I want to thank my partner, Sean Brennecke, for his valuable contribution to this post.

The titular holding was rendered in the context of whether substantial compliance was established as a defense to a breach of contract claim in a recent decision of the Delaware Court of Chancery in the matter styled LPPAS Representative, LLC v. ATH Holding Company, LLC, et al., C.A. No. 2022-0241-KSJM (Del. Ch., May 2, 2023).

This useful decision deserves a spot in the toolbox of all commercial litigators. It addresses several noteworthy issues beyond substantial compliance, including whether the right to participate by the indemnitee as part of a right to indemnification was honored–but for purposes of this short post I will limit my highlights to only a few aspects of the decision.

The court’s discussion begins with its holding that the defendant breached the terms of the contract it entered into with plaintiff by, among other things, not including the plaintiff in discussions with a government agency, not allowing plaintiff to review and comment on filings and submissions the defendant made to a court or government agency, and otherwise failed to allow plaintiff to participate in the defense of claims for which the defendants were providing indemnification. 

In so holding, the court rejected the defendants’ arguments, including that they substantially complied with the contract’s requirements. The court discusses the substantial compliance issue primarily from pages 34 to 39 of the slip opinion.  Initially, the court observed that the parties disagreed on whether Delaware law required a party to strictly comply with the terms of a contract or whether substantial compliance was sufficient. In footnote 163 the court reviewed the cases cited by the parties on this issue although the court did not view the parties as having “meaningfully” briefed the question and noted that the limited authority cited by the parties did not fully support their respective positions.

In order to “streamline this decision,” the court assumed that the applicable standard is substantial compliance as that is the lower standard. 

Applying that assumption, the court considered whether the defendants’ failure was “material.”  The court instructed that Delaware followed the Restatement (Second) of Contracts for determining materiality in the substantial compliance context and identified five circumstances which are particularly significant, including “the extent to which the injured party will be deprived of the benefit which he reasonably expected, and the extent to which the injured party can be adequately compensated for the part of the benefit of which he will be deprived….”  See Slip Op. at 35-36.  The court added that the materiality standard is “necessarily imprecise and flexible” and must be “applied in the light of the facts of each case in such a way as to further the purpose for securing for each party his expectations of an exchange of performance.”

The court reasoned that the plaintiff was deprived of the benefit which it reasonably expected, which in this case was the ability to participate in the defense in connection with its right to indemnification and that because that benefit was intangible, “it is hard to imagine how to adequately compensate” for the breach.  Under the circumstances of this case, the court found those factors to weigh in favor of a finding of materiality.

The defendant raised, and the court rejected, five arguments in support of their claim that their breach was immaterial.  One such argument was that their obligations to include plaintiff in critical discussions was not triggered because the plaintiff did not approach the defendant and request that they enter into joint defense agreement.  In rejecting this argument, the court held that the language of the indemnification provision did not impose an affirmative duty to contact the other party to put a joint defense agreement in place. 

The court further observed that the lack of such language in the agreement suggested that “neither party alone bears the burden of first contact.”  Slip Op. at 39.

Therefore, the court concluded that the failure to propose a joint defense agreement proactively did not necessarily absolve the defendants of their own obligation to work with the plaintiff to get one in place or honor their other contractual obligations. 

A recent decision of the Delaware Superior Court cited an article that I co-authored with Chauna Abner that provides a step-by-step guide to transferring cases from the Delaware Court of Chancery to Delaware’s trial court of general jurisdiction, the Superior Court. See RiseDelaware Inc. v. DeMatteis, C.A. No. N22C-09-526-CLS (Del. Super. May 22, 2023). 

The article is cited at footnote 8 of the opinion and was previously posted on this blog.  Footnote 8 notes that the procedure for transferring a case from the Court of Chancery to the Superior Court is similar to transferring a case from the Superior Court to the Court of Chancery. 

This recent decision provides a hard-to-find, practical explanation of the procedure, which is somewhat esoteric to the extent that it is not a well-traveled path and explanations about the nuanced procedures described for transfer between trial courts are not easy to find. That point makes this opinion required reading for any Delaware practitioner that needs to know the procedural requirements for this type of case transfer. 

The opinion’s judicial guidance is especially important in light of a recent trend in Delaware Court of Chancery decisions that employ more scrutiny, often sua sponte, in the service of jealously guarding (understandably) the famously limited subject matter jurisdiction of the Court of Chancery–which, many will be surprised to know, does not always always include requests for a permanent injunction.  See, e.g. In re Covid-Related Restrictions on Religious Services, Consol. C.A. No. 2021-1036-JTL (Del. Ch. Nov. 22, 2022), highlighted on these pages.

I recently posted my latest ethics column for The Bencher which provided a short overview of the standards for judicial recusal or disqualification applicable to federal judges. The standards for state judges are similar but based on slightly different rules.

Fortunately, there are not many decisions by the Delaware Court of Chancery on the standards applicable to judicial recusal or disqualification.

A recent Chancery decision applied the same standards to a Special Master as would apply to a judge in the matter styled: In re AMC Entertainment Holdings, Inc. Stockholder Litigation, Consol. Civil Action No. 2023-0215-MTZ (Del. Ch. May 10, 2023). The Court applied Rule 2.11 and Rule 2.11(A) of the Code of Judicial Conduct for Delaware Judges. Rule 2.11 provides in relevant part that:

(A) A judge should disqualify himself or herself in a proceeding in which the judge’s impartiality might reasonably be questioned, including but not limited to instances where:
(1) The judge has a personal bias or prejudice concerning a party[;]
(2) The judge, . . . or a person within the third degree of relationship,
calculated according to the civil law system,
. . .
(c) is known by the judge to have an interest that could be substantially affected by the outcome of the proceeding[.]6

Regarding Rule 2.11(A), the Court explained that:

Our Supreme Court has set forth the standard where one seeks disqualification of a judicial officer under Rule 2.11(A)(1):

‘[T]he judge must engage in a two-part analysis to determine if recusal is warranted. First, the judge must determine whether she is subjectively satisfied that she can hear the case free of bias or prejudice concerning the party seeking recusal. Second, “even if the judge believes that he or she is free of bias or prejudice, the judge must objectively examine whether the circumstances require recusal because ‘there is an appearance of bias sufficient to cause doubt as to the judge’s impartiality.’

For those interested in this topic, I encourage a close review of this excellent application of the standards to the facts in this case

Postscript: This topic was also recently addressed in a recent article about a motion to disqualify the judge hearing the pending case involving the Disney Company and the Florida Governor.

My latest ethics column for The Bencher, the publication of the American Inns of Court, on the titular topic, is reprinted below courtesy of the publisher. I have been writing an ethics column for The Bencher for the last 25 years.

Before I provide an overview of the basic standards that apply to inform the decision about whether a judicial officer should recuse himself or herself, or otherwise be disqualified from presiding over a particular lawsuit, I want to share some practical wisdom I have learned from several judges with whom I am close to personally—but before whom I would never appear in a courtroom to argue a case.

When a reasonable person familiar with the relevant facts earnestly believes that an issue of a judge’s impartiality might reasonably be raised in a pending lawsuit, that person should explore an appropriate informal means of presenting that issue to the presiding jurist. That approach provides an informal opportunity to the judicial officer to make his or her own assessment of the issue in an appropriate manner that might make a formal motion unnecessary.

This topic is covered in books dedicated solely to judicial disqualification, as well as in heavily footnoted law review articles, but this short ethics column is only intended to cover the highlights. Over the past 25 years of publishing these ethics columns I have, in a few instances, touched on topics that are related to the standards that regulate the judicial branch. See, e.g., Francis G.X. Pileggi, “Fifth Circuit Orders Recusal of Trial Judge,” The Bencher (July/August 2011); Francis G.X. Pileggi, “Professionalism and Judges,” The Bencher (July/August 2015) (describing earlier behavior of attorney as indication of judicial demeanor as a later member of court); Francis G.X. Pileggi, “Resources for Judicial Ethics Research,” The Bencher (January/February 2022).

Applicable standards include Canon 2 of the Code of Conduct for United States Judges, which provides that a judge should avoid impropriety and the appearance of impropriety in all activities. Canon 2(A) states that “[a]n appearance of impropriety occurs when reasonable minds, with knowledge of all the relevant circumstances disclosed by a reasonable inquiry, would conclude that the judge’s honesty, integrity, impartiality, temperament, or fitness to serve as a judge is impaired.” (emphasis added).

The rubric to avoid even the appearance of impropriety applies to both professional and personal conduct. The federal statute that governs judicial conduct requires that: “Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.” 18 U.S.C. § 455(a).

“[T]he test for recusal under § 455(a) is whether a reasonable person, with knowledge of all the facts, would conclude that the judge’s impartiality might reasonably be questioned.” In re Kensington Int’l, Ltd., 368 F.3d 289, 296 (3rd Cir. 2004)(emphasis added). See generally 12 Moore’s Federal Practice-Civil § 63.35 (2022). (Although mere friendship, for example with counsel, ordinarily is insufficient to warrant recusal, unusual circumstances may require recusal.)

Section 144 of Title 18, unlike Section 455, refers specifically to the appearance of a lack of impartiality as it relates to parties—as compared to counsel. See generally Geyh, Alfini, & Sample, 1 Judicial Conduct and Ethics § 4.07[3], Matthew Bender & Co., 2020). The Comment to Rule 2.3 of the Delaware Judges’ Code of Judicial Conduct notes that manifestations of bias or prejudice can include epithets, slurs, references to personal characteristics, or threatening, intimidating, or hostile acts.

The public policy animating the disqualification rules is the need to inspire public confidence in the public perception that the due process requirement of a fair trial before a fair tribunal appears to be provided to all parties and their counsel in litigation. The emphasis is on how the circumstances appear to a reasonable person with knowledge of the relevant facts—not whether actual lack of impartiality can be proven. See, e.g., Richard E. Flamm, Judicial Disqualification: Recusal and Disqualification of Judges § 5.1, at 104 (3rd edition, Banks & Jordan, 2017).

Notwithstanding the applicable standards, appropriate efforts to informally seek the recusal of a judge, and if necessary, formal motions to disqualify, should only be pursued in those rare circumstances when one’s duty to the client, as well as broader duties, make it absolutely necessary.  Even then, they should be brought reluctantly, only after thorough research, careful analysis, extensive soul-searching, confidential vetting with colleagues, and with conscientious consideration of all the aspects and ramifications of such an unpleasant process.

Francis G.X. Pileggi, Esquire, is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP. He comments on legal ethics as well as corporate and commercial decisions on his blog. He is the author of American Legal Ethics: A Retrospective from 1997–2018 (Outskirts Press 2018).

Some readers who have followed these pages over the last 18 years may be weary of reading about DGCL Section 220 court decisions regarding the nuanced right, subject to various prerequisites, of a stockholder to demand certain books and records. But bear with me for this short post.

Discovery in a Section 220 case is limited, consistent with its narrow focus and due to a Section 220 case being a “summary proceeding”. Discovery is especially restricted as it relates to requests for information directed to the company.

A recent order granting a motion for a protective order provides a helpful overview of the applicable standards, with citations to authority, of the restrictions on deposing a company representative and others. See Job v. jaris, Inc., C.A. No. 2022-0944-LWW, Order at 3 (Del. Ch. Feb. 13, 2023)(the lower case in the defendant company’s name is not a typo. The last page of the foregoing hyperlinked pdf has the court’s explanation attached to the last page of the form submitted by the movant.)

The Delaware Court of Chancery recently addressed the titular topic and reasoned after a thorough analysis that, in opposing the appointment of a receiver, counsel’s “purported representation of a defunct limited liability company is not only puzzling, but impossible.” In Re Reinz Wisconsin Gasket, LLC, C.A. No. 2022-0859-MTZ, Slip op. at 2 (Del. Ch. May 8, 2023).

The Court had previously decided in a post-trial decision that a receiver should be appointed for a cancelled LLC under 6 Del. C. section 18-805, in connection with a request that the cancellation of the LLC should be nullified. In this heavily-footnoted 12-page letter ruling, the Court explained that because the LLC was cancelled and lacks a decisionmaker, the LLC “cannot participate in the process of appointing its own receiver or retain counsel to do so.” Slip op. at 11.

This article was prepared by Frank Reynolds, who has been following Delaware corporate law and writing about it in various publications for more than 35 years.

The Delaware Chancery Court has ruled that Walmart Corp. shareholders did not wait too long to charge that their officers and directors violated their fiduciary duties and a settlement with federal drug regulators by letting Walmart misuse its opioid distributor role for 5,000 company pharmacies in Ontario Provincial Council of Carpenters’ Pension Trust Fund,et al. v Walton et.al. No. 2021-0827-JTL opinion issued (Del. Ch. April 12, 2023).

In his April 14 opinion, Vice Chancellor Travis Laster denied the defendant directors’ bid to dismiss based on laches, finding that plaintiffs were not on notice of the alleged wrongdoing until March 2020 because the Walmart board had hid its failure to reign in its alleged diversion and over-prescription of opioids that cost the company $3.1 billion in customer lawsuit liability. 

The vice chancellor’s April 14 ruling was similar to his recent decision in a related shareholder suit over the opioid liability of pharmaceutical giant AmerisourceBergen. Lebanon County Employees’ Retirement Fund, et al. v Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022).   In that case, as in this Walmart suit, Vice Chancellor Laster employed the separate accrual method to determine when each claim should have appeared on the derivative plaintiffs’ radar screens— and found in both cases that the claims were timely filed.

Update:  Passed timeliness test, failed pre-suit demand

However, as in the Amerisource suit, the Walmart timeliness ruling was a very short-lived victory for plaintiffs. In both cases, the plaintiff investors failed to show that the defendant directors were so conflicted by the threat of liability for causing opioid-related damage to the value of their companies that they could not objectively assess the merits of the shareholder charges.

All the AmerisourceBergen charges were dismissed one week after the timeliness ruling. Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 22, 2022).  And the vice chancellor, in an April 26 decision, found that the Walmart shareholders’ claims failed the pre-suit demand test and must be dismissed — with the exception of charges that the officers and directors caused the company to repeatedly violate the federal Controlled Substances Act.  Ontario Provincial Council of Carpenters’ Pension Trust Fund, et al. v Walton et.al. No. 2021-0827-JTL opinion issued (Del. Ch. April 26, 2023). Those underlying charges by the U.S. Drug Enforcement Agency, are ongoing and could involve criminal penalties, he said.

Background

Walmart, as the distributor for a national network of more than 5,000 company pharmacies, was accused in myriad later-consolidated lawsuits of over-prescribing and diverting massive amounts of drugs in a major contribution to a plague of opioid dependence.  After a bellwether suit in a multi-district litigation determined that Walmart caused $3.1 billion of a massive total national opioid damages judgment, three pension fund shareholders filed a derivative suit that charged Walmart fiduciaries brought about that liability by knowingly causing Walmart to fail to comply:

(i) with its obligations under the federal Controlled Substances Act and its implementing regulations,

(ii) with its obligations under the Controlled Substances Act when acting as a distributor of opioids, and

(iii) with its obligations under a settlement with the U.S. Drug Enforcement Agency.

The plaintiffs filed their initial complaint on September 27, 2021. On June 24, 2022, the defendants moved to dismiss the amended complaint in its entirety. The defendants argued that the claims were time-barred, that the plaintiffs had not established demand futility under Rule 23.1.

The vice chancellor ruled in the Walmart  April 12 timeliness opinion that at the pleading stage, the plaintiffs are entitled to inferences that 

(i) Walmart did not achieve compliance with its legal obligations under the DEA Settlement, 

(ii) Walmart’s directors and officers knew that Walmart was not complying) with its legal obligations, and 

(iii) Walmart’s directors and officers did not take action to cause Walmart to achieve compliance. 

The April 12 ruling

Vice Chancellor Laster concluded that, ‘The court can only apply the defense of laches at the pleading stage if it is clear from the face of the complaint that the claims are time-barred. Because of the uncertainties surrounding inquiry notice about the DEA Settlement Issues, the court cannot determine at the pleading stage those claims are time-barred. “

The April 26 ruling

However, in the demand ruling two weeks later, he found insufficient proof that a majority of the directors could not objectively consider the merits of the charges—other than the DEA controlled substances investigation.

The vice chancellor’s April 26 ruling on the Walmart demand issue cited both the approach and reasoning of his demand decision in the AmerisourceBergen case and the findings and conclusions of the MDL’s bellwether trial regarding individual liability for the harm to opioid users.  It will be summarized in detail in a future article.

The UCLA Law School will be the venue for a conference on the American Law Institute’s pending Restatement of the Law, Corporate Governance. I have been asked to be on a panel that will discuss “Corporate Governance and Private Companies” and whether public and private companies may deal with corporate governance issues differently. On the panel with me will be:
• Pierre Gentin, CLO, McKinsey & Co.
• Douglas Moll, Professor, University of Houston Law Center
• Adam B. Weiss, CLO, Relativity

Conference on the American Law Institute’s Restatement on Corporate Governance

Please view the agenda and topics here. 

The Annual Tulane Corporate Law Institute in New Orleans, held on March 23 and 24 this year, attracts leading practitioners in corporate and commercial law from around the country, including a somewhat disproportionately large number of lawyers from Delaware–as well as members of the Delaware judiciary who participate in panel presentations. For those who seek to avoid blasphemy in matters of Delaware corporate law, it remains helpful to hear the insights from the members of the Delaware courts who have the last word on Delaware corporate law orthodoxy.

The seminar spans two full days, but for purposes of this blog post, I’ll highlight only a few sound bites from two of the presentations that focus exclusively on Delaware law. The seminar was founded in large part by the late, great Delaware Supreme Court Justice Andrew G.T. Moore, who was a graduate of Tulane Law School, which sponsors and organizes the annual event. A few blogs posts over the last 18 years have provided highlights from a handful of the prior 34 seminars.

One panel was entitled: Delaware Developments:

The panel members for the above topic discussed the recent amendment to the Delaware General Corporation Law providing for officer exculpation.  Notably, it is not identical to the director exculpation provisions.  It only applies to selected officers and has yet to be universally adopted by most public companies since its August 2022 passage.  A recent expedited transcript ruling of March 29, 2023, in the Delaware Court of Chancery involving the Fox Corp and Snap, relates to the adoption of officer exculpation amendments to the corporate charter and DGCL § 242 that provide some insights on this new amendment.

Recent cases applying Caremark claims have been enjoying more traction than historically has been the case since the Caremark decision was issued about three decades ago.  See, e.g., the recent McDonald decision applying Caremark duties to officers.

Another panel member discussed caselaw that addresses when someone with less than 50% ownership of a company can be deemed a controlling stockholder, which triggers duties and standards that may become outcome-determinative.  Hint:  It requires a holistic and comprehensive analysis.

Another panel was entitled: Institutional Role of Delaware Courts in Business Disputes

Members of the Delaware Supreme Court and Delaware Court of Chancery on this panel discussed the long-term track record of Delaware courts handling cases of substantial complexity on an expedited basis applying a capacious scope of potential remedies with an extensive body of case law to rely on for many business issues decided by jurists who devote a large part of their time to those types of cases.  The recent Twitter v. Musk case was a good example.

This article was prepared by Frank Reynolds, who has been following Delaware corporate law and writing about it in various publications for more than 35 years.

The Delaware Chancery Court recently addressed a novel attorney-client privilege issue in an  appraisal action, ruling FairXchange LLC could not shield the merger deal knowledge of its dual-role director/investment funds manager  from two  plaintiff investor funds because both the funds and the director were in a ‘”circle of confidentiality” in Hyde  Park Venture Partners Fund III L.P. et. al. v. FairXchange LLC , C.A. No. 2022-0344-JTL  memorandum opinion issued (Del. Ch. Mar. 9, 2023).

In his March 9 memorandum opinion, Vice  Chancellor Travis Laster granted the motion of two venture  capital investment fund plaintiffs to compel discovery of information about  how the FairXchange’s  board set the price in a sale of the  company to Coinbase Global, Inc.  And he denied the company’s bid to force the funds to destroy whatever privileged merger information Weiss may have shared with the fund. 

He said the question is ‘whether the Company can invoke the attorney- client privilege against the funds to withhold documents that they otherwise would be required to produce.’ The answer is “No,” he said, and set out the reasons why this case is not an exception to that confidentiality rule.

Corporate counsel could profit from reading the vice chancellor’s review of those exceptions and the opinions he cited as the foundation for that March 9 decision.  “Since 1992, Delaware law has recognized that when a director represents an investor, there is an implicit expectation that the director can share information with the investor,” he noted. 

Background

Ira Weiss was one of three directors on the Fairxchange board when Coinbase made an acquisition offer that split the board: Weiss wanted to look at other options but the other two sought to move ahead with the Coinbase deal and resented Weiss’ opposition so much that they allegedly shut Weiss out of further sale negotiations and induced their preferred shareholder allies to remove him from the board.

When the sale was completed, investors Hyde Park Venture Partners Fund III L.P. and Hyde Park Venture Partners Fund III Affiliates LP filed an appraisal action claiming they did not get fair value for their shares.  In discovery battles, FairXchange tried to force the funds to destroy information given Weiss as a director–even though he was the funds’ manager and a partner in their parent venture capital firm.

Exceptions not applicable

The court listed three recognized methods by which a corporation can alter that default rule, but said none of them were in effect here because FairXchange did not act to preserve privilege:

First, as frequently happens, the parties can address the matter by contract, such as through a confidentiality agreement.

Second, the board of directors can form a committee that excludes the director, at which point the committee can retain and consult confidentially with counsel.

 Third, once a sufficient adversity of interests has arisen and becomes known to the director, the director cannot reasonably rely on corporate counsel as to the matters where the interests of the director and corporation are adverse.

Access to info foremost

The vice chancellor said, “A director’s ability to access corporate information affects whether a corporation can claim that a communication was confidential as to the director and thereby invoke the attorney-client privilege.  A director’s right to information is “essentially unfettered in nature,” and that right includes access to privileged material.  He said, “Directors of Delaware corporations are generally entitled to share in legal advice the corporation receives.” In re WeWork Litig., C.A. No. 2022-0344-JTL, 250 A.3d 901, 908 (Del. Ch. 2020).

“Under the joint client approach, the director starts inside the circle of confidentiality. Without the expectation of confidentiality on which privilege depends, the corporation cannot invoke the privilege against the director,” the vice chancellor ruled.

The Funds’ motion to compel was granted. “The Company cannot invoke the attorney-client privilege to withhold materials created between November 14, 2019, and December 8, 2021, except that the Company can assert the attorney-client privilege regarding communications relating to Weiss’s books-and-records request after he sent it on December 7.” The Company’s request for a destruction order was denied.