In a case that is destined to be frequently cited for several Delaware law principles, Vice Chancellor Noble recently wrote a 139-page decision with 361 footnotes that covered many important areas of Delaware law in a case styled: Khanna, et al. v. McMinn, et al., involving the Covad Communications Group. (For a summary on my blog of a related prior decision on a Section 220 matter involving the same company and plaintiff, see here.)
Due to the length of the decision (which is not too unusual in Chancery Court) I am making it available for download in 2 separate parts as it may be too long for some to download in one fell swoop:
Part Iand Part II.
My schedule this week will not allow me to do a complete summary at this time, but here are some of the key allegations (in addition to proxy claims and whether or not some sealed documents should be unsealed), that were addressed in the context of a motion to dismiss–which was granted as to most counts in the Amended Complaint:
(i) whether a founder of Covad was improperly permitted to develop a competitor; (ii) whether an acquisition of BlueStar Communications, an act that rescued a failing investment, was the principal cause of Covad’s entry into bankruptcy; and (iii) whether certain founders’ shares were improperly vested. These claims were examined based on alleged fiduciary duty breaches either directly, or as a controlling shareholder, or as an aider and abettor.
Though there are many, here is one that some might refer to as a “money quote”, from footnote 203: “The court cannot permit ex post results of a decision to cloud analysis of a board’s ex ante judgment….”
SUPPLEMENT: In this 139-page decision, Vice Chancellor Noble reviews many fundamentals of Delaware corporate law in derivative cases. On page 30 he discusses whether a “settlement letter” constituted a presuit demand under both the two prong Aronson test as well as under the Rales standard where no decision by the board was made. On page 34 he described in greater detail what kind of a letter would be considered a presuit demand letter. On page 65 he discussed that the second prong of the disjunctive Aronson test required reason to doubt that the board acted honestly and in good faith or that the board was adequately informed such that it should enjoy the presumption of the business judgment rule. Pages 88 through 90 discuss the duty of disclosure of material data in a proxy. On page 93 he observed that votes that were based on a faulty proxy may be set aside. Page 119 discussed the attorney/client privilege in connection with advice given to a corporation or its board members and dealt with a situation where the attorney sought to use the privilege as a sword in a suit against a former client. On page 120 the court noted that when a vice president was acting in his business role that he did not waive the privilege in communications with general counsel. The court noted that before the communication between general counsel and the board can be deemed attorney/client communications, it has to be clear that the communications were not regarding business issues, as opposed to legal issues. Finally, on page 126, the court determined that the former general counsel was disqualified as a representative shareholder in a derivative suit and that it was important to note that the suit was against a former client. The court was simply not persuaded that the former general counsel learned the data as a “officer” and not as a lawyer for the corporation. Thus, he would not be able to use the privilege information as ammunition against his former client. This derivative and class action complaint by a former general counsel of Kovad Communications Group, Inc. challenged actions and omissions of the Kovad board while the plaintiff was general counsel and focused on certain omissions and misrepresentations which he alleges impaired the accuracy of Kovad’s proxy statements issued in advance of shareholders’ meetings. Two other shareholders who joined him as representative plaintiffs were not disqualified.