Noteworthy 2012 Corporate and Commercial Decisions from Delaware’s Supreme Court and Court of Chancery.
This is the eighth year that we are providing an annual review of key Delaware corporate and commercial decisions. During 2012, we reviewed and summarized over 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues. (We also provided partial lists of key cases throughout 2012.) Among the decisions with the most far-reaching application and importance during 2012 include those that we are highlighting in this short overview. We are providing links below to the more complete blog summaries, and the actual court rulings, for each of the cases that we highlight below. Prior annual summaries are linked in the right margin of this blog. We welcome comments if readers think we missed a decision that should be included. (The Supreme Court’s stately building in Dover is featured in the photo from the Court’s website.)
Top 5 Decisions of 2012
We begin with our selection of the Top Five Cases from 2012. In no particular order, we chose the following decisions as especially noteworthy:
Gatz Properties LLC v. Auriga Capital Corp., No. 148, 2012 (Del. Supr. Nov. 7, 2012) (Per Curiam). Issue Addressed: Delaware’s High Court held that the manager of an LLC violated a contracted-for fiduciary duty that adopted the equitable standard of entire fairness in a conflict of interest transaction between the LLC and its manager. The Supreme Court also declared as dicta, any statements by the trial court that Delaware law imposed default fiduciary duties in the LLC context. Summary available here.
In Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012), in a 110-page opinion, the Delaware Supreme Court upheld the Court of Chancery’s 100-plus page decision awarding over $2 billion in damages based on a breach of fiduciary duty claim in connection with the sale of a company. Delaware’s High Court also upheld an award of attorneys’ fees in the amount of $300 million. Highlights available here. The trial court decision, styled as In re Southern Peru Copper Corporation Shareholder Derivative Litigation, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011), was highlighted on these pages here and here.
South v. Baker, C.A. No. 7294-VCL (Del. Ch. Sept. 25, 2012). Issues Addressed: This decision is a candidate for inclusion in the pantheon of iconic Delaware Court of Chancery opinions addressing the following issues: (1) When derivative plaintiffs and their counsel will be presumptively found to provide inadequate representation resulting in the complaint’s dismissal with prejudice; (2) When dismissal of one derivative suit will not bar another derivative suit involving the same corporation; (3) When a Caremark claim will be dismissed with prejudice if Section 220 is not used beforehand; and (4) How to successfully allege pre-suit demand futility in connection with making a Caremark claim. Summary available here.
In Re: Encore Energy Partners LP Unitholder Litigation, Cons., C.A. No. 6347-VCP (Del. Ch. Aug. 31, 2012). Issue Presented: Whether the terms of an LP Agreement protected the general partner from claims regarding what would otherwise be a self-interested transaction, without breaching any duty owed to its limited partners? Short Answer: Yes. Summary available here.
Soterion Corp. v. Soteria Mezzanine Corp., C.A. No. 6158-VCN (Del. Ch. Oct. 31, 2012). Why This Case is Noteworthy: This decision addresses for the first time in Delaware the applicable standard to determine when the threat of a lawsuit can be tortious interference with prospective business relationships. This opinion also features the rare instance when attorneys’ fees are assessed based on an exception to the American Rule (as compared with Rule 37 for motions to compel). Summary available here.
Honorable Mention goes to the new Practice Guidelines, discussed below, which the Court of Chancery adopted and which provide comprehensive tips and instructions for both procedural matters and substantive discovery obligations that practitioners must follow if they hope to avoid the wrath of the bench.
We also selected the following additional cases from 2012 that deserve special attention:
Supreme Court Decisions
On December 27, 2012, the Delaware Supreme Court overruled in part and remanded a decision of the Court of Chancery which denied a large investor, BVF Partners L.P. (“BVF”), the right to opt-out of a shareholder class action settlement. In the case of In Re Celera Corp. Shareholder Litigation, No. 212, 2012 (Dec. 27, 2012), the Delaware Supreme Court, en banc, addressed the issue raised on appeal by objector-appellant BVF of the Court of Chancery’s certification of plaintiff/appellee New Orleans Employees’ Retirement System (“NOERS”) as class representative in an action challenging the acquisition of Celera Corporation (“Celera”) by Quest Diagnostics, Inc. (“Quest”). BVF also appealed from the Court of Chancery’s approval of a class action settlement without an opt out right for BVF. This decision is likely to have a significant impact on efforts to bring closure to class action settlements of litigation that involve objectors with substantial holdings. Summary available here.
Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 254, 2012 (Del. Supr., July 12, 2012). Our blurb about the Supreme Court’s Order of May 31, 2012 in this case is available here. Highlights of the 138-page Court of Chancery opinion on these pages is available here. Issue Presented: Whether a violation of a confidentiality agreement can be a basis to preclude a hostile tender offer. Short Answer: Yes. The Delaware Supreme Court affirmed the decision of the Delaware Court of Chancery in this expedited appeal. Summary available here.
Rich v. Fuqi Int’l, Inc., C.A. No. 5653-VCG (Del. Ch. Nov. 5, 2012). Why this opinion is noteworthy: The Delaware Court of Chancery in this summary proceeding reaffirms in this pithy opinion that the Delaware General Corporation Law’s requirement in Section 211 that a shareholders’ meeting must be held annually, will not be suspended due to arguably conflicting provisions of the federal securities laws. That seems counterintuitive in light of the supremacy clause, but the court explains in a scholarly manner why a corporation will not be relieved of its obligation under DGCL Section 211 simply because of federal securities laws or regulations that may also impose certain prerequisites to holding an annual meeting. Summary available here.
In a transcript ruling in Dent v. Ramtron Int’l Corp., C.A. No. 7950-VCP (Del. Ch., November 19, 2012), the Court denied the plaintiff’s motion for a preliminary injunction to enjoin a shareholder vote on a merger between Ramtron and Cypress Semiconductor Corp. Issue Addressed: Whether the Court should preliminarily enjoin a shareholder vote on a merger on allegations that the company’s proxy statement is false and misleading in that the company failed to provide disclosures of financial projections thereby prohibiting the company’s stockholders from making an informed decision on whether to vote in favor of the merger or seek appraisal. (Transcript rulings are often cited in Delaware briefs as persuasive authority.) Summary available here.
Louisiana Municipal Police Employees’ Retirement System v. Lennar Corp., C.A. No. 7314-VCG (Del. Ch. Oct. 5, 2012). Issue Presented: In this summary proceeding, the Court considered whether newspaper articles announcing a federal investigation of the company, together with prior lawsuits that were settled without an admission of fault, satisfy the requisite threshold of “some evidence” to establish a credible basis of wrongdoing needed to allow a books and records demand under DGCL Section 220 to proceed. Short Answer: Not under the facts of this case. Summary available here.
Gentili v. L.O.M. Med. Int’l, Inc., C.A. No. 7600-VCG (Del. Ch. Aug. 17, 2012). Issue: Whether non-unanimous written consents of shareholders were sufficient to thwart a challenge to the election of directors at an annual meeting? Short answer: No. Summary available here.
In Re: Appraisal of Orchard Enterprises, Inc., C.A. No. 5713-CS (Del. Ch. July 18, 2012). Issue Addressed: In this post-trial decision in an appraisal action arising out of a merger, the Court determined the fair value of the shares, relying on the discounted cash flow method of valuation. Summary available here.
Shocking Technologies, Inc. v. Michael, C. A. No. 7164-VCN (Del. Ch. April 10, 2012). Issue Addressed: Whether the Court of Chancery has the inherent authority to remove a director for breach of fiduciary duty, other than via DGCL Section 225? Short answer: The issue was not directly decided, but based on the facts of this case, the Court was not inclined to exercise such an inherent power, if such a power exists, prior to the expedited trial. Summary available here.
In re Delphi Financial Group Shareholder Litigation, Cons. C.A. No. 7144 -VCG (Del. Ch. Mar. 6, 2012). This is the third Delaware Court of Chancery decision in as many weeks that denied injunctive relief, in an expedited opinion, in response to a challenged transaction–despite criticism in two of the cases, of the process and the players, but ultimately leaving it up to the shareholders to decide whether to accept offers of a substantial premium to sell their shares. Summary available here. See In Re El Paso, summarized here, and In Re Micromet, summarized here.
In Re El Paso Corporation Shareholder Litigation, Consol. C. A. No. 6949-CS (Del. Ch. Feb. 29, 2012). Chancellor Strine denied the stockholder plaintiffs request for a preliminary injunction to enjoin a merger between El Paso Corporation and Kinder Morgan, Inc. While the Court in a 33-page opinion, severely criticized the actions of a number of the players, in the end the Chancellor decided to give the shareholders of El Paso the opportunity to decide for themselves if they liked the price being offered to them. Summary available here. The Court’s opinion in this matter marks the second time in the span of only a few months that the Delaware Court of Chancery has strongly criticized Goldman Sachs for conflict of interest issues in multi-billion dollar transactions. The most recent high-profile criticism was in the Court of Chancery’s 100-plus page decision in the Southern Peru Copper case highlighted on these pages here. Our LexisNexis videocast on this opinion is available here.
Dweck v. Nasser, C. A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), found that Dweck, the former CEO, a director and 30% stockholder in Kids International Corporation (“Kids”), and Kevin Taxin, Kids’ President, breached their fiduciary duties of loyalty to Kids by establishing competing companies that usurped Kids’ corporate opportunities and converted Kids’ resources. The Court also imposed liability on an officer of the company for approving the reimbursement with company funds of the personal expenses of his superior. Summary available here.
Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012). Issue Addressed: This opinion addressed the issue of whether representative plaintiffs in a putative class action should be in sanctioned for trading on the basis of confidential information obtained in the litigation. The motion was granted. Summary available here.
Paul v. China MediaExpress Holding, Inc., C.A. No. 6570-VCP (Del. Ch. Jan. 5, 2012). Issues Addressed: (1) Whether a Section 220 case should be stayed pending the outcome of a related federal securities suit; and (2) Whether the shareholder in this case established a proper purpose to inspect books and records under DGCL Section 220. Short Answer: (1) Based on a three-part test as applied to the facts of this case, the Court refused to stay this action in favor of a pending related federal securities suit, even though a motion to stay was also pending in the federal court. (2) In this post-trial opinion, the Court determined that the shareholder established a proper purpose and was entitled to the documents necessary to investigate that proper purpose. Summary available here.
LLC and Other Alternative Entity Litigation
In Feeley v. NHAOCG, LLC , C.A. No. 7304-VCL (Del. Ch. Nov. 28, 2012)(“Feeley IV“), the Delaware Court of Chancery addressed–for the first time since the recent Delaware Supreme Court decision in Gatz Properties v. Auriga Capital, highlighted on these pages here, the issue of default fiduciary duties in the LLC context. (This is the fourth Chancery ruling that we have posted about in the Feeley case.) Highlights available here.
New Media Holding Co., LLC v. Brown, C.A. No. 7516-CS (Del. Ch. Nov. 14, 2012). Issue addressed: Does Delaware have jurisdiction over the manager of a limited liability partnership (LLP) accused of breach of fiduciary duty claims, based on acts taken in the course of his work for the LLP, absent acts taken in Delaware in furtherance of the alleged wrongdoing? Short answer: No. Summary available here.
Feeley v. NHAOCG, LLC, (“Feeley II”), C.A. No. 7304-VCL (Del. Ch. Oct. 12, 2012). This is the second of four Chancery rulings in this case that we highlighted on these pages in 2012. What this case is about: This Delaware Court of Chancery opinion addresses a dispute regarding management and control of an LLC based on an interpretation of the LLC agreement, and deserves extra attention because it is the first opinion to apply DGCL Section 144 to the LLC context. Summary available here.
Policemen’s Annuity and Benefit Fund of Chicago v. DV Realty Advisors LLC, C.A. No. 7204-VCN (Del. Ch. Aug. 16, 2012). Issue Addressed: How to define “good faith” for purposes of a limited partnership agreement that required a good faith determination for removal of a general partner. Short Answer: The Court compared the common law definitions of good faith in the fiduciary context as compared to contract law, and also referred to the definition in the Uniform Commercial Code. See Slip op. at 33 and 34, and footnote 101. Summary available here.
In Re K-Sea Transportation Partners LP Unitholders Litigation, C.A. No. 6301-VCP (Del. Ch. April 4, 2012). The prior Chancery decision in this case was highlighted on these pages here. Issues Addressed: The issues addressed by the Court of Chancery in this matter were whether the fiduciary duty claims and the contractual claims were barred by the provisions in the limited partnership agreement, including whether a provision in the agreement that established a presumption of good faith barred claims for breach of the implied covenant of good faith and fair dealing. Summary available here.
Matthew v. Laudamiel, C.A. No. 5957-VCN (Del. Ch. Feb. 21, 2012). Apparently no prior Delaware law directly addressed the issue of whether the dissolution and cancellation of an LLC transformed derivative claims into direct claims held proportionately by the members of the LLC. The Court concluded that, after the filing of the certificate of cancellation, such claims must be brought in the name of the LLC by a trustee or a receiver appointed under 6 Del. C. Section 18-805, or directly by the LLC, or derivatively by its members after reviving the LLC by obtaining a revocation of its certificate of cancellation. Summary available here.
Gerber v. Enterprise Products Holdings, LLC, et al., C.A. No. 5989-VCN (Del. Ch., Jan. 6, 2012). Issue Addressed: This decision speaks to the limitations imposed by 6 Del. C. § 17-1101 on Delaware courts to address sanctionable conduct by partners and members of alternate entities that have contracted away their fiduciary duties. Summary available here.
Rulings Regarding Practice, Procedure and Jurisdictional Issues (including attorneys’ fees as exception to the American Rule)
Duff v. Innovative Discovery LLC, C.A. No. 7599-VCP (Del. Ch. Dec. 7, 2012).
Issues Addressed: The Court of Chancery addressed the following issues in this opinion: (1) Whether a forum selection clause providing for “sole” jurisdiction in California courts should be honored when a conflicting forum selection clause in a related agreement provided for jurisdiction in Delaware courts; (2) Whether 6 Del. C. § 18-111 provided a basis for equitable jurisdiction when the agreement that gave the Court of Chancery jurisdiction only provided for money damages; (3) Whether reformation as a remedy will be allowed when the complaint did not specifically request reformation but provided notice of the elements of that form of relief.
On December 4, 2012, the Court of Chancery announced (here) that it is updating Rules 26, 30, 34 and 45 regarding discovery effective January 1, 2013, “to account for modern discovery demands” regarding electronically stored information (“ESI”) and to “bring the Court’s rules in line with current practice.” The Court also announced that it is expanding its Guidelines for Practitioners, originally released in January 2012, to include guidelines regarding discovery and in particular, ESI (the “Discovery Guidelines”). The Practice Guidelines published by the Court of Chancery are entitled: “Guidelines to Help Lawyers Practicing in the Court of Chancery“. They are a quite formidable 28 pages (after a 3-page index.) Kevin Brady, a member of the Court’s Rules Committee, provided a helpful overview of the 28-page Guidelines on these pages here.
Bessenyei v. Vermillion, Inc., C.A. No. 7572-VCN (Del. Ch. Nov. 16, 2012). Issues Addressed: (1) Whether a notarized signature signed in the absence of a notary results in an invalid verification; and (2) Whether knowingly presenting an improperly notarized verification is a basis to dismiss the complaint under Delaware Court of Chancery Rule 41(b). Short Answers: (1) Yes; and (2) Under the circumstances, dismissal of the complaint is appropriate. Summary available here.
In another Delaware “first in the nation,” Vice Chancellor Laster of the Court of Chancery on October 15, 2012, in EORHB, Inc. v. HOA Holdings LLC (C.A. No. 7409-VCL) ordered the parties to “show cause” why computer assisted review should not be used for discovery of electronically stored information (“ESI”) in that matter. After a hearing on a motion for partial summary judgment and a motion to dismiss a counterclaim, Vice Chancellor Laster, sua sponte, raised the issue of computer assisted review in discovery for the balance of the case, saying: “[t]his seems to me to be an ideal non-expedited case in which the parties would benefit from using predictive coding. I would like you all, if you do not want to use predictive coding, to show cause why this is not a case where predictive coding is the way to go.” Transcript at 66.
Coughlin v. South Canaan Cellular Investments LLC, C.A. No. 7202-VCL (Del. Ch. July 6, 2012). Issue Addressed: Whether bad faith exception to American Rule applied to impose attorneys’ fees for litigation tactics. Short Answer: Yes. Summary available here.
Manning v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an important decision of the Delaware Court of Chancery on legal ethics as applied to non-Delaware attorneys who appear before the Court pro hac vice. Issues Addressed: Whether lack of complete candor to the Court in a Motion for Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or (ii) revoke the admission pro hac vice. The Court also addressed standards (articulated in this context for the first time), of candor and full disclosure, regarding potential conflicts, that those seeking admission pro hac vice must now follow. Summary available here.
Feeley v. NHAOCG, LLC, (“Feeley III“), is a transcript ruling in a pending Chancery case involving issues that relate to a contest for control, and which has thus far generated two opinions, highlighted on these pages here and here. A transcript of an oral argument in this case has recently been made available, regarding a claim in the case that, as of the date of this transcript, had not yet been the subject of an opinion by the court, but the transcript at pages 66 to 79, reveals “practice tips” about the mechanics of submitting bills in connection with a claim for advancement of legal fees for applicable officers or managers. ( We have often explained on these pages that transcripts of rulings in the Delaware Court of Chancery are often cited in briefs as valid authority).
Danenberg v. Fitracks, C.A. No. 6454-VCL (Del. Ch. Mar. 5, 2012), addressed important issues of advancement and indemnification and established a protocol for resolving the amount of fees payable pursuant to the grant of advancement rights. Summary available here.
Hermelin v. K-V Pharmaceutical Company, C.A. No. 6936-VCG (Del. Ch., Feb. 7, 2012). Issues Addressed: The Court of Chancery addressed an issue of first impression in Delaware regarding: “what evidence is relevant to an inquiry into whether an indemnitee acted in good faith for the purposes of permissive indemnification” under DGCL §§145(a) and (b). The Court also addressed: (1) Whether the former CEO is entitled to mandatory indemnification as a matter of law; (2) Whether additional discovery is required to determine whether the former CEO acted in good faith (in which case he would be entitled to statutorily permissive indemnification pursuant to his rights under an indemnification agreement.) Summary available here.
Request for Appointment of Receiver
Badii v. Metropolitan Hospice Inc., C.A. No. 6192-VCP (March 12, 2012), involves a post-trial decision on an action under 8 Del. C. § 291 for the appointment of a receiver for an insolvent, closely held corporation, Metropolitan Hospice, Inc. (“MHI”) which owed, among other things, approximately $2 million to the IRS for back taxes, penalties, and interest. Summary available here.
Supplement: Professor Bainbridge graciously describes our annual review as a “must read”. The Columbia Law School’s new blog on corporate law, called The CLS Blue Sky Blog, reprinted our annual summary on the first day of the blog’s unveiling.