Professor Stephen Bainbridge‘s corporate law scholarship is often cited by Delaware’s Supreme Court and Court of Chancery in their corporate law opinions. The good professor is a friend of this blog and one of the most prolific corporate law experts in the country. He has recently published an article that argues in favor of fee-shifting bylaws. This adds to the burgeoning literature on this cutting edge issue in corporate litigation, and is must reading for anyone interested in this topic. See generally, recent law review article by Justice Ridgely of the Delaware Supreme Court, appearing on these pages. See also, recent article from Bloomberg BNA about pending Chancery case involving fee-shifting bylaws.
Supplement: Professor Bainbridge penned a follow-up article to the above piece that addresses the “public choice” issues regarding fee-shifting bylaws. More commentary, linked by the good professor, available from others here and here.
Lee v. Pincus, C.A. No. 8458-CB (Del. Ch. Nov. 14, 2014).
Why This Chancery Opinion is Noteworthy: The Chancellor provides in this Court of Chancery decision a useful overview of several key statements of Delaware law with widespread applicability in corporate litigation. For example: (i) the standard of review for a breach of fiduciary duty claim, and when self-dealing will require the entire fairness standard instead of the business judgment rule to apply; (ii) the difference between a direct and derivative claim is also examined; (iii) the court’s classic description of the duty of loyalty is helpful to have handy for this fundamental component of fiduciary duty; (iv) an explanation of those instances where a fiduciary duty claim will be permitted notwithstanding arguably affiliated claims based on breach of contract; (v) providing for liquidity of stock only to selected stockholders may form the basis of a claim and damages. (See footnote 29 and text accompanying both footnotes 24 and 34); and (vi) the investment bankers were not held liable for aiding and abetting even though they provided their consent to the waiver. (Cf. In re Rural/Metro).
The facts of this case involve Zynga, the “social gaming” company that is publicly traded on NASDAQ and is best known for online games such as FarmVille. It raised $1 billion in an IPO. The allegations in this case are that half of the directors waived a restriction that otherwise required them, and others, not to sell their shares until a certain number of days after the IPO. The waiver provided “earlier liquidity” to only selected members of the board and other pre-IPO stockholders. Because the waiver allowed them to sell their shares at higher prices than most other stockholders, who had to wait a longer period before they could sell, resulting in them selling their stock at a lower price, damages were claimed to exceed $200 million for the putative class.
I subjectively selected the following excerpt for my loyal readers:
The obligation Lee seeks to enforce is for the Director Defendants to not receive personal benefits inconsistent with the standard of conduct of fiduciaries under Delaware law.52 She alleges that the Director Defendants gave themselves an improper benefit inconsistent with their duty of loyalty to Lee and the putative class.53 In my view, this is quintessentially a fiduciary duty claim.
52 See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939) (“Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. . . . The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest.”).
C. Count I States a Claim for Breach of Fiduciary Duty
A motion to dismiss under Rule 12(b)(6) for failure to state a claim for relief must be denied unless, assuming the well-pled allegations to be true and viewing all reasonable inferences from those allegations in the plaintiff’s favor, there is no “reasonably conceivable set of circumstances susceptible of proof” in which the plaintiff could recover.54 Although “conclusory allegations that are unsupported by specific facts” are not accepted as true, and “unreasonable inferences [are not drawn] in the plaintiff’s favor,”55 the pleadings required to satisfy the reasonable conceivability standard are “minimal.”56 “[I]t may, as a factual matter, ultimately prove impossible for the plaintiff to prove his claims at a later stage of a proceeding, but that is not the test to survive a motion to dismiss.”57 (emphasis added)(some citations and footnotes omitted)
In re Allergan Inc. Stockholder Litigation, No. 9609, 2014 WL 5791350 (Del. Ch. Nov. 7, 2014). This opinion of the Delaware Court of Chancery addresses issues related to director’s duties of disclosure as well as ripeness in the context of corporate litigation. But as Frank Reynolds of Thomson Reuters writes, in an article that he has graciously shared with us, this decision is also the latest iteration of a long-running dispute for control of Allergan, the maker of Botox, that has generated several lawsuits in at least two states.
The court’s opinion quoted from the complaint which referred to a duty of candor, which the court referred to as the duty of disclosure, without criticizing the synonymous reference. Specifically, the court explained:
Although Count II is captioned in the consolidated complaint as a claim for breach of the “fiduciary duty of candor,” there is no independent duty of disclosure under Delaware law. Instead, the duty of disclosure derives from the duty of care and the duty of loyalty.
The court further added that:
As Vice Chancellor Laster recently explained:
Directors of a Delaware corporation owe two fiduciary duties: care and loyalty. The “duty of disclosure is not an independent duty, but derives from the duties of care and loyalty.” The duty of disclosure arises because of “the application in a specific context of the board’s fiduciary duties . . . .” Its scope and requirements depend on context; the duty “does not exist in a vacuum.” When confronting a disclosure claim, a court therefore must engage in a contextual specific analysis to determine the source of the duty, its requirements, and any remedies for breach. (citations omitted).
The court raised the issue of ripeness sua sponte, in the context of a claim for a declaratory judgment regarding written consents of shareholders, and concluded that it would not give an advisory opinion.
Justice Henry duPont Ridgely of the Delaware Supreme Court recently authored an article on one of the most timely issues in corporate litigation today: bylaw amendments that include fee-shifting and forum selection clauses.
His Honor prepared the article based on a speech he presented last month at the SMU Corporate Counsel Symposium, and we are grateful that he has allowed us to share a link to his article. In addition, it remains important to add that the SMU Law Review also consented to this posting of Justice Ridgely’s article with the following acknowledgement about the article: Posted with permission from the SMU Law Review and the Southern Methodist University Dedman School of Law. The article will appear in an upcoming issue of the SMU Law Review. The formal title of the article is: ”The Evolving Role of Bylaws in Corporate Governance.”
Much has been written in trade publications and in the blogosphere about recent developments involving bylaw amendments, some of which we have linked to on these pages.
Justice Ridgely announced a few days ago that, after 30 years as a member of the Delaware Judiciary, he will be retiring from the bench in January 2015. He has been one of the brightest stars in the constellation of Delaware jurists, which counts many shining lights among its number. Still, the Delaware Bench will be less stellar in his absence. His public service through his exemplary contributions to the administration of justice will remain a standard by which others should be measured.
My article entitled: Directors Given More Authority to Limit Multi-Forum Litigation, appeared in the November/December issue of NACD Directorship, a publication of the National Association of Corporate Directors. This regular short column discusses the recent Court of Chancery decision in City of Providence v. First Citizens Bancshares, Inc., also highlighted on these pages, which addresses one of the leading issues in Delaware corporate litigation today: forum selection bylaws.
Theravectys SA v. Immune Design Corp., C.A. No. 9950-VCN (Del. Ch. Oct. 31, 2014). This Court of Chancery opinion is useful for those engaged in Delaware corporate litigation to the extent that it clarifies when a subpoena served on a subsidiary can be used to obtain documents from the corporate parent of that subsidiary.
This letter decision involves a non-party that moved for a protective order under Court of Chancery Rule 26(c). The motion arises in the context of litigation against Immune Design Corp. (“IDC”) based on claims by Theravectys SA (“TVS”) that non-party Henogen manufactured products for IDC in violation of a contract between Henogen and TVS. In order to obtain discovery to establish its case, TVS served a subpoena on Novasep US, a corporate affiliate of Henogen. Novasep US and Henogen, neither of which is a party to this litigation, share a corporate parent headquartered in France. Novasep US is based in Pennsylvania.
Court of Chancery Rule 34(a) provides that a party may only request documents “which are in the possession, custody or control of the party upon whom the request is served.”
In this context, control has been defined to include “the legal right to obtain the documents requested upon demand. Thus, the key inquiry is whether the company has the power, unaided by the court, to force production of the documents.” See footnotes 4 and 5. In these instances, separate corporate identities are generally respected except in rare circumstances justifying the application of the alter ego doctrine to pierce the corporate veil of a subsidiary. The courts in Delaware decline to broaden the scope of control to include an inquiry into the practical ability of the subpoenaed to a party to obtain the documents.
The court did not address the arguments that the attempt to obtain these documents violated the applicable law in the foreign countries where the parent corporation and an affiliate were based.
The court found that Novasep US was not required to produce documents that were not in its possession, custody or control. The court allowed TVS discovery to allow it to attempt to demonstrate that the corporate structure of Novasep US and its relationships with its affiliates would allow it to determine whether the requested documents were within its control.
Doe v. Wilmington Housing Authority, is the name of a 2014 Delaware Supreme Court en banc unanimous decision that recognized the right to bear arms outside one’s home based on the Delaware State Constitution, Article I, Section 20. The gist of the opinion was highlighted on these pages here. The plaintiff in that case, a resident of public housing, could not have vindicated her rights through four years of litigation without the support of the National Rifle Association.
The NRA News TV Channel recently interviewed the plaintiff, who until the final decision was published, remained anonymous for fear of retaliation. The link to a video clip of her interview is available via this hyperlink.
Why is this relevant to this blog on Delaware corporate litigation? Because, as the U.S. Supreme Court has recently and repeatedly confirmed, the right to self defense, which is at the heart of the right to bear arms in both the U.S. Constitution and the Delaware Constitution, is a natural right that every person is born with. It is not a right granted by the U.S. Constitution. Rather, the U.S. Constitution and analogous provisions in state constitutions recognize this pre-existing right that we are all born with. One cannot give someone something they already have. Few rights enjoy this exalted status. It is such a fundamental right, it transcends the limited focus of this blog. God Bless America.
Mehta v. Smurfit-Stone Container Corp., C.A. No. 6891-VCL (Del. Ch. Oct. 20, 2014). This case is noteworthy for its description of the measure of damages that are potentially available for a stockholder who is wrongfully denied shares.
Background: This decision involves stockholders who initially made a demand for statutory appraisal rights in connection with a merger. The merger that is part of the background of this case, followed a plan of reorganization approved by the Bankruptcy Court in connection with a prior Chapter 11 bankruptcy proceeding of the company. The confirmation order of the Bankruptcy Court discharged and released all claims against the company and its directors relating to the bankruptcy. Shortly after the bankruptcy, the company merged. Pursuant to the merger, each share of the company’s common stock was converted into the right to receive a combination of cash, as well as a number of shares in the new company. See previous court decision in 2011 by the Delaware Court of Chancery involving this company and merger related litigation, highlighted on the pages.
The stockholders in this case made a timely demand for appraisal through their broker, and therefore did not receive the merger consideration. However, they did not complete the prerequisites for perfecting their statutory appraisal rights because they never filed a formal petition for appraisal. No other stockholder filed an appraisal either. The 120-day time period during which at least one stockholder must file an appraisal petition for an appraisal proceeding to move forward, came and went on September 24, 2011. Thereafter, the stockholders in this case withdrew the initial demand for an appraisal. After withdrawing their appraisal demand, they consistently argued and requested their right to receive the merger consideration.
The company refused to provide the merger consideration unless the stockholders agreed to broader settlement terms and other demands that the stockholders did not consent to, and therefore the company never provided the merger consideration to the stockholders in this case.
As a result the stockholders initiated this case alleging claims for breach of fiduciary duty. After a somewhat unexplained procedural delay, a motion to dismiss under Rule 12(b)(6) was briefed and oral argument was heard on September 15, 2014.
The court reviewed the relevant standard under a motion to dismiss and found that some claims were barred by the bankruptcy confirmation order which released bankruptcy related claims.
Highlights: Although the court found that there was no applicable fraud exception to the continuous ownership requirement for a derivative claim, the court found that there was a claim against the company due to the failure of the company to provide merger consideration to the stockholders in this case because after the effective date of the merger passed, and no stockholder filed a petition for appraisal by that deadline, the right to appraisal lapsed for all stockholders who had previously demanded appraisals. That triggered an obligation on the part of the surviving corporation to pay the merger consideration. Because that merger consideration was never paid, a stockholder has a claim to recover it. See Section 262(d)(1) of the Delaware General Corporation Law. See Section 262(e) regarding the deadlines within which a stockholder can withdraw an appraisal demand without the consent of the corporation. Compare also the deadline after which time the consent of the corporation is needed.
The claim against the corporation by the stockholders in this case could be framed as either a breach of contract or one for unjust enrichment.
Scope of the Remedy and Measure of Damages: The court explained that on a breach of contract claim, a plaintiff can only recover consequential damages if the damages were foreseeable at the time of the contract. Consequential damages are defined as those that do not flow directly or immediately from the breach. The court reasoned that those types of damages were not available in this case because that part of the relief requested was not reasonably foreseeable.
The court described the remedy for the failure to provide the stock portion of the merger consideration as “more difficult and will require input from the parties if this case reaches the remedial stage.”
The court further explained that:
One method would be to convert the stock component into a cash value based on the trading price of the shares on the date when payment was due and bring that amount forward with interest. Another method would be to award the value of the shares at the time of judgment, including intervening splits and dividends. Both of these approaches, however, select arbitrary points for valuing the shares. A third possibility would be to recognize that if the [stockholders] had received the stock component when it was due, they [the stockholders] would have had the ability to sell at a time of [their] own choosing during the period after September 25, 2011 [the date the stock should have been issued], until the date of judgment. In other situations where a party has a right to sell and the defendant has foreclosed the plaintiff from exercising that right, the law awards the plaintiff the highest intermediate value of the shares. See Duncan v. TheraTx, 775 A.2d 1019, 1023 (Del. 2001); Paradee v. Paradee, 2011 WL 3959604, at *13 (Del. Ch. 2010); Am. Gen. Corp. v. Continental Airlines Corp., 622 A.2d 1, 10 (Del. Ch. 1992).
Slip Op. at 14-15.
In sum, the court allowed the claim for nonpayment of merger consideration to proceed and noted that other remedial issues regarding any damages due would be confronted at a later time in the case.
Willis v. PCA Pain Center of Virginia, Inc., C.A. No. 9006-VCN (Del. Ch. October 20, 2014). This Chancery decision is noted for its usefulness in the toolbox of those who practice corporate and commercial litigation in Delaware, for two nuanced issues that often arise: (i) when equitable relief sought will be sufficient to provide Chancery with equitable jurisdiction even when legal remedies may arguably make the plaintiff whole; and (ii) nuances of the first-filed rule that explain situations (unlike this case) when deference is not always given to the suit that was first-filed.
I) Equitable jurisdictional basis: The court observed that even though specific performance can be an equitable remedy, it remains a discretionary one. If one is seeking specific performance for the transfer of personal property, as opposed to real estate, that typically can be satisfied by money damages, and thus is not necessarily a basis for a court of equity to exercise jurisdiction. But in this case involving professional services, the court found other facts that may not have allowed the parties to be made whole by money. Though not applicable here, the court noted that in some circumstances, there is a basis for equitable jurisdiction if a company’s insolvency can make a legal remedy unavailable–but a detailed foundation for the defendant’s insolvency must be adequately alleged. Equitable jurisdiction may also be available when the legal remedy is speculative or not quantifiable. Neither of the last two options applied in this case, however.
II) Nuances of the court’s discussion of the first-filed rule: (i) there are situations when complaints filed in two different fora within days or weeks of each other may be considered filed at the same time, and (ii) it is not necessary that parties be identical in both jurisdictions, especially if the missing party in one forum is controlled by a party in the other case; (iii) allegations need not be identical if they arise in both cases out of the same “nucleus of operative facts”; and (iv) issues such as those implicating the internal affairs doctrine and corporate law are more likely to be retained by a Delaware court than a run of the mill contract case.
In this matter, a breach of contract case filed a week earlier in Virginia was considered first-filed, and thus, this Delaware case was stayed in favor of that case. For purposes of allowing a case filed only a few days before to be considered first-filed, and not contemporaneous, the court observed that it will consider whether the first-filed case was the result of a race to the courthouse, such as after an agreed-upon moratorium expired, or if it was retaliation for the first-filed suit, or both parties each had months to decide whether or not to file a complaint, and one just took action sooner.
ReCor Medical, Inc. v. Warnking, C.A. No. 7387-VCN (Del. Ch. May 14, 2014). This letter opinion provides a helpful analysis of how the Court of Chancery awards attorneys’ fees based on a contract that provides for fees to be awarded to the prevailing party in a dispute. The issue here was the amount of fees, not the right to have them awarded. The essence of the objection to the amount of fees requested was that multiple lawyers worked on similar tasks and attended the same hearings. The court observed that, in hindsight, most legal services might benefit from greater efficiency, but the court concluded that the efforts in this matter were reasonable and consistent with professional judgment. The court applied a modest discount but granted most of the fees requested.