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

Last year,  I replied to Professor J. Robert Brown's list of the top 5 Delaware cases that, in his view, supported his negative perspective of Delaware law that remains the constant refrain on his blog called: The Race to the Bottom.

My introductory explanation from my rebuttal of last year was as follows:

... I realize that there are many more qualified experts who can rebut the professor's arguments far more persuasively than I, and I am well aware that the Delaware bench certainly does not need my help to defend it. Nor have I been anointed by anyone to take on this role. Nonetheless, having just completed a review of key 2007 Delaware corporate decisions, I offer my own humble rebuttal and a "counter-list" of 5 cases in 2007 that demonstrate that the Delaware courts take shareholder rights and the duties of directors very seriously. If any readers can think of a better "top 5" list, than the one I compiled below, I welcome comments. Here is my top 5 "rebuttal list":

Well, I just finished my 4th annual overview of selected Delaware corporate and commercial cases for  2008, which will be published soon in The Delaware Law Weekly, at which time I will also post it on these pages. I also just saw Professor's Brown list of 5 cases from 2008 that he uses to support his unabashedly unflattering views of Delaware law. Here is his list and here is his introductory post.

My cursory review of the cases I selected below (from the approximately 200 or so that I have summarized on this blog during 2008), is not as scholarly as the good professor's treatment, and I do not have the time (thankfully, due to my busy practice) to engage in extended debate (at least for the next week or so), but until someone else picks up the baton, I offer the following cases to counterbalance the list offered by Professor Brown. I invite others to suggest other cases that they would rather see in my "top 5 list".

•  In Cargill, Inc. v. JWH Special Circumstance, LLC, (Del. Ch., Nov. 7, 2008), read opinion here, the Delaware Chancery Court issued a 68-page decision involving a Delaware statutory trust (formerly referred to as a business trust), and found that common law fiduciary duties would apply to a trustee as a "default rule" in light of the agreement among the parties being silent on the issue. Here is a more complete summary.
• In Julian v. Eastern States Construction Service, Inc.,  2008 WL 2673300 (Del. Ch., July 8, 2008), read opinion here, the Chancery Court required directors to disgorge a $1.3 million bonus they had given themselves in a self-interested manner, without any independent protections, and based on their failure to satisfy their burden to demonstrate the entire fairness of their decision. Here is a more complete summary.
•  In Ryan v. Lyondell Chemical Company, (Del. Ch., July 29, 2008), read opinion here, the Delaware Chancery Court  found that at the procedural stage of a summary judgment motion, it would allow to proceed to trial the issue of whether the independent directors should be exposed to personal liability  for their role in the sale of the company--despite selling the company to the only known buyer for a substantial premium. A whole article could be written on this case alone, and substantial commentary has already been penned about it. An equally weighty later decision denying a motion for reargument was summarized here. The case is now on appeal with the Delaware Supreme Court.

• In Steel Partners II, L.P. v. Point Blank Solutions, Inc., 2008 WL 3522431 (Aug. 12, 2008),  the initial complaint was filed to force the holding of a shareholders meeting (which had not taken place since 2005), pursuant to DGCL Section 211. After a stipulation was entered into for a date to hold the meeting, the defendant moved for leave of court to postpone the date of the meeting by 90 days. The Chancery Court denied the request. The request was based on allegations that the plaintiff and its CEO together own about 40% of the stock and would attempt to install their own directors and then seek to buy the company at the lowest possible price for its own investors. In addition, the postponement was requested due to an alleged conflict that the plaintiff's CEO had with the majority. The court reasoned that the best way to deal with the issues presented was to communicate them to the shareholders and let them decide, based on those facts, who they wanted as directors--instead of further delaying the exercise of the shareholder franchise, which under Delaware law is sacrosanct. The summary of the case on my blog is here.

• London v. Tyrrell, 2008 WL 2505435 (Del. Ch., June 24, 2008), read opinion here. This Chancery Court decision explained in detail the reasons why it denied a motion to dismiss a derivative claim based on Chancery Court Rules 9(b), 12(b)(6) and 23.1. The derivative complaint alleged that the defendants caused the company to issue stock options in contravention of an equity incentive plan by setting the exercise price of the issued options at an unfairly low value.After a thorough factual background description, the court emphasized that: “the burden remains on the movant to demonstrate that the plaintiff has not met the requirements of Rules 9(b), 12(b)(6) and 23.1." (see footnote 12). Moreover, the court described in detail the demand futility analysis under  the seminal case of Aronson v. Lewis, 473 A.2d 805 (Del. 1984) as well as Rales v. Blasband, 634 A.2d 927 (Del. 1993). The court explained the reasons why it concluded, as succinctly as I have seen it done, that both prongs of the Aronson case were satisfied. Specifically, the plaintiff demonstrated a reasonable doubt that: (1) the directors were interested and independent; or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.
  The first prong was satisfied because the directors had a financial interest in the challenged stock option plan and also because they stood on both sides of the transaction that was challenged. Moreover, the second prong was satisfied because the allegations rebutted the business judgment rule to the extent that the allegations supported an inference that the directors intended to violate the terms of a stockholder approved option plan. The court also dismissed the arguments under Rule 9(b) that there was insufficient particularity regarding fraud allegations which apparently relied on Sections 152 and 157(b) of the DGCL.

UPDATE: The Wall Street Journal online highlighted this post here. 

UPDATE II:   The Harvard Law School Corporate Governance Blog  published this post here.

UPDATE III:  Forbes. com  highlighted this post  here.

• Email This
• Print
• Comments (1)
• Trackbacks (1)
• Share Link

CA, Inc. v. AFSCME Employees Pension Plan, (Del. Supr., July 17, 2008), read opinion here.(Revised opinion dated August 15, 2008, available here.)

This Delaware Supreme Court  decision has been anticipated by the corporate legal world with great interest since oral arguments were heard by Delaware's High Court last week.  My post with some background can be found here.  More background discussion of prior Delaware decisions that have addressed related issues, as provided by Professor Bainbridge, can be found here.

In sum, a shareholder of CA, Inc., the trillion dollar pension fund of AFSCME, proposed a bylaw amendment that would require the company to reimburse the shareholder for expenses related to nominating a less than full slate to the board of directors.

Here are the two issues presented by the SEC to the Delaware Supreme Court in a procedure authorized last year and now used for the first time:

1. Is the AFSCME Proposal a proper subject for action by shareholders as a matter of Delaware law?

2. Would the AFSCME Proposal, if adopted, cause CA to violate any Delaware law to which it is subject?

Bottom line of the decision: Yes and yes. Although bylaws, in general,  are permissibly used to address the process and procedures related to board elections, in the particular circumstances of this case, the bylaw proposed would impermissibly restrict the managerial and fiduciary duties of the board. However, the court suggested other means by which the shareholder could achieve the same goal in a way that would be consistent with Delaware law: for example, amend the certificate of incorporation.

 Here is the court's reasoning, in part, for its affirmative answer to the first question:

The shareholders of a Delaware corporation have the right “to participate in selecting the contestants” for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election. The Bylaw would accomplish that by committing the corporation to reimburse the election expenses of shareholders whose candidates are successfully elected. That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action. Accordingly, we answer the first question certified to us in the affirmative.

That, however, concludes only part of the analysis. The DGCL also requires that the Bylaw be “not inconsistent with law.” Accordingly, we turn to the second certified question, which is whether the proposed Bylaw, if adopted, would cause CA to violate any Delaware law to which it is subject. (footnotes omitted).

For its affirmative answer to the second question, the court provided the following reasoning:

... the Bylaw mandates reimbursement of election expenses in circumstances that a proper application of fiduciary principles could preclude. That such circumstances could arise is not far fetched. Under Delaware law, a board may expend corporate funds to reimburse proxy expenses “[w]here the controversy is concerned with a question of policy as distinguished
from personnel o[r] management.” But in a situation where the proxy contest is motivated by personal or petty concerns, or to promote interests that do not further, or are adverse to, those of the corporation, the board’s fiduciary duty could compel that reimbursement be denied altogether.

It is in this respect that the proposed Bylaw, as written, would violate Delaware law if enacted by CA’s shareholders. As presently drafted, the Bylaw would afford CA’s directors full discretion to determine what amount of reimbursement is appropriate, because the directors would be obligated to grant only the “reasonable” expenses of a successful short slate. Unfortunately, that does not go far enough, because the Bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award
reimbursement at all. (footnotes omitted)

Footnote 14 which directly addresses the issue of:  "what is the scope of shareholder action that Section 109(b) permits [regarding bylaws] yet does not improperly intrude upon the directors’ power to manage a corporation’s business and affairs under Section 141(a),"   explains exactly what the court did--and did not--decide:

 We do not attempt to delineate the location of that bright line in this Opinion. What we do
hold is case specific; that is, wherever may be the location of the bright line that separates the shareholders’ bylaw-making power under Section 109 from the directors’ exclusive managerial authority under Section 141(a), the proposed Bylaw at issue here does not invade the territory demarcated by Section 141(a).

One of the great things about covering this area of the law on this blog is that many experts in the field cover the same issues, so I can link to their scholarly analysis as a supplement (and sometimes in place of) any comments I have. A few samples of the corporate law professors who have already provided scholarly analysis of this opinion within hours of its release, are: here, here, here, here and here.

 I invite readers to tell me if they are aware of any other state's highest court that can be counted on, predictably, to render such a weighty decision within a week of hearing oral argument--and when the briefs were only submitted a mere two (2) days prior to oral argument.
 

UPDATE: As one would expect, an enormous amount of high quality commentary continues apace in the blogosphere about this case, and I may update this post or supplement it in the coming days. Also, as an aside, perhaps I will never get accustomed to it, as I am still thrilled when one of my posts is quoted by a luminary like Professor Bainbridge, as he was kind enough to do today here.

• Email This
• Print
• Comments
• Trackbacks (2)
• Share Link