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

CME Group Inc. v. Chicago Board Options Exchange, Inc., No. 2369-VCN (Del. Ch., June 3, 2009), read opinion here. Prior Chancery Court opinions in this case were summarized on this blog here.

 This action began in order to establish the economic and trading rights of the Board of Trade of the City of Chicago (“CBOT”), now under the auspices of CME Group, Inc., as Exercise Members or Exercise Member Delegates of defendant Chicago Board Options Exchange (“CBOE”). CBOT established and financed the CBOE, which as a national securities exchange, is regulated by the Securities and Exchange Commission (“SEC”).

Procedural Background

The prior Chancery Court decisions in 2007, linked above, denied an application for injunctive relief and also stayed this action pending a decision by the SEC about whether the Certificate of Incorporation of CBOE should be interpreted to the effect that the demutualization of CBOT resulted in the loss of Exerciser Member status.

On January 22, 2008, the SEC approved the CBOE’s interpretation that no person could qualify as an Exerciser Member of CBOE after the CBOT-CME merger.

The SEC decision of January 2008 also indicated that the Chancery Court had jurisdiction in this case to decide the state law issues among the parties, which were generally understood to involve breach of contract and fiduciary duty claims. In February 2008, the plaintiffs filed a Third Amended Complaint against CBOE and certain of its former directors. Shortly before summary judgment motions were scheduled to be argued in June 2008, the parties reached an agreement in principle resolving this litigation. A Stipulation of Settlement was submitted to the court in August 2008 and a Scheduling Order was thereafter entered which certified a temporary class, directing the sending of notices, and established the procedures for a hearing on the settlement and for making any objections to the settlement.

Issues Addressed by the Court

1) Whether this action should be certified as a class action;
2) Whether the settlement is fair and reasonable as between the plaintiff class and the defendants;
3) Whether the allocation of the settlement proceeds among the putative class members is fair and reasonable; and,
4) Whether the requirements imposed in order to qualify for receiving distribution of the settlement proceeds are fair and reasonable.

Without reciting the intricate factual details and overlapping claims in this 30-page decision, I will focus on the more noteworthy legal issues.

Class Certification

The court reviewed the requirements of Chancery Court Rule 23(a) which provides the four criteria that must be satisfied for certification of a class: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation. The court reviewed the facts of this case and found that these prerequisites were easily satisfied. The court also reviewed the requirements of Chancery Court Rule 23(b) that must be satisfied by parties seeking certification of a class and the court found that the certification of a mandatory (i.e., non-op-out) class is appropriate under both Chancery Court Rules 23(b)(1) and 23(b)(2).

Adequacy of a Settlement

The court acknowledged that in approving a settlement of this nature, the court is not in a position to resolve the merits of the dispute, but rather, the court must assess the nature of the claims asserted and the defenses that might be raised in opposition and then apply its own business judgment to determine whether the proposed settlement is fair and reasonable. The court observed that there was no objection to the sufficiency of the settlement and that the objections filed related primarily to allocation.

Structural Objections

The court addressed the many objections that related to the following three categories:
1) Objections dealing with class membership cut-off and eligibility dates;
2) Objections to the verification procedures established to assure that participating members satified various requirements of Group A Settlement Class Members;
3) Objections to the allocation of value as between Group A Settlement Class Members and Group B Settlement Class Members; and
4) An objection to the scope of the release requested by CBOE.

The court addressed each of the substantive objections in turn and overruled them. Regarding allocation, the court noted that an allocation plan must be fair, reasonable and adequate (citing Schultz v. Ginsburg, 965 A.2d 661, 668 (Del. 2009)). The court observed there was no mathematical model to yield the proper division of proceeds among class members where the class members are not situated in exactly the same fashion. As part of approving the settlement, the court determined that the allocation was also fair and reasonable.

The Release

The issues regarding the release included the fact that certain person would be bound by the release although they would receive no consideration. The court cited authority at footnote 41 for the position that receiving no consideration is not necessarily a sound basis for objecting to a settlement because a party funding a settlement reasonably can expect to put all claims relating to the subject matter of the litigation (both real and theoretical) behind it.

Brief Postscript

In a final section of the opinion entitled “Brief Postscript,” the court concluded that: “This was a difficult matter.” Nonetheless, the court explained that it was “in no position to reach any conclusion other than that the Settlement, including its allocation plan, was, in the words of Schultz, ‘fair, reasonable, and adequate.’”
 

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In Re Cablevision/Rainbow Media Group Tracking Stock Litigation, No. 19819-VCN (May 22, 2009), read opinion here.

This Chancery Court decision resolved a dispute regarding the amount of fees and the division of fees between class counsel in a Delaware shareholders’ suit that challenged the exchange by Cablevision Systems Corporation of its then-outstanding tracking stock and certain assets of its Rainbow Media Division for Cablevision common stock. Shareholder actions challenging the transaction based on the adequacy of the consideration were filed in Delaware and later in New York. The allegations in both actions were similar although the New York action contained additional claims.

Procedural background

According to the court, the Delaware case “did not proceed with any great dispatch. It was the better part of two years before the Delaware plaintiffs began to move forward with their litigation here. The plaintiff in the New York action did take discovery but that case was eventually confronted by a stay of that action.” The plaintiff in the New York case moved to intervene in the Delaware action to seek a stay of the Delaware action in favor of the New York action. The Delaware Chancery Court directed counsel for both the Delaware plaintiffs and the New York plaintiff to “work together to pursue cooperatively the interests of the class. Apparently that request was not implemented.”
The proposed settlement that would also include the New York action was for payment to the class of $8.25 million, inclusive of attorneys’ fees. The proposed settlement supported a fee award of 30% of the common fund recovery.

Objections to Class Action Settlement

However, the New York plaintiff made known its objections to the proposed settlement and succeeded in negotiating an increase of $1.5 million in the settlement proceeds to a total of $9.75 million. The plaintiff in New York asserted that the Delaware plaintiffs settled “on the cheap and that its ability to negotiate an even greater settlement was severely hampered as a result.”
Nonetheless, the Chancery Court approved the settlement of a payment of $9.75 million. The court regarded this as a fair and reasonable amount under the circumstances as a settlement.

Issue: How to Split Fees Among Class Counsel

The only issue was the question of attorneys’ fees in terms of the total amount and how those amounts would be divided between counsel. Counsel for the Delaware plaintiffs sought an award of 30% of the $8.25 million. However, counsel for the New York plaintiff urged the court to reduce the total award to $1.75 million (thus increasing the amount to be distributed to the class) and then divide that amount equally between counsel for Delaware plaintiffs and counsel for the New York plaintiff.

Court's Reasoning

The court acknowledged that there was no “bright line test” to apply in this situation. The court explained why it decided that an award of 22.5% of the fund would be an appropriate amount for attorneys’ fees which would result in a total award of fees and expenses of $2,193,800 (with expenses for both Delaware and New York counsel approximating $195,000).

The court acknowledged the difficulty in allocating attorneys’ fees among lawyers for plaintiffs pursuing substantially similar claims in different jurisdictions. The court recited the standards generally for awarding attorneys’ fees in class actions and recognized that the attorneys for the New York plaintiff were able to secure an additional $1.5 million for the settlement. In sum, the court awarded 22.5% of the initial $8.5 million recovery to the Delaware plaintiffs “reduced from the additional amount paid to the class from what would have been fees paid to the Delaware plaintiffs if the proposal of the 30% fee award from the common fund had been approved.” Thus, the bottom line is that the Delaware plaintiffs were awarded $1,717,000 in fees and expenses and the New York plaintiff was awarded $476,800 in fees and expenses.

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Kuroda v. SPJS Holdings, L.L.C., Del. Ch., No. 4030-CC (April 15, 2009), read opinion here.

This case involves the following claims among members of an LLC, arising out of an LLC Agreement: (i) breach of contract; (ii) tortious interference with contract; (iii) tortious interference with prospective economic advantage; (iv) breach of the implied covenant of good faith and fair dealing; (v) conversion; (vi) unjust enrichment; and (vii) civil conspiracy. The court dismissed the foregoing claims against most of the defendants based on a motion to dismiss under Rule 12(b)(6). The discussion of this smorgasbord of claims serves as a useful reference to include in the toolbox of the business litigation lawyer.

Background

The factual background involves an intricate web of overlapping entities. The central fact that is key to this dispute is that a few investment management professionals formed several entities for the primary purpose of investing in Japanese companies. The plaintiff was the main "point man" in Japan. Eventually, the plaintiff and the other members of the LLC had disagreements that caused the plaintiff to want to leave. This litigation started when the negotiations for an amicable departure were unsuccessful. Among the problems that gave rise to the suit included the alleged failure of the defendants to provide full payment that the plaintiff thought he was owed, and the issuance to the plaintiff of a K-1 purporting to assign him $10 million in income that he apparently did not receive.

Breach of Contract Claim

Regarding the breach of contract claims relating to the LLC Agreement, the court denied the motion to dismiss against two of the defendants based on the familiar test for a Rule 12(b)(6) motion that the court cannot choose at such a preliminary stage the movant's view of the contract if it is "not the only reasonable interpretation". FN 9.

The opinion also includes discussion about whether the LLC members could be held liable "as members, solely by reason of them being members". Reference was made to Section 18-303(a) of the Delaware LLC Act, which addresses the liability of members to third-parties, but, the court explained, it "has no bearing on the liability between members." FN 13.

The court discussed the elements of a breach of contract claim (FN 15). The plaintiff, Kuroda, alleged that issuing him a K-1 that purported to assign him income that he never received. However, he still failed to allege the element of damages because as a Japanese citizen it was not clear that he would owe taxes  in the U.S., or suffer other damages as a result of an inaccurate K-1, though the court did allow the plaintiff to amend his complaint. [This conclusion should be compared with a decision from the Chancery Court of many years ago in an unaffiliated case that reached a different result on different facts but involved an arguably analogous issue. See   Litle v. Waters, 1992 WL 25758 at *8 (Del. Ch., Feb. 11, 1992)(finding that the plaintiff in that case stated a claim for oppression of a minority shareholder by failing to declare dividends in a subchapter S corporation where the plaintiff minority shareholder was incurring tax liability but receiving no income to pay the liability, while the Defendant was receiving loan repayments which he could use to pay his tax liability.)]

Tortious Interference with Contract

It was explained by the court as "well-settled that a party to a contract cannot be held liable for both breaching a contract and tortiously interfering with the same contract." FN 18. Moreover, the individual defendants were in control of the member entities, thus, as long as they were acting within the scope of their respective roles as managers of the member entities, they cannot be held liable for tortious interference with contract, based on the reasoning that they are the agents of the signatories to the contract. FN 20.

Tortious Interference with Prospective Economic Advantage

The elements of a claim for tortious interference with prospective economic advantage were recited (FN 31), but preliminarily, the court found that those claims were not direct claims that could be brought by the plaintiff, but rather were derivative claims that needed to be brought on behalf of the LLC through which he did business. See 6 Del. C. Section 18-1001 and FN 32.

Implied Covenant of Good Faith and Fair Dealing

An  explanation of this cause of action and a nuanced amplification of its limited scope in the opinion is the best way to  understand why this claim was dismissed, so I quote from page 24 of the slip opinion:

The implied covenant of good faith and fair dealing inheres in every contract and requires ‘a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits’ of the bargain.”38 The implied covenant cannot be invoked to override the express terms of the contract.39 Moreover, rather than constituting a free floating duty imposed on a contracting party, the implied covenant can only be used conservatively “to ensure the parties’ ‘reasonable expectations’ are fulfilled.”40 Thus, to state a claim for breach of the implied covenant, Kuroda “must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.”41 General allegations of bad faith conduct are not sufficient. Rather, the plaintiff must allege a specific implied contractual obligation and allege how the violation of that obligation denied the plaintiff the fruits of the contract. Consistent with its narrow purpose, the implied covenant is only rarely invoked successfully.42

Conversion

In connection with defining the elements of this claim (FN 49), the  court explains that when a claim arises out of a contract, such a cause of  action cannot be bootstrapped into a tort claim (FN 50). Moreover, the Court emphasized that there is a very narrow exception to the general prohibition against claims for the conversion of money. That is, the plaintiff, Kuroda, would have to establish a right to the money, separate from a contract right, that he asserts is being withheld improperly by the defendants. This he cannot do. FN 54.

Unjust Enrichment

After reciting the elements of this claim (FN 61), the reason given for why it was dismissed is as follows: such a claim is not available where, as here, there is a contract that governs the relationship between the parties. Thus, "when the complaint alleges an express, enforceable contract that controls the parties' relationship ... a claim for unjust enrichment will be dismissed." FN 63.  But cf. FN 65 that cites a case that refers to the limited circumstances in which the concept of "alternative pleading"  will allow both such claims to be pled in the same complaint.

Civil Conspiracy

The plaintiff failed to adequately allege the elements of an underlying claim, and thus this count in the complaint was dismissed because, as the court noted, civil conspiracy is not an independent claim. FNs 70 and 71. Moreover, the opinion cites to authority in footnote 74 for the position that unless a breach of contract constitutes an independent tort (which the excerpt above shows is hard to do), a breach of contract cannot constitute an underlying wrong on which a claim for civil conspiracy can be based.
 

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AT & T  Corp. v. Lillis, (Del. Supr., March 9, 2009), read opinion here. In a rare split decision, the Delaware Supreme Court ruled 3-2 to affirm the original decision of the Chancery Court  that was initially reversed by the Supreme Court (also a procedural rarity). 

This case involves an attempt by former officers and directors of MediaOne Corp. (the "Option Holders") to seek compensation from AT & T for the value of their stock options.

The bottom line of this procedurally quirky case is as follows: the Supreme Court originally reversed the Chancery Court and instructed it on remand not to base its decision on certain admissions made by AT & T in its pleadings that were later amended. After remand, the Chancery Court changed its orginal decision and found in favor of AT & T. Now, however, in its second decision, the Supreme Court has reasoned that the Chancery Court was right the first time and thus Delaware's High Court must affirm the original decision of the Chancery Court in favor of the Option Holders. ( Of course, the dissenting Justices in this opinion see it differently.)

The multiple prior decisions in this case have been highlighted here,  with the most recent Chancery Court opinion here, explaining in detail the procedurally unusual posture of this matter. Notably, the prior decision in this case decided by the Supreme Court was a unanimous en banc opinion highlighted here.

This opinion is must reading for any litigator that  needs to address any of the following issues:

• lasting impact of admissions (if any) in a pleading that is later amended;
• "the law of the case" doctrine
• whether legal positions taken in a case have any impact on divining the parties'  intent in a contract at the time the parties entered into that contract
• "course of conduct" as a contract interpretation principle
• whether a position taken in a pleading, which is later amended, can be used as "course of conduct" to interpret the intent of the parties in an agreement
• whether an admission in a pleading, later amended to withdraw the admission, can still be used as "evidence"--as compared to a legal admission. (see FN 17 in the majority opinion and FN 10 in the dissenting opinion)

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The Delaware Chancery Court, by Order available here, has amended Chancery Court Rules 3(aa) and 15(c), effective March 2, 2009. The text of the Order is so short, I will repeat it verbatim:

This 31st  day of December, 2008, IT IS HEREBY ORDERED that Court of Chancery Rule 3(aa) is amended by deleting the first sentence of Rule 3(aa) in its entirety and substituting in place of the first sentence the following language, which shall be effective Monday, March 2, 2009.

Rule 3(aa)

All complaints, counterclaims , cross-claims and third-party complaints, and any amendments thereto, shall be verified by each of the parties filing such pleading.

IT IS FURTHER ORDERED that Court of Chancery Rule 15 (c)(3) shall be amended by deleting subparagraph (c)(3) in its entirety and substituting in its place the following language , which shall become effective March 2, 2009.

Rule 15(c)(3)

The amendment changes the party or the name of the party against whom a claim  is asserted if the foregoing provisions of subdivision (2) of this paragraph are satisfied and, within 120 days of the filing of the complaint , or such additional time the Court allows for good cause shown, the party to be brought in by amendment.
 

The change to Chancery Court Rule 3(aa) makes it clear that not only do complaints need to be verified, but so too counterclaims, cross-claims, third-party complaints, and any amendments thereto.

The change to Rule 15(c)(3) refers to a new limit of 120 days from the filing of the complaint (with exceptions) as a deadline for when amendments that change the party or the name of the party will relate back to the date of the original pleading.

"All ye who labor" in the vineyards of Delaware corporate/business litigation, be forewarned.

UPDATE/CLARIFICATION: The Chancellor sent an email today to members of the Delaware Bar, shortly after the above Order was circulated by email, to provide clarification about the referenced amendment to Rule 15(c)(3). His Honor's email follows verbatim.

To all members of the Bar:

This is to clarify one possible ambiguity regarding the Chancery Rule 15(c)(3) amendment that you just received today via the DSBA's List Service. The Court of Chancery only amended the introductory paragraph to Rule 15(c)(3), beginning with the words "the amendment"  and ending with the words "by amendment". Nothing in the amendment to the introductory paragraph of Chancery Rule 15(c)(3) was intended to alter or modify the remaining subparagraphs (A) and (B) to Rule 15(c)(3). Those subparagraphs remain unchanged.

Thank you for your attention to this matter.

Bill Chandler
 

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Rohm and Haas Co. v. The Dow Chemical Co., (Del. Ch., Feb. 19, 2009), read letter decision here. The Chancery Court denied a Motion for Protective Order filed by proposed third-party deponents in this procedural ruling. Dow sought to depose several members of the Haas family who were also trustees of the trust that is a major shareholder. This expedited case is scheduled to go to trial next month on the claim by Rohm and Haas that it is entitled to specific performance of a merger agreement.

Prior posts about the background of this case that has received widespread attention in the popular press, and a prior procedural decision, have been highlighted on this blog here.

In this short letter decision, the court noted the broad scope of discovery allowable under Rule 26, but also acknowledged the court's power to restrict discovery where appropriate. In light of the large role played by the trust as a shareholder, and the claim that the shareholders would be harmed if the merger was not consummated, as well as the likelihood of obtaining useful information from the deponents, the court denied the motion for protective order, but emphasized that Dow assured the court that it would treat the witnesses with respect and "accommodate their schedules and conduct the depositions in a location convenient to the witnesses."

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In Brown v. Rembert,  2008 Del. Ch. LEXIS 180 (Dec. 11, 2008), the Chancery Court was presented with a motion on the eve of trial that raised the issue of whether the claims were within the court's limited jurisdiction. This detailed post-trial opinion explains why the claims for breach of fiduciary duty related to the use of a Power of  Attorney, between a formerly married couple, must be presented  to the Delaware Family Court, and therefore, cannot be adjudicated in Chancery Court. See generally, Section 342 of Title 10 of the Delaware Code.

Footnote 69 makes it clear that the issue of  Chancery's subject matter jurisdiction is so fundamental that it can be raised at any time prior to final judgment.

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My annual review of selected key corporate and commercial Delaware decisions in 2008 is here. The Delaware Law Weekly published it in its current issue. (Due to its length, this week only Part I appeared and next week the second half of the article will be published.)

My short reviews for each of the last three years, are available  here, here and here.

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The Bank of New York Mellon v. Realogy Corp., (Del. Ch., Dec. 18, 2008), read opinion here. This Chancery Court decision in favor of The Bank of New York Mellon ("BNYM"), involved contract interpretation of various documents in connection with an attempt to refinance.  Both BNYM as indenture trustee, and the corporate issuer sought declaratory judgment on cross-motions for summary judgment regarding whether the refinancing would be a breach of the relevant debt instruments and agreements. Summary judgment (on portions of the complaint) was granted in favor of BNYM.

Because the Delaware court applied New York  contract law (which is normally beyond the scope of this blog on Delaware corporate and commercial law), I want to highlight merely the quintessentially Delawarean procedural aspects of this case. Namely, the lightning speed with which this case  was presented and decided, is noteworthy as a common example of how quickly the Delaware Chancery Court can "tee-up for decision" and issue a comparatively lengthy opinion (compared to most other courts), on a complex case with a somewhat complicated set of facts. 

Specifically, in this case, the complaint was filed on Nov. 28, 2008. Expedited treatment was granted on Dec. 1. The Answer was filed on Dec.8. Both Opening Briefs on cross-motions for summary judgment (on parts of the complaint) were filed on Dec. 9, and Answering Briefs on Dec. 14. Oral argument was heard on Dec. 15 and this comprehensive and detailed opinion was issued on Dec. 18.  For a case involving complex factual issues and sophisticated overlapping documents and large amounts of money, that is amazingly quick work on the part of both the parties and the court.

UPDATE: The Wall Street Journal online highlighted this post today here. (See screenshot below)

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It may not rival the type of history made in this country last week, but it's still "a first". This blog was cited in a recent law review article for the first time that I know about. The article by Prof. Christopher M. Bruner is titled: The Enduring Ambivalence of Corporate Law,  59 Ala. L. Rev. 1385  (2008). It discusses many scholarly nuances of Delaware corporate law and cites thousands of sources in its hundreds of footnotes.

Hat tip to Prof. J. Robert Brown who highlighted footnote 304 of the above article that contains the cite to both my blog and to Professor Brown's blog, The Race to the Bottom. His post about it is here.

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In TowerHill Wealth Management, LLC v. The Bander Family Partnership, L.P., (Del. Ch., Oct. 9, 2008), read opinion here, the Chancery Court enjoined the defendant from pursuing arbitration of claims that the court determined should be litigated in Chancery. In addition to resolving issues of substantive arbitrability, the court provides an extensive analysis of the factors that need to be satisfied under Delaware Supreme Court Rule 42 in order to successfully seek an interlocutory appeal (and were not satisfied here), as well as applying the discretionary standard to stay a trial court's decision pending appeal (not met here).

After explaining its reasoning, the court acknowledged that even though it denied both the interlocutory appeal and the stay pending appeal, the Supreme Court could still decide to stay the trial court's decision to enjoin the arbitration and then still accept the interlocutory appeal.

This is the first of two Chancery  Court decisions within about a week of each other that were decided by the Chancery Court this month and that by coincidence both involve enjoining arbitration and determining whether the Chancery Court or an arbitrator should decide a particular issue in light of an arbitration clause between the parties.

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In Amirsaleh v. Board of Trade of New York City, Inc., 2008 WL 4182998 (Del. Ch., Sept. 11, 2008), the Chancery Court explored the contours and the content of the implied duty of good faith and fair dealing that is imposed on every contract governed by Delaware law. Here is a short summary of the prior Chancery Court decision in the case.

This is must reading for anyone interested in the latest explanation and amplification in Delaware of the all-important implied duty of good faith and fair dealing. The factual background involved the refusal to accept an election form after a deadline in connection with a merger--although other forms were accepted after the deadline for some involved in the merger.

The court's introductory paragraph includes a classic truism to the effect that even the most carefully drafted agreements cannot anticipate and address every potential issue that might arise in course of performing the terms of a deal. Thus, the crucial obligation of good faith can be a gap-filler. This duty is especially important, the Court emphasizes, when one party is given discretionary powers.

Specifically, the Court reasoned that:

"Simply  put, the implied covenant requires that the 'discretion-exercising party' make that decision in good faith". See footnote 47. See also footnotes 38 to 41.

The Court  also discussed third-party beneficiaries and the test for standing of such parties.

UPDATE: There are several other decision of the Court of Chancery in this case that should be read  in order to obtain a fuller understanding of how these issues were treated later in the case.

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Usha Rodrigues on The Conglomerate blog here  recounts a recent visit by Chancellor William Chandler to Georgia where he taught a short Advanced Corporations course. She includes some quotes from His Honor that provide insight into his views of Delaware corporate law.

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In Duthie v. CorSolutions Medical, Inc., 2008 WL 4173850 (Sept. 10, 2008), read opinion here, the Delaware Chancery Court addressed three issues in  a case in which it had previously ordered advancement.

1. Are the plaintiffs entitled to advancement of fees incurred in affirmatively asserting defamation claims regarding statements made in connection with the litigation about which the initial advancement suit was filed?
2. Were plaintiffs entitled to fees for securing parallel counsel to "get up to speed on the file" in case of a potential conflict (that never materialized)?
3. Are various fees for which advancement has been sought reasonable?

The court's answer to the first and second question is yes. As to the third question, the court set up a procedure for a Special Master to be appointed if the parties could not resolve the amount of fees to be paid--after each counsel submitted an affidavit about the reasonableness of their fees.

Here are what I regard as a few key points of the decision corresponding to the above issues:

• Although advancement is usually raised in the context of defending claims, there are instances where a defensive strategy appropriately includes asserting affirmative claims, especially where, as here, the certificate of incorporation broadly allows for it. (citing Citadel Holding Corp.  v. Roven, 603 A.2d 818, 824 (Del. 1992)). 

• Having new counsel ready to "hit the ground running" in the event of a potential conflict (even if it did not materialize) was prudent and it was reasonable to incur such fees--thus, they also are included with the advancement right.

• Money quote, regarding dispute over fees: "Advancement  is not the proper  stage for a detailed analytical review of the fees, whether in terms of the strategy involved or the staffing and time committed. Typically, a good faith certification from counsel  should  suffice."  But note that the court did establish a procedure in this case to address that issue.

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In Berger v. Pubco Corp., 2008 WL 4173860 (Sept. 8. 2008), the Delaware Chancery Court addressed the amount of attorneys' fees to be awarded to plaintiff's attorneys whose litigation efforts resulted in a "corporate benefit". Like its "cousin: common fund", corporate benefit is one of the doctrines that allows the court to award attorneys'  fees to plaintiffs' attorneys who bring derivative actions. The court also discusses the policy underpinnings for this policy.  (see footnotes 1 and 2 for supporting cases).

This is the first of two Chancery decisions in as many days about attorneys' fees.

The only issue  in this case was whether the amount requested was reasonable. The court applied the 7 factors commonly applied based on the seminal case of Sugarland Industries v. Thomas, 420 A.2d 142, 149-50 (Del. 1980).

Key points:

• The benefit conferred on the corporation by the litigation (heightened disclosure and a quasi-appraisal remedy) was substantial--even if the litigation was not terribly complex or novel.
• Plaintiff's counsel wanted $900k. Defense counsel only wanted to give him $92k. The court awarded $250k (which amounted to about $953 per hour.)
• Separate from the fees, the court also granted the plaintiff the right to a "Cede list" as distinguished from a NOBO list (The court described each in footnote 20, with the Cede list referring normally to the stockholders of record--that the corporation regulary keeps on file--as compared to the beneficial owners in a NOBO list). The court also declined to restrain communications between plaintiff's counsel and beneficial  owners.

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The recent invasion of Georgia by Russia reminded me of something that we in the U.S. understandably take for granted. Regardless of the unrest occurring in the rest of the world, we have the luxury of contemplating and writing about Delaware corporate law without worrying about other countries encroaching our borders--at least via conventional warfare. Residents of Georgia who are now homeless or running for cover from the Russians are not so fortunate.

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I am at the Annual ABA Meeting in New York City today. I just attended a helpful presentation on the multi-faceted aspects of the attorney/client privilege in the context of shareholder derivative suits  and special litigation committees of the board of directors.

 Wilmington lawyer Kurt Heyman moderated the panel that included a member of the Delaware Court of Chancery. Many helpful cases were discussed including a very factually specific and detailed Order of the Chancery Court in a case involving AIG which I will try to upload here when I get back to the office. The issue addressed was whether individual directors who were defendants in the suit could have access to data that the defendant corporation claimed were protected by the attorney/client privilege. So too, the issue was addressed of whether derivative shareholders were entitled to obtain similar materials. In Delaware, such Orders  (compared to an opinion) can still be cited in briefs, so it would be helpful to have ready access to it.

SUPPLEMENT: Here is the Order of the Chancery Court in the AIG case that allowed the directors access to data that the corporation sought to prevent the disclosure of  based on the attorney/client privilege. Here are the program materials presented by Kurt, including highlights of  the Order and helpful citations to related cases supporting the conclusions in the Order, and related useful commentary. Many thanks to Kurt Heyman as well as his colleagues Patricia Enerio and Jill Agro for the excellent materials and for allowing me to upload them for this blog post.

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In Troy Corp. v. Schoon, (Del. Ch., July 18, 2008), read opinion here, the Chancery Court addressed the issue of collateral estoppel and found that certain claims were barred due to prior litigation in which the plaintiffs had the opportunity to raise the same claims that are now being pursued in this current matter. The Court was not persuaded by the argument that the prior proceeding involved was a "summary proceeding", but rather reasoned that it was a strategy of the plaintiff not to pursue the particular discovery and the specific issues that it had the ability to prosecute in the prior action- which has now resulted in those claims being barred from the litigation in the instant case.

The five (5) prior opinions in this case that were summarized on this blog are available here.

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Courtesy of Professor Bainbridge is a link to an article by Professor Bob Thompson on the seminal  Delaware Supreme Court decision in Sinclair Oil v. Levien, from 1971, that addressed key issues of fiduciary duty and judicial review standards. Here is an excerpt from a quote that Professor B. included in his post about the article.

Sinclair provides room for “selfish” ownership for a majority shareholder, so long as the minority shareholders receive a proportional benefit, a standard that at the time seemed to expand the discretion for majority shareholders. Viewed from a point decades later, this part of Sinclair has not proved to be a template for broader applications and other doctrines have developed to constrain the actions of majority shareholders.

Keywords: director action, judicial review of corporate action, business judgment rule, intrinsic fairness, enhanced scrutiny, controlling shareholders, fiduciary duty

UPDATE: Here is an insightful analysis by Professor Larry Ribstein of the Sinclair case highlighted in Professor  Thompson's article. A quote  from Professor R's extensive discussion of the "contract aspect of the case"  follows:

Once you’re outside of fiduciary land, as you are in Sinclair, parties in a commercial relationship can act selfishly to each other, governed by their contracts. Sometimes the contract is implied and not obvious. But the court should look hard for these contractual guideposts. The fog of fiduciary language often obscures the search. This is the basic lesson of Sinclair

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In Hoag v. Amex Insurance Company, (Del. Supr., July 21, 2008), read opinion here, the Delaware Supreme Court upheld the trial court's imposition of the penalty of dismissal of a complaint against a plaintiff that failed repeatedly to comply with orders compelling discovery of data that was key to the claims and defenses in the case. The Court recited in detail the multiple orders that the appellant simply failed to comply with depsite ample opportunity.

Delaware's High Court acknowledged the severity of the penalty but reasoned that it  was warranted in light of the circumstances. The opinion includes "good quotable" language about the importance to the legal system of compliance with discovery obligations.

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Courtesy of The Hon. E. Norman Veasey, former Chief Justice of the Delaware Supreme Court, here is an article that was recently published in the Wilmington News Journal on the topic of federalism and corporate law, especially as it relates to the ongoing debate and "tug-of-war" between Delaware preeminence in regulating the internal affairs of corporations and the power of Congress to encroach on that turf.

Chief Justice Veasey takes a historical approach in his article, referring to the competing theories at work at the time of the formation of our Republic and the thought process of the men who formulated our U.S. Constitution. The article is a valuable addition to the scholarship in this area.

UPDATE: Here is Professor Bainbridge's commentary on the article.

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