In PARFI HOLDING AB v. MIRROR IMAGE INTERNET, INC., 2008 WL 4110698 (Del. Ch., Sept. 4, 2008), the Delaware Chancery Court provides a magnum opus on the "importance of being earnest". Many wags might suggest that such truisms need not be explained in an opinion, but we all know of lawyers who have made less than true representations to the court with impunity. Well, this opinion "draws a line in the sand" and dismisses a case due to the misrepresentations that were made to the court intentionally in an attempt to have the court make a ruling based on those false facts.
This opinion is 28-pages long in the Westlaw format which amounts to roughly 90 pages in the original slip opinion format. Though not unusually long for a Chancery Court opinion, I want to thank the famous Wilmington trial lawyer Rick DiLiberto for taking me to a Phillies baseball game this afternoon, which gave me the chance to read this recent opinion today (between pitches) so I could post this tonight.
No less than four (4) prior reported decisions have been published in this case–two each by the Delaware Chancery Court and the Delaware Supreme Court. The extensive and excruciatingly detailed factual background described in this opinion is encyclopedic, but if one wants even more background facts, the prior opinions in this case can be found at the following citations:
Parfi Holding AB v. Mirror Image Internet, Inc., 794 A.2d 1211 (Del. Ch.2001) (called “Parfi I”), rev’d, 817 A.2d 149 (Del.2002)(“Parfi II”); Parfi Holding AB v. Mirror Image Internet, Inc., 842 A.2d 1245 (Del.Ch.2004)(“Parfi III ” or the “Stay Order”); aff’d in part, rev’d. in part, 926 A.2d 1071 (Del.2007)(“Parfi IV ”).
Two of those cases were briefly highlighted on this blog here and here. The latest opinion issued a few days ago is another Chancery Court example of a "law review article that also serves as the court’s decision." So, how does one summarize a law review article in the abbreviated format of a blog post? I will try to highlight key passages and liberally "cut and paste" what many bloggers refer to as the "money quotes".
The first quote is from the court’s own introductory overview of its opinion:
In essence, the plaintiff sought to have a motion for reargument granted, but not by
way of proper argument, but instead on the basis of a misleading recitation of the facts. In this opinion, I conclude that an order of dismissal is the only fitting remedy for this misconduct. When a party knowingly misleads a court of equity in order to secure an unfair tactical advantage, it should forfeit its right to equity’s aid. Otherwise, sharp practice will be rewarded, and the tradition of civility and candor that has characterized litigation in this court will be threatened.
Second, I conclude that, in any event, the plaintiffs do not have derivative standing. One of the plaintiffs did not own stock at the time of two of the transactions it challenges and thus lacks standing as to those claims. And, as to its other claims, that plaintiff lacks standing because it sold off any economic interest in the company on whose behalf it is putatively suing during the course of this litigation, leaving itself an empty holder without any economic interest in the corporation. Given that reality, the public policy purpose behind the continuous ownership rule requires a finding that this plaintiff lacks standing.
In addition to misrepresentations to the court, one reading of the voluminous facts in this case can lead one to the conclusion that the plaintiffs were playing games with the court and trifling with its jurisdiction. The gamesmanship of the plaintiffs (as opposed to its lawyers) involved parallel arbitration proceedings in Sweden.
The Chancery Court had issued a Stay of the Chancery proceedings based on the understanding that the arbitration in Sweden would proceed apace. At a subsequent routine status conference in the Chancery case, the court inquired about the pendency of the arbitration. What eventually became apparent was that the primary plaintiff entity (and the man who controlled that plaintiff entity) were trying to game the system. The plaintiffs (and the primary controlling person in particular) did not like the Stay Order and did not want to proceed to arbitration so he lied to the court about his "inability" to proceed with the Swedish arbitration in an attempt to seek a modification of the Stay Order.
But the court smelled something rotten in Denmark and allowed discovery into whether the plaintiffs engaged in sanctionable delay or made misrepresentations to the court. The results of discovery confirmed evidence of both.
Authority to Dismiss
The court discusses Chancery Court Rules 41(b) and 41(e) as a basis to dismiss a case due to either failure to prosecute and/or failure to comply with rules or orders of the court. In addition the court emphasized its "inherent authority to police the litigation process, to ensure that acts that undermine the integrity of the process are sanctioned." (italics mine)(see footnote 75).
The duty of candor to the court was described as essential to the proper functioning of the judicial process and the opinion includes copious authority for penalizing a breach of that duty–including dismissal of a case. (see footnotes 76 to 84 and related text).
Standing for Derivative Plaintiff
The contemporaneous ownership test and the continuous ownership rule were discussed as requirements for plaintiffs attempting to bring a derivative lawsuit based on DGCL Section 327 and Chancery Court 23.1. The court engaged in an extensive treatment of the public policy reasons that allow derivative actions, which the court observed are akin to class actions in some ways to the extent that the representative plaintiff is bringing suit in a fiduciary capacity on behalf of the corporation and similarly situated shareholders.
After a careful review of the facts and the law relating to standing requirements for bringing a derivative suit, the court determined that: the contemporaneous and continuous ownership requirements were not met. Part of the court’s reasoning includes this money quote:
Because of the important policy purpose served by the continuous ownership rule, the rule is a bedrock tenet of Delaware law and is adhered to closely.FN107 Where, as here, a derivative plaintiff has become an “empty plaintiff,” FN108 form (i.e., ownership of shares) does not trump substance (i.e., lack of any economic interest whatsoever in the recovery pursued for the corporation),FN109 and the clear policy purpose served by the traditional application of the continuous ownership rule is implicated.FN110 Whatever right exists to bring a derivative action derives its origin
from our common, not statutory, corporate law,FN111 and given that reality, I have no hesitance in holding that a derivative plaintiff who empties itself of any
interest in the underlying litigation loses standing.
However the opinion at footnote 113 recognizes the different approach used under DGCL Section 220 claims for books and records. One reason is that derivative actions have their basis in common law, compared to the statutory origins of Section 220 cases. In the latter, the Chancery Court does not have the same policy reasons to look beyond record ownership to determine if a stockholder has a net long term interest in the corporation. (Compare footnotes 116 and 117 as well as related text.)
Fees in Connection with a Motion to Compel
For those lawyers like myself who need to be constantly aware that–regardless of how much time is spent on a case, or needs to be spent–the total bill will be scrutinized by the court and/or the client. So, it is instructive to see what other lawyers charge for their work–and whether the court regards those fees and reasonable. The court awarded costs related to a motion but then reviewed the amount of fees requested.
The fees requested were almost $70,000 for five lawyers who spent "165.3 hours to prepare less than 30 pages of briefing." The fifth lawyer was involved due to the personal problem of one of the original lawyers on the case and though that overlap (due to the newest lawyer needing to review the file to get up to speed), was no fault of the lawyers, it was not fair to charge the other side for that personal situation. In sum, the court awarded 75% of the fees requested. (see footnotes 125 to 127 and related text.)
UPDATE: Here is the Delaware Supreme Court’s Order of Jan. 2009 dismissing the appeal.