Delaware Corporate and Commercial Litigation Blog : Delaware Litigation Lawyer & Attorney : Francis G. X. Pileggi : Corporate, Business, Commercial, Delaware Chancery Court

Amirsaleh v. Board of Trade of the City of New York, No. 2822-CC (Del. Ch., January 19, 2009), read opinion here. Read summaries on this blog of the several prior opinions of the Court of Chancery in this case here. In this latest opinion, the Court presumed the reader's familiarity with the background facts recited in the Court's November 2009 opinion.

Overview

This 24-page Court of Chancery decision provides a descriptive post-trial analysis of the application of the implied covenant of good faith and fair dealing that Delaware imposes on all contracts--without exception. The claim for breach of the covenant was ultimately rejected in the context of allegations that a deadline was "selectively extended" to assist "connected" people.

Background

This dispute arose out of the merger, on January 12, 2007, of the New York Board of Trade ("NYBOT") with and into CFC Acquisition Company, a wholly owned subsidiary of IntercontinentalExchange, Inc. ("ICE").  In connection with the merger, NYBOT owners (known as members) were effectively given the option of being cashed out or receiving a combination of ICE common stock and cash in exchange for their membership interests. NYBOT members expressed their merger consideration preference by completing and timely submitting an election form to a third-party. The combination of ICE common stock and cash was worth more than the option of only straight cash, so most members naturally did not prefer to be cashed out.

The initial deadline for the election was January 5, 2007. Many members missed the deadline. Thus, the deadline was extended until January 18, 2007. However, some members still missed the extended deadline.

Plaintiff submitted his form late and it was rejected as untimely, thus he was cashed out instead of receiving the combination of common stock. He then sued claiming a breach of the implied covenant of good faith and fair dealing.

The Court's November 2009 opinion, cited as 2009 WL 3756700 (Del. Ch. Nov. 9, 2009), explained in great detail the contours of  the good faith and fair dealing covenant. The current opinion decided whether the evidence presented at trial satisfied the prerequisites for breach of that obligation. It did not.

Highlights

Although the demarcations of the applicable law were set forth in the November 2009 decision, the latest opinion is helpful for its highlighting of the factual situations that are illustrative of "what one should do" when there are financial repercussions for failing to meet deadlines and under what circumstances allowing only "selective" extensions of that deadline may be considered bad faith and a violation of the covenant of good faith and fair dealing.

Prerequisites to Finding Bad Faith Based on Facts of This Case

The Plaintiff failed to present at trial sufficient evidence to satisfy his burden of proof that the acceptance of less than all of the late elections amounted to bad faith. In order to establish bad faith the Court determined that the Plaintiff was required to show (but did not),  the following:

(i) that the decision to allow a limited extension of the deadline was motivated by bad faith; and (ii) that it was the result of a culpable mental state. See. 2009 WL 3756700 at *5-6.

The Court explained that the Plaintiff could have demonstrated the foregoing by showing that the decision to open a late acceptance window was: (i) solely based on the fact that certain "connected members" failed to get their forms in on time; or (ii) that certain "connected members" received special treatment in submitting late elections, including holding open the window until all  "connected members" had submitted their elections.

Four Examples Not Demonstrating Bad Faith

The Court explained that bad faith (the absence of good faith) would not be found if it appeared that the decision to accept late submissions fell within the following categories: (i) it was driven by considerations of customer satisfaction balanced against leaving enough time to calculate and distribute the merger distribution by the January 29, 2007 distribution deadline required by the merger agreement; or (ii) if it appeared that defendants made reasonable efforts to give all members making late elections the same or substantially similar assistance turning in their late forms. See n. 11. Nor would bad faith be found if: (iii) defendants had failed to accept any late election form; or (iv) if defendants accommodated all late filers (as this would have exceeded the implied covenant's requirements.) See n. 18

Court's Reasoning and Holding

The Court found that opening a late election acceptance window was not motivated by a desire to help "connected members" but rather was intended to accommodate all members who missed the deadline. Moreover, the people whom the Plaintiff claimed were "connected' and the object of the defendants' alleged favoritism, were not "connected" at all, as the Court explained after careful analysis of the relationships involved, spanning many pages of this opinion.  

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Lyondell Chemical Co. v. Ryan, Del. Supr. (March 25, 2009), read opinion here.  See revised opinion of  April 16, 2009 here. The Delaware Supreme Court rendered this unanimous en banc decision last evening. It was much anticipated in the corporate law world and in the few hours since its release it has already generated substantial commentary among corporate law professors and similar commentators.

Kevin Brady, a highly respected Delaware litigator, has provided us with the following review of the opinion:

In its decision on an interlocutory appeal, Delaware's High Court reversed the Court of Chancery’s July 29, 2008 decision denying summary judgment for the directors of Lyondell Chemical Company (“Lyondell”) as to the “Revlon” and “deal protection” claims and whether the directors of Lyondell acted in good faith in conducting the $13 billion sale of Lyondell.

The class action complaint alleged that the Lyondell directors breached their fiduciary duties of care, loyalty and candor and put their personal interests ahead of the interests of the Lyondell shareholders. In particular, the complaint alleged that: (i) the merger price was grossly insufficient; (ii) the directors were motivated by self-interest; (iii) the process by which the merger was negotiated was flawed; (iv) the directors agreed to unreasonable deal protection provisions and (v) the preliminary proxy statement omitted numerous material facts. By way of background, the merger price represented a substantial premium over the market price and the merger was approved not only by a disinterested board but also by more than 99% of the voted shares.

Lyondell’s charter contained an exculpatory provision pursuant to 8 Del. C. § 102(b)(7), protecting the directors from personal liability for breaches of the duty of care, so the case turned on whether there were any shortcomings on the part of the directors to implicate their duty of loyalty, a breach of which is not exculpated. Because the Court of Chancery had found that the board was independent and was not motivated by self-interest or ill will, the focus became whether the directors were entitled to summary judgment on the claim that they breached their duty of loyalty by failing to act in good faith.

Court of Chancery Focuses on Process and Deal Protection Provisions

The Court of Chancery rejected all of the plaintiffs’ claims except those directed at the process by which the directors sold the company and the deal protection provisions in the merger agreement. In particular, whether under Revlon v. MacAndrews & Forbes Holdings, Inc. (506 A. 2d 173, 182 (Del. 1986)), the directors failed to obtain the best available price in selling the company. The Court of Chancery decided that “unexplained inaction” by the Lyondell directors for two months permitted a reasonable inference that the directors may have consciously disregarded their fiduciary duties. The Supreme Court disagreed finding that there was no evidence from which to infer that the directors knowingly ignored their responsibilities, thereby breaching their duty of loyalty.

Justice Carolyn Berger writing for the Court examined the concepts of “bad faith” and “failure to act in good faith” as well as the range of conduct that might be classified as such in light of existing Delaware case law. See, In re Walt Disney Co. Deriv. Litig. (906 A. 2d 27 (Del. 2006)), Stone v. Ritter, (911 A. 2d 362 (Del. 2006) and In re Caremark Int’l Deriv. Litig. (698 A. 2d 959 (Del. Ch. 1996). While the Court of Chancery had denied summary judgment in order to obtain a more complete record before deciding whether the directors had acted in bad faith, the Supreme Court determined that the trial court “reviewed the existing record under a mistaken view of the applicable law.” The Supreme Court went on to note that there were three factors that contributed to that mistake: (i) the Court of Chancery imposed Revlon duties on the directors before they either decided to sell, or before the sale had become inevitable; (ii) the Court of Chancery read Revlon and its progeny as creating a set of requirements that must be satisfied during the sale process; and (iii) the Court of Chancery “equated an arguably imperfect attempt to carry out Revlon duties with a knowing disregard of one’s duties that constitutes bad faith.”

When Exactly Do Revlon Duties Arise?

In analyzing Revlon and its progeny, the Court of Chancery determined that the directors must actively engage in the sale process, and confirm that they have obtained the best available price either by conducting an auction, a market check or demonstrating “an impeccable knowledge of the market.” The Court of Chancery concluded that because the Revlon sale process must follow one of the these courses of conduct identified above and that the Lyondell directors had not followed any of the standards that the Court of Chancery extracted from Revlon and its progeny, the directors were unable to meet their burden under Revlon.

The Supreme Court disagreed noting that the problem with the Court of Chancery’s analysis was that Revlon duties arise not because a company is “in play” (such as in this case where there was a Schedule 13D filing) but rather when the company “embarks on a transaction – on its own initiative or in response to an unsolicited offer – that will result in a change of control.” In this case, that was when the Lyondell directors began negotiating the sale of Lyondell. The Supreme Court further noted that “there is no legally prescribed steps that directors must follow to satisfy their Revlon duties” and that the Lyondell directors failure to take any specific steps during the sale process could not have demonstrated a “conscious disregard of their duties.”

The Supreme Court concluded that the Court of Chancery “approached the record from the wrong perspective. Instead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price.” Finding that the record clearly established that the Lyondell directors did not breach their duty of loyalty by failing to act in good faith, the Supreme Court reversed the decision of the Court of Chancery and remanded the matter for entry of judgment in favor of the Lyondell directors.

SUPPLEMENT: Professor Stephen Bainbridge provides a scholarly analysis here. Dean and Professor Eric Chiappinelli provides his learned overview of the case here. Professor Gordon Smith gives us the benefit of his professorial insights here. Attorney  Bernard Sharfman of the Cohen Milstein firm has written a thoughtful article that includes a discussion of this case here.

Some of the extensive commentary on the trial court's opinion is collected here.

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In General Video Corp. v. Kertesz, (Del. Ch., Jan. 13, 2009), read opinion here, the Delaware Chancery Court refused to apply the "bad faith" exception to the Americal Rule and thus rejected a request by the victor for fee-shifting to the losing party in a case whose post-trial opinion was highlighted here.

This case dealt with a long-list of claims between ex-partners whose business venture failed and one partner started a new business without the other.

The Court reasoned that despite noting in its post-trial opinion that a key document was not authentic, that does not equate with the subjective perspective that the plaintiff believed and knew it was not authentic but relied on it anyway.

That is, the standard to be satisfied to establish the level of bad faith necessary to award attorneys’ fees as an exception to the American Rule, is not the same as, and is not satisfied by, failing to carry the burden of proof to win on a claim.

Chancery Court Rule 21 was also addressed. The Court refused to apply this rule, as requested, to add a shareholder as an indispensable party so that the party seeking attorneys’ fees could pierce the corporate veil. The Court explained that simply because it referred to the shareholder as the real party in interest for analytical purposes, does not make him an indispensable party for purposes of Rule 21.
 

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