Expedited Trial in Section 225 Case Upheld

 Salvatore v. Visenergy, Inc., C.A. No. 10108-CB (Del. Ch. Oct. 6, 2014). This short letter ruling is noteworthy in passing as a reminder that in Section 225 cases, a trial date will often be scheduled within 60 days of filing a complaint. The substantive issue in this case surrounded a written consent of shareholders to elect board members, but this decision related to a request for a continuance of the trial

In this decision, the court refused to postpone a trial date set for 45 days from the complaint being filed. The “intervening holidays” and related excuses did not prevail. Nor did the fact that one party was pro se. DGCL Section 225 allows for expedited proceedings to determine the validity of board elections. This type of expedited proceeding is one of the “sweet spots” of Delaware corporate litigation.

Nuances of Advancement of Fees for Compulsory Counterclaims

Pontone v. Milso Industries Corp., C.A. No. 7615-VCP (Del. Ch. Oct. 6, 2014).

Why This Case is Important:  This decision of the Delaware Court of Chancery granted interlocutory appeals requested by both parties due to the arguable inconsistency in cases applying the Delaware Supreme Court decision in Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992), regarding what types of counterclaims are subject to advancement of fees.

Bottom Line Reasoning: The Court of Chancery reasoned that the parties would benefit and it would be in the interest of justice to have greater clarity on the issue of what types of counterclaims are advanceable.  The court explained that:  “Advancement cases can be quite contentious, time-consuming, and expensive.  A decision clarifying when counterclaims are advanceable would avoid unnecessary litigation and resolve at least some potential advancement disputes before they occur.”  Slip op. at 11.

Prior decisions in this case by the Court of Chancery have been highlighted on these pages.  The prior opinions of May 29, 2014, regarding a dispute over which counterclaims were compulsory and therefore advanceable, also addressed exceptions to a Special Master Report.  On September 3rd, the court denied a motion for reargument.

The court discusses Supreme Court Rules 41 and 42 which govern interlocutory appeals.  Both parties to the case sought interlocutory appeals based on slightly different arguments that had in common that several decisions of the Court of Chancery were not consistent with the two-prong test of the Delaware Supreme Court in Roven in connection with which counterclaims are advanceable, or subject to advancement of fees.  See, e.g., Zaman v. Amedeo Holdings, Inc., 2008 WL 2168397 (Del. Ch. May 23, 2008) (Strine, V.C.).  See also cases cited at footnote 18 of the letter decision in this case with citations to cases that are arguably not consistent with Roven, or at least internally inconsistent.

30th Annual Distinguished Lecture in Law

Delaware and the Development of Corporate Governance
PileggiLecture184px

The Delaware Journal of Corporate Law of Widener Law Delaware
presents the

30th Annual Francis G. Pileggi Distinguished Lecture in Law
Delaware and the Development of Corporate Governance
Professor Brian R. Cheffins
S.J. Berwin Professor Corporate Law,
University of Cambridge, Cambridge, UK

Friday, October 17, 2014
8:00 a.m. Breakfast; 8:45 a.m. Lecture

Hotel duPont, du Barry Room
11th and Market Streets
Wilmington, DE 19801

One substantive CLE credit available in Delaware and Pennsylvania.

Register online, or download the brochure and registration form as a pdf below and mail, email, or fax the form to Rose Callahan.

Download the brochure and registration form as a pdf ]

For questions or inquiries, please contact Rose E. Callahan at 302-477-2014 or via email at recallahan@widener.edu.

Since 1998, Professor Brian R. Cheffins has been the S. J. Berwin Professor of Corporate Law at Cambridge University. He began his academic career at the University of British Columbia’s Faculty of Law, where he taught from 1986 to 1997. Professor Cheffins has held visiting appointments at Duke, Harvard, Oxford and Stanford and was named a Guggenheim Fellow in 2002. His primary research interests are corporate governance and corporate law, with particular reference to economic and historical aspects. Professor Cheffins is the author of Company Law: Theory, Structure and Operation (Oxford, 1997), The Trajectory of (Corporate Law) Scholarship (Cambridge, 2004) and Corporate Ownership and Control: British Business Transformed (Oxford, 2008).

In the 2014 Pileggi Lecture, entitled “Delaware and the Development of Corporate Governance,” Professor Cheffins will assess Delaware’s contribution to a corporate governance transformation U.S. public companies have experienced over the past 40 years. He will focus on various judgments handed down by Delaware’s courts that qualify as corporate governance landmarks while making the point that Delaware’s impact has varied from marginal to substantial depending on the era and the governance topic involved.

Prior Lectures in this series, at least for the last few years, were highlighted on these pages.

History of the Annual Pileggi Lecture
In 1985, Francis G.X. Pileggi, who was then the Internal Managing Editor for the Delaware Journal of Corporate Law, envisioned creating a forum where practitioners, judges, and academics, distinguished in the area of corporate law, could speak directly to those most responsible for setting policy on corporate law in the United States—the Delaware bench and bar. Through his efforts and the generosity of his father, Francis G. Pileggi, the idea turned into reality. It continues today through the members of the Delaware Journal of Corporate Law and the continued generosity of Francis G. Pileggi, a founding attorney of Pileggi & Pileggi.

UPDATE: Frank Reynolds of Thomson Reuters has written an excellent summary of the Lecture this year.

Section 220 Demand Rejected As Time-Barred

Wolst v. Monster Beverage Corp., C.A. No. 9154-VCN (Del. Ch. Oct. 3, 2014), this post-trial Chancery ruling is a another example of why a demand for books and records based on DGCL Section 220 is often an unpredictable exercise, and not inexpensive. In this decision, the Court rejected a Section 220 demand in light of the purpose for the demand relating to actions taken about seven years ago–well beyond the typical three year statute of limitations for derivative breach of fiduciary duty claims. Several highlights of this decision are noteworthy for purposes of corporate litigation:

  • The court refused to extend to derivative claims the general rule that a class action tolls the statute of limitations for the putative members of the class pursuing direct claims. See Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974); Dubroff v. Wren Hldgs., LLC, 2011 WL 5137175 (Del. Ch. Oct. 28, 2011).
  • Although the Court of Chancery is not bound by statutes of limitations, and a demand may be allowed if there were other potential claims that were not time-barred, the purpose of the demand was to investigate matters that occurred seven years ago, which the court determined would be barred by laches.

New Section 220 Books and Records Decision Applies Wal-Mart to Allow Production

Oklahoma Firefighters Pension & Retirement System v. Citigroup Inc., No. 9587, final report issued (Del. Ch. Sept. 30, 2014). This decision by a Master in Chancery is of importance to the extent it is the first trial court decision to apply the recent Delaware Supreme Court’s Wal-Mart decision, highlighted on these pages, in connection with the types of data a shareholder can demand from a corporate board whose foreign subsidiary is credibly accused of wrongdoing, pursuant to DGCL Section 220. This ruling is subject to de novo review by the Court of Chancery. The money quote from the decision follows:

Having established a proper purpose for its inspection, Plaintiff bears the additional burden of showing that the books and records it seeks are “necessary and essential” to the stated purpose. The Delaware Supreme Court [in the Wal-Mart case] recently explained:

Documents are “necessary and essential” pursuant to a Section 220 demand if they address the “crux of the shareholder’s purpose” and if that information “is unavailable from another source.” Whether documents are necessary and essential “is fact specific and will necessarily depend on the context in which the shareholder‟s inspection demand arises.”40

To reiterate, I recommended in my draft report that the Court order Citigroup to produce for inspection (1) board and committee minutes and materials provided to the board or committees, (2) meeting preparation materials as defined above, and (3) policies and procedures, but only to the extent those books and records related to the following topics: (a) the Banamex fraud, (b) the BSA/AML matters at Banamex USA, (c) Citigroup‟s fraud detection and prevention efforts, and (d) Citigroup‟s BSA/AML compliance.

Frank Reynolds of Thomson Reuters provides an article with an insightful overview about the case.

Exculpation of Independent Directors Headed for Appellate Review

This post was prepared by Aimee M. Czachorowski.
An interlocutory appeal has recently been granted in the Delaware Court of Chancery case of In re Cornerstone Therapeutics, Inc., Cons. C.A. No. 8922-VCG (Del. Ch. Sept. 26, 2014), on the issue of when independent directors may be dismissed prior to trial. The next step in the process is for the Delaware Supreme Court to make their own independent determination about whether they will take the interlocutory appeal. This is an important issue in Delaware corporate litigation that is less settled than one would expect for such a common issue.
In a prior recent opinion highlighted on these pages, the Chancery Court declined to dismiss members of a special committee potentially exculpated from liability by a DGCL Section 102(b)(7) provision when the entire fairness standard is applied to review the transaction.  The Court held that, pursuant to Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001), it could not determine whether the director defendants could be exculpated until after a decision had been made as to the entire fairness of the transaction. 
The directors have now been granted an interlocutory appeal of that decision, in part because of the conflicting Chancery decisions on whether, under an entire fairness standard of review, exculpation under 102(b)(7) can be employed to dismiss them at the motion to dismiss stage, or whether they must await a full decision on the entire fairness of the transaction after trial. 
 

Non-Signatory LLC Members Bound By Operating Agreement

Seaport Village Ltd. v. Seaport Village Operating Company, LLC, et al., C.A. No. 8841-VCL (Del. Ch. Sept. 24, 2014). This decision by the Delaware Court of Chancery highlights a counterintuitive statutory rule. The Delaware LLC Act provides that each LLC member, and the LLC itself, are considered parties to an LLC operating agreement, even if they did not sign the agreement.

As the court explained, Section 18-101(7) of the Delaware LLC Act:

added the following language to the LLC Act: “A limited liability company is not required to execute its limited liability company agreement. A limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.” Del. SB 363, 141st General Assembly, 2002 Delaware Laws Ch. 295 (June 20, 2002). The amendment became effective on August 1, 2002. In 2005, the General Assembly added nearly identical language to the LLC Act to clarify that members also are bound by the LLC’s operating agreement, regardless of whether they execute the agreement. Del. SB 86, 143rd General Assembly, 2005 Delaware Laws Ch. 51 (June 14, 2005) (adding the words “[a] member … is bound by the limited liability company agreement whether or not the member … executes the limited liability company agreement”). These amendments make clear that the LLC and its members are parties to and bound by the LLC agreement, regardless of whether they sign it.

Another noteworthy aspect of this short ruling is one that the parties did not argue. The dispute related to a contractual provision that awarded attorneys’ fees to the prevailing party. There was no issue raised by the parties or the court that such a contractual provision was generally enforceable in Delaware, and enforceable in this case.

 Supplement: It deserve mention whenever the venerable Professor Bainbridge quotes or links to this blog, and so we are thrilled to note that he links to this post on his blog.

Update on Fee-Shifting Bylaw Issue in Pending Chancery Case

Recent activity in the Delaware Court of Chancery has followed the Delaware Supreme Court’s May 2014 decision in ATP Tour, Inc v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), highlighted on these pages, which upheld a fee-shifting bylaw, at least in principle.   The plaintiff in the pending Delaware Court of Chancery case in Kastis v. Carter, C.A. No. 8657-CB, recently moved to challenge the validity of a bylaw adopted expressly by the defendant corporation to invoke the fee-shifting provided for in ATP. This is a cutting-edge issue in Delaware corporate litigation.    

The defendant corporation, Hemispherx, adopted the fee-shifting bylaw on July 3, 2014, after it became clear that the Delaware General Assembly was not going to act to disallow such provisions in response to the Court’s decision in ATP.  On July 18, 2014, Hemispherx notified the plaintiff in Kastis that it had adopted the bylaw and intended to apply it retroactively, invoking it in the pending Chancery case.  Kastis quickly filed a motion to invalidate the bylaw.[1]  Both parties briefed the issue.[2]  After an August 12 teleconference with the Court, in which the Court indicated that the plaintiff needed to amend its complaint to challenge the validity of the bylaw, Plaintiff moved, on August 22, for leave to amend its complaint.[3]  Again, both parties submitted briefing.[4]

Surprisingly, after briefing, the parties agreed just this week not to apply the fee-shifting bylaw to any aspect of the litigation.  They informed the Court that they had agreed “that the bylaw will have no application to this litigation, and [Hemispherx] will not assert the bylaw as a basis for fee-shifting in this case.”[5]  Accordingly, since the fee-shifting bylaw was no longer at issue, plaintiffs’ Motion for Leave to Amend its complaint was denied.[6]  Although the case will continue its progress in the Court of Chancery on other issues, the issue of whether Hemispherx’s bylaw is valid or enforceable will no longer be addressed.

Aimee Czachorowski, an associate in our Wilmington office, prepared most of this post.

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The following referenced court filings in the Kastis case are hyperlinked together as one pdf.

[1] July 21, 2004 Motion to Invalidate Retroactive Fee-Shifting and Surety Bylaw or, in the Alternative, to Dismiss and Withdraw Counsel.

[2] Hemispherix Response and Plaintiffs’ Reply Brief.

[3] Plaintiffs’ Motion for Leave to File an Amended Complaint.

[4] Defendants’ Response to Plaintiffs’ Motion For Leave to File an Amended Complaint and Motion for Partial Stay.

[5] September 16, 2014 letter to Chancellor Bouchard.

[6] September 16, 2014 Order.

Dismissal Denied for Disinterested Directors When Entire Fairness Applies to Transaction

In re Cornerstone Therapeutics Inc. Stockholders Litigation, Cons. C.A. No. 8922-VCG (Del. Ch. Sept. 10, 2014). This Chancery decision is noteworthy for its analysis of the applicable standard for a motion to dismiss members of a special committee when the challenged transaction would otherwise be subject to the entire fairness standard. This opinion provides a helpful review of the history of the standard and a discussion of when the burden of proof shifts to the plaintiff even when that standard applies, though initially the burden rests with the defendant.

The opinion also features one of the first applications of the recent Supreme Court opinion in M&F Worldwide, highlighted here, which provides that a deal with a controlling shareholder, in order to enjoy the business judgment rule standard of review, be conditioned ab initio on a majority of the minority approval, and approval by an independent special committee.

Chancery Applies Comity to Stay Litigation

In Scott v. Dandero, C.A. No. 9041-VCG (Del. Ch. Sept. 8, 2014), the Court of Chancery applied general principles of comity and judicial efficiency to deny a request to lift a stay of a case before it involving parties and issues that were common to separate pending litigation in Texas. This amorphous power of the court is a useful and practical tool to employ when  common parties are involved in multi-jurisdictional litigation involving related issues.