Court Rejects Pre-Trial Restrictions on Expert Testimony

A recent short letter ruling by the Delaware Court of Chancery provides a useful tool for the toolbox of commercial and corporate litigators regarding pre-trial arguments to exclude the testimony of an expert who has prepared a report, even though in the Court of Chancery motions in limine to obtain pre-trial rulings on such evidentiary issues are not as meaningful as they would be for a jury trial. Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Del. Ch. Nov. 13, 2017). See also prior decisions in this litigation that have been highlighted on these pages for more background details.

Overview: A motion in limine was denied without prejudice to object at trial to exclude consideration of expert evidence on two issues: (1) whether the expert, who relied on a recitation of facts upon which his opinion was based, should have been precluded from testifying about the facts which allegedly were “cherry-picked and self-serving.”  The court determined that it was able to separate the testimony at trial that was based on second-hand comments — as opposed to first-hand facts.  In addition, the court reasoned that the expert would be subject to cross-examination, where any deficiencies or any inaccuracies on the facts relied upon for the expert opinion can be scrutinized.

The second issue is whether the expert should be precluded from opining on subjective knowledge or intent of individuals that would be outside the scope of the area of expertise of the expert. The court concluded the risk of that danger could be dealt with by objections at trial.

The court relied on Delaware Rule of Evidence 702 which requires that expert opinion be based, among other things, on “sufficient facts or data . . ..” The court also relied on precedent for the view that subjective testimony about the subjective intent of a plaintiff regarding damages is not admissible as expert testimony under DRE 702. See Hoechst Celanse Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 1994 WL 721624 at *1 (Del. Ch. Apr. 20, 1994).

Chancery Rejects Section 220 Demand Post-Trial

A recent post-trial opinion from the Delaware Court of Chancery serves as another example to support the view that demands for books and records pursuant to DGCL Section 220 are not for the faint of heart.

In Wilkinson v. A. Schulman, Inc., C.A. 2017-0138-VCL (Del. Ch. Nov. 13, 2017), the Court denied a request for books and records in a decision supported by copious citations to precedent, based largely on the conclusion that even though the demand may have satisfied the requirement for a “proper purpose” on its face, in reality the true purpose was one crafted by counsel for the stockholder–but that the stockholder himself did not appear too familiar with. During the stockholder’s deposition, it was revealed that the stockholder was not conversant with the details of the demand, or its purpose–and that the stockholder served as a plaintiff in seven other lawsuits for the same law firm that pursued the instant case.

Takeaway: There are many other examples that we have highlighted on these pages over the past nearly 13 years, that demonstrate that Section 220 cases are often hotly litigated and it is not rare to incur the cost of a trial, as in this matter, and “come up dry” in terms of not proving the right to obtain documents from the corporation. Thus, the economics of a Section 220 demand favor those whose stake in a company makes it economically rational to pursue such a claim. See, e.g., Section 220 cases highlighted previously.

Chancery Denies Motion for Stay Based on Pre-Indictment Criminal Probe

This post was prepared by Brian E. O’Neill, Esq. of Eckert Seamans.

The Delaware Court of Chancery recently denied a motion to stay proceedings, which was filed by five defendants who had been served with subpoenas by the Federal Bureau of Investigation in connection with a criminal probe. In A. Schulman, Inc. v. Citadel Plastic Holdings, LLC,  C.A. No. 12459-VCL (Del. Ch. Nov. 2, 2017), Vice Chancellor Laster addressed the defendants’ motion to stay proceedings for ninety days, and their request to hold a status conference at the expiration of the ninety-day stay.

Background: The underlying civil litigation involved claims for breach of contract and fraud.   The defendants moved to dismiss the complaint, which motion was denied.  The parties then engaged in voluminous discovery practice over sixteen months.  The matter was scheduled for trial in March 2018.  On October 3, 2017, the FBI served the five individual defendants with subpoenas to produce records in connection with a criminal investigation.

The five individual and numerous corporate defendants in the Court of Chancery litigation were all represented by the same firm. After service of the FBI’s subpoenas, the five individual defendants requested a ninety day stay, citing their need to retain separate counsel due to the criminal investigation.  Plaintiffs consented to a postponement of the depositions of the five individual defendants, but otherwise objected to the motion for stay.  [Parenthetically, a Section 220 Chancery decision on November 13, 2017, involving the plaintiff companies was highlighted on these pages].

Analysis:  The Court noted that although the defendants requested a ninety day stay of proceedings, “in reality they seek an indefinite stay.”  The Court also noted that “Delaware courts have not articulated a specific test to apply when analyzing whether to stay a civil case in light of a pending criminal investigation.”  Absent controlling precedent, Vice Chancellor Laster turned to the relevant test articulated by the United States Court of Appeals for the Third Circuit.

The Third Circuit has identified two overarching issues to guide a trial court’s analysis of whether to stay a civil action due to the pendency of a related criminal case. The two issues are:  (1) “the status of the criminal case, including whether the defendants have been indicted” and (2) “the extent to which the issues in the criminal and civil cases overlap.”

Guided by those two overarching principles – status of the criminal case and its overlap with the civil action – the Third Circuit then looks to the balancing of five factors. The five factors are:

(1)     the interest of the plaintiff in proceeding expeditiously with his case and any potential prejudice it may suffer from any delay;

(2)     the burden upon the defendants from going forward with any aspects of the proceedings, in particular any prejudice to their rights;

(3)     the convenience of the court and the efficient management of judicial resources;

(4)     the interests of any non-parties; and

(5)     the interest of the public in the pending civil and criminal litigation.

Vice Chancellor Laster noted that the grant of a total stay in a civil action is an “extraordinary remedy.” Upon its review of the two guiding principles, the Court found that the criminal matter was in its earliest stages (pre-indictment) and noted that civil stays are infrequently granted at that point.   As to the issue of overlap, the Court found that “the defendants have not made a meaningful showing on that point”.  Moreover, the Court noted that the defendants failed to attach the FBI subpoena to their motion for stay, and failed to present meaningful information during an off-the-record discussion with the Court.

After weighing the merits of each the five factors, the Court concluded that the motion should be denied. The Court found that the criminal investigation “remains at a nascent stage” and that the grant of the requested stay “would reward individuals who engaged in more serious wrongdoing by enabling them to use a threatened (but not yet commenced) criminal proceeding as a shield against a longstanding civil case.”  Accordingly, the Court denied the five individual defendants’ motion for a stay.

Takeaway: Litigants seeking to stay civil proceedings based on the pendency of a related criminal matter must satisfy a five-factor test, and must articulate the extent of overlap between the civil litigation and the criminal matter.  Moreover, there is less likelihood of obtaining a stay of the civil action before an indictment has been issued.

Chancery Grants Dispositive Motion on Earn-Out Claims

A recent Court of Chancery decision granted a motion for judgment on the pleadings on several claims relating to post-closing earn-out payments due in connection with an acquisition.  In GreenStar IH Rep, LLC v. Tutor Perini Corporation, C.A. No. 12885-VCS (Del. Ch. Oct. 31, 2017), the court found that the terms of the agreement were unambiguous and that the facts alleged were sufficient to enter judgment on three of the eight counts in the complaint that sought damages and declaratory judgments relating to the failure of the buyer to make earn-out payments as required by the merger agreement.

Background:  This case involved the sale of GreenStar Services Corporation to Tutor Perini Corporation.  The agreement provided for a right to receive post-closing earn-out consideration in the event certain pre-tax profit milestones were achieved.  The motion for judgment on the pleadings that this opinion decided, related to those parts of the complaint which asserted breach of contract claims for failure to make the earn-out payments in the third, fourth and fifth years after closing.  The court determined that based on a review of the applicable agreement and the facts alleged in the complaint that the seller was entitled to earn-out payments as a matter of law based on the clear and unambiguous terms of the agreement.  The court also determined that the buyer was not entitled to any offset based on any alleged wrongdoing in the counterclaims.  The court also rejected claims for fraud based on the failure to plead with the necessary particularity.

The relevant provisions in the merger agreement provided for the calculation of the earn-out payments based on pre-tax profit.  The agreement defined pre-tax profit as the amount calculated and included in a pre-tax profit report compiled in accordance with GAAP.  If the pre-tax profit report was not objected to, then the parties would be bound by it for purposes of calculating the earn-out.  If there was an objection to the pre-tax profit report, there was a procedure in the agreement providing for binding arbitration.

Analysis:  The court recited basic contract principles including the truism that when, as in this matter, the language of an agreement is unambiguous, the court is bound by the language within the agreement.  See cases cited at footnotes 50 and 51.

The court read the agreement as unambiguously providing for the calculation of the earn-out payments due based on the pre-tax profit reports.  When, as in this case, there was no objection to those reports, the parties agreed that those reports would be binding in terms of determining the amount of the earn-out payments that were due.

The court specifically rejected the argument of the buyer that the unambiguous provisions of the agreement regarding the binding nature of the report should be subject to a condition that the report would not be binding if the buyer either failed to properly calculate the pre-tax profit or if the buyer allegedly relied on inaccurate financial statements. The court rejected that argument in part, because it would allow the buyer to unilaterally determine when the pre-tax profit report was not considered binding.

Likewise, in rejecting that argument, the court also rejected the argument that the implied covenant of good faith and fair dealing should allow for an implication that the report would only be binding if it was determined to be accurate.

Implied Covenant of Good Faith and Fair Dealing:  The court defined the limitations of the implied covenant of good faith and fair dealing, which will not be used when contract language could have easily been drafted to expressly provide for the allegedly missing terms and when the existing contract speaks directly to the issue in dispute.  Stated differently, the covenant exists solely to fulfill the reasonable expectations of the parties, and to avoid arbitrary frustrations of the parties’ bargain, but in order for the implied covenant to apply, the obligation asserted and the obligation to be implied must not contradict the purposes reflected in the express language of the contract.

Holding: In sum, the court found that there were “no gaps to be filled” and that the court would not imply a term that is inconsistent with the intent of the parties as evidenced by the express terms of the agreement.  See footnote 70 and cases distinguished therein.

Also notable is the court’s rejection of the argument that the existence of 13 affirmative defenses made it premature to grant a motion for judgment on the pleadings.  Cases cited in footnotes 72 through 74 supported the court’s reasoning that the “rhythmic incantation of multiple affirmative defenses, each revealed in a single sentence, cannot, alone, defeat an otherwise well-supported motion for judgment on the pleadings.”

Takeaway Although most earn-out disputes involve genuine issues of material fact that might make a dispositive motion more challenging, where there are purely contractual interpretation issues that are subject to unambiguous terms, this decision may help to support an effort to seek a pre-trial ruling on at least some of the contract issues in an earn-out dispute.

Chancery Rejects Jurisdiction Over Merits of Dispute Involving Selection of Successor Arbitrator

The Court of Chancery opinion in the case styled In Re: Good Technology Corporation Stockholder Litigation, C.A. No. 11580-VCL (Del. Ch. Oct. 27, 2017), provides a pithy, persuasive analysis of a binding arbitration agreement that specifically appoints a named arbitrator–but that arbitrator later recused himself.

Overview: This decision provides reasoning supported by ample citations to authority to explain why that recusal of a specified arbitrator will not nullify the binding nature of the arbitration clause.  Rather, assuming that the arbitration provision provides for the applicability of rules of an arbitration service such as JAMS or the AAA, the issue of how to deal with an unavailable name arbitrator will be treated as an issue of “procedural arbitrability”, and a successor arbitrator can be selected by the particular arbitral forum or, if the Federal Arbitration Act applies, under some circumstances a court may name a substitute arbitrator.

Holding:  In the procedural context of this case, the court granted a motion to dismiss an attempt to enforce a term sheet that should be decided by binding arbitration.  

Takeaway An important aspect of the decision is that a binding dispute resolution provision will not be nullified simply because the specifically named arbitrator becomes unavailable.

Release Bars Claim for Excessive Pay

A recent Chancery decision dismissed a claim for excessive compensation based on a prior release that covered such claims. The ruling in Feuer v. Dauman, C.A. No. 12579-CB (Del. Ch. Oct. 25, 2017), may be useful in those instances where an analysis is necessary to determine whether a settlement encompasses subsequent claims based on events that pre-dated the settlement.  Unfortunately, the court did not have an opportunity to directly address the propriety of paying compensation of several million dollars during a period when the recipient was physically absent from board meetings and allegedly incapacitated due to mental and physical health issues.

Background: This letter decision granted a motion to dismiss claims for breach of fiduciary duty, waste, and unjust enrichment in connection with a challenge to the payment of approximately $13 million of compensation to Sumner Redstone from July 2014 to May 2016, when the directors of Viacom allegedly knew that he was incapacitated and incapable of doing his job.  The court found that the claims asserted were released as part of a settlement agreement Viacom entered into in August 2016.

The court recounted the procedural history of multiple other lawsuits filed during the relevant period of time involved. Some of those lawsuits involved a contest for the control of Viacom. Those lawsuits were settled in August 2016.

The court quoted from the relevant portions of the settlement agreement and the relevant release language. The instant action was filed approximately one month prior to the settlement agreement being entered into.  The defendant-directors moved to dismiss based on failure to state a claim for relief, as well as failure to plead demand futility.

Holding: The court explained that the plain language of the release in the settlement agreement provides that Viacom released each of the individual defendants from any claims that would clearly encompass those in the instant lawsuit. The court explained that the plaintiff only devoted a single paragraph to address the release issue in its briefing.

The argument was made that the release purported to prospectively limit any exercise of fiduciary duty owed by the directors of Viacom, but the court did not read the release as prospectively limiting any exercise of fiduciary duty. Rather, by its terms, the court explained that the release extinguished potential liability arising from acts that included those in the instant complaint.

Takeaway: The plaintiff chose to rely on its original complaint instead of amending it pursuant to Rule 15(aaa).  In retrospect, the plaintiff might have considered presenting facts in an amended complaint that would have created a record with facts and circumstances under which the release was negotiated and executed, in order to adequately raise issues about its validity, such as the possibility that it was part of a self-interested transaction – – because the directors sued in this case are the same persons who authorized the prior controlling release.

Delaware courts recognize the validity of general releases, and there was no basis in the complaint in this matter to challenge the presumptively valid release. Thus, the instant complaint was dismissed, as to the named plaintiff only, but the court expressed no opinion on the issue on the possibility of additional challenges to the release.  The court stressed that this opinion is not intended to have preclusive effect on potential claims of any other stockholder of Viacom.

U.S. Supreme Court Justice Clarence Thomas

Although the focus of this blog for nearly 13 years has been, and continues to be, Delaware corporate and commercial law, along with related practice topics such as legal ethics, the topic of the U.S. Supreme Court transcends that niche and in many instances controls state law decisions even on corporate and commercial law issues. That prelude is my justification for including this short post about U.S. Supreme Court Justice Clarence Thomas. A recent article chronicles the inspirational story of his life that began dirt poor–literally–with his single mother trying to take care of him and his brother, with a job that paid her $10-per-week, and ultimately being raised by his grandparents in the segregated South. See Myron Magnet, The Founders’ Grandson, Part I, City Journal (Autumn 2017).

Regardless of whether one agrees with his views on the law, or his past political affiliation, a reader would need to be stone cold heartless not to be inspired by his rise to the pinnacle of the legal profession from the humblest of beginnings. In addition to his grandfather’s influence and guidance, he credits perseverance and hard work among the secrets to his success. I have the greatest respect for him.

Chancery Finds Expert Valuations Are Inadmissible as Hearsay Evidence

In our latest column for the Delaware Business Court Insider, we provide an overview of a recent opinion from the Delaware Court of Chancery, in Zohar II 2005-1 Ltd. v. FSAR Holdings, which examined the nuances regarding hearsay and expert valuation reports.  The Court provided a helpful overview for those who may be years removed from studying the intricacies of the Delaware Rules of Evidence.

Chancery Clarifies Basis for Jurisdiction over Non-Residents

A recent Delaware Court of Chancery opinion clarified the requirements for imposing personal jurisdiction on non-residents in the context of a foreign person or entity forming a Delaware entity as part of a scheme that gives rise to the Delaware litigation. The Dow Chemical Company v. Organik Kimya Holding A.S., C.A. No. 12090-VCG (Del. Ch. Oct. 19, 2017.

Background: The factual background of this case involves employees of a chemical company who left and took trade secrets that they then used to compete against the former employers around the world. At least one prior related judicial ruling found that some trade secrets were stolen.

This decision provides useful principles of personal jurisdiction that should be of widespread applicability to those engaged in Delaware commercial litigation. The procedural context of this case was a motion to dismiss for lack of personal jurisdiction based on Court of Chancery Rule 12(b)(2).

General Rule of Jurisdictional Discovery:

The court allowed extensive jurisdictional discovery on factual issues in light of the plaintiff making a “prima facie”showing of personal jurisdiction in the complaint, even in the context of a motion to dismiss.

Key Principles:

  • The court employs a two-step process to determine if the court has personal jurisdiction over a non-resident defendant: (1) whether Delaware statutory law provides a basis for jurisdiction; and (2) whether exercising personal jurisdiction complies with the Due Process Clause of the U.S. Constitution.
  • The court relied on the principles in the Papendick case and its progeny for the established rule that forming a Delaware entity as an integral part of a scheme that gives rise to the Delaware litigation, qualifies as both “doing business” and also “minimum contacts” for purposes of imposing personal jurisdiction. See Section 3104(c)(1) of Title 10 allowing for jurisdiction where a single act of doing business in Delaware has a nexus to the cause of action. See also footnotes 109 – 112.
  • Because the non-resident parent company in this case was instrumental in forming a Delaware entity, as part of a scheme related to the claims in the Delaware lawsuit, that satisfied the basis for personal jurisdiction – – but not so for the other foreign defendants involved.
  • The court also recited the elements of the conspiracy theory of jurisdiction and found that the requirement that foreign defendants “knew or should have known about any Delaware nexus to the scheme,” was not satisfied. See footnotes 137 – 145.

33rd Annual Distinguished Lecture in Law

The Delaware Journal of Corporate Law of Widener University Delaware Law School

presents the 33rd Annual Francis G. Pileggi Distinguished Lecture in Law

Is Delaware Retreating?

Randall S.Thomas
John S. Beasley II Chair in Law and Business
Director, Law & Business Program
Professor of Management, Owen Graduate School of Management
Vanderbilt Law School

Friday, October 20, 2017

8:00 a.m. Breakfast; 8:45 a.m. Lecture

Hotel DuPont, du Barry Room
11th and Market Streets
Wilmington, Delaware 19801

Encore presentation 11 a.m.

Widener University Delaware Law School

One substantive CLE credit available in DE and PA

Register online here.

For additional information or for accessibility and special needs requests,
contact Carol Perrupato at caperrupato@widener.edu or 302-477-2178.

Prior Annual Pileggi Distinguished Lectures have been highlighted on these pages. This Lecture Series was funded by my late father, F.G. Pileggi, Esq., over 30 years ago when I was on the law review and was thinking of a vehicle to attract prominent scholars to contribute law review articles, based on their annual lectures.

Supplement: The PowerPoint slides from this year’s Lecture are now available .

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