Bakerman v. Sidney Frank Importing Co., Inc., (Del. Ch., Oct. 16, 2006), read opinion here . The Chancery Court, in this 57 page opinion, which was submitted on Aug. 31 and originally decided on Aug. 10, 2006 includes a good discussion of the pre-suit "demand excused" analysis under Chancery Court Rule 23.1 with the familiar two-pronged test in Aronson v. Lewis, 473 A.2d 805 (Del.1984). See also Rales v. Blasband, 634 A.2d 927, 931 (Del.1993).
Also discussed was the Court’s unwillingness to weigh the interests the directors had in one entity compared with their interests in the entity on the other side of the table in a contested transaction, when conducting an analysis of independence at the pleading stage, citing cases such as Harvard Finance Partners v. Huzienga, 751 A.2d 879, 888 (Del. Ch. 1999). Also noted was the distinction between a burden a plaintiff bears to plead a reasonable doubt as to director disinterest under Rule 23.1 compared with the ultimate burden to demonstrate director interest later in the litigation through admissible evidence. Id.
Noteworthy about this case is a discussion of the validity of a consent based on failure to disclose material facts (a material omission) as well as coercion or duress in connection with threatened termination of employment. The Court discusses when such threats may constitute coercion. The Court found that the threat of litigation was a form of coercion despite an alleged ethics violation by an attorney due to his holding of a 5% membership interest in the client’s business.
Regarding the threat of termination of employment, the Court noted that Delaware “possibly” recognizes a covenant of good faith and fair dealing in at-will employment, (citing Reiver v. Murdoch and Walsh, P.E., 625 F. Supp. 998,1014 (D. Del. 1985)), although the applicable New York law did not. (New York law applied in this case to that issue.) Nonetheless, the Chancery Court held that an employer’s threat to terminate an at-will employee in order to obtain a release of claims is subject to a standard apparently more stringent than ordinary contract principles (citing New York Cases).
The Court concluded that the threat to terminate the employee (who was an in-house lawyer) in order to obtain his consent, arguably constituted a wrongful act amounting to coercion. The Court noted that it raised a sufficient question as to the voluntariness of consent given especially since the employee was allowed only one half-hour to examine the consent and he was neither represented nor encouraged to consult with counsel.
The Court also discussed the other elements of economic duress being an analysis of whether the wrongful act overrode the will of the party and also whether the coercive conduct creates or takes advantage of an exigent circumstance such that the victim could not reasonably be expected to resist and seek timely legal relief to protect his interest. In addition, the Court considered acquiescence and whether, if it occurred, it cleansed the coercion.
Part of the opinion also includes a discussion of the distinction between a direct versus a derivative claim as well as a helpful description of the foundation for a claim based on a breach of the implied covenant of good faith and fair dealing.