Chancery Denies TRO: Prevents Minority from Limiting Rights of Controlling Redstone Family

By Francis Pileggi on Posted in Chancery Court Updates

In a high-profile expedited control contest covered on the front page of The Wall Street Journal and most of the major media outlets covering business, law or Hollywood, the Court of Chancery denied the request for a TRO by a minority stockholder that sought to thwart the efforts of the Redstone family from exercising its voting control regarding a potential deal with Viacom, in an opinion styled CBS Corp. v. National Amusements, Inc., C.A. No. 2018-0342-AGB (Del. Ch. May 17, 2018).

The issues in this opinion and the detailed facts could be the topic of a law review article. The intent of this short blog post is more modest and will rely on bullet points for busy readers, but a careful reading of the short decision of the court linked above is necessary for anyone who seeks to be current on the latest rulings impacting Delaware corporate litigation.

Key Facts

  • Shari Redstone and her family have voting control of CBS even though they own a small percentage of the stock. A Special Committee of the CBS board was concerned that Ms. Redstone would use her voting power to replace the CBS directors who were not in favor of a merger with Viacom.
  • The Special Committee planned a dividend of voting stock that would dilute the voting power of Ms. Redstone but purportedly would not impact the economic interests of her or any other stockholders.
  • On Monday, May 14, the Special Committee sought a TRO. On May 16 a hearing was held on the TRO. On May 17, the above linked opinion denied the TRO.
  • One hour before the May 16 hearing, Ms. Redstone, by written consent, amended the bylaws to require a vote of 90% of board members before any dividends could be issued (which would prevent the dividend of voting stock that the directors had planned–unless Ms. Redstone consented.)

Key Aspects of Court’s Legal Analysis 

  • The court recited the familiar requirements for a TRO. Slip Op. at 7. But, the defendants argued for the slightly higher standard applicable to a preliminary injunction which requires a likelihood of success on the merits.
  • The key legal issue arose in connection with the right of a controller to be a “first mover” to protect its control position and the right of independent directors to manage the company pursuant to DGCL Section 141(a).
  • Although there was one case arguably suggesting a contrary position, the court relied on two cases that more directly support the rights of a controller to be a “first mover” to protect its control position: Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401, 407 (Del. 1985), and Adlerstein v. Wertheimer, 2002 WL 205684, at *9 (Del. Ch. Jan. 25, 2002). Compare Hollinger Int’l Inc. v. Black, 844 A.2d 1022, 1029 (Del. Ch. 2004), aff’d 872 A.2d 559 (Del. 2005)(granting injunction to prevent a controller, Lord Black, from reneging on a prior agreement to grant authority to independent directors in connection with the sale of a company he controlled.)
  • The court also referred to relief available under DGCL Section 225 which the directors could use in the future to contest their removal as directors if they allege their removal was improper. In addition, relief would be available if a merger with Viacom is alleged to be the result of a breach of fiduciary duties by a controller. Thus, the irreparable harm component and the balancing of the equities requirement for injunctive relief were not met at this juncture–though one can be fairly certain that the parties will be back in court again in the near future as this drama unfolds.

ABA Issues Opinion on Judicial Use of Internet for Factual Research

By Francis Pileggi on Posted in Commentary

The American Bar Association recently issued an opinion regarding the limitations on the use by judges of the internet for factual research regarding a pending matter, on their own and without input from the parties in a pending case.  I published a short overview of that ABA opinion for my regular ethics column for The Bencher, a publication of The American Inns of Court.

Missed Notice Deadline Bars Contract Claim for Escrow Funds

By Francis Pileggi on Posted in Chancery Court Updates

A recent decision of the Delaware Court of Chancery provides a cautionary tale for corporate and commercial litigation practitioners about the importance of complying with contractual notice deadlines. In PR Acquisitions, LLC v. Midland Funding LLC, C.A. No 2017-0465-TMR (Del. Ch. April 30, 2018), the court barred a claim made for funds held in escrow because the applicable agreement required notice to be sent to the seller, but instead notice was mistakenly sent to the escrow agent. Although actual notice by phone was given to the seller prior to the deadline, the court explained why that did not satisfy the manner of notice required by the deadline provided for in the agreement.

Brief Factual Background

The basis for the dispute between the parties was the sale of consumer debt accounts. The purchase and escrow agreements for the transaction required that claims for funds held in escrow based, for example, on allegations of breach of representations and warranties, be sent to an address for the seller provided in the agreement. The seller’s liability for those claims was limited to the $6 million held in escrow. The court found that no written request or documentation of a claims was sent to the seller by the deadline. The court described how the buyer’s general counsel gave the notice letter to his assistant, but according to the opinion, the letter was only sent to the escrow agent and not the seller directly as required by the agreement. Despite this “clerical error”, the seller was notified by phone of the claim by the deadline.

Court’s Analysis

The court rejected the buyer’s argument that actual notice to the seller by phone should suffice as substantial compliance with the deadline. Nor was the court persuaded by the argument that the agreement did not require “strict compliance” with the notice provision.

Strict Compliance Required for Notice Provisions for Contract Claims

Notably, the court supported its holding in large part by distinguishing several cases that the buyer relied on for its failed argument that “actual notice” should suffice as “substantial compliance” with a contractual notice provision.  The cases that the court distinguishes are cited at footnotes 71, 75, 79, and 88, and accompanying text. None of those cases that the buyer relied on allowed for substantial compliance when the agreement specified a particular method of delivery to a specific party by a fixed deadline–as a condition for claims to an escrow fund. The buyer offered “no reason other than its own error for its failure to comply with the notice provision in the escrow agreement.” Thus, the court granted summary judgment to the seller and barred the claims.

Liability Limited to Escrow Funds

The court also dismissed claims of fraud that would have circumvented the buyer’s claim that the seller’s limitation of liability should not be confined to the funds held in escrow. The buyer’s argument on this point was based on the decision in Abry Partners V, L.P. v. F & W Acquisitions LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006). The court explained that Abry did not help the buyer in this case. The Abry opinion, authored by the current Chief Justice of Delaware when he was a Vice Chancellor, announced that the “public policy of Delaware prohibits a seller from insulating itself from the possibility that the sale would be rescinded if the buyer can show either: 1) that the seller knew that the Company’s contractual representations and warranties were false; or 2) that the seller itself lied to the buyer about a contractual representation and warranty.” 891 A.2d at 1064.

In order to make the showing explained in Abry, the buyer must “prove that the seller acted with an illicit state of mind, in the sense the seller knew that the representation was false and communicated it to the buyer. The buyer may not escape the contractual limitations on liability by attempting to show that the seller acted in a reckless, grossly negligent, or negligent manner.” Id. This statement of the law needs to be contrasted with the limitations of liability in an agreement that, if carefully drafted, will be enforced in Delaware to limit liability of the parties for representations and warranties to only that which is explicitly stated in the agreements between the parties.

Dissolved LLC Revived Due to Inadequate Reserves for Claims

By Francis Pileggi on Posted in Chancery Court Updates

Any commercial or corporate litigator who needs to pursue claims against a dissolved entity should read the recent Delaware Court of Chancery opinion in Capone v. LDH Management Holdings LLC, C.A. No. 11687-VCG (Del. Ch. April 25, 2018). In essence, the court nullified the certificate of cancellation that had dissolved the LLC in this case because no reserves were set aside, as required by statute, for claims that the executives of the LLC were aware of before they dissolved the company. In effect, the court revived or resurrected the LLC so that claims could be made against it. Presumably (though not expressly addressed in the court’s decision), this might also allow for individual claims to be made against the managers of the LLC as well.

Brief Background

The factual background of this case involves members of an LLC whose equity was subject to a call, which the company made. Shortly after the valuation of that equity was made, a portion of the parent entity was sold for an amount that suggested that the valuation of the equity subject to a call was grossly insufficient. The record suggests that the higher valuation, based on offers for the sale of the company received very shortly after the valuation date, was known or reasonably expected, at or about the time the valuation was made. The court found that the management of the LLC was aware of the claims that the valuation was lower than it should have been, but the LLC was dissolved without any reserves being set aside for those claims. The nullification issue was presented to the court in the procedural context of cross-motions for summary judgment.

Overview of Legal Principles Involved and Court’s Analysis

Section 18-804(b)(1) of the Delaware LLC Act requires a dissolving LLC to “make reasonable provision to pay all claims and obligations, including all contingent, conditional or unmatured contractual claims, known to the limited liability company.” Section 18-804(b)(3) requires than an LLC undergoing the wind-up process must make provisions that are likely to be sufficient to cover claims that have not yet been made formally, but that “based on facts known to the LLC, are likely to arise or to become known to the LLC within 10 years after the date of dissolution.” Section 18-804(b)(2) applies similarly to actual claims formally pending.

Types of Claims Requiring a Reserve

The court may nullify a certificate of cancellation if an LLC is not wound up in accordance with the LLC Act, which has the effect of reviving the LLC so that claims may be brought against it. Section 18-804(b)(1) has a broad scope and requires provision for all claims–including “contingent, conditional or unmatured”  claims that are known to the LLC. Although there is flexibility regarding what a “reasonable provision” is under the circumstances, the purpose of Section 18-804 is to provide “mandatory protection” to creditors if an LLC dissolves and winds up its affairs. See footnote 119, citing cases explaining that due to the dearth of caselaw in this area, decisions on this topic involving corporations and LPs can be applied by analogy–and vice versa.

Notice of Claims

The court analyzed whether the LLC had actual knowledge of the claims, as Section 18-101(5) requires actual–not constructive knowledge. A thorough review of the facts, including emails from the claimants to the management of the LLC articulating the view that the claimants’ membership interests were not valued in compliance with the good faith requirements of the LLC agreement, satisfied the court that the notice requirement was met. The knowledge of the LLC’s key officers is imputed to the LLC.

Reasonable Reserves

Although the court provided a hypothetical frivolous claim that might allow for no reserve to be made, the court explained that “even a relatively weak claim may justify a reserve” especially where, as in this case, the claim raises the prospect of a large damages award. The court instructed that a claim is not frivolous simply because it will likely be unsuccessful, but rather the inquiry should be whether the claim “lacks even a good-faith arguable basis in law”. (emphasis in original). See footnote 158, citing cases that explore the nuances of that analysis. The court reasoned that based on the details of this case, there was a good-faith arguable basis in law for the substantial claims that the LLC was aware of. See also footnote 165 for another hypothetical the court provides to illustrate its reasoning in support of its conclusion on this point.

Conclusion 

The court held that that the managers of the LLC were aware of the non-frivolous claims at the time of the dissolution and the LLC Act required creation of a reserve to cover the claims. Because the LLC failed to do that, it was dissolved in violation of Section 18-804(b)(1), and the court, therefore, nullified the certificate of cancellation.

Blockchain Technology and Delaware Corporate Law

By Francis Pileggi on Posted in Commentary

The Delaware General Corporation Law was amended last summer to allow companies to maintain their corporate records using blockchain technology. The purpose of this short post is to provide a high-level overview of this evolving intersection of technology and corporate law that will have an increasingly profound impact on corporate governance and related areas of the law–in addition to the impact it will have on many other fields and industries. The enabling legislation is designed to permit the use of a particular technology to maintain corporate records in a way that addresses a problem with the current system, especially for larger companies with millions of stockholders, for example, about who owns the stock and how they voted in a merger.

The Basics

A recent article in the Harvard Business Law Review that describes blockchain developments in the context of Delaware law, explained that: “Blockchain technology is also known as “distributed ledger technology” (DLT), because copies of a single, shared ledger are distributed across a decentralized network of multiple “nodes,” or users.” If a transaction or other information is confirmed or validated by all nodes, the transaction or information is cryptographically recorded in a shared ledger. This system eliminates the intermediaries who are now involved, for example, in recording the owners of shares and how they voted. Instead, using DLT the transaction is authenticated in real time by automated network consensus.

Of course, there is much more minutiae involved in the use of DLT, but describing the details of how blockchain technology or DLT works is beyond the scope of this modest post. For those interested in that minutiae, however, an article entitled Corporate Governance and Blockchain provides extensive explanations about the intricacies of blockchain technology in the context of corporate record keeping and voting.

Current Corporate Problems that Blockchain Addresses

In order to understand why some view the use of blockchain technology for corporate records as “arriving at the promised land”, one must understand the many problems inherent in the current system of maintaining stock ledgers and recording stockholder votes. Vice Chancellor J. Travis Laster of the Delaware Court of Chancery outlined several problems with the current system of voting shares in a keynote speech to the Council of Institutional Investors on September 29, 2016. His Honor observed that most beneficial owners of stock register their shares in the name of Cede & Co., the nominee of the Depository Trust Company, or DTC. Banks and brokerage firms own DTC. Separate accounts for the custodians’ customers are not maintained because DTC holds the shares of its custodians in fungible bulk.

But Delaware law was not designed for the nominee system of holding stock. Rather, it assumes that stockholders own shares directly. Delaware’s adoption of Article 8 of the UCC is inconsistent with Delaware corporate law, however, because the UCC treats each stockholder as owning a pro rata interest in the fungible bulk.

Beneficial-Nominee Systemic Problems

Several recent opinions by the Court of Chancery illustrate the problems. See In re Appraisal of Dell Inc. (Dell Continuous Ownership), 2015 WL 4313206 (Del. Ch. July 30, 2015) and the later decision captioned In re Appraisal of Dell Inc. (Dell Dissenter Requirement), — A.3d –, 2016 WL 3030909 (Del. Ch. May 11, 2016). In the first Dell decision, because the nominee issued certificates for the stockholders seeking appraisal in the name of the custodial banks, the shares were no longer held continuously by the same record holder through the close of the merger, and therefore the statutory requirement for an appraisal was not satisfied–through no fault of the stockholder. Though this result was required by the applicable law, the vice chancellor regarded it as an absurd result.

Voting Problems

In order to pursue an appraisal under Delaware law, the stockholder must not have voted for the merger. In the second Dell decision cited above, T. Rowe Price was the beneficial owner of several million shares for which Cede served as the record holder. DTC had a duty to ensure that T. Rowe’s shares were voted according to T. Rowe’s instructions. DTC did this by executing a proxy to T. Rowe’s participant, State Street. Then, State Street outsourced the task of implementing voting instructions from T. Rowe to Broadridge Financial Solutions. But T. Rowe used Institutional Shareholder Services to transmit its voting instructions. T. Rowe had a computerized system that generated default voting instructions for ISS to vote in favor of a management-supported merger. In this instance, they changed the default vote and confirmed different instructions. But the date of the shareholder vote was later postponed three times, and the third time the default system was not changed. Thus, by mistake, and through no fault of the record owner of the stock, the vote was mistakenly made in favor of the merger.

Because the ownership of individual shares held beneficially is not tracked in the U.S. clearance and settlement system, imprecision occurs. When the vote is close, certainty about the exact number of votes cast often remains elusive. See In re Transkaryotic Therapies, Inc., 954 A.2d 346 (Del. Ch. 2008)(highlighted on these pages), and Marcel Kahan & Edward Rock, The Hanging Chads of Corporate Voting, 96 Geo. L.J. 1227, 1279 (2008). This lack of ability of the current system to ensure accuracy in the number of shares voted, and by whom, creates tension with the increased importance that Delaware law gives to the stockholder vote. See, e.g., Corwin v. KKR Fin. Holdings, LLC, 125 A.3d 304 (Del. 2015).

Amendments to the Delaware General Corporation Law

Among the recent amendments allowing use of the new approach to corporate record keeping and communication with stockholders is DGCL Section 224, which was amended to allow the use of distributed ledger technology to create and maintain corporate records. Section 219 was also revised to allow the stock ledger to be maintained by “or on behalf of the corporation” to allow for use of this new technological approach to maintaining the stock ledger. This would allow for a much for precise and dependable method to determine who the record owner of stock is in a company and how that stock was voted for a particular transaction.

Current Status in Delaware and New Competition by Wyoming

An article in Fortune magazine marked the occasion of the passage last year of these enabling amendments to the DGCL. A recent article in the local Delaware newspaper called The News Journal chronicles the apparent “reduced enthusiasm” of current Delaware state officials in pursuing the Delaware Blockchain Initiative at a fast pace, until the consequences that may be visited upon the many players in the current “infrastructure” of the current system–which is responsible, directly or indirectly, for a substantial portion of the state’s annual budget–are fully considered. But, Wyoming reportedly is galloping at a expedited pace to become the leading state for the implementation of blockchain technology in corporate matters and other areas as well.

Only a month or so ago, several types of multi-faceted blockchain legislative changes recently passed by the Wyoming legislature were signed by the state’s governor, and other states are reportedly joining the race to join the party.

At a seminar a few days ago in Delaware, sponsored by the Delaware State Bar Association, entitled “Blockchain Technology for Lawyers”, the panelists attributed the “pushing of the pause” button on further blockchain initiatives (beyond the existing changes to allow the use of blockchain), as part of the deliberative process that has been a part of the careful approach that Delaware has always taken before making major changes to its corporate statute that about two-thirds of Fortune 500 companies rely on, and that the State of Delaware relies on for a large part of its annual budget–as opposed to a lack of enthusiasm for taking the lead on this new development of major importance and potentially epic impact on Delaware corporate governance.

Much has already been written about this exciting new development in Delaware corporate law, and this short post was only intended as a cursory review of the topic with links to allow readers access to other sources with more thorough treatment of the issues involved.

SUPPLEMENT: A few days after I published this post, I learned that Vice Chancellor Laster just co-authored an article on this topic. Anyone serious about this subject matter must read that article. See J. Travis Laster and Marcel T. Rosner, Distributed Stock Ledgers and Delaware Law, 73 Bus. Law. 319 (Spring 2018)

Mere Act of Forming Delaware Entity Not Basis for Personal Jurisdiction

By Francis Pileggi on Posted in Chancery Court Updates

A recent decision from the Delaware Court of Chancery provides practical insights into the requirements for imposing personal jurisdiction in Delaware over non-residents involved in the formation of a Delaware entity. The act of forming a Delaware entity only, without more, is not sufficient to impose personal jurisdiction in Delaware over a non-resident involved in the formation.

The case of Baier v. Upper New York Investment Company LLC, C.A. No. 6896-VCS (Del. Ch. April 16, 2018), involves lengthy litigation among siblings over the division of the inheritance from their parents’ estate.  The estate involved assets in many foreign countries and some of those assets were titled in Delaware entities.  A prior decision addressed more detailed factual background in the matter, in an opinion styled: de Adler v. Upper New York Inv. Co. LLC, 2013 WL 5874645 (Del. Ch. Oct. 31, 2013).

Mere Formation Not Enough:

The most noteworthy statement of law in this case with the most widespread application to corporate and commercial litigators (although not a new statement of the law), is the court’s ruling that the “mere formation of a Delaware entity, without more, is insufficient for this Court to exercise jurisdiction. Rather, the act of formation must be ‘an integral component of the total transaction to which [the] cause of action relates.’” See footnotes 88 to 92.

Single-Act Long-Arm Statute:

The court refers to Delaware’s long-arm statute, at Section 3104(c)(1) of Title 10 of the Delaware Code as a “single act” statute. This requires that the non-resident defendant’s act of transacting business in Delaware must have a nexus to the claim against that non-resident defendant.

Also notable was the court’s description of the slightly different standard that applies when a motion to dismiss based on personal jurisdiction is analyzed prior to any jurisdictional discovery–in which case only a prima facie showing is necessary.  Once, however, jurisdictional discovery is completed, one must allege specific facts to support personal jurisdiction. See footnotes 76 and 77.  The court then discussed the familiar two-step personal jurisdictional analysis where the court first assesses whether there is a statutory basis for personal jurisdiction, and then, secondly, determines whether its exercise of personal jurisdiction over a non-resident defendant is consistent with the Due Process Clause of the Fourteenth Amendment to the United States Constitution. See footnotes 81 and 82.

Jurisdiction over Managers of LLC:

The court also discussed the concept of when a manager of an LLC is subject to personal jurisdiction under Section 18-109 of the Delaware LLC Act. See page 26.

Latches:

Latches as an equitable defense was also discussed in connection with the general rule that due to the factual nature of the requisite analysis of the applicability of latches, a ruling on that argument is generally not suitable for a motion to dismiss–but this case was an exception to that rule. See pages 28 and 29.  Thus, laches was a separate basis to dismiss the claims even if personal jurisdiction were appropriate.

Law of the Case

The court also discussed the “law of the case” doctrine, which equally applies to decisions of courts from other countries involving the same issues between the same parties, in which case the principle of comity also militates against re-litigation of issues previously decided.

SUPPLEMENT: Law360 published another summary of this case that I prepared.

Delaware Choice-of-Law Provision Upheld

By Francis Pileggi on Posted in Commentary, Other Court Decisions

Delaware case law is replete with decisions upholding provisions in contracts that choose Delaware as the governing law for any disputes related to an agreement. A recent Delaware decision adds to the large body of Delaware jurisprudence on this topic. See, e.g., selected decisions on choice-of-law enforceability from the Delaware Supreme Court and Delaware Court of Chancery, highlighted on these pages over the last decade or so. Similar reasoning has been applied by the Delaware courts to uphold forum selection clauses requiring that suits relating to a contract be filed exclusively in state or federal courts located in Delaware. See, e.g., selected cases on forum selection clauses highlighted on these pages over the last ten years-plus, including reference to a recent update of Delaware statutes validating such provisions in corporate bylaws. These two related topics are of widespread applicability that extend beyond the corporate and commercial litigation fare, and legal ethics topics, typically covered on this blog.

The recent decision in Change Capital Partners Fund I, LLC v. Volt Electrical Systems, LLC, et al., C.A. No. N17C-05-290-RRC (Del. Super. April 3, 2018), by the Delaware Superior Court (Delaware’s trial court of general jurisdiction that does not hear the equitable claims filed in Chancery), provides an excellent overview of the doctrinal underpinning for the longstanding position of the Delaware courts that choice-of-law provisions in agreements are generally enforceable.

The agreement involved was for the purchase of accounts receivable. The unsuccessful argument made was that either New York or Texas law should apply, despite the choice-of-law provision selecting Delaware as the governing law, because (i) either of those states would be the “default state” in the absence of a choice-of-law provision; (ii) enforcement of the agreement would be contrary to the public policy of either Texas or New York; and (iii) both New York or Texas have a materially greater interest in the determination of the issues between the parties to the agreement.

Delaware’s Public Policy Upholding Freedom of Contract

Part of the court’s introductory summary of its conclusion provides a preview of the more detailed reasoning that the scholarly decision provides: “Delaware courts are generally reluctant to subvert parties’ agreed-upon choice-of-law provisions.” In the context of a motion to dismiss, this opinion provides many eminently quotable statements of Delaware law that are perfectly suitable for use in future briefs. For example, the court started with the basic public policy of Delaware regarding contracts in general, separate from the choice-of-law issue:

Delaware courts are ‘strongly inclined’ to respect the widely recognized and fundamental principles of freedom of contract. This Court will not interfere unless ‘upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract.’ With very limited exceptions, Delaware courts will enforce the contractual scheme that the parties have arrived at through their own self-ordering, both in recognition of a right to self-order and to promote certainty of obligations and benefits. Upholding freedom of contract is a fundamental policy of this State. (internal footnotes omitted)

Delaware Choice-of-Law Policy and the Exception in Restatement (Second) of Conflicts, Section 187(2)(b)

It remains well-settled that:

Delaware courts will honor a contractually-designed choice-of-law provision so long as the jurisdiction selected bears some material relationship to the transaction. The existence of a choice-of-law clause establishes a material relationship between the chosen state and the transaction. Title 6, section 2708(a) of the Delaware Code recognizes that a choice-of-law clause is a significant, material and reasonable relationship with this State and shall be enforced whether or not there are other relationships with this State (citing Oak Private Equity Venture Capital Ltd. v. Twitter, Inc., 2015 WL 7776758, at *9 (Del. Super. Ct. Nov. 20, 2015)).

If an agreement has no choice-of-law provision, Delaware applies the “most significant relationship” test from Section 188 of the Restatement. Where such a provision does exist, however, Section 187(2)(b) of the Restatement provides for exceptions to enforceability, which were the arguments made unsuccessfully as noted at the beginning of this synopsis. Those exceptions may apply if: (i) the “default state’s” law would apply absent a choice-of-law provision; (ii) Delaware law would be contrary to a fundamental public policy of the default state; and (iii) the default state has a materially greater interest in the enforcement of the agreement.

Importantly, a “mere difference between the laws of two states will not necessarily render the enforcement of a cause of action arising in one state contrary to the public policy of another.” (citing Vichi v. Koninklijke Philips Elecs. N.V., 62 A.3d 26, 45 (Del. Ch. 2012)). The Vichi case was highlighted on these pages. The Superior Court distinguished several mostly Chancery decisions involving covenants not to compete, in which the public policy of California and Delaware on that topic is substantially different. See, e.g., EBP Lifestyle Brands Holdings, Inc. v. Boulbain, 2017 WL 3328363, at *7 (Del. Ch. Aug. 4, 2017); Kan-Di-Ki, LLC v. Suer, 2015 WL 4503210, at *18 (Del. Ch. July 22, 2015); Ascension Ins. Holdings, LLC v. Underwood, 2015 WL 356002, at *3 (Del. Ch. Jan. 28, 2015).

Notably, the Superior Court found that New York and Delaware do have different public policy on the topic of usury laws, which were relevant to the agreement at issue in this case. New York has a strong policy against interest rates higher than 25%. See footnote 30. Delaware, by contrast, has no cap on interest rates. See footnote 31 for statutory and case law citations.

But, it is not enough for the public policy of two states simply to be conflicting. In addition, a party seeking to avoid a choice-of-law provision pursuant to Section 187(2)(b) of the Restatement, must demonstrate that the other state has a “materially greater interest in the enforcement or non-enforcement” of the agreement at issue. In this case, the Superior Court found a sufficient connection to Delaware because: (i) one of the parties was a Delaware entity; and (ii) both parties agreed to choose Delaware law to control their agreement.

Delaware Public Policy to Uphold Contracts Generally is Stronger than Public Policy of Other States to Enforce This Particular Agreement Under Other State Law

Several prior Delaware decisions were cited to support the reasoning in this opinion that when the court must choose between the law of other states that arguably may apply, the choice of Delaware law typically prevails. See, e.g., footnotes 40 and 47. For example, in Abry Partners V, L.P. v F & W Acquisition, LLC, 891 A.2d 1032, 1048, n.25 (Del. Ch. 2006), the Court of Chancery needed to choose among different choice-of-law provisions in several interlocking agreements that provided for different state laws to apply, and reasoned that no rational businessperson would intend that the law of multiple jurisdictions would apply to a single controversy having its origin in a contract-based relationship. In Abry, therefore, the agreement calling for Delaware law prevailed.

Additional reasoning to support the conclusion in this Superior Court opinion was based on the recognition that there is an inherent difficulty in avoiding the terms of a contract based on allegedly contrary public policy of another state. In part, this is due to the fundamental, strong Delaware public policy of freedom of contract and the inclination of the Delaware courts to enforce otherwise valid contracts. Stated another way, “Delaware courts regularly express their reluctance to allow avoidance of the contractual choice-of-law provision” and are “strongly inclined to respect [a] parties’ agreement….” See footnotes 36 to 39 and accompanying text.

In sum, this opinion should be included in the toolbox of every litigator who needs to know the latest iteration of Delaware law on the enforceability of choice-of-law provisions selecting Delaware law to govern issues that arise in connection with an agreement.

Supreme Court Clarifies Requirements for Whistleblower Protection

By Francis Pileggi on Posted in Other Court Decisions, Selected Articles by Francis

The U.S. Supreme Court’s recent decision in Digital Realty Trust v. Somers, explained that in order for a whistleblower to be protected from retaliation, in some circumstances, the employee must complain directly to the SEC. I provide a summary of the decision in my latest article for the magazine of the National Association of Corporate Directors, called Directorship.

Chancery Addresses Scope of Director Consent Statute and Civil Conspiracy Claims

By Francis Pileggi on Posted in Chancery Court Updates

In the context of cross-claims of fraudulent inducement by parties to a merger, the Court of Chancery discussed several principles of Delaware law that serve as useful references for those involved in corporate and commercial litigation.  The opinion in LVI Group Investments, LLC v. NCM Group Holdings, LLC, C.A. No. 12067-VCG (Del. Ch. Mar. 28, 2018), provides useful iterations of the following principles of Delaware law:

·     The extended scope of the director consent statute which allows for the imposition of personal jurisdiction on officers and directors of Delaware entities even when the claims are not for breach of fiduciary duty.  This opinion amplifies the Delaware Supreme Court’s recent Hazout decision which reversed decades of prior precedent on this topic, highlighted on these pages, interpreting Section 3114 of Title 10 of the Delaware Code.

·     The court also discusses the general rule that a civil conspiracy may not be formed between a director and the corporation that she represents, however, there are exceptions to this rule which are explored in this opinion.  For example, the court noted that it was unaware of any Delaware authority in support of a per se rule that a private equity firm and its principal cannot conspire with a company controlled, but not wholly owned, by them.  The court cited to several decisions addressing this issue including Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 60 (Del. Ch. Nov. 24, 2015), which was highlighted on these pages.  The court also cited Prairie Capital for the principle that a corporate officer can be held personally liable for the torts he commits and cannot hide behind a corporate shield when he is a participant in the tort.

·     The court also considered the extent to which a fraud claim can be pursued in the presence of a non-reliance clause and an integration clause.  The court explained that this was not a bar to claims that representations within the agreement itself were fraudulently made.  See Abry Partners V, L.P. 891 A.2d at 1064 (“To the extent that the stock purchase agreement purports to limit the Seller’s exposure for its own conscious participation in the communication of lies to the Buyer, it is invalid under the public policy of this State.  That is, I find that the public policy of this State will not permit the Seller to insulate itself from the possibility that the sale would be rescinded if the Buyer can show either:  (1) that the Seller knew that the Company’s contractual representations and warranties were false; or (2) that the Seller itself lied to the Buyer about the contractual representations and warranty.”)  See also Prairie Capital III, L.P., 132 A.3d at 61. 

·     The court also explained that equitable fraud claims, also known as negligent misrepresentation claims, require a special relationship, such as a fiduciary relationship, as a prerequisite in order for the scienter requirement of common law fraud to be waived.

Supreme Court Addresses Forum Non Conveniens

By Francis Pileggi on Posted in Delaware Supreme Court Updates

A recent Delaware Supreme Court decision should be required reading for anyone involved with a forum non conveniens case in Delaware. Aranda v. Philip Morris USA Inc., Del. Supr., No. 525, 2016 (March 27, 2018), provides an overview of the Delaware law on forum non conveniens and clarified that even if it is a minority view among the 50 states, Delaware only requires that the trial court “consider” whether an alternative forum is available as part of its analysis, but the trial court is not required to find that an alternative forum is available before making its determination whether to dismiss a case based on forum non conveniens.  The court reviewed the three general categories of forum non conveniens cases.  The first type of case under that general category is referred to as:

(1) a first-filed Delaware case with no case pending elsewhere (the Cryo-Maid test);

(2) a second-filed Delaware case with another first-filed case pending elsewhere (the McWane test); and,

(3) a hybrid recently addressed by the Delaware Supreme Court in Gramercy Emerging Markets Fund v. Allied Irish Banks, P.L.C., 173 A.3d 1033 (Del. 2017), which involves a later-filed Delaware case pursued after another jurisdiction had dismissed the first-filed case based on forum non conveniens.  All three of the foregoing types of cases require some application of the forum non conveniens factors.  The difference is the presumptions applied in each category to the applicable factors.  See Slip op. at 11-12.

The court was aware of the competing arguments, and the majority of other states who approached the issue differently. The court also addressed the public policy issue involved.

In sum, Delaware’s high court was satisfied that the trial court did consider the availability of an alternative forum before dismissing the case on forum non conveniens grounds, but it concluded that whether an alternative forum was available is not a deciding factor.  Rather the trial court is only required to consider it as one of many factors.

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