of the decision with more widespread relevance are the statements of Delaware law involving the Revlon duties of directors, which involves an enhanced review by the court to determine if the fiduciary duties of the directors were fulfilled in connection with the sale of control of a company.
The Delaware Supreme Court determined that the Court of Chancery based its ruling on “an erroneous understanding of what Revlon requires.” Delaware’s high court emphasized that “Revlon made clear that when a board engages in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable.” However, the court also emphasized that Revlon does not require a board to set aside its own view of what is best for the company’s stockholders, nor does it require an auction in every instance.
Importantly, the Delaware Supreme Court underscored that: “There is no single blueprint that a board must follow to fulfill its duties” when the company is for sale, and a court applying the enhanced scrutiny under Revlon must determine “whether the directors made a reasonable decision, not a perfect decision.”
In order for a market check to be effective, an act of solicitation is not needed “so long as interested bidders have a fair opportunity to present a higher-value alternative, and the board has the flexibility to eschew the original transaction and accept the higher-value deal.” Moreover, the Court stated that the “ability of the stockholders themselves to freely accept or reject the board’s preferred course of action is also of great importance in this context.” See footnotes 84 through 88.
Delaware’s high court ruled that the Court of Chancery ignored its own precedent and the precedent of the Supreme Court to the effect that: “There are no legally prescribed steps that directors must follow to satisfy the Revlon duties . . .. Directors’ decisions must be reasonable, not perfect.” See footnotes 94 and 95.
Delaware’s high court reasoned that there were no material barriers that would have prevented a rival bidder from making a superior offer. For example, there was a broad “fiduciary out” that enabled the board to terminate the transaction with a more favorable deal emerged.
The Court explained that the facts in the original Revlon case involved the resistance by a selling board to a particular bidder and attempts by that board to prevent market forces from allowing the highest bidder to participate. In this case, there was no barrier to the emergence of another bidder and there was sufficient time to allow a higher bidder to emerge. The court also found it to be important that the stockholders of the seller had the chance to vote on whether to accept the deal that had been presented.
Mandatory Injunction Standard
In addition to finding that the trial court applied the wrong Revlon standard, the Delaware Supreme Court found that the Court of Chancery should not have issued any injunction, but certainly should not have entered a mandatory injunction. The appellate court found that the Court of Chancery also applied the wrong standard for a mandatory injunction.
Before a mandatory injunction can be issued, the Court of Chancery must “either hold a trial and make findings of fact, or base an injunction solely on undisputed facts.” See footnote 107.
This appellate decision also took the Court of Chancery to task by finding that the trial court erred in its issuance of an order that infringed on the contractual rights of the parties without justification. This opinion is unusually harsh in its criticism of the trial court for not applying the correct standard for a mandatory injunction and for not correctly applying the Revlon standard, the purpose of which is to insure that fiduciary duties are fulfilled.
The Supreme Court explained that the denial of a preliminary injunction does not include any final determinations of any facts or law and, in essence, is an acknowledgement that monetary damages after trial are the remedy that the plaintiff needs to pursue. Thus, this corporate litigation will now continue in light of the clarifications provided.
Salamone v. Gorman, Del. Supr., No. 343, 2014 (Del. 9, 2014). This Delaware Supreme Court decision interprets a voting agreement to determine whether it provides for a method of voting to elect directors based on a per capita, or a per share, framework. This appeal was based on a summary proceeding under Section 225 of the Delaware General Corporation Law to determine the composition of the board.
This opinion features noteworthy analyses of DGCL Section 212 which is the default rule of one share/one vote, and also includes a helpful discussion of the distinction between the nominating process and the process to elect board members. Also useful is the discussion of voting agreements under DGCL Section 218.
The net result of this decision was that Delaware’s high court reversed the Chancery in part and affirmed in part.
In Re Appraisal of Dole Food Company, Inc., C.A. No. 9079-VCL (Del. Ch. Dec. 9, 2014). This Court of Chancery decision is helpful for those engaged in corporate litigation, and any form of civil litigation in Delaware, to the extent that it confirms well-settled Delaware law of practice and procedure, that a lawyer cannot instruct a deponent not to answer a question during a deposition merely based on an argument that the question is either irrelevant or not likely to lead to the introduction of admissible evidence.
Under Court of Chancery Rule 37, that improper instruction required fee-shifting, which means that the attorney improperly instructing the witness not to answer is now responsible (or his client is), for the costs of the aborted deposition and the costs of preparing and filing the motion to compel. The court made the distinction between the fee-shifting required in these circumstances under Rule 37 and a separate analysis that applies for costs imposed for bad faith litigation (or fee-shifting clauses in agreements).
This opinion also includes an important analysis regarding what information must be produced in discovery for appraisal actions. Specifically, the court ordered the production of valuation materials that the plaintiffs in this appraisal action compiled prior to the lawsuit being filed. Also, the improper instruction not to answer a question during a deposition related to the same information that the deponent was required to testify about, after the plaintiff refused to produce it in reply to discovery requests. See generally materials previously provided on these pages regarding proper deposition practice in Delaware.
2009 Caiola Family Trust v. PWA, LLC, C.A. No. 8028-VCP (Del. Ch. Dec. 18, 2014).
This Delaware Court of Chancery opinion involves litigation over the management of a Delaware limited liability company formed to operate a residential apartment complex. The plaintiffs are non-managing members of the company that owns 90% of membership interests and the defendant is a Kansas LLC which owns 10% of membership interests and is also the managing member of the company, as well an individual who is a managing member of the Kansas LLC. The plaintiffs accuse the defendants of various breaches of the operating agreement of the company, as well as their fiduciary duties. The relief requested is the removal of the Kansas LLC from its position as a managing member. This decision is based on a motion to dismiss pursuant to Rule 12(b)(6) or in the alternative, on grounds of forum non conveniens. The motion to dismiss was denied except as it related to a claim for waste made by the plaintiffs.
The rest of this 31-page opinion is rather unremarkable except perhaps for the discussion of personal jurisdiction under the long-arm statute, 10 Del. C. § 3104. See prior Chancery decision in this case dated April 30, 2014.
AB Value Partners, LP v. Kreisler Manufacturing Corp., C.A. No. 10434-VCP (Del. Ch. Dec. 16, 2014). This Chancery opinion can be highlighted with a few bullet points:
- A motion for a TRO will be reviewed under the standard for a motion for preliminary injunction if a more developed record is presented to the court, but in any event, a mandatory injunction requires a much greater showing than a typical status quo injunction. Neither standard was satisfied in this case.
- Advance notice bylaws are commonplace and will only be enjoined due to inequitable circumstances, not evident in this case. A review of Delaware cases where such bylaws were upheld, and those in which such bylaws were stricken, provide a useful guide for future reference.
In re Comverge, Inc. Shareholders Litigation, Cons. C.A. No. 7368-VCP (Nov. 25, 2014).
This Court of Chancery opinion addresses a motion to dismiss a stockholder challenge to a completed merger. The plaintiffs contend that the board of directors of Comverge breached their fiduciary duties by conducting a flawed sales process and agreeing to unreasonable deal protection measures that precluded the possibility of a topping bid and related claims. This 54-page opinion granted in part and denied in part the motion to dismiss.
Two parts of this opinion are notable. One is the discussion of the Revlon standard as enhanced scrutiny in connection with a review of the fiduciary duties of board members in the service of maximizing the sale price of the enterprise when there is a transaction that will result in a change of control, especially when the merger consideration paid to the target stockholders is cash. See page 22.
Although the enhanced scrutiny under Revlon is more exacting than the deferential rationality standard applicable to conventional decisions governed by the business judgment rule, the court described the Revlon test as one of reasonableness. In that regard, the questions before the court in this case were:
(1) Whether the decision-making process employed by the directors, including the information on which the directors based their decision, was adequate; and,
(2) Whether the directors’ actions, in light of the circumstances that were existing, were reasonable. Thus, the court explained that the Revlon enhanced scrutiny is both subjective and objective. There is an objective reasonableness evaluation, however, Revlon is not a license for the courts to second guess reasonable, but debatable, choices that directors have made in good faith. See footnote 26.
The court found that for purposes of the motion to dismiss, it was reasonably conceivable that the Comverge Board breached its duty of care and possibly acted in bad faith in approving deal protection measures in connection with the merger that were impermissibly preclusive.
The court next turned to the claim that the acquiring company aided and abetted a breach of fiduciary duty by the target board. In connection with this analysis, the court considered other Delaware decisions involving persons misleading directors into breaching their duty of care. The court also referred to the recent Chancery decision of In Re Rural Metro Corp., 88 A.3d 54, 97 (Del. Ch. 2014), in which the target company’s financial advisor knowingly participated in breaches of the duty of care by members of the board because the advisor had “created the unreasonable process and informational gaps that led to the board’s breach of duty.” Id. at 99.
The court observed that a similar theme in these cases is that the third party aider-and-abettor possessed the requisite degree of “knowing participation” because the factual record pointed to evidence of a conflict of interest diverting the advisor’s loyalties from its client, such that the advisor, like the banker in Del Monte, is being paid in some manner something he would not otherwise get in order to assist in the breach of duty. Id. at 100.
The court concluded in this case that the claim failed because it falls in the category of cases where the claim does not involve a situation in which the third party bidder attempted to create or exploit conflicts of interest in the board, nor did the bidder conspire in or agree to the fiduciary breach of the board. Nor, as a financial advisor might, did it serve in the role of a gatekeeper.
We have previously written on these pages about the long-running saga in the Delaware courts involving stockholders of Wal-Mart seeking books and records from the retail giant regarding an imbroglio with its Mexican subsidiary. Bottom line: They were ordered to produce some documents. Wal-Mart told the Court of Chancery recently that they produced all documents in compliance with the court’s order. According to the stockholders, however: not so. Now the Chancellor must decide who is correct.
Frank Reynolds of Thomson Reuters provides an excellent overview of the situation in a recent article. Yours truly is quoted but nonetheless Frank provides a helpful update on this saga.