Live From New York! This is a blog post from a seminar in New York City entitled “Delaware Law Developments 2010: What All Business Lawyers Need to Know”, and presented by the Practising Law Institute.
Co-chairs of the seminar are Vice Chancellor J. Travis Laster of the Delaware Court of Chancery and former Vice Chancellor Stephen Lamb, now of the Paul Weiss firm, as well as Gregory P. Williams of the Richards Layton firm.
The panel members include leading corporate litigators from Delaware as well as a current and a former member of the Delaware Court of Chancery. Among the panel members from the New York Bar are Ted Mirvis of the Wachtell Lipton firm and Julie North of the Cravath Swaine firm. (Also among the luminaries on the panel are Kevin Brady, who readers will recognize as a Delaware litigator who frequently contributes to these pages, and Matthew O’Toole, a Delaware lawyer and co-author of the leading treatise on Delaware LLCs.)
[As an aside, some might wonder why Delaware lawyers are presenting a seminar in New York on Delaware law. Part of the answer is that New York lawyers as a group make up one of the largest “markets” for Delaware law. As noted, New York lawyers are included on the panels for this seminar on Delaware law, and some New York lawyers appear in the Delaware Courts more often that some Delaware lawyers–and a sizeable number of New York lawyers are just as conversant in Delaware corporate law matters as many Delaware lawyers. As a related, illustrative note, although there are readers from all 50 states who read this blog, the number of readers from New York has always been the source of the most readers of this site–whose focus is recent decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial law.]
Pam Tikellis of the Delaware Bar discussed the recent Revlon decision that was summarized on these pages here, and she provided tips from that decision that would help to guide those seeking court approval of settlements in derivative or class actions. She also noted that the “newest” Revlon opinion did not announce new standards though it may have put a sharper point on existing standards. Her comments included the following:
• Notify the Court immediately as soon as an MOU is signed. The Court will usually schedule a “status conference” to discuss "in broad strokes" the key aspects of the deal (not the actual hearing to approve it), in order for the court to get an assessment of any issues that may arise. (The Revlon decision was initially assigned to a different member of the Court and one reason this procedure may not have been followed is because it may have been impacted by the "interregnum" before it was assigned to the newest member of the Court).
• She noted that the status of the recent Revlon case is that the defendants decided (after the Court’s recent decision) to "withdraw" their support for the settlement. Thus, the case now will be litigated. So too, the “special discovery” ordered by the Court about the settlement is now moot.
Former Vice Chancellor Stephen Lamb was the first panel’s moderator and his comments included the following insights about the preferred procedure and better practice to seek approval for settlements of class or derivative actions:
• The need for notifying the Court promptly upon the signing of the MOU is in part due to the fact that if the court is not given a timely opportunity to make an initial assessment of the proposed settlement, afterwards it will be too late for the Court to easily deal with the proposed settlement if the transaction that was originally contested has already been consummated before there is an opportunity for the deal to be blessed by the Court. See, e.g., SS & C Technologies case and TD Bank case.
• The point was also made that if a PI hearing had been scheduled then the Court needs to make a determination about the basis for cancelling the PI hearing because after the hearing is cancelled it will likely be too late to fix any problems if the settlement is not ultimately approved by the Court.
Ted Mirvis discussed the impact of the recent Revlon decision on the volume of deal litigation in Delaware, in the following ways:
• There is a real possibility that fewer representative or class action cases will be filed in Delaware as a result of this case and he also observed that more attention is now being given to the advisability of considering an amendment of charter provisions to provide for exclusive jurisdiction in the Delaware Court of Chancery of any derivative actions or suits by shareholders. However, it is uncertain whether non-Delaware courts will enforce such a provision.
• Lately, the most common situation that develops regarding litigation of contested transactions is that many cases are filed in many jurisdictions around the country at the same time, to contest a transaction, but it is no longer certain that the non-Delaware courts will defer to the Delaware case. Thus, the net result is often multiple cases proceeding at the same time in different fora.
• One tactic his firm has used is to file the same motion in all pending jurisdictions to tell each court that “it doesn’t matter which court the case proceeds in but it should not proceed simultaneously in multiple courts.” Due, in part, to the unpredictability of obtaining a prompt—or consistent—ruling on such motions, this approach is not a reliable panacea.
William Lafferty of the Delaware Bar suggested that more contested-transaction-cases controlled by Delaware law have been filed recently outside of Delaware based in part on the perception that these types of cases will receive greater scrutiny in Delaware. (The data supports the argument that fee awards are greater outside of Delaware especially in disclosure cases.) He said that the volume of Chancery cases may be the same but the number of deals that are being contested in Delaware appears to be declining. However, he said, that it “may not necessarily be a bad thing”
Vice Chancellor Lamb observed that: When he was on the bench, he examined “exhibit “A” to the MOU because he wanted to know the details behind the settlement and any surrounding circumstances in order to identify any possible issues.
Ed Welch of the Delaware Bar suggested that unlike other jurisdictions, in Delaware it is not enough to challenge price alone, but typically a successful case requires additional claims regarding process and proxy/disclosure claims. By comparison, claims in other jurisdictions that are not as “meritorious” and may only include a claim about the price of the deal, may have a better chance of prevailing. Thus, the issue about "cases involving Delaware law being filed elsewhere" is created due to the high standards that Delaware maintains, and by comparison the “lower” standards in some non-Delaware jurisdictions.
Betsy McGeever of the Delaware Bar discussed recent settlements of disclosure cases. Typically, this type of case settles shortly after the complaint is filed, but before a PI hearing, and all claims other than disclosure are waived. Often, settlements are based on minor additional financial details but merely confirm the fairness of the price (which claim is withdrawn). She said that “at least for now”, Chancery is still approving such settlements, but Vice Chancellors Strine and Laster have expressed concern and have reduced fees that were requested. For the most recent iteration of Delaware law on this topic, see here for a decision just published today, May 6, by Vice Chancellor Parsons in the case styled In Re Cox Radio Shareholders Litigation.
The recent Delaware Supreme Court opinion in Crown EMAK was discussed by Ed Welch. It was highlighted previously here. The whole panel exchanged views regarding the issue of separating voting rights and economic rights of stock. For example, if the “vote buyer” has an interest contrary to those who have economic rights then it would appear to be contrary to the alignment of such rights which is the policy basis on which voting rights were granted.
Bill Lafferty discussed the London v. Tyrell case, highlighted on this blog here. This case involved a Special Litigation Committee that the court found to be lacking. After a motion to dismiss was denied, a two-person Special Litigation Committee was formed. One of the two had a familial relationship with the CEO and the other had a prior business relationship with a director (who apparently felt some type of allegiance or gratitude for a prior deal.) The Court also dissected the report of the SLC and was critical of the lack of careful consideration of a claim to the extent it did not recognize that injunctive relief for a due care claim is not precluded by Section 102(b)(7). One of the points to take from this decision is to be 100% certain that the independence of any special litigation committee member is clear and that their report examines all the issues and applies all applicable law. Otherwise, the SLC may be a waste of time and effort. Also, notable is that the SLC has the burden to establish its independence.
VC Lamb said that one should read this London case and the Sutherland case and the Oracle case for guidance to be sure that an SLC is properly constituted.
VC Lamb also mentioned the new rules in the Court of Chancery that allow a case to be filed so that a member of the Delaware Court of Chancery will serve as an arbitrator. The hearing is to be scheduled within 90 days of filing the complaint and it will be done in confidence (at least prior to appeal). The expectation is that the appeal to the Supreme Court will not be de novo, but rather will be more limited and on a more expedited basis, although rules for appeals have not yet been published. Prior discussions of these new rules have appeared on these pages in the past. See, e.g., here.
Professor Ann Conaway of Widener University School of Law briefly discussed Delaware law applicable to the duties of management in the context of a struggling company in distress.
When a company is insolvent, at that point the duties to shareholders are merely transferred to the creditors—who are then standing in the shoes of the shareholders. See, e.g., Nelson v. Emerson.
Contrary to the misreading by some commentators of Delaware law on this point, she emphasized that the “Zone of Insolvency” concept is dead. A creditor can only bring derivative claims against directors of a corporation and the duties to creditors arises when a company is insolvent and not prior to that moment in time.
As for alternative entity law, the LLC statute does not provide support for the view that fiduciary duties apply in the absence of an express contract provision. The good professor observed that there is a division among members of the Court of Chancery regarding whether common law fiduciary duties apply when a contract does not clearly address the issue. Her analysis is consistent with remarks made at a recent seminar by Delaware Supreme Court Chief Justice Myron Steele that were highlighted here. (I understand that the Chief Justice and Professor Conaway will soon be publishing jointly a scholarly work on the latest developments in the law of alternative entities.)