Partners Healthcare Solutions Holdings, L.P. v. Universal American Corp., C.A. No. 9593-VCG (Del. Ch. June 17, 2015). This Delaware Chancery decision provides useful guidance on a situation involving a director who was designated by a major stockholder pursuant to an agreement giving that stockholder the right, but not the obligation, to appoint an independent director.

An issue arose because the major stockholder became adverse to the company in litigation and the company did not want to seat the director designated by that major stockholder unless the director would first agree not to be represented by the same law firm that was adverse to the company in pending litigation, and sign a confidentiality agreeement.  After this suit was filed, the parties settled the specific performance claim which attempted to enforce the terms of the designation agreement.  That partial settlement required the law firms to create an ethical wall to prevent the attorneys representing the stockholder in the litigation against the company from being the same attorneys who represented or provided advice to the director.  (Referring to a George Orwell book, the court suggested that this was an obvious solution to this corporate litigation that started as a Section 225 action.)

The court granted summary judgment to the company on the separate related claim for damages and attorneys’ fees related to the attempt to specifically enforce the director designation agreement–prior to the partial settlement.

See generally J. Travis Laster and John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 70 Bus. Law. 33 (Winter 2014/2015) (addressing issues regarding directors appointed by particular class or series of stock, referred to as “blockholder directors.”)

Bonus: Although this was not a Section 220 case, a useful discussion was included based on an old Chancery decision that prohibited a designated agent for purposes of a Section 220 inspection to review documents when that agent already was adverse to the corporation in pending litigation.  See Henshaw v. American Cement Corp., 252 A.2d 125 (Del. Ch. 1969).