Delaware Court of Chancery Rule 5.1 defines the requirements for court filings to receive confidential treatment, contrary to the presumption that all court filings should be made available to the public. (The former terminology “under seal” is no longer used in the current version of the rule.) A recent Chancery decision addressed the filing of depositions with the court–referred to as lodging the depositions–with confidential treatment, but they were stricken from the docket based on the court’s analysis that there was no compliance with the requirements of Rule 5.1 in general, and Rule 5(d)(6) in particular.

In Tornetta v. Musk, C.A. No. 2018-0408-JRS (Del. Ch. Jan. 14, 2022), one the of cases pending in Delaware involving the iconic Elon Musk, the court reasoned that contrary to the applicable rule, the lodging of the depositions: served no purpose in the defense or prosecution of claims before the court. By striking the deposition transcripts from the docket, the court also avoided the need to address redactions of over 6,000 pages of the transcript.

Two Key Takeaways

There are two main takeaways that make this pithy letter-ruling noteworthy for future reference:

  • The always useful reminders of the prerequisites under Rule 5.1 to receive confidential treatment for court filings, such as the definition in Rule 5.1(b)(3) of “good cause” that the person seeking to maintain “confidential treatment” has the burden of establishing. See Slip op. at 8.
  • The rarely explained requirements of Rule 5(d)(6), which states: “When discovery materials are to be filed with the Court [such as the lodging of depositions] other than during trial, the filing party shall file the material together with a notice (a) stating in no more than one page, the reason for filing and (b) setting forth an itemized list of the material.”

A recent decision by the Delaware Court of Chancery provides a handy reminder of the standards the court applies to determine when it will grant a motion to expedite.  In Silverberg v. Munshi, C.A. No. 2022-0018-PAF (Del. Ch. Jan. 10, 2022), the court explained that:

 Although our court is well known for being responsive to plaintiffs seeking expedited proceedings in order to obtain injunctive relief, a plaintiff must first plead a colorable claim and demonstrate a sufficient threat of irreparable harm warranting the costs of expedited proceedings.

Slip op. at 4.

The court determined in its discretion that the motion to expedite did not meet the prerequisites, and denied the motion as being “facially without merit”.

Notable about this decision is that it decided a motion that was filed on Jan. 5, 2022, with the complaint, and denied by this letter decision on Jan. 10–before a response to the motion appears to have been filed. Motions to Expedite are commonly granted in Chancery, but this ruling proves what most practitioners know: not all such motions are granted.

For the last 24 years or so I have written an ethics column for The Bencher, the flagship publication of The American Inns of Court. My current column is entitled: Resources for Judicial Ethics Research.

Most readers will not have a frequent need for the research sources that I have compiled on this topic, but it should make it easier to reference sources that are not otherwise readily accessible in one place.

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

A novel Delaware Chancery Court ruling lets public investors in an ex-Citibank Inc. executive’s special purpose acquisition company press charges that the SPAC’s controller, insiders and directors reaped hundreds of millions from an $11 billion merger at the plaintiffs’ expense by concealing the target firm’s newly-decreased value in In Re MultiPlan Corp. Stockholders Litigation, No. 2021-0300, opinion issued (Del. Ch. Jan. 3, 2021).

Vice Chancellor Lori W. Will rejected most of a motion to dismiss consolidated breach of disclosure duty charges against SPAC Churchill Capital Corp III, its founder/controller Michael Klein and his hand-picked directors and officers, finding their merger proxy may have misled public investors into backing Churchill’s acquisition of healthcare cost manager MultiPlan Corp. rather than redeeming their shares.

The decision — the first by the nation’s preeminent business court on a challenge to the unique SPAC type of transaction — is significant because it said Churchill’s founder, sponsor, directors and insiders failed to comply with the ordinary fiduciary duties required of other corporate officials, causing the public investors to lose more than 30 percent of their investment value when the bad news emerged post-merger about Multiplan’s imminent loss of its principal client.

Conflicts provide an opening

Importantly, the vice chancellor also spotlighted the conflicted nature of an SPAC’s structure and operation, in which the directors are often beholden to the founder and have unique rights to very lucrative founder shares that can reap huge returns—if—the SPAC can, within two years, fulfill its mission to acquire a private company and take it public.  By contrast, common public investors in Churchill were limited to the choice of backing the deal and taking shares in the acquisition or rejecting it and redeeming their stock for face value plus interest.

Vice Chancellor Will found that this disparity meant that common shareholders who challenged SPAC deals can sue directly for one group — rather than derivatively on behalf of the entire company, which would require them to jump through many procedural hoops.  It also means that the defendant directors in this and similar cases will not normally qualify for review of their actions under the protection of the deferential business judgment rule because of their conflicts of interest.  Instead, they will be required to show that the deal’s price, negotiation and disclosures met the entire fairness standard, she said.

Deprived of information?

However, those conflicts were not the court’s reason to deny the motion to dismiss.  The vice chancellor said plaintiffs sufficiently alleged that they would have redeemed their shares if they knew that Multiplan was losing its primary source of income.

The proxy that Churchill provided to its investors said a due diligence review of Multiplan showed that it was well worth the $11.1 billion offered and any recent decrease in its revenue was due to “idiosyncratic’ factors.  But six weeks after the sale, the news about the imminent loss of Multiplan’s main customer caused its stock price to drop by more than 30 percent.

Will said the common shareholders were aware of the structural inequity issue, but: “They did not agree to be deprived of adequate information to make their decision.”

Background

Churchill was founded by Klein in 2020 – the year many such entities were created – and like other SPACs, it had no other business besides the acquisition of a single private company to take public.  It bought MultiPlan for $11.1 billion and two common shareholders sued when the bad fiscal news about it was revealed.  The suit charged that Klein, Churchill, its directors, insiders and officers breached their fiduciary duties by misleading the common investors and making it difficult to redeem their shares.

In addition to denying the defendants’ motion to dismiss because of their conflicts of interest, Vice Chancellor Will rejected their argument that the disclosure duty count is a fiduciary duty claim that had been “bootstrapped” from a contractual charge.  Courts must dismiss such breach of fiduciary duty claims “where the two claims overlap completely,” defendants contend.

Obligated to inform

The plaintiffs are not attempting to “change the contours of their redemption rights beyond those defined by Churchill’s charter,” the vice chancellor ruled.  “This case is therefore unlike those where Delaware courts have held that a fiduciary duty claim could not be maintained because it sought to enforce obligations governed by contract.  Churchill’s certificate of incorporation does not speak to whether the Board was obligated to disclose all material information about a proposed merger when stockholders were deciding whether to redeem.”

Nor could the charges be called ‘holder claims” because a holder claim is “a cause of action by persons wrongfully induced to hold stock instead of selling it.” And no one was asked to hold stock, Vice Chancellor Will added.

However, as to the charges against Jay Taragin as CEO and CFO of various Klein entities, the plaintiffs “do not make a single allegation about actions that could expose him to liability” or “plead facts sufficient to raise doubt as to whether Taragin fulfilled his fiduciary duties.”

And as to the aiding and abetting charges against The Klein Group LLC, a financial advisor with respect to the merger and a wholly-owned subsidiary of defendant M. Klein & Co. that received $30.5 million for its advisory services, the court dismissed, finding no evidence of knowing participation in the alleged breach of duty.

Takeaways

Will other courts adopt Vice Chancellor Will’s view that the unique structure and operation of SPACs raises unique questions about the independence and disinterest of the defendant directors, controllers and insiders and allows plaintiffs to avoid the maze of derivative actions and more easily get their foot in the door with disclosure or other charges?  If they do, there may well be a future need to reformat the SPAC, or similar transactions, in the future.

A recent Delaware Court of Chancery opinion should have a place in the toolbox of litigators who need to be familiar with the latest iteration of Delaware law on the nuanced aspects of the consent statute as a potential basis to impose personal jurisdiction on officers and directors of Delaware corporations by virtue of their service in that capacity.  In BAM International, LLC v. The MSBA Group, Inc., C.A. No. 2021-0181-SG (Del. Ch. Dec. 14, 2021), the court engaged in a thorough analysis of the multi-faceted determinations that need to be made if jurisdiction by virtue of the consent statute can be used as the basis for personal jurisdiction–when there is no breach of the fiduciary duty that the director or officer owes to the corporation or its stockholders.

Issue Addressed:

The court specifically addressed the issue of whether officers of a Delaware entity can be haled into a Delaware court for a contract-related claim despite having no relationship with Delaware other than their status as officers of a Delaware entity?  This opinion remains noteworthy because Delaware law on this topic has evolved since the Delaware Supreme Court changed Delaware law on this issue not long ago, and the trial courts are still trying to clarify the contours of the jurisdictional issues involved with the consent statute at 10 Del. C. § 3114(a) and § 3114(b).

Key Principles:

Section 3114(a) of Title 10 of the Delaware Code, applicable to directors, and Section 3114(b) applicable to officers of Delaware corporations, each impose personal jurisdiction on those who have consented to serve in those roles in two situations: (1) actions alleging breach of their duty to the corporation and its stockholders; or (2) where litigation is brought in Delaware involving the corporation, to which the officer or director is a “necessary” or “proper” party.  See Hazout (Delaware Supreme Court decision, and its progeny, highlighted on these pages).

The court in this recent decision determined that although Section 3114 was satisfied, due process was not satisfied given the nature of the action and the paucity of the contacts with the state.  The court observed that the plaintiffs in this case did not seek to rely on the long-arm statute, but instead relied only on the consent statute.

Jurisdiction by Contract:

By way of general reference, the court noted that parties can agree to personal jurisdiction by contract, in which case a minimum contacts analysis would not be required.  See Slip op. at 14.  The court described the 3-part test that Delaware employs to determine when a non-signatory is bound to a forum selection clause.  See footnote 68 and accompanying text.

Consent Statute:

The court provided the historical background of the consent statute which was originally enacted with respect to directors in 1977 and extended to officers in 2004.  The court described the constitutional due process issues that the consent statute raises as causing “Delaware courts some amount of headache.”  See footnote 79 and accompanying text.

Because the only substantive claim against the officers in their individual capacities in this case was for tortious interference, the claim did not arise out of their duties owed to the company for which they served as officers, but instead from torts allegedly committed against another entity.  Therefore, the court explained that in order to impose jurisdiction based on the consent statute, the officers must be “necessary or proper parties,” to the lawsuit against the company for whom they serve as officers.

Necessary or Proper Party:

The court provides a definition of what it means to be a “necessary party” in this context: “If her rights must be ascertained and settled before the rights of the parties to the lawsuit can be determined.”  See Slip op. at 21.  The court instructed that a “party is proper if she has a tangible legal interest in the matter separate from the corporation’s, and if the claims against her arise out of the same facts and occurrences as the claims against the corporation.”  Id.

Minimum Contacts:

Although the court found that the individual officers were proper parties for purposes of the consent statute, the court also reasoned that the necessary minimum contacts to satisfy due process were not present.  The court described the contract at issue in this case as a “guardian-variety commercial contract, rather than one necessarily implicating Delaware interests.”  The court cited Turf Nation v. UBU Sports, Inc., 2017 WL 4535970 (Del. Super. Oct. 11, 2017), as involving a similar fact pattern and applicable analysis.  As in the Turf case, the court explained that the simple commercial contract at issue does not involve Delaware corporate law nor does it involve a contract to be performed in Delaware.  Rather, the court emphasized that Delaware has “no real interest in this case other than the exercise of personal jurisdiction over officers and directors, which is, in my view, insufficient in light of the constitutional due process rights owed . . ..”  Slip op. at 25.  The court added that the actions allegedly giving rise to liability were not taken as officers of the company that they serve nor were the harms alleged to have been committed breaches of fiduciary duties.

Lastly, the court noted that the simple fact that Delaware law governs the contract and Delaware was selected as a forum for settling disputes, is not sufficient alone to satisfy constitutional due process without more—because, in part, the officers in this case are not signatories to  those agreements that called for Delaware as a forum.

I have highlighted many Delaware decisions addressing issues related to pro hac vice motions on these pages over the last 17 years or so, such as the standards for the admission of a non-Delaware lawyer pro hac vice to represent a party in pending Delaware litigation. Some of the decisions I have highlighted involve efforts to revoke the admission after the motion is granted. See, e.g., several of those decisions highlighted on these pages.

The most comprehensive resource on this nuanced Delaware topic that this writer has seen are seminar materials from Judge Andrea Rocanelli, a Delaware trial judge for 12 years who, after 12 years on the bench, in 2021 began offering ADR services such as mediation, arbitration and neutral evaluation for complex cases. Prior to her judicial service, she was the Chief Disciplinary Counsel for the Delaware Supreme Court: in charge of enforcing legal ethics among members of the Delaware Bar.

Those materials, dated from about 2006 to 2008 and linked below with the permission of Her Honor, include unreported decisions (which most readers know can be cited in Delaware briefs), as well as unpublished findings of the arm of the Delaware Supreme Court that decides attorney misconduct cases.

An article I co-authored also provides a compilation of selected key Delaware court decisions, rules, and customs to guide out-of-state attorneys admitted to practice in Delaware pro hac vice (PHV), and that article was recently updated in a post on these pages.

An appeal currently pending before the Delaware Supreme Court may provide more authoritative guidance on the issues addressed in this short blog post, to the extent Delaware’s High Court rules on whether it was proper for a trial court to revoke the PHV admission of a non-Delaware lawyer based on that attorney’s conduct outside of Delaware–and not directly related to the Delaware case in which the lawyer had been admitted PHV. See Page v. Oath Inc., C.A. No. S20C-07-030 CAK (Del. Super., Jan. 11, 2021).

The seminar materials Judge Rocanelli graciously agreed to share with readers of this blog include: (1) selected cases addressing the obligations of Delaware counsel in connection with pro hac vice admissions; (2) selected cases addressing misconduct by counsel admitted pro hac vice; (3) cases addressing misconduct by out of state counsel other than in litigation before the court. (Cases cited in the linked materials rejected efforts to revoke an admission pro hac vice based on misconduct alleged to have occurred in an unrelated case.)  

Also of increasing importance is a list of decisions involving lawyers from different offices of the same firm, at page four of the materials. This is a burgeoning problem, especially for younger lawyers in the Wilmington offices of larger firms based out of state.  These materials should be helpful to those lawyers by giving them a strong basis to push back on more senior lawyers who are not familiar with the higher standards–compared to most other states–of the pro hac vice rules in Delaware.

Other materials from Judge Rocanelli provide cases and commentary regarding pro hac vice admissions that divide the analysis into four parts: (1) the initial contact from a lawyer who wants to associate with Delaware counsel; (2) the terms of an agreement for the retention as Delaware counsel and the scope of the representation; (3) the details of the motion for admission pro hac vice; and (4) the details of working together and the obligations of both the Delaware lawyer moving the admission and opposing counsel.

Her Honor also provides a helpful list of “do’s and don’ts” for serving as Delaware counsel for non-Delaware lawyers.

As a gesture of gratitude for Her Honor allowing me to share her seminar materials on these pages, I am happy to offer a link to the current CV of Judge Rocanelli.

Postscript: Way back in 2008, I provided a link on this blog to some of the above seminar materials, with the authorization of Judge Rocanelli.  As sometimes happens in older blog posts, the link in that vintage post to those materials was no longer connecting to the material.  I recently contacted Judge Rocanelli who has graciously allowed me to publish again the above-linked materials.

Based on my experience in litigating cases in states outside of Delaware and my experience over the last 30-plus years working with lawyers from many states in the country, the standards that are expected of Delaware lawyers and that are imposed on lawyers admitted pro hac vice are typically much more stringent than in states outside of Delaware.

In some ways, publishing highlights of these high standards on this blog and in other articles I have written could be viewed as discouraging some potential non-Delaware lawyers from hiring me as their Delaware counsel because they could very easily find someone else who might not be as demanding or might not be as insistent on compliance with the spirit and letter of the Delaware standards, but that is an economic risk that I am willing to take.

The purpose of this short blog post is to identify key decisions that are merely a helpful starting point in an analysis of whether or not the attorney/client privilege was preserved by the seller of a company post-closing, depending on whether the transaction was a sale of assets, or a statutory merger, or some variation.

The recent Superior Court decision in Serviz, Inc. v. ServizMaster Co., LLC, et al., C.A. No. N20C-03-070-PRW-CCLD (Del. Super. Dec. 6, 2021), considered a post-closing assertion of a privilege over attorney/client communications, involving the sale of a server, among other assets, pursuant to an asset purchase agreement.  There are other important details that are necessary to an understanding of the case, but the purpose of this short blog post is only to identify a few key cases to begin one’s research on this topic.  This recent case follows the seminal decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS (Del. Ch. Nov. 15, 2013), which found that in connection with a statutory merger under 8 Del. C. § 259, absent an express reservation by agreement, all privileges are property of the surviving corporation.  This contrasted with an earlier Chancery decision which reached an opposite conclusion in connection with an asset sale.  See Postorivo v. AG Paintball Holdings, Inc., C.A. No. 2991-VCP (Del. Ch. Feb. 7, 2008).

Of course, there are other decisions that need to be included in any complete analysis of this topic, and the specific facts of any situation may be outcome-determinative, but for selfish purposes I wanted to make these three cases easier to find in one place, in the event I ever needed to embark on an extended analysis of the titular topic.

The recent Delaware Supreme Court decision in AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, Del. Supr., No. 71, 2021 (Dec. 8, 2021), has already been the subject of many articles in the few days since it was released because it is the first definitive pronouncement by Delaware’s High Court on the breach of what is known as an “ordinary course covenant” in connection with how a business is managed between the date an agreement of sale is signed and the date of closing. The Supreme Court affirmed the Court of Chancery’s decision, 2020 WL 7024929 (Del. Ch., Nov. 30, 2020), that the Seller breached its covenant that it would not deviate from how the business was typically run–without the Buyer’s consent–notwithstanding the intervening worldwide pandemic.

Although I typically eschew highlights of decisions such as this one that have already been the focus of widespread analysis in legal publications, this decision has such widespread applicability to basic contract disputes, in addition to the sale of businesses, that I decided to provide a few pithy observations. I encourage readers to also read the copious commentary published by many others on this case that provides more detailed background facts and thorough insights.

Basic Facts

The basic facts involved the sale of 15 hotel properties for $5.8 billion. In response to the pandemic and without the Buyer’s consent, the Seller made drastic changes to its hotel operations. The transaction also featured fraudulent deeds for some of the hotel properties. The lengthy Court of Chancery opinion provided extensive details about what the court regarded as active concealment or failure to disclose that fraud by the Seller’s law firm. The Supreme Court’s opinion references the failure to disclose the fraud, and repeats the Court of Chancery’s findings on that aspect of the case–that could be the topic for a separate article–but the High Court’s decision focuses on the impact of the violation of the ordinary course covenant as a sufficient basis to uphold Chancery’s decision. Among the changes made by the Seller without the Buyer’s approval (which could not have been unreasonably withheld) were the closure of two hotels, thirteen hotels “closed but open”, and the layoff or furlough of over 5,200 full-time-equivalent employees.

Highlights of Court’s Analysis 

  • The Court explained that an ordinary course covenant “in general prevents sellers from taking any actions that materially change the nature or quality of the business that is being purchased, whether or not those changes were related to misconduct.” See Slip op. at 25 and n. 42.
  • The agreement did not refer to what was ordinary in the industry in which the Seller operated. Rather, the ordinary course language referred only to the Seller’s operation in the ordinary course–and consistent with past practice in all material respects measured by its own operational history. Slip op. at 27 and n. 55-56.
  • Nor did the covenant have a reasonable efforts qualifier–although other parts of the agreement did. If the agreement referred to industry standards, it would be more akin to a commercially reasonable efforts provision, which it was not. Slip op. at 28 and n. 58
  • The High Court rejected the Seller’s reliance on FleetBoston Financial Corp. v. Advanta Corp., 2003 WL 240885 (Del. Ch. Jan. 22, 2003), as inapposite, but instead the Court relied on a Chancery decision interpreting an ordinary course covenant in Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., 2014 WL 5654305 (Del. Ch. Oct. 31, 2014).
  • The Supreme Court affirmed Chancery’s reasoning that the drastic actions taken in response to the pandemic were both inconsistent with past practices and far from ordinary. Although the Seller could have timely sought the Buyer’s approval before making drastic changes in response to the pandemic, it did not. Having failed to do so, the Seller breached the ordinary course covenant and excused the Buyer from closing. Slip op. at 33.
  • The MAE provision in the agreement was written differently and had to be interpreted differently, and independently, from the ordinary course covenant, because, for example, it did not restrict a breach of the ordinary course covenant to events that would qualify as an MAE. The parties knew how to provide for such a limitation, as they did elsewhere, but they did not do so in the ordinary course covenant. Slip op. at 34.

Postscript: We are grateful to Prof. Bainbridge for sharing this post on LinkedIn. 

Professor Stephen Bainbridge, a leading corporate law scholar whose many publications are cited in opinions of Delaware’s Court of Chancery and Supreme Court, recently provided learned commentary about the latest guidance by the SEC on Rule 14a-8 regarding shareholder proposals.

The good professor provides citations and links to other commentary that suggests that this guidance, which reverses the published positions of the SEC over the last four years, now positions the SEC as engaging in a “wholesale abandonment of any assessment of relevance of a proposal to a company’s business (as compared to relevance to society at large.).”

Among other issues raised by the SEC arguably playing a new role akin to a SJW, Professor Bainbridge cites to a law review article by fellow corporate law titans who have explained why shareholders have a “First Amendment interest in not being forced to be associated with political speech that they do not support.” Lucian A. Bebchuk & Robert J. Jackson, Jr., Corporate Political Speech: Who Decides?, 124 Harv. L. Rev.  83, 113 (2010).

Prof. Bainbridge adds that: If that’s true about political speech by the corporation, as explained in the law review article by Bebchuk and Jackson, “shouldn’t it be even more true with respect to political speech foisted upon the corporation by government fiat regardless of whether the speech has any meaningful relationship to the company’s business?”