Although this short post does not qualify as breaking news, it will be a useful reminder for some:

The Delaware Court of Chancery prefers “stockholder” as the term uniformly used in the Delaware General Corporation Law for those owning a corporation, though in the past, especially prior to the 2010 DGCL amendments, there were inconsistent references–and court decisions in the past have not always been scrupulous in observing the distinction. See generally In Re Adams Golf Shareholder Litigation, C.A. No. 7354-VCL, transcript (Del. Ch. Oct. 3, 2012) (yes, that’s 10 years ago.)

Shout out to The Chancery Daily for this observation.

This post was prepared by Frank Reynolds, who has been following Delaware law and writing about it in various publications for over 30 years.

The Chancery Court’s chief judge recently ruled Carvana Corp. controller Ernest Garcia ll stated only one of eight needed factors for a quick appeal of her June decision that he and his son, CEO Ernest Garcia III, must prove their stock deal was entirely fair to the on-line used car dealer’s investors in In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ch) Oct. 3, 2022.

Chancellor Kathaleen McCormick’s detailed Oct. 3 order denied Garcia II’s bid for an interlocutory appeal of her June 30 opinion that declined to dismiss derivative breach-of-duty charges that the Garcias profited by orchestrating an allegedly unfairly-priced $600 million stock offering while Carvana’s share price was depressed by the pandemic.  In that earlier ruling, she found the long, dependent business relationships two directors had with the CEO excused the plaintiffs’ pre-suit demand on the board.  In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ch) June 30, 2022.

In the Oct. 3 ruling, the Chancellor examined and rejected in turn four of the five reasons Garcia II offered in support of his Delaware Supreme Court appeal under Rule 42—which establishes a two-step test for determining whether to certify interlocutory appeal.  She said:

The court must first determine whether “the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment.”

If the substantial-issue requirement is met, this court will then analyze eight factors concerning whether “there are substantial benefits that will outweigh the certain costs that accompany an interlocutory appeal.”

She acknowledged as to the first step that although the substantial-issue requirement is met when a decision speaks to the merits of the case, in practice, the state supreme court has accepted appeals of non-merits-based questions that implicate significant issues under Delaware law.  Recently, the Delaware high court has granted interlocutory appeals “concerning the exercise of personal jurisdiction over non-resident fiduciaries,” she wrote.

But the Chancellor said although the Opinion addresses a substantial issue, it does not follow that the issue must be resolved by Delaware’s Supreme Court at an interlocutory as opposed to final stage. The second step under Rule 42 is to consider whether eight factors provide sufficient support when conducting a balancing analysis.

Here, she said, Garcia presents only five factors and of them, “only one provides clear support. The others weigh against interlocutory appeal or are neutral.”

Factor A considers whether the Opinion involves a novel question of law in the state’s jurisprudence. Although Garcia Senior contends that personal jurisdiction has not previously been asserted on the exact facts present here, his narrow view ignores the well-settled rule of law that implicit consent can serve as a basis for personal jurisdiction. “The mere application of long-held precedent to new facts does not make an order worthy of appeal.” the court said in finding Factor A does not support Garcia Senior’s application.

Factor B asks the court to consider whether the Opinion conflicts with other trial court decisions. Garcia Senior contends that the Opinion is inconsistent with the “longstanding Delaware precedent which holds that purchasing or owning shares of stock in a Delaware corporation, standing alone, is not enough to enable a Delaware court to exercise personal jurisdiction over a non-consenting party, even in cases of sole ownership.” But the court said jurisdiction was not the result of Garcia’s majority ownership of shares but his use of that position to force the adoption of a bylaw requiring breach of duty suits to be filed in Delaware–which is consistent with most Delaware decisions.

Factor D looks to whether the Opinion sustains the controverted jurisdiction of the trial court. The Opinion held that this court’s exercise of personal jurisdiction over Garcia Senior is appropriate. This factor is accordingly satisfied. Although Factor D is satisfied, it is not dispositive, the Chancellor said.

Factor G considers whether interlocutory appeal may terminate the litigation. Without citing any case law, Garcia Senior contends that this factor has been satisfied because reversal of the Opinion would terminate the litigation in this Court “as to him.” This is true, but to the extent Factor G looks to judicial and administrative efficiency, it is irrelevant, the court said.

Factor H concerned whether interlocutory review would eliminate litigation, but the court said even if it eliminated charges against Garcia ll, the litigation would continue against the other defendants.

The Delaware Court of Chancery’s recent opinion in XRI Investment Holdings LLC v. Holifield, No. 2021-0619-JTL (Del. Ch. Sept. 19, 2022), should be included in the pantheon of consequential Delaware Chancery opinions and will remain noteworthy for many reasons that deserve to be the subject of a law review article, but for purposes of this short blog post, I only intend to highlight a few of the many gems in this 154-page magnum opus with the most widespread applicability  to those engaged in Delaware corporate and commercial litigation.

Brief Background

The background facts are described in the first 50 pages or so of the opinion, but for purposes of this high-level short overview, this case involved a disputed transfer of interests in an LLC that were alleged to be in violation of the transfer restrictions in the LLC Agreement.  The membership interests were used as security for a loan, and upon default the membership interests were foreclosed upon in an inequitable manner.

Key Points

This opinion engages in a deep and comprehensive analysis regarding the historical foundation of equitable defenses and their applicability to claims that are not the type of traditional claims pursued in a court of equity, as well as other key aspects of Delaware Law, including a discussion of:

  • The Step-Transaction Doctrine and when a series of transactions will be treated as a unitary whole.
  • Void and voidable transactions–and when an act will be treated as void ab initio, in which event it generally cannot be cured or defended against.
  • Equitable Defenses: Some, such as laches, can only be asserted as defenses to equitable claims–but other equitable defenses, such as acquiescence, are available to defend against both equitable and legal claims. This holding by the Court is contrary to a “smattering of recent decisions” in Chancery that did not fully address “nuances that permeate this area of the law”.
  • This decision attempts to bring more harmony and cohesiveness to that smattering of recent decisions.
  • The Court examines in extensive depth the somewhat ancient historical origins of the courts of equity, and the claims and defenses permitted in those courts.
  • The always useful fundamentals of contract interpretation are reviewed as well. See pages 45-47
  • The Court addresses the distinction between: (i) a “right tied to an ownership interest in an entity” and (ii) “the right to whatever cash that interest might generate once it reaches a particular person’s pocket”. See footnote 25. Also cited in the footnote is the recent Supreme Court opinion in Protech Minerals Inc. v. Dugout Team LLC, 288, 2021 (Del. Sept 2, 2022), and the important need to distinguish between the above two concepts.
  • Although the Court of Chancery faithfully (but maybe reluctantly) follows the Supreme Court’s precedent in CompoSecure LLC v. Card UX, LLC, No. 177, 2018 (Del. Nov 7, 2018), regarding void transactions, in dictum the opinion encourages the Supreme Court to reconsider its decision in CompoSecure. A polite list of reasons is offered for why Delaware’s high court should reconsider that precedent, in part because it prevented the trial court in this case from avoiding an inequitable result–and because there is a need to harmonize several areas of Delaware law at issue in this case. See page 111.
  • For example, current Supreme Court precedent allows parties to an agreement to declare certain acts as void–not voidable–and this current ability to “contract out” of equitable review and prevent a court of equity from applying its traditional equitable powers and remedies, deserves (reasoned this opinion respectfully), to be revisited.
  • Among the multi-faceted aspects of the opinion’s rationale for encouraging the  Delaware Supreme Court to reconsider its CompoSecure opinion, this opinion cites to basic contract principles under the common law that considered some contracts as void ab initio if they were violative of public policy. See footnotes 58 to 62 and related text. See also footnotes 65 to 68 regarding the aspects of corporate charters and bylaws that are subject to the limitations of the DGCL because corporations are creatures of the state.
  • This Court of Chancery decision importantly notes that the Delaware LLC Act recognizes that principles of equity apply in the LLC context. See footnote 96. (Cue: the “maxims of equity”.)
  • Even though the Court of Chancery held that its holding was “contrary to the equities of the case”, it held that the result was controlled by precedent–that should be revisited.

Postscript

  • There are also other areas of Delaware LLC law, not addressed in this opinion, that are not well-defined or could benefit from clarification by Delaware’s highest court, to harmonize a “smattering of Chancery decisions”, but most parties on the unpleasant side of a decision do not have the benefit of the author of the trial court opinion assisting with appellate arguments.
  • This case may also provide a reminder of the truism that the victor in a trial court decision should not celebrate too much, or too soon, while the decision is pending on appeal. (Non-Delaware readers should know that there is no intermediate appellate court in Delaware.)

This post was prepared by Frank Reynolds, who has been following Delaware law and writing about it in various publications for over 30 years.

The Delaware Supreme Court recently overturned the approval of a settlement of a Goldman Sachs Group Inc. shareholder’s legal challenge to an allegedly extravagant pay plan for the investment company’s non-employee directors, because the pact would wrongly release future claims based on liability arising from the pact itself in Griffith v. Stein and Blankfein, et al., C.A. No. 264, 2021 (Del. Sup. Aug. 16, 2022).

Writing for the full court, Chief Justice Collins Seitz Jr. reversed the Chancery Court ‘s decision that the 2020 settlement was “a reasonable and, indeed, a favorable compromise of the claims still at issue” and, “there has to be a forward-looking release of some kind if such a settlement will work because the purpose of a settlement is to provide peace for the issues that are raised in the litigation.”

The chief justice said while a settlement release in a derivative action “is an essential, bargained-for element,” and a broad release is “intended to accord the defendants ‘global peace,’” a release “cannot be limitless” in that it cannot release future claims that arise from new facts relating to the settlement rather than the underlying litigation.

The high court’s ruling is of value to corporate law specialists in that it sets out newly-clarified standards for the review of decisions on objections to settlements of derivative litigation.  It found that “a release is overly broad if it releases claims based on a set of operative facts that will occur in the future. If the facts have not yet occurred, then they cannot possibly be the basis for the underlying action.”

Background

Shiva Stein filed suit in the Court of Chancery in 2017 against Goldman Sachs Group as nominal defendant and its board of directors, asserting direct and derivative claims that GS Group’s non-employee director compensation was “substantially” above that of directors of peer companies and therefore a misuse of assets that breached the board’s duties.

The directors moved to dismiss but meanwhile, the parties agreed to a settlement that investor Sean Griffith objected to because of its alleged lack of cash consideration, its overly broad “intergalactic” release of all claims and Stein’s ineligibility as class representative.  A new proposed settlement in 2020 included “a reduction in compensation of GS Group directors going forward with a then-present value in the range of $4.6 million,” with changes to GS Group practices to be ratified by a future stockholder vote to approve a 2021 compensation plan, from 2022 through part of 2024.

In support of the new pact, the directors said the Court of Chancery has approved settlements that were contingent on future events and the court approved the 2020 settlement over objections finding it fair overall.  Stein v. Blankfein, C.A. No. 2017-0354, at 30 (Del. Ch. Aug. 18, 2020) (TRANSCRIPT).

“Too broad”

Chief Justice Seitz reversed because the “release bars all claims relating to non-employee director compensation into 2024 and not just the cap on compensation.”  Many settlements include forward-looking reforms, “But a release that directly or indirectly binds absent interested parties is limited by the Due Process Clause,” he wrote in reversing and remanding to the Chancery Court.

Other appeal issues

The high court took the opportunity to address two other issues that Griffith had appealed.

Plaintiff representative adequacy

He claimed that the court erred by not assessing Stein’s adequacy as a derivative plaintiff to represent the corporation’s interests before approving the settlement. He said Stein should be treated like a class action plaintiff under Rule 23, meaning that the Court of Chancery must assess Stein’s adequacy as a plaintiff before approving a settlement. He argues that she is unfit as a representative because she is a “frequent filer” and is motivated to release the corporation from all stockholder claims in exchange for fees to her attorneys.

The high court said, “Court of Chancery Rule 23.1 contains express requirements to settle derivative claims. The plaintiff’s adequacy as a representative of the corporation’s interest is not one of them. Absent an express requirement in Court of Chance Rule 23.1 that the Court determine the adequacy of a derivative plaintiff before approving a settlement of litigation, we are reluctant to imply such a requirement.”

Fees

Finally, Griffith argued that the court erred when it commented during its bench ruling that, when awarding fees for the successful objection to the 2018 Settlement, it considered whether it might have come independently to the same conclusion regarding the objection.

The high court said that, “While there is support for the proposition that a court should not discount a fee award based on the obviousness of the flaws in a settlement submitted for court approval, we review the court’s fee award for abuse of discretion. The Court of Chancery did not place undue weight on this issue and undertook a thoughtful analysis… Thus, the court did not abuse its considerable discretion when deciding the appropriate fee award.”

This post was prepared by Frank Reynolds, who has been following Delaware law and writing about it in various publications for over 30 years.

The Delaware Chancery Court recently threw out a shareholder’s oversight claim against SolarWinds Corporation’s directors because it failed to show they were unfit to review plaintiffs’ negligent supervision suit over a costly Russian hacker cybercrime — even though under the milestone Marchand opinion, cybersecurity was a “mission critical” area for the online software provider’s business, in Construction Industry Laborers Pension Fund et al. v. Bingle et al., C.A. No. 2021-0940-SG opinion issued  (Del. Ch. Sept. 6, 2022).

In his September 6 opinion, Vice Chancellor Sam Glasscock said he granted the directors’ motion to dismiss the so-called Caremark negligent supervision charge because the Delaware Supreme Court’s Marchand v. Barnhill opinion required more than the plaintiffs’ allegation that SolarWinds’ board of directors negligently received no cybersecurity reports in more than two years.  Marchand v. Barnhill 212.3d 805, 822 (Del. 2019).  He said according to Marchand, the complaint lacked particularized pleadings to support a scienter claim that the SolarWinds directors demonstrated bad faith in fulfilling their fiduciary duty of oversight, commonly called a Caremark claim.

Chancellor William Allen’s pioneering 1996 opinion in Caremark first set the standards for a claim of breach of duty to supervise. In re Caremark Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).

Importantly for corporate law specialists, Vice Chancellor Glasscock’s Sept. 6 opinion said “to plead potential liability sufficient to cause directors to be unable to consider a demand and thus justify a derivative claim under Rule 23.1, the lack of oversight pled must be so extreme that it represents a breach of the duty of loyalty. This in turn requires a pleading of scienter demonstrating bad faith—in then-Chief Justice (Leo) Strine’s piquant formulation, a failure to fulfill the duty of care in good faith.”

The Vice Chancellor said additionally, the plaintiffs, led by the Construction Industry Laborers and Central Laborers pension funds, were dismissed because, “only utter failures by directors to impose a system for reporting risk, or failure to act in the face of “red flags” disclosed to them so vibrant the lack of action implicates bad faith, in connection with the corporation’s violation of positive law, have led to viable claims under Caremark.”

Background

SolarWinds, a Delaware corporation that went public in 2018, provided information technology infrastructure management software for clients ranging from the Fortune 500 to United States government agencies and was entirely dependent on the sale of its management software – which requires access to clients’ information technology systems.  Plaintiffs said that made the system highly vulnerable to attack by a malware called Sunburst, which was very injurious for SolarWinds and its clients.

Consolidated shareholder suits filed December 2020 in the wake of costly Sunburst damage, charged that the SolarWinds board created two director committees to split the job of advising and updating the board on cybersecurity issues but neither did the job and neither made any report to the board during a 26-month period in which the board negligently neglected its duty to monitor the mission critical area of cybersecurity.  That failure to monitor allowed Russian hackers to use SolarWinds own program as a Trojan horse that infected client software during updates, the complaints said.

As federal agencies investigated the alleged theft of government data through an infected SolarWinds Orin software, the director defendants filed motions to dismiss the now-consolidated complaints in January 2022, focusing on whether the derivative suit properly alleged that a majority of the board of directors could not impartially review the charges because of the likelihood of their liability.

What standard applies?

Plaintiffs alleged both that:

  1. A majority of the demand Board utterly failed “to implement and monitor a system of corporate controls and reporting mechanisms” regarding cybersecurity, and that
  2. Even if a monitoring system was in place, the directors failed to “oversee” such system of oversight in breach of their fiduciary duties because they overlooked “red flags” signaling corporate risk.

But the vice chancellor ruled that:

Plaintiffs in Caremark cases must “plead with particularity ‘a sufficient connection between the corporate trauma and the [actions or inactions of] the board,’” and “a stockholder cannot displace the board’s authority simply by describing the calamity and alleging that it occurred on the directors’ watch.”  He said a meritorious Caremark claim demonstrates a breach of the duty of loyalty, by way of a failure by the directors to act in good faith

Carelessness absent scienter not bad faith.

Marchand means that “the lack of a system of controls with respect to a particular incarnation of risk does not itself demonstrate bad faith; the lack of such system must be the result of action or inaction taken in bad faith,” the Vice Chancellor said.   “This distinction is heightened, I believe, in consideration of risk outside the realm of positive law.”

“Without a satisfactorily particularized pleading allowing reasonably conceivable inference of scienter, a bad faith claim cannot survive a motion to dismiss,” the vice chancellor said in summarizing reasons for dismissal – and the reason why so many Caremark claims are short-lived.  Therefore, he said, “to plead potential liability sufficient to cause directors to be unable to consider a demand and thus justify a derivative claim under Rule 23.1, the lack of oversight pled must be so extreme that it represents a breach of the duty of loyalty.”

Dandelions

And, he said, that explains why Caremark claims have recently “bloomed like dandelions after a warm spring rain” but “remain, however, one of the most difficult claims to cause to clear a motion to dismiss.”

The Delaware Supreme Court recently addressed the standard to determine when an individual may be held in contempt for the violation of a court order by a company that person controls. I provided an overview of the decision for my latest article for the current issue of  The Bencher, the flagship publication of the American Inns of Court. The article is reprinted below with their permission.

The Delaware Supreme Court recently had occasion to address the standard to determine when a person who controls an entity—for example, through ownership of all or most of the stock of a corporation—can be personally responsible for contempt of court penalties when the corporation’s actions are in violation of a court order.

In the matter styled TransPerfect Global Inc. v. Pincus, Del. Supr., No. 154, 2021 (June 1, 2022), Delaware’s highest court reviewed the latest appeal in a long-running bitter battle that entered the Delaware court system in 2014 with a petition under Delaware General Corporation Law Section 226 to appoint a custodian to resolve a deadlock between two co-owners who were formerly engaged to be married and who each held 50% ownership of a translation and litigation-support company. They continued to co-manage their company, in a contentious manner, despite calling off their nuptials.

Procedural Background

For purposes of this short ethics column, instead of reviewing the four prior Supreme Court decisions concerning this case, and about a dozen rulings of the Delaware Court of Chancery over almost a decade, as well as several cases filed in a few other states, suffice it to say that the limited aspect of the appeal that this column focuses on is a suit filed by TransPerfect in Nevada that was in violation of an order by the Delaware Court of Chancery requiring all disputes related to this matter to be filed in the Court of Chancery.

After the appointment of a custodian to break the deadlock, one of the 50% owners bought the other half of the company to become essentially the 100% owner (the “controller”). The controller was not a named plaintiff in the Nevada lawsuit. But the Court of Chancery found the controller in contempt for the company’s filing of that lawsuit, which the trial court held to be a violation of a prior order, as explained in a 135-page opinion by the Court of Chancery.

Key Standards of Contempt Clarified

Delaware’s High Court began its careful analysis with a recitation of the fundamentals on which a finding of civil contempt is based, with copious footnotes to authorities that describe the prerequisites and the nuances involved in such a “weighty sanction.” Slip op. at 22–23 and footnotes 99–101 and 127.

A trial court must explain how an individual personally violated a court order to satisfy the standard to hold a person in contempt of a court order. Specifically, there must be evidence in the record that a person who controls a company personally violated a court order, for example by directing a company he or she controls to violate that court order. In this particular appeal, there was no such evidence in the record.

For clarification and guidance, the Delaware Supreme Court explained that “to find a corporate officer or shareholder in civil contempt of a court order, the trial court must specifically determine that the officer or shareholder bore personal responsibility for the contemptuous conduct.” Slip op. at 33. The court observed that this requirement is consistent with the prerequisite that “when an asserted violation of a court order is the basis for contempt, the party to be sanctioned must be bound by the order, have clear notice of it, and nevertheless violate it in a meaningful way.” Id. at 33–34.

Although the sanctions for contempt were properly applied to the company, the criteria for imposing penalties for contempt on the controller were not satisfied, based on the appellate record. Therefore, the penalties imposed on the controller for contempt were vacated.

This decision will be helpful for anyone who needs to determine if a person who controls a company may also be personally liable for actions taken by the company that may violate a court order.

Francis G.X. Pileggi, Esquire, is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP. His email address is Francis.Pileggi@LewisBrisbois.com. For the past 17 years, he has commented on key corporate and commercial decisions, as well as legal ethics, at www.DelawareLitigation.com.

Although I have been quoted extensively in many major publications about various aspects of the ongoing Twitter v. Musk litigation pending in the Delaware Court of Chancery regarding Twitter’s efforts to force Musk to consummate the offer by Musk to buy Twitter, I have not written much about the multitude of pre-trial rulings regarding the expedited trial scheduled, for now, to take place next month–because almost every publication imaginable seems to be providing breathless coverage of the daily developments, and this blog tends to focus more on the court decisions and corporate law developments of greater usefulness for practitioners–that are less likely to be covered elsewhere.

But worth noting for those who toil in the vineyards of corporate and commercial litigation in Delaware is the recent ruling on a motion to quash a subpoena issued to a non-party in the case. In Twitter, Inc. v. Elon R. Musk, et al., C.A. No. 2022-0613-KSJM (Del. Ch., Sept. 2, 2022), the Court reviewed the applicable rules of civil procedure, which in Delaware are modeled after the Federal rules:

Rule 45 requires a subpoenaing party to “take reasonable steps to avoid  imposing undue burden or expense on a person subject to that subpoena.” The court protects nonparties “from significant expense resulting from the inspection and copying commanded.” The court will “quash or modify the subpoena” in a number of circumstance[s], including if the subpoena “[f]ails to allow reasonable time for compliance” or “[s]ubjects a person to undue burden.” Rule 26 empowers the court to deny or limit discovery that is “unreasonably cumulative or duplicative” or “obtainable from some other source that is more convenient, less burdensome, or less expensive.” The movants bear the burden of establishing that the Delaware subpoenas exceed Rules 45 or 26.

Slip op. at 4 (footnotes omitted).

Notably, on a procedural level, the motion to quash was filed on Aug. 25, with an opposition and a reply filed before the court’s written Sept. 2 ruling linked above. That’s a fast disposition by any measure. (By the way, the same jurist issued several other substantial written opinions in this case–and in other unrelated cases–during the same short period of time.)

The motion to quash was based in large part on the subpoena in Delaware being duplicative of a similar subpoena filed in California. This letter ruling is a gift for the reader to the extent that it is only 5-pages long, so I encourage anyone interested in the topic to read the whole thing.

But the core reasoning for the Court’s denial of the motion to quash, which includes a description of behavior that may serve as an example of the type of reaction to a subpoena that would not help one to prevail in a motion to quash a subpoena, follows:

In other circumstances, I might view entirely duplicative subpoenas served for such tactical purposes as problematic. Where, as here, the subpoena recipient Tweets the subpoenaing attorneys the middle finger and a video of someone urinating on subpoenas, I am less bothered by it.

Slip op. at 5.

109 Elon Musk Twitter Photos - Free & Royalty-Free Stock ...

The Delaware General Corporation Law was recently updated to afford corporate officers the opportunity to enjoy the benefits of exculpation from some forms of liability that corporate directors have enjoyed protection from for many years.

Much has already been written about this topic, but a recent post on the Harvard Law School Corporate Governance Blog  provides helpful details, and encouragement for companies to amend their corporate charters to implement this important new statutory protection.

Vice Chancellor J. Travis Laster of the Delaware Court of Chancery gave a lecture at the University of Iowa College of Law on “Big Law Ethics”, or lack thereof, based on findings that His Honor described in the “A” trilogy of cases in which he scored the ethical lapses of several senior partners in a few of the largest and most prestigious law firms in the country.

The presentation, at the below link, should be watched by anyone interested in the role lawyers play in society.

Guest Lecture: Hon. J. Travis Laster, Vice Chancellor of the Court of Chancery State of Delaware – YouTube 

[For those who might want to skip the introductions and preliminary comments, the core of the presentation begins at about 13:00 of the video at the above link.]

His Honor’s presentation lasted about an hour, and it’s worth watching in its entirety, but for those who may want the highlights, a few golden nuggets can be found in the following bullet points:

  • Our system depends on the integrity of lawyers.
  • There is a Latin maxim that translates as: Fraud destroys everything.
  • Most aspects of litigation occur outside the view of the court, so the court cannot police most of what happens in litigation, such as during the discovery process
  • Ethical lapses by senior partners at the largest and most prestigious law firms in the country, as described in the three Chancery decisions known as the “A” Trilogy: Akorn; AB Stable; and Anthem (one of which was 246-pages long; another over 300 pages), suggest that the problem of ethical lapses at law firms who occupy the loftiest levels of the legal profession is not an isolated occurrence, but might portend a more widespread problem.
  • Litigation will not function properly if lawyers are not honest and American society in general is based on voluntary compliance with legal obligations.
  • Even otherwise good people can experience moments of weakness

Three Reasons Why Good People May Do Bad Things

  1. Situational Dynamics: Clients can go elsewhere and most law firm partners are expected to originate business and bring in, or keep, clients. The job of a lawyer is to advance the goals of the client (though the lawyer must rise above the sometimes base or non-existent “morals of the marketplace”.)
  2. Cultural Norms: Lawyers are expected to be zealous advocates (though that word is not part of the ethical rules, as compared to being referenced in the comments). This can lead to “altruistic extremism” and bad behavior that they would not likely engage in if not arguing on behalf of a client. Lawyers make arguments for a living and some of the best advocates are in Big Law (among other places.)
  3. Slippery Slope or Ethical Fading: Minor ethical lapses, if not checked or corrected or discouraged, can lead to larger violations. The slippery slope can be flattened if minor violations are “nipped in the bud” and corrected.

Possible Solutions Suggested by V.C. Laster

  • Mentorship programs to help establish positive norms and check errant behavior, along with self-policing.
  • Be ready to fire a client who insists on improper actions.
  • Find supportive colleagues (e.g., American Inns of Court).
  • Be attentive and “look for” ethical issues, which are not always easy to recognize.
  • Use cautionary tales as lessons of behavior to avoid.
  • Remember that the coverup is often worse than the behavior attempted to be hidden.

Final Words of Wisdom:

  • A lawyer’s top priority should be justice. The duty to the court is higher than the duty to the client.
  • In the words of Justice Brandeis: sunlight is the best disinfectant

Any lawyer involved in litigation about issues surrounding an LLC member’s withdrawal from an LLC should become familiar with the recent decision in 5high LLC v. Feiler, C.A. No. 2022-0108-LWW (Del.Ch. Aug. 5, 2022).

Issue Addressed

Whether one of the original 50/50 members of an LLC resigned despite no written LLC agreement and no written resignation.

Essential Background Facts

Two members formed an LLC without a written LLC agreement but agreed orally that each would have a 50% ownership interest, each would co-manage the LLC, and each contributed an equal amount of capital. Shortly after the formation, one of the 50/50 members orally resigned and took several public actions to notify vendors, customers, employees, and others that he was resigning. The other 50% member orally accepted the resignation and the parties began exchanging draft formal documents–but they never signed a formal, written agreement to memorialize the resignation.

Important Legal Principles From Court’s Opinion

  • The Delaware Declaratory Judgment Act was an appropriate vehicle to present the issue for the Court to decide if one of the original 50/50 members remained as the sole member. Slip op. at 15-16 and n. 84.
  • The LLC Act allows an LLC agreement to be written, oral or implied. Slip op. at 18. See Section 18-101(9) of LLC Act.
  • The court defines an implied agreement and explains how one can be formed by conduct of the parties. Slip op. at 18-19.
  • Subjective intent is not relevant to determining if an implied contract was formed, and silence or failure to object can be treated as acceptance. Id.
  • Based on the circumstances of this case, it was not necessary to invoke the magic word “resign”, and there was ample evidence presented at trial on a paper record, to permit an objective observer to conclude that the departing member’s behavior demonstrated his intent to sever all ties with the LLC–and the remaining member accepted that offer to sever ties.
  • The LLC Act provides default provisions, but the parties’ implied contract modified those default provisions. Slip op. at 20-21.
  • The LLC Act’s default provisions would otherwise have prevented the resigning member from withdrawing prior to dissolution or winding up of the LLC. Id. and n. 104. See Section 18-603 of LLC Act.
  • The implied agreement was not conditioned on a formal, written agreement being signed, and efforts to memorialize the implied agreement did not alter the implied agreement. Slip op. at 21.
  • The court’s statement of the law and its reasoning highlighted above might possibly be applied to other situations where, for example, parties may agree–in an implied contract–to settlement terms in other contexts without signing a formal, written agreement.