Kevin LaCroix on his widely-respected blog called The D&O Diary, comments on the results of a Cornerstone Research report which found that the number of appraisal actions filed in Delaware courts declined in 2017 and 2018–compared to increases every year from 2010 to 2016. Kevin provides excellent insights and a link to the actual report from Cornerstone Research about this aspect of Delaware corporate litigation.
Delaware case law is well-established regarding the aspect of the fiduciary duty of loyalty that prohibits a corporate director from usurping a corporate opportunity. A recent decision from the Delaware Court of Chancery applies that well-settled prohibition in a flexible manner to a set of facts that have apparently not been squarely addressed in prior precedent. In Personal Touch Holding Corp. v. Glaubach, C.A. No. 11199-CB (Del. Ch. Feb. 25, 2019), the court awarded damages for the breach of this subset of fiduciary duty, as well as for other breaches of fiduciary duty.
Basic Background Facts:
This case involved a co-founder who also served as a president and director of a New York-based provider of healthcare services. He was removed when the company discovered various transgressions. The former director purchased an office building in his individual capacity–secretly–even though the court found that the former director had been aware that the company was interested for several years in purchasing a similar building for its own use. The former director then offered to lease the building back to the company at what the court found to be above-market rental rates.
Key Principles of Law:
This short blog post assumes that readers are familiar with the basic principles involved with the usurpation of corporate opportunities, and will merely highlight some of the key statements of law and the court’s reasoning in this 84-page opinion.
The well-known elements of a claim based on the corporate opportunity doctrine have been stated frequently in prior Delaware cases. Those familiar with corporate litigation will recognize the following four elements of a claim for usurpation of corporate opportunity:
“(1) The corporation is financially able to exploit the opportunity;
(2) The opportunity is within the corporation’s line of business;
(3) The corporation has an interest or expectancy in the opportunity;
(4) By taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation.”
Slip op. at 36-38.
The court explained that Delaware Supreme Court decisions have referred to some of these elements in the disjunctive even though they are often quoted as being conjunctive. Specifically, proof of either the third element or the fourth element would sustain a corporate opportunity claim.
Moreover, the court decides the viability of a corporate opportunity claim by weighing the four factors in a holistic fashion and no one factor is dispositive. Id.
Key Reasoning of the Court:
As a side note, the court also found a separate breach of fiduciary duty as a result of the former director engaging in a “letter-writing campaign” over a several month period in which the former director sent harassing and disturbing anonymous letters to board members, employees and the lender of the company which caused harm to the company by hurting morale and causing distraction–in addition to attempting to sabotage the company’s relationship with its primary lender. Slip op. at 76-83.
A recent decision by the Delaware Court of Chancery provides an example of those rare instances where the court refers a violation of legal ethics to the Office of Disciplinary Counsel for investigation, as compared to the court itself determining the appropriate penalty. See Charter Communications Operating LLC v. Optymyze, LLC, et al., C.A. No. 2018-0865-JTL, letter (Del. Ch. Mar. 5, 2019)
Some readers are surprised to read about Delaware court opinions which explain that the Delaware courts do not view their primary role as enforcers of the Rules of Professional Conduct unless violations of those rules “prejudicially disrupt judicial proceedings” or “threaten the legitimacy of judicial proceedings.” See, e.g., Crumplar v. Superior Court, 56 A.3d 1000, 1009 (Del. 2012), highlighted on these pages. Other cases have used the phrase “interfering with the administration of justice.” See, e.g., Lendus LLC v. Goede, highlighted on these pages.
Rather, the Office of Disciplinary Counsel (ODC), a branch of the Delaware Supreme Court, is the proper venue for investigating and enforcing violations of legal ethics. In the Charter case linked above, the court was considering violations of Rule 11 when the counsel involved withdrew. The court explained that there might be some cases where it would continue to address a Rule 11 issue even after counsel withdrew, but the ODC is well equipped to investigate attorneys and recommend appropriate action.
Legal ethics is a topic covered by these pages because it not only applies to Delaware corporate and commercial litigation, but it also permeates virtually every aspect of legal practice. See, e.g., my recently published book on legal ethics highlighted on these pages.
A recent decision by the Complex Commercial Litigation Division of the Delaware Superior Court in Winshall, et al. v. Viacom International, Inc., C.A. No. N15C-06-137 EMD CCLD (Del. Super., Feb. 25, 2019), ruled that a claim for indemnification was not ripe until a final adjudication, after appeal, was decided. In a matter involving a claim for indemnification for attorneys’ fees based on a finding of a breach of a merger agreement by the Court of Chancery, which was affirmed by the Delaware Supreme Court, the Superior Court held that a subsequently filed indemnification claim was not barred by the statute of limitations because the claim did not become ripe until the affirmance by the Delaware Supreme Court. See Slip op. at 17-19.
The indemnification claim for “losses” which was defined in the agreement to include attorneys’ fees, was based on the Court of Chancery’s prior finding of a breach of agreement. The court also discussed several rebuttals to a statute of limitations argument and how they applied to the facts of this case. Id. at 22.
Ameliorating the relative paucity of case law on the prerequisites for successfully motioning the Delaware Supreme Court for approval to file an amicus curiae brief, is a recent Order in the matter styled In re Verizon Insurance Coverage Appeals, Nos. 558, 560, 561, 2018, Order (Del. Feb. 21, 2019). The Delaware Supreme Court via this Order denied a motion to file an amicus brief by a trade association because the proposed amicus brief: (i) addressed an issue not raised in the Opening Brief; (ii) was duplicative of the Opening Brief; and (iii) did not offer unique supplemental assistance to the court.
A specific Delaware Supreme Court rule addresses motions to file an amicus brief, but does not provide much amplification. In this Order, Delaware’s high court cited Turnbull v. Turnbull, 644 A.2d 1322, 1324 (Del. 1994), regarding prerequisites for filing an amicus brief beyond what is stated in the court rule.
Among the multitude of court decisions on DGCL Section 220 highlighted on these pages, a rare bird is the shifting of fees by the court based on the bad-faith exception to the American Rule. In a rare instance that should not be considered anything other than unusual, the Court of Chancery recently granted, in a transcript ruling, fee shifting in a books and records action in which the court found that there was no justification for the refusal to provide LLC managers with requested books and records, and that the defendant LLC acted in bad faith by withholding those company records. See Crestview-Oxbow Acquisition, LLC, et al. v. Oxbow Carbon, LLC, C.A. No. 2018-0654-JTL, transcript (Del. Ch. Jan. 15, 2019; filed Jan. 31, 2019).
A recent short Order of the Court of Chancery reiterated one of the limitations on the right of a director to receive corporate information. In the latest installment of the internecine imbroglio in the litigation captioned Schnatter v. Papa John’s International, Inc., C.A. No. 2018-0542-AGB, Order, (Del. Ch. Feb. 25, 2019), the Court explained that DGCL Section 141(c) allows a board to act “openly with the knowledge of the excluded director to appoint a special committee, in which case communications with the counsel would be properly protected, at least to the extent necessary for the committee’s ongoing work”. (internal quotes modified)(citing Kalisman v. Friedman, 2013 WL 1668205, at *4 (Del. Ch. Apr. 17, 2013)). The Kalisman case was highlighted on these pages.
The Court in its Order reasoned that there was no evidence presented in the context of the motion to compel that Schnatter ever regarded the law firm for the Special Committee as the Company’s counsel or the Board’s counsel. Nor was there a reasonable basis for Schnatter to regard that law firm as representing his interests, including his interests as a director.
Schnatter was barred from obtaining privileged communications for a very narrow period of time in anticipation of the contemplated formation of a Special Committee pursuant to DGCL Section 141(c). Schnatter was excluded in order for the Special Committee to investigate certain matters concerning him.
A recent post-trial decision from the Delaware Court of Chancery denied a claim for corporate books and records based on DGCL § 220 after finding that there was no credible basis for wrongdoing to support the stated investigative purpose for the demand. Hoeller v. Tempur Sealy International, Inc., C.A. No. 2018-0336-JRS (Del. Ch. Feb. 12, 2019). Section 220 cases are among the most common forms of Delaware corporate litigation. (In terms of the number of recent Delaware cases highlighted on this blog, it might only be outnumbered by forum selection clause cases.)
Commentary:
About 100 or more Delaware court decisions on Section 220 have been highlighted on these pages over the last 14 years. Regular readers will recall many commentaries about Section 220 that include this lawyer’s respectful skepticism, or lack of enthusiasm, for Section 220 as a tool to obtain information as part of one’s preparation for a plenary complaint. To the extent that Section 220 is a tool, the decision highlighted in this post supports the view that in some cases Section 220 may be more akin to a sledgehammer than a scalpel, to the extent that Section 220 can often be expensive and time consuming and unsatisfying as a means of obtaining information from a corporation by a stockholder.
For busy readers, the most noteworthy aspects of this 39-page decision can be explained through the use of bullet points to highlight the court’s comprehensive and well-reasoned review of the facts and law involved in an unsuccessful Section 220 claim.
Brief Background:
This case involved a demand for corporate books and records in connection with the termination of a long-term corporate customer relationship which accounted for over 20% of the sales of the defendant company. This important relationship was the subject of alleged misrepresentations that were allegedly more optimistic about the future of the relationship than was warranted. Although some documents were produced in response to a pre-suit Section 220 demand, the complaint in this case was filed when additional documents demanded were not provided.
Procedural History:
Although internal Chancery guidelines suggest a trial within about 90 days of a complaint, the trial in this case was held within a still comparatively prompt 6-months after the complaint was filed, in November 2018. This February 2019 post-trial decision provides for a relatively quick determination, however unsatisfying to the plaintiff, although prior Section 220 cases highlighted on these pages indicate that when Section 220 cases are appealed, and in some cases remanded, litigation involving Section 220 conceivably could last for several years.
Key Takeaways:
Some of the key legal principles that can be found in this post-trial opinion include the following well-known prerequisites for a Section 220 claim, and important nuances of those requirements, many of which are not expressly stated in the statute:
News from the Department of Self-Promotion: Recently I was awarded the 2019 Chief Justice William Killen Award for Second Amendment Legal Advocacy in connection with my most recent successful legal challenge of certain state regulations. The award was presented on behalf of the Delaware State Sportsmen’s Association, which is an affiliate of the National Rifle Association, before a group of about 600 people in Dover. In a recent Delaware court opinion highlighted on these pages, my colleague Jamie Inferrera and I prevailed in our arguments that certain regulations at state parks were in violation of a Delaware Supreme Court decision that found prior regulations invalid based on the Second Amendment to the U.S. Constitution and the counterpart in the Delaware State Constitution at Article I, Section 20. The award is named after the first Chief Justice and first Chancellor of the State of Delaware. Although this is not an annual award, several years ago I received this award for other appellate victories.
There are many people–lawyers and non-lawyers alike–as well as several organizations too numerous to mention in this short post who made it possible to prevail in three major court decisions, available at the above hyperlinks, that now form a foundation for a body of law in Delaware that is based on the natural right to self defense, which every human is born with, and that the United States Supreme Court has ruled to be at the core of the right to bear arms.
In the current issue of the ABA publication Business Law Today, I co-authored an article on the intersection of corporate governance principles and the nearly ubiquitous field of artificial intelligence–along with my colleague Shani Else.
