Court Determines Amount of Bond for Injunction

Those litigators who need to know the finer points of how the amount for a requisite bond is determined for purposes of obtaining an injunction, must read the recent Delaware Court of Chancery opinion in Applied Energetics, Inc. v. Farley, C.A. No. 2018-0489-TMR (Del. Ch. Aug. 14, 2018). 

Noteworthy Aspects of this Decision:

·     There are relatively few Delaware decisions that explore the nuances and minutiae of how the amount of a bond is determined.  A bond is the form of security typically needed to obtain either a preliminary injunction or a TRO pursuant to Rule 65(c).

·     Injunctive relief in this case was expressed via a Stipulated Status Quo Order that was entered on July 20, 2018, but the amount of the bond was formally articulated on August 14, 2018, when this decision came down.

·     Court of Chancery Rule 65(c) provides that: “No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the Court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who was found to have been wrongfully enjoined or restrained.” 

·     Among the very few decisions thoroughly analyzing the bond requirement for injunctive relief includes the Delaware Supreme Court decision in Guzzetta v. Serv. Corp. of Westover Hills, 7 A.3d 467, 470 (Del. 2010), which was highlighted on these pages, and explained the requirement of a bond for injunctive relief, as follows:  “The security, usually a bond, fixes the maximum amount that an enjoined party may recover . . . .  Because actual damages are uncertain, and because a wrongfully enjoined party has no recourse other than the security, the court should ‘err on the high side’ in setting the bond.”  Id.  Delaware’s High Court in that decision also instructed that the amount of the bond is a matter of discretion, but there must be “a credible basis for the estimated damages.”  Id. at 471. See generally, Guzzetta post-remand decision by the Court of Chancery increasing the amount of the bond in the Guzzetta case after the Supreme Court’s ruling.

·     The Court in the instant Applied Energetics, Inc. v. Farley case found problems with the estimate of damages by both parties and, in essence, engaged in an abbreviated analysis of the appropriate measure of potential damages based on the claims in the case, and determined that a bond in the amount of: “$200,446.52 was required to be posted within five days of the entry of the order that provided for the injunctive relief.”

Court Describes Required Pretrial Disclosure of Scope of Expert Testimony/Opinions

A recent decision of the Delaware Court of Chancery provides clarification on the amount of pretrial disclosure required in order for an expert’s testimony at trial not to be stricken. Project Boat Holding, LLC v. Bass Pro Group, LLC, C.A. No. 12606-VCS (Del. Ch. Aug. 10, 2018).  This opinion addresses a point of practical importance not only for corporate and commercial litigation, but also for any other type of litigation in which experts testify at trial. Not all states follow the Delaware procedure of allowing pretrial discovery depositions of trial experts and there is a relative paucity of decisional law on this procedural topic.

The letter decision in this case was made in the context of a motion to strike trial testimony of an expert witness based on the argument that the expert had not sufficiently disclosed the full scope of his opinion or trial testimony in the required pretrial disclosures, or in his deposition.Related image

Noteworthy Aspects of Decision:

·     Court of Chancery Rule of Procedure 26(b)(4)(A)(i) provides that:  “A party may require any other party to identify each person whom the other party expects to call as an expert witness at trial, to state the subject matter on which the expert is expected to testify, and to state the substance of the facts and opinions to which the expert is expected to testify and a summary of the grounds for each opinion.”

·     Moreover, Rule 26(e)(1)(B) provides that once a response to expert discovery is given, the responding party must thereafter “seasonably supplement its response with respect to any question directly addressed to the identity of each person expected to be called as an expert witness at trial, the subject matter on which the person is expected to testify and the substance of the person’s testimony.” 

·     The court instructed practitioners that: “the purpose of identifying and providing expert reports is to provide the opposing side with notice of the basis for the opinion and to allow them to respond in kind.”  See footnote 5 and accompanying text.

·     The court added that:  “The requirement of a party to comply with discovery directed to identification of expert witnesses and disclosure of the substance of their expected opinion is a pre-condition to the admissibility of expert testimony at trial.”  See footnote 6 and accompanying text.

·     The court warned that when a proffering party has failed to provide adequate disclosure of his expert’s opinions to his opponent prior to trial, the court may exclude the testimony at trial, or receive it subject to objection and a later motion to strike the testimony from the trial.  See footnote 7 and accompanying text.

·     The court clarified that:  “Under Rule 26, a party is only required to state the substance of the facts and opinion to which the expert is expected to testify and a summary of the grounds for each opinion.  He need not provide every nuance or detail of the expert’s opinion in a pretrial disclosure (whether by report or interrogatory response), particularly given that our rule of procedure (and the court’s case management order in this case) allow for expert depositions.”  See footnotes 8 and 9 and accompanying text.

·     In this case, the court reasoned that on only one of the issues involved, the pretrial disclosures sufficiently identified the substance of the expert’s opinions and summarized the grounds for the expert’s conclusion; moreover, the contours of the expert’s opinion on that one issue were explored during his deposition.  The court was satisfied after reviewing the pretrial disclosures that the trial testimony on that one subject was entirely proper and need not be stricken.  This aspect of the opinion related to the laminated layers of the boat at issue–but the court reached a different conclusion regarding the expert’s opinion on the separate issue of the adequacy of testing.

·     This decision is a useful tool for the toolbox of litigators of nearly any subject matter who need to determine how detailed their expert opinions and pretrial disclosures should be for purposes of making sure that the expert’s trial testimony will be admissible.

Chancery Denies Motion to Dismiss Earn-Out Claim Due to Ambiguity

One of the more common forms of commercial litigation continues to be disputes regarding earn-out formulas for post-closing payments due if certain milestones are met.  The Delaware Court of Chancery decision in Fortis Advisors LLC v. Stora Enso AB, C.A. No. 12291-VCS (Del. Ch. Aug. 10, 2018), involved a motion to dismiss earn-out claims. 

Background:

The amended complaint alleged that there were two post-closing payments due upon the achievement of designated milestones (the “Milestone Payments”).  The Milestone Payments were based on certain provisions in the merger agreement that called for various actions to be completed, and if they were completed, then substantial additional payments would be due to the seller.  Exhibits to the merger agreement provided the details and deadlines regarding the Milestone Payments.  The first Milestone Payment required a construction of a plant and the completion of the production of certain products.  The second Milestone Payment required the construction of a separate plant and the production of certain products at a specific price by a specific deadline.

The claim for breach of contract alleged that the buyer did not comply with the business plan that was a part of the Merger Agreement and that the actions required to be taken in order for the Milestone Payments to be due, were not performed.

Legal Analysis:

The usefulness of this decision is primarily based on the court’s analysis of the standard under Rule 12(b)(6) for a motion to dismiss, as opposed to its analysis of specific terms of the merger agreement that might be replicated in other merger agreements with earn-out provisions such that the court’s analysis of merger terms would be applicable in other cases.

Rather, the court explained that in a motion to dismiss, the movant can only prevail if its proffered interpretation of the merger agreement is the only reasonably interpretation.  In this case, however, the interpretations of the merger agreement by each of the parties were both reasonable, and therefore, as a procedural matter the court found that granting the motion to dismiss was inappropriate.

The court explained in detail why the interpretation of each of the parties was reasonable because of an ambiguity in the provisions of the agreements on which the motion to dismiss was based.  Because the court determined that additional discovery is needed and a fuller record would need to be examined at trial in order to determine the intent of the parties in connection with the terms in the merger agreement that were disputed, a determination prior to trial about whether or not there was a breach of the agreement regarding the Milestone Payments was premature.

Chancery Provides Comprehensive Explanation of the Broad Scope and Flexibility of its Equitable Remedial Powers

The most comprehensive description in a Delaware decision in several decades of the broad and flexible authority of the Court of Chancery to fashion an appropriate customized equitable remedy was provided, with bountiful citations to authority and treatises, in the recent decision styled In Re Oxbow Carbon LLC Unitholder Litigation, C.A. No. 12447-VCL (Del. Ch. Aug. 1, 2018). Several of the prior decisions in this case providing more detailed factual background were highlighted on these pages previously.

This opinion contains the type of all-inclusive coverage of a topic that deserves to be treated with the same reverence one would afford a frequently-consulted reference book that should be readily accessible in the “tool box” of those involved in corporate or commercial litigation who might need to quote authority for the capacious scope of the Court of Chancery’s flexible and customized equitable remedial powers.

The most important parts of the opinion, with the broadest potential applicability for corporate and commercial litigation, include the following:

  • The decision includes the most encyclopedic description in a Delaware opinion, with the most citations to authority and other scholarly sources, about which this writer is aware, of the doctrinal underpinning and public policy reasons, as well as historical origin, of the copious and flexible authority of the Court of Chancery to fashion appropriate equitable remedies customized to the circumstances of each case. See pages 4 through 8. Compare a relatively recent Chancery decision addressing the same general topic in a much more abbreviated fashion, highlighted on these pages.
  • The court describes the prerequisites for the discretionary remedy of specific performance. See pages 8 and 9.
  • The court explains how its flexibility to fashion an appropriate remedy is available to modify the typical limitations of the remedy of specific performance–to the extent that the court is not constrained to order performance of a contract exactly as the contract is written, but instead may provide a more customized type of specific performance. See page 13.
  • In connection with its authority to both fashion a customized remedy and to monitor enforcement or execution of the court’s judgment and remedial decision, the court provides an extensive analysis, with plentiful citations to authority, of its power to appoint an independent monitor to oversee the implementation of its judgment (as opposed to a receiver). See pages 16 to 21.

Chancery Instructs on Anti-Reliance Clauses that Bar Extra-Contractual Fraud Claims

The Delaware Court of Chancery recent provided explicit guidance to drafters of M&A agreements and those that litigate such agreements, to the extent that it provides clarion instruction on the prerequisites for contractual clauses that will bar extra-contractual claims for fraud. In the case styled ChyronHego Corporation v. Wight, C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018), the court dealt with the familiar claims of fraud arising from a corporate acquisition–and how such claims may be avoided.

The opinion provides many important articulations of Delaware law relating to misrepresentations alleged to have been made in connection with the purchase or sale of a company. The most noteworthy iterations of Delaware law include the following:

  • Delaware law allows parties to identify the specific information on which a party has relied, and forecloses reliance on other information. See footnote 51 and accompanying text (citing Prairie Capital III, L.P. v. Double E Holding Corp., 131 A.3d 35, 50 (Del. Ch. 2015)(highlighted on these pages)).
  • In order for an anti-reliance provision to be effective, it must be unequivocally clear. By contrast, “Standard Integration Clauses” without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations. Slip op. at 12 (citing Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006) (highlighted on these pages)).
  • The court emphasized that in order for anti-reliance language to be enforceable, “the contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.” See footnote 55 and accompanying text (citing Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004)).
  • Regarding the particular facts of this case, the court reviewed the entirety of the contract in context, and in particular analyzed in combination the following clauses: (i) a standard integration clause; together with (ii) an exclusive remedies clause; (iii) a clause defining excluded liabilities; (iv) an indemnification provision; and, significantly (v) an expressly articulated anti-reliance clause–that the court quoted on page 13 of the opinion.
  • The court also relied on the reasoning of the Prairie Capital case, linked above, which involved similar contract language that included express anti-reliance provisions. See Slip op. at pages 14 and 15.
  • The court also quoted the reasoning in the Abry Partners case, linked above, that defines the limits, based on Delaware public policy, of an anti-reliance provision. Delaware courts will not condone an anti-reliance provision that one attempts to use in order to: (1) protect a seller from liability for making false representations in a contract; or (2) avoid liability for knowledge that representations in a contract are false. See page 25. See also footnote 100 which noted the truism that knowledge or false statements by a corporate agent can be imputed to the corporation itself.

Supreme Court Limits Application of Corwin Doctrine

The recent decision of the Delaware Supreme Court in Morrison v. Berry, et al., Del. Supr., C.A. No. 445, 2017, July 9, 2018 (revised July 27, 2018), limited the application of the Corwin doctrine and prohibited the cleansing effect of stockholder approval, in part due to inadequate disclosures. See Corwin v. KKR Fin. Holdings LLC, 125 A.3d 305, 312 (Del. 2015). See also Appel v. Berkman, 180 A.3d 1055, 1064 (Del. 2018).

The court began the opinion with “. . . a cautionary reminder to directors and the attorneys who help them draft their disclosures: partial and elliptical disclosures cannot facilitate the protection of the business judgment rule under the Corwin doctrine.” See footnote 1.

Key Principles Articulated by Delaware’s High Court:

  • The court explained that under the Corwin doctrine: “The business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.”
  • The Corwin doctrine is premised on the view that “when the real parties in interest–the disinterested equity owners–can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to the stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them.” See footnotes 13 and 14.
  • The Corwin doctrine has been extended to stockholders deciding whether to tender their shares. See footnote 15.
  • A condition to the applicability of the Corwin doctrine is disclosure of material information. That is, the vote of the stockholders must be fully informed. To the contrary, in this case the Supreme Court found that there was materially incomplete and misleading information and a failure to disclose troubling facts regarding director behavior that would have been material to a voting stockholder. Therefore, the court refused to apply the business judgment rule standard of review. See footnotes 18 and 19.

Delaware’s high court provided many other important principles of corporate law with wide application, including the following bullet points:

  • The court explained the various nuances of the board’s duty of disclosure to stockholders. See page 28 and footnote 101.
  • The duty of candor owed by directors to each other was also described. See page 22 and footnote 77.
  • The opinion provides a definition of materiality and explains when an omitted fact is material. See page 19.

Chancery Explains Limitations on Right of Directors to Corporate Information

In the latest iteration of the ongoing litigation involving CBS Corporation and its controlling stockholder, the Court of Chancery recently provided a textbook summary of the general rule that directors have the right to unfettered access to corporate data, with three general exceptions. In the case styled In re CBS Corporation Litigation, Consol. C.A. No. 2018-0342-AGB (Del. Ch. July 13, 2018), the Delaware Court of Chancery explained that one of those exceptions to the general rule applied to prevent directors who were adverse to a Special Committee from obtaining communications with counsel for the Special Committee. This quintessential Delaware corporate litigation case has garnered extensive coverage in the trade press and most major media outlets.Cbs news logo1

The directors of CBS affiliated with the controller of CBS were prevented from obtaining the privileged communications between the CBS Board’s Special Committee and its counsel. The court found that other records requested fit in the category of the general rule that entitled the directors to communications between the company and its corporate counsel.  Still other document requests would require further factual development before a decision could be made on whether or not they should be produced.  A prior decision in this case was highlighted on these pages.

Three Exceptions to Directors’ Right to Corporate Data:

The three general exceptions to the rule that directors have unfettered access to corporate data are as follows: (1) based on an ex ante agreement among the contracting parties; (2) a board can act pursuant to DGCL § 141(c) and “openly with the knowledge of the excluded director to appoint a Special Committee.”  That committee would be free to retain separate legal counsel and its communications with that counsel would be protected; and (3) a board or a committee can withhold privileged information when sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation that he was a client of the board’s counsel. See Kalisman v. Freidman, 2013 WL 1668205 (Del. Ch. Apr. 17, 2013). See also SBC Interactive, Inc. v. Corporate Media Partners, 1997 WL 770715, at *6 (Del. Ch. Dec. 9, 1997).

 

 

Chancery Describes Broad Powers to Remedy Breach of Fiduciary Duty

A recent decision of the Delaware Court of Chancery provides a mini-treatise on the capacious capacity of the court to fashion creative and customized remedies when a breach of fiduciary duty is found. The 126-page opinion in the matter of Basho Technologies Holdco B, LLC v. Georgetown Basho Investors, LLC, C.A. No. 11802-VCL (Del. Ch., July 6, 2018), involved an investor who gained control of a company as part of a bad-faith campaign to profit from the sale of the company, and in the process of solidifying its control, caused the company’s failure.

The court found that the controller had a plan to force a near term exit and positioned itself as the point person for any efforts to raise capital.  It used its blocking rights to veto any financing that did not conform to its grand scheme. The court ordered substantial damages against the controlling stockholder for breach of fiduciary duty involving self-dealing that resulted in the downfall of the business.

In this lengthy opinion, there are many key principles of Delaware corporate law, and a description of different types of remedies, that are noteworthy and which have wide applicability. Those include the following:

  • The court explained that mere blocking rights alone (e.g., to veto new financing), will typically not suffice to support a finding of control. See footnote 315 and accompanying text. The court cited, however, to several sources that supported the view that one can be found to be a controlling stockholder for purposes of a single transaction. See footnote 309 and accompanying text.
  • The court provided a list of factors that might contribute to a finding of actual control although it would be “impossible to identify or foresee all of the possible sources of influence that could contribute to a finding of control over a particular decision.” See pages 66 to 70 and supporting footnotes.
  • The court provides a comprehensive textbook-style recitation of the elements of a breach of fiduciary duty claim, as well as the definition of a fiduciary relationship. See pages 58 and 59 and footnotes 291 to 293.
  • The court instructs how the governing standard of review will impact the analysis for reviewing a claim for breach of fiduciary duty, and how the analysis will be guided by whether the business judgment rule applies or the entire fairness test applies. See pages 60 to 61.
  • The court reiterated the truism that one who has majority voting power owes fiduciary duties. See footnote 63. But, importantly, even one without majority voting power can be found to owe fiduciary duties if that person “exercised control over the business and affairs of the corporation.” See footnote 305. The court explains how that requisite degree of control might be shown to exist. Id. The court noted that despite some who might think otherwise, even though the entire fairness standard is the most onerous standard of review, that standard does not always result in a win for the plaintiff and “scholarly research establishes that only exceptional entire fairness cases result in meaningful damage awards.” See footnote 399.
  • The court reasoned that when there is a breach of the duty of loyalty as long as there is a connection between the harm and the award, “the law does not require certainty in the award of damages.” See page 123. The court added that: “Responsible estimates that lack mathematical certainty are permissible so long as the court has a basis to make a responsible estimate of damages. Once a breach of duty is established, uncertainties in awarding damages are generally resolved against the wrongdoer.” See page 124 and footnotes 520 and 521.
  • The court observed that: “In determining damages, the powers of the Court of Chancery are very broad in fashioning equitable and monetary relief under the entire fairness standard as may be appropriate . . . .” See page 107 and footnotes 456 and 457.
  • The court provided an extensive recitation of the wide scope of its authority to fashion equitable remedies for breach of fiduciary duty. For example, the court explained that when the entire fairness test applies and there has been a breach of the duty of loyalty, the stockholders may demand rescission of a transaction or, if that is impractical, the payment of rescissory damages. See footnote 13.
  • The court defined rescissory damages as the monetary equivalent of rescission and the Delaware courts have awarded those damages in cases where a fiduciary has selfishly appropriated the property of a beneficiary. These damages differ from compensatory damages in that the loss can be measured at the time of the judgment rather than at the time of the injury. See footnotes 514 through 517.

Court of Chancery Explains the Phrase “Sound Business Practices” in L.P. Agreement

A recent Delaware Court of Chancery opinion explained the meaning of undefined terms in a limited partnership agreement which required the general partner in the Limited Partnership to use “best efforts” and “sound business practices.” In connection with claims that the general partner breached the agreement, the court in Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS (Del. Ch. July 6, 2018), explained that it would use dictionary definitions to help illustrate the meaning of those undefined terms. See page 25 and footnotes 91 to 93.

The court did not refer to the more common standard of “commercially reasonably efforts”, but that somewhat related contractual standard has been discussed in cases highlighted on these pages. Instead, the court’s application of dictionary definitions of the terms “best efforts” and “sound business practices” were applied to deny the motion to dismiss for breach of contract.The court also provided helpful contract interpretation principles in connection with how to define terms not defined in an agreement. See footnote 25.

Additional Noteworthy Principles Applicable to Commercial Litigation:

  • The court reiterated the well-known Delaware principle that unless expressly disclaimed, alternate entities such as limited partnerships will be subject to default fiduciary duties. See footnote 3.
  • The court explained that when fiduciary duties are disclaimed, and a new contractual standard is inserted to replace default fiduciary standards, the appropriate nomenclature for a claim for breach of that standard is a simple breach of contract, and not a breach of a “contractual fiduciary duty.” See pages 35 and 36.
  • The court observed in passing what the elements of a claim for piercing the corporate veil are, and even though the plaintiffs did not use that terminology, that is how the court interpreted their claim. The court described why the elements for such a claim were not met. See pages 37 and 38.
  • In connection with granting the motion to dismiss the claim for breach of fiduciary duties, the court discussed the well-recognized concept in Delaware that the controllers of a corporate general partner of a limited partnership may owe fiduciary duties to the limited partnership, if such persons exercise control over the limited partnership’s property—but that claim cannot be made if the limited partnership disclaims all fiduciary duties. See pages 42 and 43 and accompanying footnotes. The Delaware decision that articulated that cause of action against controllers of a corporate general partner of an L.P.is known as In re USA Cafes, L.P. Litigation, 6 A.2d 43 (Del. Ch. 1991).

Delaware Supreme Court Issues Order to Improve Work/Life Balance

The Chief Justice of the Delaware Supreme Court issued an Order recently that seeks to improve work/life balance of both practicing lawyers and their staff. Among the most important aspects of the Order include the requirement that Delaware courts amend their rules and electronic filing policies to require all court filings in non-expedited matters, except for initial pleadings and notices of appeal, to be completed by 5:00 p.m. Eastern Time in order to be considered timely filed that day.  All initial pleadings, notices of appeal and electronic filings in expedited matters must be completed before midnight Eastern Time in order to be considered timely filed that day, except for expedited matters where the parties have agreed upon, or the court has ordered, a different filing deadline.  This requirement shall become effective on September 14, 2018.Scales, work and life

Practitioners in the Delaware Court of Chancery have often included already in many Scheduling Orders, either by mutual consent or by direction of the court, a requirement that filings be made by 4:00 p.m. Eastern on the filing deadline.

Also, the new Order requires trial courts to “consider adopting” practices and policies that disfavor: (i) filing due dates on Mondays or the day after a holiday in non-expedited matters; (ii) the issuance of non-expedited opinions addressing dispositive motions or post-trial relief after 4:00 p.m. as a general matter, and afternoons on Fridays; and (iii) the scheduling of oral arguments and trials in August, except in expedited matters or if there is an important reason for proceeding at that time.

The Delaware Law Weekly article on this topic quoted yours truly regarding the impact of the Order. The Supreme Court’s Order dated July 18, 2018, also included several pages of preambles which provide background information and the recommendations of a committee on the topic that was unable to reach a consensus, but whose report is available on the website of the Delaware state courts at: https://courts.delaware.gov/rules/

The new rules will be of special importance to the many lawyers from different time zones who work with Delaware counsel on Delaware cases. For example, lawyers in California will need to complete any work on filings to be submitted in Delaware courts several hours before the normal end of the work day for their staff.  This Order will be of particular benefit to the staff who help lawyers with their filings because most staff, unless they volunteer for the extra money from overtime, do not want to be forced to work overtime.  Of course, staff for lawyers did not “sign up” for the long hours that lawyers expect to work and most staff are not paid commensurately.

The court is to be commended for attempting to improve the quality of life for practicing lawyers–and their staff–in Delaware and those in other states who practice with them in the litigation trenches. In the same vein, a recent article noted that the enlightened country of New Zealand is experimenting with a 4-day work week. 

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