A recent Delaware Supreme Court opinion provides a tutorial on the standards imposed on Delaware lawyers when a deponent, who is the lawyer’s client, engages in inappropriate conduct during a deposition. See Shorenstein Hays-Nederland Theaters LLC Appeals, Nos. 596, 2018 and 620, 2018 (Del. Supr. June 20, 2019). My overview of the decision was the focus of my latest legal ethics column for The Bencher, the publication of the American Inns of Court, which appears in the current issue. (I’m now in my 21st year of writing that ethics column for their national publication.)

This is the first decision from Delaware’s High Court on this issue, as compared to the rather abundant guidance that has existed for many years regarding the consequences when lawyers themselves engage in errant conduct during a deposition. A prior Chancery decision from 2015 involving the parties in this case was highlighted on these pages, and provides additional factual background details about the underlying long-running, internecine imbroglio that the court was ruling on–before it addressed the deposition issues.

Bonus Supplemental Materials:

Courtesy of the Delaware Business Court Insider, we provide our article that appeared in the April 21, 2021 edition on an important topic for Delaware litigators.

No Such Thing as Local Counsel in Delaware Court of Chancery

By: Francis G.X. Pileggi* and  Chauna A. Abner**

This is a compilation of selected key Delaware court decisions, rules, and customs to guide out-of-state attorneys admitted to practice in Delaware pro hac vice, or non-Delaware lawyers who collaborate on Delaware litigation with Delaware counsel. (This is an updated version of an article I co-authored with Kevin F. Brady many years ago.)

The Role of Delaware Counsel

The Delaware Court of Chancery does not recognize the limited role of “local counsel” to the extent that it implies a less than plenary role of Delaware counsel—even if non-Delaware counsel are overseeing the litigation or taking the “laboring oar.” See, e.g., Wood v. U.S. Bank Nat’l Ass’n, 2021 Del. Ch. LEXIS 21, at *19 (Del. Ch. Feb. 4, 2021) (“‘Even when forwarding counsel has been admitted pro hac vice and is taking a lead role in the case, the Court of Chancery does not recognize the role of purely local counsel.’”) (quoting James v. National Finance, LLC, 2014 Del. Ch. LEXIS 254, at *12 (Del. Ch. Dec. 5, 2014)); State Line Ventures, LLC v. RBS Citizens, N.A., 2009 Del. Ch. LEXIS 233, at * 1 (Del. Ch. Dec. 2, 2009).

The Court of Chancery emphasizes that a Delaware attorney of record is responsible for every action taken by his or her client—from the content of the pleadings to the fulfillment of discovery obligations. “[T]he Delaware lawyer who appears in an action always remains responsible to the Court for the case and its presentation,” without reference to who drafted the document at issue or was responsible for certain actions. James, 2014 Del. Ch. LEXIS 254, at *38. See generally, Principles of Professionalism for Delaware Lawyers.

The Court of Chancery has published Guidelines to Help Lawyers Practicing in the Court of Chancery, which make clear that the concept of “local counsel” does not exist in Delaware as a role with less than full responsibility. Delaware Court of Chancery, Guidelines to Help Lawyers Practicing in the Court of Chancery (2012), http://courts.state.de.us/Chancery/docs/CompleteGuidelines.pdf

Those Guidelines provide in part as follows:

Role of Delaware Counsel

  • The concept of “local counsel” whose role is limited to administrative or ministerial matters has no place in the Court of Chancery. The Delaware lawyers who appear in a case are responsible to the Court for the case and its presentation.

 

  • If a Delaware lawyer signs a pleading, submits a brief, or signs a discovery request or response, it is the Delaware lawyer who is taking the positions set forth therein and making the representations to the Court. It does not matter whether the paper was initially or substantially drafted by a firm serving as “Of Counsel.”

 

  • The members of the Court recognize that Delaware counsel and forwarding counsel frequently allocate responsibility for work and that, in some cases, the allocation will be heavily weighted to forwarding counsel. The members of the Court recognize that forwarding counsel may have primary responsibility for a matter from the client’s perspective. This does not alter the Delaware lawyer’s responsibility for the positions taken and the presentation of the case.

 

  • Non-Delaware counsel shall not directly make filings or initiate contact with the Court, absent extraordinary circumstances. Such contact must be conducted by Delaware counsel.

 

  • It is not acceptable for a Delaware lawyer to submit a letter from forwarding counsel under a cover letter saying, in substance, “Here is a letter from my forwarding counsel.”

 

Attorneys Admitted Pro Hac Vice

The Delaware courts also strictly regulate the pro hac vice admission of out-of-state attorneys, and the rules require a Delaware attorney moving the admission of an out-of-state attorney to determine and certify to the admitting court that the lawyer to be admitted is reputable and competent. See Delaware Supreme Court and Delaware State Bar Association, Principles of Professionalism for Delaware Lawyers, at ¶ C (Nov. 1, 2003), http://courts.delaware.gov/forms/download.aspx?id=39428.

Out-of-state counsel also must certify that they have reviewed Delaware’s Principles of Professionalism for Delaware Lawyers. Even after being admitted to practice in Delaware pro hac vice, an out-of-state attorney may not: (i) sign pleadings; (ii) file documents with the Court; (iii) communicate directly with the Court; or (iv) attend proceedings without Delaware counsel (including calls with the court, mediation and arbitration proceedings), without express permission by the Court. See Forte Capital Partners, LLC v. Bennett, Del. Ch., C.A. No. 1495-N (2005) (rejecting pleadings, motions, and letters to the Court signed by out-of-state counsel; also rejecting the appearance before Court in a teleconference by an attorney admitted pro hac vice when Delaware counsel was not present for the conference).

In 2013, a non-Delaware lawyer was subject to a Private Admonition for participating in a conference call with the Court–without his Delaware attorney. However, out-of-state counsel who are admitted pro hac vice may take or defend depositions in the pending action without the presence of their Delaware counsel. See Griffin v. Sigma Alpha Mu Fraternity, 2012 Del. Super. LEXIS 119 (Del. Super. Ct. Mar. 15, 2012) (holding that out-of-state counsel is not permitted to question a deposition witness in a Delaware action—even if “supervised” by Delaware counsel—”unless, and until, counsel is admitted pro hac vice.”)

The Court of Chancery issued an Order to clarify that only members of the Delaware Bar can be registered with the eFiling system as eFilers and to receive eFiling notifications by email. See Delaware Court of Chancery, Standing Order (Aug. 5, 2008) http://courts.delaware.gov/chancery/docs/ ChanceryStandingOrder_Out-Of-StateAttorneys_080408.pdf

The Court of Chancery also issued a notice informing Delaware lawyers that it is a violation of Rule 79.1 to share their eFiling passwords or add non-Delaware lawyers to the electronic service list.

An out-of-state attorney’s pro hac vice status may be revoked upon a motion to the Court. See State ex rel. Secretary of the DOT v. Mumford, 731 A.2d 831, 835 (Del. Super. Ct. 1999) (revoking the pro hac vice admission of out-of-state attorney who “demonstrated a lack of civility and professionalism by ‘coaching the witnesses’ during the depositions, by failing to control or attempt to control the objectionable conduct of his client, and by encouraging the [inappropriate] conduct of his client.”). Inappropriate conduct by out-of-state attorneys will not be tolerated by the courts, and can lead to revocation of an attorney’s pro hac status and submission of specific matters to the bar of the attorney’s home state as well as Delaware’s Office of Disciplinary Counsel. Manning v. Vellardita, 2012 Del. Ch. LEXIS 59 (Del. Ch. Mar. 28, 2012) (holding that while out-of-state attorney’s failure to fully disclose law firm affiliation “fell short of the level of candor this Court expects of attorneys practicing in Delaware,” there was no basis to revoke attorney’s pro hac vice status; however, Court referred the matter to the bar association of attorney’s home state and the Delaware Office of Disciplinary Counsel).

Delaware’s pro hac vice rules apply with equal force to Delaware-barred attorneys who do not maintain an office in Delaware. Maintaining an office in Delaware is a prerequisite to serving as an attorney of record in Delaware pursuant to Sup. Ct. R. 12(a)(i); if a Delaware attorney retires, or practices in another state, and his firm does not maintain a bona fide Delaware office, then that attorney will need to be admitted pro hac vice before filing documents with or arguing before any Delaware court.

The Delaware Supreme Court’s Office of Disciplinary Counsel has compiled materials and case excerpts relevant to attorneys admitted pro hac vice. These materials provide guidance on issues frequently encountered by Delaware counsel when assisting out-of-state counsel, as well as guidance for counsel admitted pro hac vice, including:

  • Out-of-state counsel’s desire to impermissibly limit the scope of retention of Delaware Counsel;

 

  • Identifying the client: distinguishing the underlying client in the litigation from out-of-state counsel who directs Delaware counsel and pays the bills;

 

  • Special consideration required when both Delaware counsel and out-of-state counsel are associated with the same firm, including the proper form of signature blocks; and

 

  • Procedures for Delaware-barred attorneys who practice out of state and do not maintain a bona fide Delaware office.

 

As a supplement to the extensive materials provided by the Office of Disciplinary Counsel, the following cases provide distinct examples of attorney conduct that will not be tolerated by the Delaware courts, and how the courts address such conduct:

    • Sample v. Morgan, 935 A.2d 1046 (Del. Ch. 2007) (holding that a non-Delaware lawyer and her law firm could be sued in Delaware for providing advice and services to a Delaware corporation, its directors, and its managers on matters of Delaware corporate law, including the preparation of a certificate of incorporation, which they provided to a service agent to be filed in Delaware).

 

    • Beck v. Atl. Coast PLC, 868 A.2d 840 (Del. Ch. 2005) (sanctioning and fining out-of-state counsel under Rule 11 and Rule 37 for filing a deceptive complaint, improperly certifying that the plaintiff was fit to serve as class representative, and intentionally withholding relevant non-privileged documents responsive to discovery requests).

 

    • Auriga Capital Corp. v. Gatz Props., LLC, 2012 Del. Ch. LEXIS 19 (Del. Ch. Jan. 27, 2012) (shifting fees where plaintiff and his counsel acted in bad faith by “splatter[ing] the record with a series of legally and factually implausible assertions,” allowing defendant to collect responsive documents without legal supervision, and failing to preserve relevant documents and information).

 

    • Griffin v. The Sigma Alpha Mu Fraternity, C.A. No. 09C-04-067 JAP (Del. Super. Mar. 15, 2012) (imposing a $500 fine against plaintiffs for allowing out-of-state counsel, who was not admitted pro hac vice in Delaware, to conduct a deposition in a Delaware case).

 

    • In re Asbestos Litig. Limited to Ronald Carlton, C.A. No. 10C-08-216 ABS (Del. Super. Ct. May 14, 2012) (warning Delaware counsel of possible sanctions and/or rejection of documents filed for failure to adhere to the requirement that all correspondence to the Court be submitted on Delaware counsel’s letterhead and signed by Delaware counsel).

 

Electronic Discovery Duties

Electronic data preservation, collection, and production are also governed by the Delaware courts. Both the District of Delaware and the Court of Chancery provide guidelines on preserving electronically stored information (ESI) on their websites.

The District of Delaware implemented a Default Standard for Discovery, Including Discovery of Electronically Stored Information (Dec. 8, 2011), http://www.ded.uscourts.gov/sites/default/files/Chambers/ SLR/Misc/EDiscov.pdf, and a Default Standard for Access to Source Code (Dec. 8, 2011), http://www.ded.uscourts.gov/sites/default/files/Chambers/SLR/Misc/DefStdAccess.pdf. These standards require counsel for all parties to confer on several topics concerning the production of ESI to avoid costly litigation of discovery disputes.

The Court of Chancery has adopted Guidelines for Preservation of Electronically Stored Information that require counsel to develop and oversee a process to preserve all relevant ESI. See Delaware Court of Chancery, Guidelines for Preservation of Electronically Stored Information (Jan. 18, 2011), http://courts.delaware.gov/forms/download.aspx?id=50988. This process should include, at a minimum, identifying all custodians of potentially relevant information, disseminating litigation hold notices to those custodians, and conferring with opposing counsel to discuss whether they will limit or forgo discovery of ESI.

—          —          —

These guiding Delaware principles are further refined by the individual courts, each having its own rules for the admission of out-of-state attorneys, and the requirements of Delaware counsel. In addition, Delaware charges fees on an annual basis to renew a pro hac vice motion to enable out-of-state counsel to maintain his or her pro hac vice status in a particular case.

______________________________________________________________________________

*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

**Chauna A. Abner is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP

16th Annual Review of Key Delaware Corporate and Commercial Decisions

By: Francis G.X. Pileggi and Chauna A. Abner

This is the 16th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. This list does not attempt to include all important decisions of those two courts that were rendered in 2020. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available here.

The Delaware Business Court Insider again published this year’s Annual Review though it appeared in two parts due to its length, in last week’s edition and in this week’s edition. Part I and Part II are reprinted below with the courtesy of The Delaware Business Court Insider. (c) 2020 ALM Media Properties, LLC. All rights reserved.

This year’s list focuses, with some exceptions, on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications. For example, the Sciabacucchi; Solera; and AB Stable (Anbang) cases have already been the subject of extensive commentary by others. Links are also provided below to the actual court decisions and longer summaries.

DELAWARE SUPREME COURT DECISIONS

Supreme Court Instructs on Nuances of Fiduciary Duties of Disclosure and Loyalty

A Delaware Supreme Court decision from 2020 that deserves to be read by anyone interested in the nuances of Delaware law on the fiduciary duties of disclosure and loyalty of a manager or a director in connection with communications with stockholders or others to whom a fiduciary duty is owed, is Dohmen v. Goodman, No. 403, 2019 (Del. June 23, 2020), in which Delaware’s High Court answered a question on this topic certified from the U.S. Court of Appeals for the Ninth Circuit.

Key Takeaways:

There is a “per se damages rule” in Delaware that covers only those breaches of the fiduciary duty of disclosure involving requests for stockholder action that impair the economic or voting rights of investors. Importantly, this per se damages rule only covers nominal damages. Again, for emphasis: the per se damages rule does not apply to damages other than nominal damages. Therefore, in order to recover compensatory damages, one who proves a breach of the fiduciary duty of disclosure must also prove reliance, causation and damages. See Slip op. at 24.

The Court in its en banc opinion provides a useful overview of fiduciary duties in general, and addresses the many nuances–that change depending on the situation presented–of the duty of disclosure in particular as it relates to requests for action by stockholders or others to whom a fiduciary duty is owed.  See Slip op. at 9-10.

Brief Overview of the Case:

The procedural background of the case involved an issue of Delaware law that the U.S. Court of Appeals for the Ninth Circuit certified to the Delaware Supreme Court. In other words, the Ninth Circuit asked the Delaware Supreme Court to decide an issue of Delaware law that was originally presented to the Ninth Circuit.

This gem of a 24-page opinion, which is relatively short for many Delaware opinions, was decided based on stipulated facts, which in a very simplified way, decided a claim by a limited partner in a hedge fund, who as limited partner in a limited partnership was owed a duty by the fund manager, which was structured as an LLC. Among the claims by the limited partner was that the general partner of the limited partnership, the LLC manager, breached fiduciary duties by failing to disclose that the general partner was the only investor in the fund other than the suing limited partner, and related omissions or misrepresentations.

Delaware Fiduciary Duty Law:

In connection with its decision, the Delaware Supreme Court recited several useful truisms of Delaware law. For example, the agreements at issue did not disclaim the fiduciary duty of loyalty, and therefore, the general partner owed fiduciary duties to the limited partners, similar to those owed by directors of Delaware corporations. See footnotes 15 through 16.

The Court recited the very nuanced and multifaceted aspects of the fiduciary duties of care and loyalty that applied to communications with stockholders or limited partners. Those duties depend on the context of the communication, and whether the communication is to an individual stockholder or to a group of stockholders. See footnotes 18 through 32 and accompanying text.

The Court described several different types of factual situations which impact the application of the duty owed in connection with communications that involve a request for stockholder action, as compared to those that might involve merely periodic financial disclosures. The per se damages rule does not apply to the latter.

The Court discussed the most important Delaware decisions involving the duty of disclosure and how it is applied in various factual circumstances.

Bottom Line:

The Court explained that the per se damages rule only applies when a director seeks stockholder action and breaches their fiduciary duty of disclosure, in which case a stockholder may seek equitable relief or damages. That is, when directors seek stockholder action, and the directors fail to disclosure material facts bearing on that decision, a beneficiary need not demonstrate other elements of proof, such as reliance, causation or damages. This rule only applies to nominal damages and does not extend to compensatory damages. See Slip op. at 10 through 11.

Link to original post on these pages about this case.

 

Supreme Court Interprets Key Words in Agreement

A Delaware Supreme Court decision from May 2020 is noteworthy for the approach it takes in determining the meaning of a word in an agreement, for example, by parsing the syntax and sentence structure where the word at issue appears in the agreement. In Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., No. 68, 2020 (Del. May 22, 2020), the Delaware Supreme Court provides useful guidance about how to determine the meaning of a key word in an agreement. In this matter, despite a lengthy definition in the agreement of the word “transfer”, the parties still disputed its meaning.

Background:

The underlying dispute involved a complex constellation of interrelated entities which the Court provided a graphic description of by way of a chart. The essential facts on which the dispute was based involved the interpretation of an LLC agreement which imposed restrictions on the transfer of LLC units and provided for the right of first refusal and other provisions triggered by a “transfer.” Several terms were defined in the agreement–with rather lengthy definitions–but the definitions did not provide sufficient clarity. The most consequential definition that was disputed was the meaning in the context of the agreement of the word “transfer.”

The problem presented to the Court of Chancery was whether the sale of an interest triggered either a right of first refusal and/or a right of first offer, and if both applied, which was to be given priority.

The Court of Chancery concluded that a sale by Hunt of its shares to Borealis would be a “transfer.” The Supreme Court had a different view.

The finding by the Court of Chancery that the purchase of Hunt’s shares constituted a transfer, triggered the requirement to offer the shares to Sempra. As a result of other consequences of that holding, the Court of Chancery found that Sempra was the only party with the right to purchase the Hunt shares, and entered judgment in favor of Sempra. This expedited appeal followed an expedited trial. It remains noteworthy that this opinion came only 30 days after the final submission of the appeal to the Supreme Court.

Analysis by the Supreme Court:

The Supreme Court held that the right of first refusal in Section 3.9 of the agreement at issue is only triggered by transfers by the Minority Member and its Permitted Transferees, and that Hunt is neither. Put another way, Delaware’s High Court held that the fact that the right of first refusal is only triggered by transfers by the Minority Member is dispositive in favor of Borealis, regardless of whether the Hunt Sale could be said to effect an indirect transfer.

One of the agreements involved was governed by New York law and one was governed by Delaware law–but the Court noted that the law of both states as it relates to contract interpretation in this case is the same. See footnote 22.

Two other footnotes contain important observations of Delaware law that are especially worth remembering:

(1) The management of an LLC is vested in proportion to the then-current percentage or other interest of members in the profits of the LLC owned by all the members, and “the decision of members owning more than 50% of the said percentage or other interest in the profits [is] controlling.” Footnote 27; see Section 18-402 of the Delaware LLC Act.

(2) Also noteworthy is the observation by the Court that an argument that was only raised in a footnote would justify “passing over it” because footnotes, according to Delaware Supreme Court Rules, “shall not be used for argument ordinarily included in the body of a brief.” Footnote 28. See Del. Sup. Ct. R. 14 (d)(iv).

The most noteworthy parts of this pithy 21-page decision are found in the last few pages which include the core of the Court’s reasoning.

In particular, the most memorable part of the Court’s reasoning is the parsing by the Court of the syntax and sentence structure of the agreement in order to interpret the meaning of a particular word in the agreement. The Court focuses on the “subject of the operative sentence” in Section 3.1, of which “the verb phrase ‘may only transfer’ serves as the predicate.” The Court further explains that the subject of the operative sentence is neither accidental nor unimportant because it is the same subject for which the verb phrase “intends to transfer” serves as the predicate in section 3.9.

The Court added that the subject, which is stated conjunctively, does not include Hunt. Therefore, the Court reasoned that it was unnecessary and inappropriate to parse the definition of transfer, as defined in the agreement, to determine the scope of Section 3.1 and Section 3.9, because: “the subjects of the opening sentences in both of those sections do that for us.” See Slip Op. at 20 – 21.

In sum:

Although the detailed factual background needs to be reviewed more closely in order to fully understand the Court’s reasoning, for anyone who wants to understand Delaware law regarding proper contract interpretation, and interpretation of the meaning of a word, even when it is defined in an agreement, this opinion is must-reading.

Link to original post.

 

Delaware Supreme Clarifies Contract-Based Right to Corporate Records

A Delaware Supreme Court opinion issued in July 2020 should be required reading for anyone interested in the latest iteration of Delaware law on the contract-based right to demand “books and records” in the alternative entity context. Delaware’s High Court ruled in Murfey v. WHC Ventures, LLC, No. 294, 2019 (Del. July 13, 2020), that the Court of Chancery erred by interjecting into a limited partnership agreement a statutory requirement from Section 17-805 of the Delaware LLC Act that did not appear in the parties’ agreement.

The great importance of this ruling can best be appreciated by emphasizing that the Court did not opine in any manner on the statutory requirements for demanding books and records of a business entity–about which we recently provided an overview of key decisions on this topic, with the title of: Demands for Corporate Documents Not for the Fainthearted.

We will add to that characterization of Delaware decisions interpreting statutory provisions for demanding corporate documents, a general observation based on the instant decision: Contract-based demands for books and records of business entities are not for the fainthearted either. A few reasons that support our observation include the following:

  • This Supreme Court decision features the en banc Justices split 3-2, along with a less-than-common reversal of a Chancery decision. So, that procedural note underscores that 6 of the best legal minds in Delaware (5 jurists on the high court and 1 in Chancery rendering opinions in this case) cannot find unanimity on this issue.
  • The original demand in this case was made on January 10, 2018. The Chancery complaint was filed in September 2018. Through no fault of the court system, this final decision on appeal came down on July 13, 2020. About 2 years is still lightening-fast for the period from filing a complaint to a final decision by a state’s highest court, but that still implies substantial legal fees and the need for financial and other types of stamina for someone who is serious about seeking corporate records.
  • Although this decision provides authoritative guidance on this nuance of Delaware business litigation, a careful parsing of the opinion still reveals a fertile field for indeterminacy–which makes it a challenge for the lawyers toiling in this vineyard who are trying to predict the outcome of this type of contract interpretation dispute–even if one need not be concerned with applying the multitude of court decisions applying the statutory provisions for inspection rights in this context.
  • We will end our introductory observations on a positive note: despite the plethora of case law interpreting the various statutory provisions for demanding books and records, such as Section 220 and Section 18-305, this decision is a welcome addition to the relatively few published Delaware opinions that address the purely contract-based right to books and records of an alternative entity.

Basic Factual Background:

Based on the assumption that readers of this post are familiar with the basics of Delaware law in this area, we are only highlighting the irreducible minimum amount of facts to provide context for the key legal principles announced.

This case followed a typical pattern. The company provided some documents initially, and at the time of trial the only issue was the very limited documents the company refused to produce.

Somewhat unusual was that only one specific type of document was the subject of the trial court decision and the appeal: the K-1 of the other limited partners in the limited partnership. Although the company allowed counsel for the plaintiff and the plaintiff’s valuation expert to review those K-1s, they refused to let the plaintiffs themselves review the K-1s of other limited partners–even subject to the common confidentiality agreement.

The limited partnership agreements involved allowed for a rather broad scope of documents to be demanded, including tax returns which were specifically listed as being subject to production. The company took the curious position that a K-1 (of other limited partners) was not part of the tax returns of the company–or at least not within the scope of documents they need to produce.

Primary Issue Addressed on Appeal:

Whether the Court of Chancery erred by injecting into the terms of the agreement that provided for a right to books and records–additional statutory prerequisites. Short answer: yes.

High Court’s Reasoning–Key Takeaways:

The majority opinion made quick work of dispensing with the defense that valuation was not a valid basis for requesting the disputed documents or that tax returns were not needed to complete a valuation. See, e.g., footnotes 65 and 66 as well as related text. More notably, the Court found that the statutory notion of a “proper purpose” was not applicable to contract-based demands. See, e.g., footnote 53 and accompanying text (quoting with approval prior decisions so holding.)

Also noteworthy is the Court’s reference to dictionary definitions of words, including prepositions, at issue in this case. See footnotes 32 and 33.

The Court reviewed many prior Delaware decisions that addressed when, if ever, it would be appropriate to infer words or conditions that do not appear in the terms of an agreement, such as statutory prerequisites. Slip op. at 18-25.

A key part of the Court’s reasoning was that: because the partnership agreements involved

… do not expressly condition the limited partner’s inspection rights on satisfying a “necessary and essential” condition [a statutory concept], and given the obvious importance of tax return and partnership capital contribution information to the Partnerships’ investors, as evidenced by the agreements, we are not persuaded that such a condition should be implied. Slip op. at 25.

The majority opinion’s “rebuttal” of the dissenting opinion deserves to be read in its entirety. Slip op. at 32 to 37. Two especially notable excerpts:

  • “The words ‘necessary and essential’ do not appear in the written agreements”. Slip op. at 35.
  • “… we also do not agree that the parties to a limited partnership agreement have to expressly disclaim any conditions applied in the Section 220 context (or the Section 17-305 context….)” Footnote 85.

Link to original post.

 

Supreme Court Rejects Two Common Defenses to Section 220 Demands

A recent decision from the Delaware Supreme Court provides hope to stockholders who seek to obtain corporate documents pursuant to Section 220 of the Delaware General Corporation Law to the extent that Delaware’s High Court removed two common defenses that companies use to oppose the production of corporate records to stockholders. In AmerisourceBergen Corporation v. Lebanon County Employees Retirement Fund, No. 60, 2020 (Del. Dec. 10, 2020), the two most important aspects of the ruling are that:

(i) A stockholder making a Section 220 demand need not demonstrate that the wrongdoing being investigated is “actionable;” and

(ii) When the purpose of a Section 220 demand is to investigate potential wrongdoing and mismanagement, the stockholder is not required to “specify the ends to which it might use” the corporate records requested (i.e., exactly what it will do with the documents it receives).

Over the last 15 years we have highlighted many of the frustrating aspects of decisions construing Section 220 to the extent that one needs stamina and economic fortitude to pursue what oftentimes is an unsatisfying result. See, e.g.,recent overview on this topic.

This decision should be in the toolbox of every corporate litigator not only because it announces a new path for Section 220 cases and reminds us of the basic prerequisites of the statute, but also in light of it partially overruling and distinguishing some prior cases. This opinion also confirms that several Chancery decisions that were not in harmony with this decision should no longer be followed.

Key Takeaways:

       One of the most important takeaways from this decision is that the Court clarified that when the purpose of a Section 220 demand is to investigate potential mismanagement, the stockholder is “not required to specify the ends to which it might use” the corporate documents requested.  See page 22.

       The second most important takeaway from this case is the Court’s holding that a stockholder pursuing a Section 220 demand need not demonstrate that the alleged wrongdoing is “actionable.” See page 25.

       The three prerequisites (not including the many nuances) for successfully pursuing a Section 220 demand to inspect a corporation’s books and records requires a stockholder to establish that: (1) such stockholder is actually a stockholder; (2) such stockholder has complied with Section 220 respecting the form and manner of making demand for inspection of such documents; and (3) the inspection such stockholder seeks is for a proper purpose. See pages 12-13.

       The Court recited the many examples of proper purposes that have been recognized to be reasonably related to the interest of the requesting stockholder. See footnote 30 for a lengthy list, which includes “to communicate with other stockholders in order to effectuate changes in management policies.”

       The Court reiterated the well-known requirement that when the proper purpose of a stockholder making a Section 220 demand is to investigate potential mismanagement, a stockholder needs to demonstrate “a credible basis” from which the court may infer that “there is possible mismanagement that would warrant more investigation.” See page 15.

       Although a credible basis of wrongdoing needs to be presented by a preponderance of the evidence to pursue the proper purpose of investigating potential wrongdoing, a company will not be permitted to mount a merits-based defense of such potential wrongdoing. See page 37.

       Moreover, while trying to harmonize prior decisions on these nuances, the Court observed that some of the decisions struck a discordant note. See footnote 109.

       The Court also affirmed the following two aspects of the Court of Chancery’s ruling: (1) regarding the scope of documents, the Court found that it was appropriate to include a requirement that the company produce officer-level materials and (2) the high Court found it was not an abuse of discretion to order a Rule 30(b)(6) deposition–because the company refused to describe the types and custodians of corporate records that it had in response to discovery requests. See pages 39 and 43.

Link to original post

 

DELAWARE CHANCERY COURT DECISIONS

Chancery Provides Refreshing Section 220 Guidance

The Delaware Court of Chancery rendered a decision in November 2020 that belongs in the pantheon of noteworthy Court opinions addressing the nuances, first principles and practical challenges regarding Section 220 of the Delaware General Corporation Law. There are many decisions on this topic addressing the right of stockholders to demand inspection of corporate records, but few are as “blogworthy” as this decision in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0173-KSJM (Del. Ch. Nov. 24, 2020). Compare another pantheon-worthy Chancery decision earlier this year in AmerisourceBergen. See Lebanon Cnty. Emps. Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752 (Del. Ch. Jan. 13, 2020), which was affirmed by the Delaware Supreme Court.

Weighing in at 69-pages, this opinion’s length is indicative of the complexities of Section 220 that are belied by the apparent simplicity of the statute. Our favorite part of this decision is the acknowledgement that when pursuing the statutory rights that Section 220 appears to allow, one can easily be stymied by the gamesmanship of companies who can play a war of attrition, usually with impunity, in light of the asymmetrical economics involved. See Slip op. at 3-5 and footnote 6 (citing an article addressing the obstacles to pursuing Section 220 rights: James D. Cox, et al., The Paradox of Delaware’sTools at Hand Doctrine: An Empirical Investigation,” 75 Bus. Law. 2123, 2150 (2020)).

Similar observations about the practical hindrances, economic and otherwise, to utilizing Section 220 have often been the topic of blog posts over the last 15 years. See, e.g., recent blog post explaining that Section 220 cases are not for the fainthearted.

This Gilead case provides guidance on an important topic that warrants a very lengthy analysis. We provide highlights via bullet points, and then interested readers can click on the above link and read all 69-pages.

The bullet points that we find to have the most widespread applicability and importance are the following:

• The Court criticizes the trend in which companies often inappropriately litigate the underlying merits of a potential, future plenary suit as opposed to addressing whether the prerequisites have been met for a Section 220 demand, as well as the tendency of companies to otherwise prevent stockholders from using Section 220 as a “quick and easy pre-filing discovery tool.” Slip op. at 3-4.

• The Court provides many quotable explanations of the “credible basis” standard that must be satisfied in order to rely on the proper purpose of investigating suspected wrongdoing. The Court emphasizes that this “lowest possible burden of proof” does not require a stockholder to prove that any wrongdoing actually occurred; nor does it require a stockholder to show by a preponderance of the evidence that wrongdoing is even probable. Slip op. at 23, footnotes 103 and 104.

• Rather, the Court instructed that the recognized proper purpose for using Section 220 to investigate suspected wrongdoing is satisfied when there is a credible basis to suspect merely the “possibility” of wrongdoing. Id. at 24, n.106.

• The Court addresses the common tactic used by companies challenging a proper purpose when they assert that the “stated proper purpose is not the actual proper purpose for the demand.” This opinion teaches that in order to succeed in such a defense, the company must prove that the “plaintiff pursued its claim under false pretenses. Such a showing is fact intensive and difficult to establish.” See footnote 153 and accompanying text.

• The Court made quick work of dispensing with the issue of standing in Section 220 cases. The Court reasoned that the standing argument in this case was in reality a Potemkin Village (our words) for the company’s challenge to the viability of derivative claims that the plaintiffs might pursue in the future. Although the Court discussed standing under Section 220 in general, it also underscored that a Section 220 proceeding does not warrant a trial on the merits of underlying claims. Slip op. at 41–42.

• The Court instructed that generally Section 220 plaintiffs need not specify the “end-uses” of the data requested for their investigation. Slip op. at 49.

• The Court also provided helpful practical tips about the scope of production required once the preliminary prerequisites of Section 220 have been satisfied. The Court noted that in some instances the company will be required to provide more than simply formal board materials. See Slip op. at 51-54.

• The opinion acknowledged that in some instances after limited discovery in a Section 220 action, plaintiffs can refine their requests with greater precision and that in some cases the Court has asked the plaintiffs to streamline their requests. See Slip op. at 63.

• In response to the Court being vexed by the overly aggressive tactics of the company, the Court invited the plaintiff to “seek leave to move for fee shifting.” As one example of the Court’s observation that the company was taking positions for no apparent purpose other than obstructing the exercise of the statutory rights of the plaintiff, the Court noted that the company refused to produce even a single document before litigation commenced.

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Must-Read Chancery Decision for Buyers of Businesses Whose Value Depends on Retaining Customer Relationships

The Delaware Court of Chancery in August 2020 addressed the issue of whether a seller was liable for not disclosing the notification it received prior to closing that one or more key customers were terminating their relationship with the seller’s business. Swipe Acquisition Corporation v. Krauss, C.A. No. 2019-0509-PAF (Del. Ch. Aug. 25, 2020). The Court’s decision and other decisions cited below must be read by anyone who seeks a deep understanding of Delaware law on this topic.

Key Issue Addressed:

When will a fraud claim survive in connection with a purchase agreement that restricts claims for misrepresentations and limits claims for indemnification? In this case, most of the motion to dismiss was denied, but one of the reasons this decision is noteworthy is because it exposes the lack of a bright-line-rule on this issue when compared to other decisions addressing the same or similar issues–depending on the specific terms of the anti-reliance clause involved and the specific claims of fraudulent misrepresentations or omissions.

As an indication of how common this issue is, a few days before this ruling the Court of Chancery issued another decision that addressed the issue: Pilot Air Freight, LLC v. Manna Freight Systems, Inc., No. 2019-0992-VCS (Del. Ch. Sept. 18, 2020).

Key Facts of Swipe case:

This case involves a dispute over the lack of disclosure by the seller prior to closing when the seller learned that a key customer was claiming to terminate its business relationship even though the sales price was impacted by the existence of key customers. The sellers knew that if the buyers learned of the termination by the key customer involved that the deal might not close. See Slip op. at 8. Nonetheless, the sellers did not inform the buyers of the termination of the key customer at issue. Moreover, the sellers did not amend any of the financial information provided to the buyers, which had then become stale. Id. at 9. Based on weaker-than-expected performance before the closing, the buyers and the sellers did agree to reduce the purchase price even though the loss of the key customer was not disclosed.

Key Principles of Law with Widespread Applicability:

  • The Court cited to multiple cases to explain when an anti-reliance clause will not bar a fraud claim. See Slip op. at 28-29.
  • The Court also elucidates when a fraud claim and a contract claim will not be considered duplicative; when both can proceed at the preliminary stage of a case; and when a contract claim and a fraud claim will not be considered boot-strapped. See id. at 31-33.
  • The Court explained why duplicative claims may often survive at the motion to dismiss stage. See footnote 61 and accompanying text.
  • The Court explained the primacy of contract law in Delaware, and when parallel contract claims and breach of fiduciary duty claims may not proceed in tandem. See footnote 58 and accompanying text.

In addition to the cases cited above on the topic at hand, this decision should be compared with the Delaware Superior Court’s Infomedia decision that was issued just a few short weeks before this Chancery ruling. Of course, the exact terms of the applicable agreements and the detailed circumstances are often determinative, but in the unrelated Delaware Superior Court decision about a month earlier, the Court concluded that the failure to inform the sellers shortly before the execution of an asset purchase agreement that key customers intended to terminate their service contracts, even though written notice had not yet been received, would not be a sufficient basis for fraudulent misrepresentation claims due to anti-reliance provisions in an asset purchase agreement, thereby resulting in a grant of the motion to dismiss, based on the terms of the agreement involved in that case. See Infomedia Group Inc. v. Orange Health Solutions, Inc. (Del. Super. July 31, 2020).

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Chancery Determines Standard Applicable to Contested Transaction

The recent Delaware Court of Chancery decision in Salladay v. Lev, No. 2019-0048-SG (Del. Ch. Feb. 27, 2020), addressed the standards the Court may apply to review the conduct of directors in a contested transaction, and determined that the entire fairness standard applied, based on the facts of this case, resulting in a denial of a motion to dismiss.

Key Points:

This decision provides the latest iteration of Delaware law regarding the analyses the Court employs to review a challenged transaction to determine whether fiduciary duties were fulfilled.

In this case, the Court determined that the business judgment rule did not apply. The Court provides a practical, educational elucidation of why the efforts to “cleanse” the transaction did not revive the business judgment rule, in light of the failure to satisfy the prerequisites discussed in Corwin v. KKR Holdings, LLC, 125 A.3d 304 (Del. 2015); Kahn v. M & F Worldwide (MFW), 88 A.3d 635 (Del. 2014); and In re Trados, Inc. Shareholders Litigation (Trados II) 73 A.3d 17 (Del. Ch. 2013).

The Court also discusses the recent Delaware Supreme Court cases which clarified “where or when the line is drawn” for the “cleansing” criteria to be considered as being imposed “ab initio,” such that a deal will earn the deferential BJR review standard, in Flood v. Synutra International, Inc., 195 A.3d 754 (Del. 2018), as well as Olenik v. Lodzinski, 208 A.3d 704 (Del. 2019).

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Chancery Explains Proper Methods to Expand Board Size and to Fill Board Vacancies

A recent Delaware Court of Chancery decision provides a primer on the proper way to expand the size of a board of directors and the proper way to fill board vacancies, as well as explaining the difference between a de facto and a de jure director. See Stream TV Networks, Inc. v. SeeCubic, Inc., C.A. No. 2020-0310-JTL (Del. Ch. Dec. 8, 2020).

This opinion should be at the fingertips of every corporate litigator who is called upon to address whether:

(1) the size of a board of directors was properly expanded;

(2) director vacancies were properly filled; or

(3) whether the actions of a de facto board member were binding even if because of technical mistakes that director was not properly appointed such that she would qualify as a de jure director.

Many additional consequential statements of Delaware law with widespread utility are included in this consequential 52-page decision.

Highlights:

       The Court describes the well-known prerequisites for obtaining a preliminary objection. See page 16.

       The Court provides a tutorial, with copious citations to statutory and caselaw authority, to explain: (i) how to expand the size of the board of directors; (ii) who has the authority to expand the size of the board; (iii) how to fill vacancies on the board; and (iv) who is authorized to fill vacant board seats. See pages 17 to 20.

       This opinion features a maxim of equity that would be useful to have available when the situation calls for it: equity regards as done what ought to have been done. See page 20.

       The Court explained that only the charter or the bylaws can impose director qualifications, and in any event those qualifications must be reasonable. See page 21.

       The Court explained that a director could not agree to conditions of service as a board member that would be contrary to the exercise of the fiduciary duties of a director. See page 22.

       An always useful reminder of the three tiers of review of director decision-making are provided. Those three tiers are: (i) the business judgment rule; (ii) enhanced scrutiny; and (iii) entire fairness. See pages 50 to 51.

       In addition to explaining when those three tiers apply, the opinion also regales us with a classic recitation of the business judgment rule as the default standard:

” . . . the default standard of review is the business judgment rule, which presumes that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.” See page 50.

      This decision teaches that unless one of the rule’s elements is rebutted, the Court merely looks to see whether the business decision made was rational in the sense of being one logical approach to advancing the corporation’s objective.

       The Court explains the difference between a de facto director and a de jure director, and which actions of a de facto director are binding.  See pages 23 to 25.

       Another extremely important aspect of this decision (which takes up the majority of the 50-plus pages) is a deep dive into the historical foundations of Section 271 of the Delaware General Corporation Law which applies generally to the sale of most or all of the assets of a corporation, and which would typically require stockholder approval. See page 27 through 48.

       The Court supports with detailed reasoning and extensive footnote support its conclusion that Section 271 does not apply to an insolvent corporation that transfers assets to a secured creditor. Compare DGCL Section 272 (allows directors to mortgage corporate assets).

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Delaware Court of Chancery Provides Rule 11 Insights

There are relatively few Chancery decisions on Rule 11 compared with more common corporate and commercial litigation issues that are the subject of Chancery opinions, and an October 2020 letter decision provides insights into why there are not more rulings on Rule 11. In POSCO Energy Co., Ltd. v. FuelCell Energy, Inc., Civil Action No. 2020-0713-MTZ (Del. Ch. Oct. 22, 2020), in which a motion for leave to amend under Rule 15 was granted without awarding fees, while distinguishing both the Lillis and Franklin Balance cases, the Court explained that Rule 11 should not be casually raised, but that in any event a requirement for invoking it is to provide separate written notice and an opportunity to cure, as opposed to including it as part of a motion addressing other issues as well.

The Court explained that:

FuelCell has invoked Court of Chancery Rule 11 casually and repeatedly in this matter.21 The Court may only determine if Rule 11(b) was violated “after notice and a reasonable opportunity to respond,” and a litigant may only initiate those proceedings by “[a] motion for sanctions . . . made separately from other motions or requests.”22  Under that plain language, if FuelCell seeks sanctions for conduct it believes violates Rule 11, it must do so in an independent motion, not in argument opposing unconditional leave to amend. And, in my view, it is distracting, detrimental to the famed collegiality of the Delaware bar, and counterproductive to the “just, speedy and inexpensive determination” of judicial proceedings to summon Rule 11 in rhetoric.23

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Chancery Declines to Order Reserve for Fraud Claims Against Dissolving Corporation Under DGCL Section 280

There remains a relative paucity of opinions addressing the nuances of the dissolution statute under DGCL Section 280, compared to the Delaware decisions addressing other sections of the DGCL, so we refer to a September 2020 Court of Chancery decision that denies a Motion for Reargument under Rule 59(f) of a ruling that rejected a request to set aside a reserve for a fraud claim–even though the letter ruling was barely three-pages long–in the matter styled In re Swisher Hygiene, Inc., 2018-0080-SG (Del. Ch. Sept. 4, 2020). The prior decision was highlighted here.

The Court explained that the allegations did not state a “creditor claim”, though the ruling expressly did not prejudice the right to “bring litigation to determine” the fraud claim, which related to disputed ownership of stock in the company being dissolved.

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Chancery Enforces Forum Selection Clause in Charter for Inspection Demand

One of our selected Court of Chancery decisions is almost as noteworthy for what it did not decide as for what was decided. In JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020), Delaware’s Court of equity enforced an exclusive forum selection clause in a company charter, based at least in part on the internal affairs doctrine, to prevent a stockholder in a Delaware corporation from filing suit in California in reliance on a California statute to demand the inspection of corporate records, notwithstanding a California statute that appears to allow a stockholder to sue in California for corporate records if the Delaware company has its principal place of business in California.

What the Court did not decide is whether a stockholder may contractually waive her rights under DGCL section 220. Count this writer as a skeptic on that point. The Court reviewed several overlapping agreements, such as a stock option exercise agreement, that the stockholder signed and that purported, at least in the company’s view, to waive inspection rights under DGCL section 220. Some of the agreements were governed by Delaware law and some by California law.

This decision could be the topic of a law review article due to the many core principles of corporate law and doctrinal underpinnings the Court carefully analyzes. But, we only provide a few bullet points with an exhortation that the whole opinion be reviewed closely.

  • The Court provides an in-depth discussion of the foundational concepts that undergird the internal affairs doctrine as it applies to the request for corporate records, as well as related constitutional issues that arise.
  • But footnote 7 acknowledges contrary authority that suggests that a local jurisdiction may apply its law to a demand by a local resident for corporate records of a foreign corporation.
  • The Court compares DGCL section 220 with its counterpart in the California statutory regime.
  • The exclusive forum selection clause in the charter was addressed, and the Court explained that but for this provision, the California court would be able to apply DGCL section 220.
  • Importantly, the Court emphasized that is was not deciding whether a waiver of DGCL section 220 rights would be enforceable. Although at footnote 14 the Court provides citations to many Delaware cases that sowed doubt about the viability of that position–but then the Court also cited cases at footnote 15 that more generally recognized the ability to waive even constitutional rights.
  • Footnote 16 cites to many scholarly articles, and muses about the public policy aspects of the unilateral adoption of provisions in constitutive documents, such as forum selection clauses in Bylaws. Early in the opinion, at footnote 7, by comparison the Court waxes philosophical about the concept of the corporation as a nexus of contracts–as compared to it being viewed as a creature of the state. The latter view has implications about the exercise of one state’s power in relation to other states, especially when private ordering may be seen as private parties exercising state power by proxy.

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Chancery Clarifies Nuances of Section 220 Stockholder Demand for Inspection Rights

A July 2020 Delaware Court of Chancery opinion provides insights into nuances of DGCL Section 220 as it relates to the rights of stockholders to inspect corporate books and records, and deserves to be in included in the pantheon of Delaware decisions on this topic. It must be read by anyone seeking a complete understanding of Delaware law on Section 220. In Woods v. Sahara Enterprises, Inc., C.A. No. 2020-0153-JTL (Del. Ch. July 22, 2020), the Court provided warmly welcomed clarity about important nuances of DGCL Section 220 with eminently quotable passages for practitioners who need to brief these issues. See generally overview of takeaways from 15 years of highlighting Section 220 cases, and compare a recent Delaware Supreme Court decision about contract-based rights to inspect corporate books and records.

This short overview will only provide several of those worthy passages in the format of bullet points.

Among the more noteworthy aspects of this notable decision are the following.

  • A consequential aspect of this jewel of a decision is the instruction by the Court that there is no basis in Delaware law to require a stockholder demanding corporate records under Section 220 to explain why the stockholder wants to value her interest in the company–in order to satisfy the recognized proper purpose of valuation. See Slip op. at 11; and 14-15.
  • The Court provided an extremely helpful list of many recognized “proper purposes” needed to be shown to satisfy Section 220. See Slip op. at 8-9.
  • The Court also recited several examples of what showing is recognized as sufficient to satisfy the “credible basis requirement” to investigate mismanagement pursuant to Section 220. See Slip op. 18-19.
  • An always useful recitation of the basic elements of the fiduciary duty of directors of a Delaware corporation and the subsidiary components of the duty of loyalty and care, are also featured. See Slip op. at 20.
  • The Court categorized the specific requests for documents in this case as follows: (i) formal board materials; (ii) informal board materials; and (iii) officer-level materials. Then the Court expounds on the different focus applicable to each category.
  • Notably, after quoting the actual document requests, the Court found that some of them were overly broad–but the Court edited and narrowed some of the requests before concluding that the company was required to produce the Court-narrowed scope of documents.

Bonus supplement: Prof. Bainbridge, a nationally prominent corporate law scholar, provides learned commentary on this case and Section 220 jurisprudence generally. Readers should recognize the good professor as the prolific author who scholarship has been cited in Delaware Court opinions.

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*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

**Chauna A. Abner is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

The following article is reprinted with permission from the Jan. 15, 2020 edition of “The Delaware Business Court Insider”, (c) 2020 ALM Media Properties, LLC. All rights reserved.

By: Francis G.X. Pileggi and Chauna A. Abner

This is the 15th year that Francis Pileggi and various co-authors have created an annual list of important corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. This list does not attempt to include all important decisions of those two courts that were rendered in 2019. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available at this hyperlink.

This list focuses, with some exceptions, on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications. Links are also provided below to the actual court decisions and longer summaries.

DELAWARE SUPREME COURT DECISIONS

Company Required to Produce Emails Among Management to Stockholders

The Delaware Supreme Court recently issued an opinion that clarifies the duty of a company to produce emails among its management in a Section 220 case. In KT4 Partners LLC v. Palantir Technologies, Inc., Del. Supr., No. 281, 2018 (Jan. 29, 2019), Delaware’s high court addressed a demand under Delaware General Corporation Law (DGCL) Section 220 by a stockholder for corporate books and records, including emails and electronically-stored information (ESI) among management, to allow the stockholder to investigate possible wrongdoing, such as the reasons behind amendments to an Investors’ Rights Agreement that severely reduced the original rights granted under that agreement. This opinion quoted from a law review article co-authored by Francis Pileggi on the intersection of DGCL Section 220 and ESI.

https://www.delawarelitigation.com/2019/01/articles/delaware-supreme-court-updates/company-required-to-produce-emails-among-management-to-stockholders/

Supreme Court Explains the Implied Covenant of Good Faith and Fair Dealing

A recent Delaware Supreme Court decision is must-reading for those who need to know the latest iteration of Delaware law on the implied covenant of good faith and fair dealing. In Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, Del. Supr. No. 536, 2018 (Jan. 17, 2019), Delaware’s High Court provided the latest articulation of Delaware law on the multi-faceted doctrine of the implied covenant of good faith and fairing dealing. In connection with affirming in part and reversing in part a 176-page trial court opinion, which was highlighted on these pages, the Supreme Court agreed with the analysis of the trial court’s correct reading of the plain meaning of the LLC agreement at issue, but disagreed with the application by the trial court of the implied covenant.

 https://www.delawarelitigation.com/2019/01/articles/delaware-supreme-court-updates/supreme-court-explains-the-implied-covenant-of-good-faith-and-fair-dealing/

Delaware Supreme Court Clarifies Ab Initio Requirement for BJR Review

The Delaware Supreme Court recently clarified the “ab initio” requirement announced in Kahn v. M&F Worldwide Corp. case as part of the set of standards that would allow for the BJR standard to apply to a challenged merger. See Olenik v. Lodzinski, No. 392, 2018 (Del. Supr., rev. April 11, 2019).  The High Court determined that the requirement was not satisfied based on the facts of the instant case because the “economic bargaining took place prior to the date” when the protections announced in the Kahn v. M&F Worldwide Corp. case needed to be in place.

Much commentary has already been written about this case, so a lengthy summary is not provided here, but I refer to prior decisions that have applied the ab initio requirement, for background purposes, as noted on these pages.

 https://www.delawarelitigation.com/2019/04/articles/delaware-supreme-court-updates/delaware-supreme-court-clarifies-ab-initio-requirement-for-bjr-review/

Delaware Supreme Court Clarifies Appraisal Law

The Delaware Supreme Court, in a per curiam decision, recently determined that “deal price less synergies” was the appropriate determination of fair value in the appraisal action before it.  In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Apr. 16, 2019), the Court reversed the Court of Chancery’s holding that “unaffected market price” was the fair value on the date of the merger. This case is the third in a recent trilogy of precedent-setting Delaware appraisal cases, preceded by DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017).  This case has been the subject of extensive commentary by scholars and practitioners.

https://www.delawarelitigation.com/2019/04/articles/delaware-supreme-court-updates/delaware-supreme-court-clarifies-appraisal-law/

Delaware Supreme Court Addresses Independence of Directors

In Marchand v. Barnhil, CA. No. 2017-0586-JRS (Del. Ch. June 18, 2019), the Delaware Supreme Court addressed the meaning of the words “independence” and “disinterestedness” in the context of adequately pleading pre-suit demand futility as a prerequisite for pursuing a derivative claim against corporate directors. The court reversed the Court of Chancery’s dismissal of the case for failure to establish demand futility. This issue is one of the most nuanced and challenging in Delaware corporate litigation as indicated by the disagreement on the outcome among the experienced jurists deciding this case.

https://www.delawarelitigation.com/2019/06/articles/delaware-supreme-court-updates/delaware-supreme-court-addresses-independence-of-directors/

Delaware Supreme Court Instructs on Standards of Deposition Conduct

A recent Delaware Supreme Court opinion provides a tutorial on the standards imposed on Delaware lawyers when a deponent, who is the lawyer’s client, engages in inappropriate conduct during a deposition. In Shorenstein Hays-Nederland Theaters LLC Appeals, Nos. 596, 2018 and 620-2018 (Del. June 20, 2019), Delaware’s High Court issued its first decision on this specific issue, as compared to the rather abundant guidance that has existed for many years regarding the consequences when lawyers themselves engage in errant conduct during a deposition.

https://www.delawarelitigation.com/2019/09/articles/delaware-supreme-court-updates/delaware-supreme-court-instructs-on-standards-of-deposition-conduct/

Confidentiality Agreement Not Always Required for Section 220 Demands

For the first time, the Delaware Supreme Court decided that in a lawsuit in which a stockholder demands corporate books and records pursuant to Section 220 of the Delaware General Corporation Law, although it is typical to condition the production of records on entering into a confidentiality agreement, that the statute does not strictly require such a condition for production. The court also explained in Tiger v. Boast Apparel, Inc., No. 23, 2019 (Del. Aug. 7, 2019), that a party need not show exigent circumstances for a court to grant something less than indefinite confidentiality, and the inspection of records pursuant to Section 220 is not subject to a presumption of confidentiality.

https://www.delawarelitigation.com/2019/08/articles/delaware-supreme-court-updates/confidentiality-agreement-not-always-required-for-section-220-demands/

COURT OF CHANCERY DECISIONS

Chancery Clarifies Director’s Right to Corporate Records

A recent Delaware Court of Chancery decision addressed the important issue of the right of directors to be given access to corporate records. In Schnatter v. Papa John’s International, Inc., C.A. No. 2018-0542-AGB (Del. Ch. Jan. 15, 2019), Delaware’s court of equity considered a claim under Section 220(d) of the Delaware General Corporation Law (DGCL) by the founder and largest stockholder of the Papa John’s pizza chain who was forced out as the CEO but retained his position as a director.  He sought to obtain books and records in his capacity as a director to support an investigation that the other directors breached their fiduciary duties by improperly ousting him for unjustified reasons.

https://www.delawarelitigation.com/2019/01/articles/chancery-court-updates/chancery-clarifies-directors-right-to-corporate-records/

Chancery Finds Usurpation of Corporate Opportunity

Delaware case law is well-established regarding the aspect of the fiduciary duty of loyalty that prohibits a corporate director from usurping a corporate opportunity. A recent decision from the Delaware Court of Chancery applies that well-settled prohibition in a flexible manner to a set of facts that have apparently not been squarely addressed in prior precedent.  In Personal Touch Holding Corp. v. Glaubach, C.A. No. 11199-CB (Del. Ch. Feb. 25, 2019), the court awarded damages for the breach of this subset of fiduciary duty, as well as for other breaches of fiduciary duty.

https://www.delawarelitigation.com/2019/03/articles/chancery-court-updates/chancery-finds-usurpation-of-corporate-opportunity/

Chancery Applies Corporate Advancement Case Law to LLC Context

A recent Delaware Court of Chancery decision interpreted the advancement provisions of an LLC Agreement by applying case law interpreting DGCL Section 145 in the corporate context.  In Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. Apr. 30, 2019), the court reviewed the applicability of “defined phrases” that are familiar prerequisites for advancement in the corporate context pursuant to DGCL Section 145, and analyzed that same language that was used in an LLC agreement provision granting advancement.

https://www.delawarelitigation.com/2019/05/articles/chancery-court-updates/chancery-applies-corporate-advancement-case-law-to-llc-context/

Chancery Instructs on DGCL Merger Requirements

A recent Delaware Court of Chancery opinion began by describing the complaint as reading like a law school exam designed to test the knowledge of a student regarding the requirements in the DGCL that must be satisfied in connection with a merger, and the court commented that the company would not have done well on the exam.

In Mehta v. Mobile Posse, Inc., C.A. No. 2018-0355-KSJM (Del. Ch. May 8, 2019), the court identified the six primary issues in this case as follows:

(1) Whether DGCL Section 262 was not complied with in connection with the failure to notify stockholders of their appraisal rights within the required timeframe;

(2) Whether DGCL Section 228 was not complied with due to the failure to send prompt notice of the written stockholder consents;

(3) Whether the merger agreement, or documents it incorporates, failed to comply with DGCL Section 251 by not including the amount of cash the preferred stockholders would receive for their shares;

(4) Whether the stockholder consents did not enjoy the ratifying effect under DGCL Section 144;

(5)  Whether the director defendants breached their fiduciary duty of disclosure; and

(6) Whether the director defendants breached the fiduciary duty of loyalty because the merger was a self-dealing transaction and not entirely fair.  With one small exception, the court found that the statutory violations were sufficiently established at the early procedural stage of a motion for judgment on the pleadings.

https://www.delawarelitigation.com/2019/05/articles/chancery-court-updates/chancery-instructs-on-dgcl-merger-requirements/

Chancery Grants Advancement on Counterclaims

A recent decision of the Delaware Court of Chancery clarifies those instances where a defensive counterclaim against a former officer and director may be covered by advancement rights. In a bench ruling in Dodelson v. AC Hold Co., Inc., C.A. No. 2019-009-SG (Transcript) (Del. Ch. May 21, 2019), the court interpreted the charter provision that included within the coverage for “indemnified parties” both former directors and officers. Notably, bench rulings may be cited as authority in briefs before the Delaware Court of Chancery.

https://www.delawarelitigation.com/2019/06/articles/chancery-court-updates/chancery-grants-advancement-on-counterclaims/

Chancery Orders Mandatory Indemnification per DGCL Section 145(c)

The recent Delaware Court of Chancery decision in Brown v. Rite Aid Corporation, C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019), clarified the perennial issue of how the word “success” is defined for purposes of mandatory indemnification under Section 145(c) of the Delaware General Corporation Law–even if all of the arguments in the underlying litigation were not successful.

https://www.delawarelitigation.com/2019/06/articles/chancery-court-updates/chancery-orders-mandatory-indemnification-per-dgcl-section-145c/

Chancery Determines Valid LLC Managers; Rejects Bump-Out Theory of Board Replacements

The Delaware Court of Chancery left no doubt in a recent ruling that the “bump-out theory” of replacing LLC managers is not recognized in Delaware. In Llamas v. Titus, C.A. No. 2018-0516-JTL (Del. Ch. June 18, 2019), the court explained that incumbent managers need to be removed before their replacements can validly “take their seats.” The court interpreted the counterpart to DGCL Section 225, which is Section 18-110(a) of the Delaware LLC Act.

https://www.delawarelitigation.com/2019/07/articles/chancery-court-updates/chancery-determines-valid-llc-managers-rejects-bump-out-theory-of-board-replacements/

Advancement Granted for Post-Termination Use of Confidential Information

A recent Delaware Court of Chancery opinion in Ephrat v. medCPU, Inc., C.A. No. 2018-0052-MTZ (Del. Ch. June 26, 2019), will remain a noteworthy decision for two reasons: (1) It provides and anthology of prior Delaware decisions granting advancement to former directors or officers that defend claims regarding the use of confidential information acquired in a prior corporate capacity; and (2) It adds nuance to the existing abundant case law interpreting the threshold phrase “by reason of the fact,” which is one of the statutory prerequisites that must be satisfied for advancement claims to prevail pursuant to DGCL Section 145.

https://www.delawarelitigation.com/2019/07/articles/chancery-court-updates/advancement-granted-for-post-termination-use-of-confidential-information/

Chancery Addresses Personal Jurisdiction Over Co-Conspirator

In Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019), the court provided a noteworthy explanation of the important nuances that need to be understood when personal jurisdiction is contested, and this opinion provides an excellent analysis of the requirements for opposing personal jurisdiction based on the Delaware Long Arm Statute.

https://www.delawarelitigation.com/2019/08/articles/chancery-court-updates/chancery-addresses-personal-jurisdiction-over-co-conspirator/

Fully-Executed Contract Ruled Unenforceable

In Kotler v. Shipman Associates, LLC, C.A. No. 2017-0457-JRS (Del. Ch. Aug. 21, 2019), the Delaware Court of Chancery issued an opinion that should be read by all lawyers who seek to avoid the risk of a fully-executed contract being ruled unenforceable due to a court later finding, perhaps surprisingly, that the agreement did not accurately express the understanding of the parties.

https://www.delawarelitigation.com/2019/08/articles/chancery-court-updates/fully-executed-contract-ruled-unenforceable/

Chancery Explains Step-Transaction Doctrine and Defines “Affiliate”

An important concept known as the step-transaction doctrine, which treats the agreements in a series of formally separate but related transactions involving the transfer of property as a single transaction if all the steps are substantially linked, was explained in the recent Delaware Court of Chancery opinion in PWP Xerion Holdings III LLC v. Redleaf Resources, Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019) and should be consulted by anyone who needs to understand the components of this important doctrine.

https://www.delawarelitigation.com/2019/10/articles/chancery-court-updates/chancery-explains-step-transaction-doctrine-and-defines-affiliate/

Delaware Forum Selection Clause Controls Over Foreign Exclusive Jurisdiction Statute

The recent Delaware Court of Chancery decision in AlixPartners, LP v. Mori, No. 2019-0392-KSJM (Del. Ch. Nov. 26, 2019) rejected an effort to dismiss a Delaware action notwithstanding the provision in an agreement that provided for a forum in a foreign country, and the apparent law of that foreign country that also supported exclusive jurisdiction in that country.

https://www.delawarelitigation.com/2019/12/articles/chancery-court-updates/delaware-forum-selection-clause-controls-over-foreign-exclusive-jurisdiction-statute/

The Delaware Court of Chancery recently had occasion to describe the important norms that lawyers are expected to follow, and the minimum standards of attorney conduct imposed on both Delaware and non-Delaware counsel who enter their appearance in a matter before the Court. See Lendus, LLC v. Goede, C.A. 2018-0233-SG (Del. Ch. Dec. 10, 2018).

This case is noteworthy for a few reasons. In addition to the recitation of basic principles on which the practice of law is based, the decision provides citations to authority and quotable excerpts for use in a brief when issues of attorney conduct arise. The behavior involved in this case was egregious, and it serves as a reminder of the outer limits of conduct that will not be tolerated, for example during depositions and during other interactions among counsel and clients.

This case also serves as a reminder that in Delaware the trial courts do not view themselves–in the first instance–as enforcers of all the rules of professional conduct for lawyers–unless a violation interferes with the administration of justice in the litigation–though they may, as in this case, refer the matter to the Office of Disciplinary Counsel, which is an arm of the Delaware Supreme Court, or the analogous agency in other states when the conduct of an non-Delaware attorney is an issue.

The court begins the opinion by citing another case that exhorts attorneys to: “think twice, three times, four times, perhaps even more” before seeking sanctions against other attorneys for inappropriate conduct. Both parties in this case filed cross-motions for sanctions, but the court found only one of them to be warranted.

The court emphasizes in its introduction that it derives no pleasure in criticizing others because judges understand the “pressures and frustrations of practice.” The court also referred to members of the bench as not being above reproach, with the following phrase: “None of our own eyes being timber-free….” See page 2.

In sum, without dwelling on the embarrassing details, if an attorney’s conduct is truly egregious enough, this decision provides the authority and reasoning to address the problem, especially if that attorney is admitted pro hac vice.

Compare: Recent Chancery decision highlighted on these pages that explained why it was important for lawyers to follow the rules applicable to discovery, as well as abiding by related deadlines.

The Delaware Court of Chancery recently imposed penalties on a non-Delaware attorney for behavior during a deposition that was not in compliance with the applicable Delaware deposition standards. The letter decision in the matter styled In Re: Shawe & Elting LLC, C.A. No. 9661-CB (Del. Ch. Aug. 14, 2015), provides helpful guidance on the types of obstructionist conduct during a deposition that can be the subject of penalties imposed by the court.

Although such behavior during a deposition may be common in some fora, and in my experience is not often penalized even in Delaware, this ruling provides specific guidelines that can be used by those who have the time, money and inclination to seek enforcement of the rules against those who obstruct depositions or interfere with the questioning during a deposition by both subtle and not-so-subtle “cues” to the deponent, such as speaking objections, “questions to the defending attorney”, and the “nuclear option”–instructing the deponent not to answer a question.

Highlights of this useful ruling include the court’s reliance on the following rules:

  • Court of Chancery Rule 30(d)(1) only condones an instruction to a deponent not to answer a question in three instances: (i) to preserve a privilege; (ii) to enforce a limitation on evidence based on an existing direction by the court; or (iii) to present a motion under Rule 30 (d)(3)[e.g., to seek a protective order].
  • Rule 30(d)(2) provides that: “if the court finds … conduct that has frustrated the fair examination of the deponent, it may impose upon the persons responsible an appropriate sanction, including the reasonable costs and attorney’s fees incurred by any party as a result thereof.”

We have previously included on these pages materials that can be used by those who are interested in the standards applicable to depositions in Delaware cases–even when those depositions are taken outside of Delaware, or when they are taken or defended by non-Delaware attorneys, as in this matter, admitted pro hac vice. See, e.g., here and here. In corporate litigation, it remains common for out-of-state attorneys to be admitted pro hac vice and to take or defend depositions in Delaware cases, but when they do so, they are still bound by the Delaware rules.

The sad reality is that parties or their counsel often do not have the time, or the client’s authorization to spend the money needed to file a motion to compel or related motion to “play policeman” when an attorney interferes with the questioning at a deposition–especially when the obstructions are not as clear-cut as they were in the instant case.

This decision was issued on the day after the court’s 106-page decision addressing substantive matters and granting a request for dissolution in this “business divorce” dispute.

In my recent ethics column for The Bencher, I highlight a recent decision of the Delaware Court of Chancery in the Dole case that enforces standards of conduct for deposition practice. In addition to interpreting Court of Chancery Rule 37 as requiring the mandatory award of fees, the decision provides a helpful review of discovery standards in general that may be useful for corporate litigation and other litigation as well.

In Re Appraisal of Dole Food Company, Inc., C.A. No. 9079-VCL (Del. Ch. Dec. 9, 2014). This Court of Chancery decision is helpful for those engaged in corporate litigation, and any form of civil litigation in Delaware, to the extent that it confirms well-settled Delaware law of practice and procedure, that a lawyer cannot instruct a deponent not to answer a question during a deposition merely based on an argument that the question is either irrelevant or not likely to lead to the introduction of admissible evidence.

Under Court of Chancery Rule 37, that improper instruction required fee-shifting, which means that the attorney improperly instructing the witness not to answer is now responsible (or his client is), for the costs of the aborted deposition and the costs of preparing and filing the motion to compel.  The court made the distinction between the fee-shifting required in these circumstances under Rule 37 and a separate analysis that applies for costs imposed for bad faith litigation (or fee-shifting clauses in agreements).

The court read Rule 37(b) to require fee-shifting when a motion to compel is granted. See Slip op. at 33. See also June 2015 decision by the Delaware Supreme Court reading the rule in the same manner though that reading is not obvious or self-evident to some.

This opinion also includes an important analysis regarding what information must be produced in discovery for appraisal actions.  Specifically, the court ordered the production of valuation materials that the plaintiffs in this appraisal action compiled prior to the lawsuit being filed.  Also, the improper instruction not to answer a question during a deposition related to the same information that the deponent was required to testify about, after the plaintiff refused to produce it in reply to discovery requests.  See generally materials previously provided on these pages regarding proper deposition practice in Delaware.

Cartanza v. Cartanza, C.A. No. 7618-VCP (Del. Ch. April 16, 2013).

Issue Addressed:  Whether attorneys’ fees should be awarded due to defense counsel obstructing the efforts of opposing counsel to depose his client.

Short Answer: Yes.

Brief Overview

This letter ruling is a useful tool for the toolbox of any litigator.  In essence, defense counsel obstructed the efforts of the opposing counsel to depose his client.  For example, he explained without detail that certain vague medical conditions limited the availability of the defendant.  In addition, defense counsel purported to require that plaintiff provide specific reasons for the deposition, but the court found no basis in the rules or applicable case law for requiring a party to justify the request for taking the deposition of a party.

The court explained: “No particularized need standard” exists under Delaware law for a party to explain the need for a deposition, even when a deponent is suffering from a medical ailment.  Rather, a party has “a right to take a deposition regarding any matter which is relevant to the subject matter involved in the pending action.  The information sought need not be critical . . ..”  See footnote 20 (citing Court of Chancery Rule 26(b)(1)).  See also footnote 19 and related text.

Therefore, under Court of Chancery Rule 37(a)(4)(A), the court awarded attorneys’ fees.

Of course, in a situation like this, the nuances and the details of the specific factual situation are often determinative, and for that reason this short 12-page letter ruling should be read in its entirety before applying the highlights of the standards referenced.

These guidelines for collaboration between Delaware counsel and non-Delaware lawyers were prepared by Francis G.X. Pileggi and Kevin F. Brady. 

This is a compilation of selected key Delaware court decisions, rules, and customs to guide Delaware attorneys serving as “Delaware Counsel” (or “local counsel”), and out-of-state attorneys admitted to practice in Delaware pro hac vice, or non-Delaware lawyers who collaborate on Delaware litigation with Delaware counsel.

The Role of Delaware Counsel

The Delaware Court of Chancery does not recognize the limited role of “local counsel” to the extent that it implies a less than plenary role of Delaware counsel—even if non-Delaware counsel are overseeing the litigation or taking the “laboring oar.”[i]  The Court of Chancery emphasizes that a Delaware attorney of record is responsible for every action taken by his or her client—from the content of the pleadings to the fulfillment of discovery obligations. “[T]he Delaware lawyer who appears in an action always remains responsible to the Court for the case and its presentation,” without reference to who drafted the document at issue or was responsible for certain actions.[ii] See generally, Principles of Professionalism for Delaware Lawyers.

The Court of Chancery has published Guidelines to Help Lawyers Practicing in the Court of Chancery, which make clear that the concept of “local counsel” does not exist in Delaware as a role with less than full responsibility. [iii] Those Guidelines provide in part as follows:

1. Role of Delaware Counsel

a. The concept of “local counsel” whose role is limited to administrative or ministerial matters has no place in the Court of Chancery. The Delaware lawyers who appear in a case are responsible to the Court for the case and its presentation.

b. If a Delaware lawyer signs a pleading, submits a brief, or signs a discovery request or response, it is the Delaware lawyer who is taking the positions set forth therein and making the representations to the Court. It does not matter whether the paper was initially or substantially drafted by a firm serving as “Of Counsel.”

c. The members of the Court recognize that Delaware counsel and forwarding counsel frequently allocate responsibility for work and that, in some cases, the allocation will be heavily weighted to forwarding counsel. The members of the Court recognize that forwarding counsel may have primary responsibility for a matter from the client’s perspective. This does not alter the Delaware lawyer’s responsibility for the positions taken and the presentation of the case.

d. Non-Delaware counsel shall not directly make filings or initiate contact with the Court, absent extraordinary circumstances. Such contact must be conducted by Delaware counsel.

e. It is not acceptable for a Delaware lawyer to submit a letter from forwarding counsel under a cover letter saying, in substance, “Here is a letter from my forwarding counsel.”

Former Chancellor William Chandler summarized the duties of “Delaware Counsel” in a recent interview, where he explained that Delaware attorneys have a duty to review all filings to make certain that the arguments and positions are consistent with Delaware’s rules and laws.[iv] The former chancellor also spoke about the obligation of Delaware attorneys to inform out-of-state counsel about Delaware courts’ customs and traditions.

Attorneys Admitted Pro Hac Vice

The Delaware courts also strictly regulate the pro hac vice admission of out-of-state attorneys, and the rules require a Delaware attorney moving the admission of an out-of-state attorney to determine and certify to the admitting court that the lawyer to be admitted is reputable and competent.[v] Out-of-state counsel also must certify that they have reviewed Delaware’s Principles of Professionalism for Delaware Lawyers. Even after being admitted to practice in Delaware pro hac vice, an out-of-state attorney may not (1) sign pleadings; (2) file documents with the Court;[vi] (3) communicate directly with the Court; or (4) attend proceedings without Delaware counsel (including calls with the court, mediation and arbitration proceedings), without express permission by the Court.[vii] However, out-of-state counsel who are admitted pro hac vice may take or defend depositions in the pending action without the presence of their Delaware counsel.[viii]

The fee for pro hac vice admission is assessed on an annual basis, and varies by court. The District of Delaware, which recently announced its “Pro Hac Vice Enhancements,” now allows District of Delaware registered CM/ECF users to pay the $25 annual fee for attorneys admitted pro hac vice through the Court’s electronic filing system.[ix]

An out-of-state attorney’s pro hac vice status may be revoked upon a motion to the Court.[x] Inappropriate conduct by out-of-state attorneys will not be tolerated by the courts, and can lead to revocation of an attorney’s pro hac status and submission of specific matters to the bar of the attorney’s home state as well as Delaware’s Office of Disciplinary Counsel.[xi] Examples of inappropriate conduct are provided below.

Delaware’s pro hac vice rules apply with equal force to Delaware-barred attorneys who do not maintain an office in Delaware. Maintaining an office in Delaware is a prerequisite to serving as an attorney of record in Delaware pursuant to Sup. Ct. R. 12(a)(i); if a Delaware attorney retires, or practices in another state, and his firm does not maintain a bona fide Delaware office, then that attorney will need to be admitted pro hac vice before filing documents with or arguing before any Delaware court.

The Delaware Supreme Court’s Office of Disciplinary Counsel compiled materials and case excerpts relevant to the practice of law in Delaware for attorneys admitted pro hac vice.[xii] These materials provide guidance on issues frequently encountered by Delaware counsel when assisting out-of-state counsel, as well as guidance for counsel admitted pro hac vice, including:

  • Out-of-state counsel’s desire to impermissibly limit the scope of retention of Delaware Counsel;
  • Identifying the client: distinguishing the underlying client in the litigation from out-of-state counsel who directs Delaware counsel and pays the bills;
  • Special consideration required when both Delaware counsel and out-of-state counsel are associated with the same firm, including the proper form of signature blocks; and
  • Procedures for Delaware-barred attorneys who practice out of state and do not maintain a bona fide Delaware office.

As a supplement to the extensive materials provided by the Office of Disciplinary Counsel, the following cases provide distinct examples of attorney conduct that will not be tolerated by the Delaware courts and how the courts address such conduct:

  • Sample v. Morgan, 935 A.2d 1046 (Del. Ch. 2007) (holding that a non-Delaware lawyer and her law firm could be sued in Delaware for providing advice and services to a Delaware corporation, its directors, and its managers on matters of Delaware corporate law, including the preparation of a certificate of incorporation, which they provided to a service agent to be filed in Delaware) (Ex. 12 hereto).
  • Beck v. Atl. Coast PLC, 868 A.2d 840 (Del. Ch. 2005) (sanctioning and fining out-of-state counsel under Rule 11 and Rule 37 for filing a deceptive complaint, improperly certifying that the plaintiff was fit to serve as class representative, and intentionally withholding relevant non-privileged documents responsive to discovery requests) (Ex. 13 hereto).
  • Auriga Capital Corp. v. Gatz Props., LLC, 2012 Del. Ch. LEXIS 19 (Del. Ch. Jan. 27, 2012) (shifting fees where plaintiff and his counsel acted in bad faith by “splatter[ing] the record with a series of legally and factually implausible assertions,” allowing defendant to collect responsive documents without legal supervision, and failing to preserve relevant documents and information) (Ex. 14 hereto).
  • Griffin v. The Sigma Alpha Mu Fraternity, C.A. No. 09C-04-067 JAP (Del. Super. Mar. 15, 2012) (imposing a $500 fine against plaintiffs for allowing out-of-state counsel, who was not admitted pro hac vice in Delaware, to conduct a deposition in a Delaware case) (Ex. 15 hereto).
  • In re Asbestos Litig. Limited to Ronald Carlton, C.A. No. 10C-08-216 ABS (Del. Super. May 14, 2012) (warning Delaware counsel of possible sanctions and/or rejection of documents filed for failure to adhere to the requirement that all correspondence to the Court be submitted on Delaware counsel’s letterhead and signed by Delaware counsel) (Ex. 16 hereto).

Electronic Discovery Duties

Electronic data preservation, collection, and production are also governed by the Delaware courts. Both the District of Delaware and the Court of Chancery provide guidelines on preserving electronically stored information (ESI) on their websites.

The District of Delaware implemented both a Default Standard for Discovery, Including Discovery of Electronically Stored Information[xiii] and a Default Standard for Access to Source Code.[xiv] These standards require counsel for all parties to confer on several topics concerning the production of ESI to avoid costly litigation of discovery disputes.

The Court of Chancery has adopted Guidelines for Preservation of Electronically Stored Information that require counsel to develop and oversee a process to preserve all relevant ESI.[xv] This process should include, at a minimum, identifying all custodians of potentially relevant information, disseminating litigation hold notices to those custodians, and conferring with opposing counsel to discuss whether they will limit or forgo discovery of ESI.

—          —          —

These guiding Delaware principles are further refined by the individual courts, each having its own rules for the admission of out-of-state attorneys, and the requirements of Delaware counsel. In addition, Delaware charges fees on an annual basis to renew a pro hac vice motion to enable out-of-state counsel to maintain his or her pro hac vice status in a particular case.

Because electronically stored information has created unique and unusual situations for lawyers and their clients in terms of discovery and trial, this topic is currently under review by many courts in Delaware.

**The exhibits referred to in this column are available by contacting the authors.

—————————————————————————————

[i]           State Line Ventures, LLC v. RBS Citizens, N.A., 2009 Del. Ch. LEXIS 233, at * 1 (Del. Ch. Dec. 2, 2009)

[ii]            Id.

[iii]          Delaware Court of Chancery, Guidelines to Help Lawyers Practicing in the Court of Chancery (2012), http://courts.state.de.us/Chancery/docs/CompleteGuidelines.pdf

[iv]          Francis G.X. Pileggi and Kevin F. Brady, Interview with Chancellor William Chandler from the Delaware Court of Chancery, Delaware Corporate & Commercial Litigation Blog (June 17, 2011), https://delawarelitigation.com/2011/06/articles/commentary/interview-with-chancellor-william-chandler-from-the-delaware-court-of-chancery/

[v]              Delaware Supreme Court and Delaware State Bar Association, Principles of Professionalism for Delaware Lawyers, at ¶ C (Nov. 1. 2003), http://courts.delaware.gov/forms/download.aspx?id=39428

[vi]          The Court of Chancery issued an Order to clarify that only members of the Delaware Bar can be signed up with the LexisNexis eFiling system as eFilers and to receive eFiling notifications by email. See Delaware Court of Chancery, Standing Order (Aug. 5, 2008) http://courts.delaware.gov/chancery/docs/ ChanceryStandingOrder_Out-Of-StateAttorneys_080408.pdf

The Court of Chancery also issued a Notice informing Delaware lawyers that it is a violation of Rule 79.1 to share their eFiling passwords or add non-Delaware lawyers to the electronic service list. See Francis G.X. Pileggi, Chancery Clarifies and Admonishes: eFiling Passwords for Delaware Lawyers Only, Delaware Corporate & Commercial Litigation Blog (May 6, 2008), https://www.delawarelitigation.com/2008/05/articles/ commentary/chancery-clarifies-and-admonishes-efiling-passwords-for-delaware-lawyers-only/

[vii]         See Andrea L. Rocanelli, Pro Hac Vice: Ethical Challenges of Serving as Delaware Counsel, Office of Disciplinary Counsel of the Delaware Supreme Court (Jan. 25, 2008), https://www.delawarelitigation.com/int86.PDF (citing Forte Capital Partners, LLC v. Bennett, Del. Ch., C.A. No. 1495-N (2005) (rejecting pleadings, motions, and letters to the Court signed by out-of-state counsel; also rejecting the appearance before Court in a teleconference by an attorney admitted pro hac vice when Delaware counsel was not present for the conference)). See also https://www.delawarelitigation.com/2008/01/articles/ commentary/delaware-litigation-via-pro-hac-vice-admissions/ (suggesting that Delaware lawyers provide these materials to out-of-state lawyers when asked or retained to serve as local counsel).

[viii]         See Griffin v. Sigma Alpha Mu Fraternity, 2012 Del. Super. LEXIS 119 (Del. Super. Ct. Mar. 15, 2012) (holding that out-of-state counsel is not permitted to question a deposition witness in a Delaware action—even if “supervised” by Delaware counsel—“unless, and until, counsel is admitted pro hac vice.”)

[ix]          United States District Court for the District of Delaware, Pro Hac Vice Enhancements (July 13, 2012), http://www.ded.uscourts.gov/pro-hac-vice

[x]           See State ex rel. Secretary of the DOT v. Mumford, 731 A.2d 831 (Del. Super. Ct. 1999) (revoking the pro hac vice admission of out-of-state attorney who “demonstrated a lack of civility and professionalism by ‘coaching the witnesses’ during the depositions, by failing to control or attempt to control the objectionable conduct of his client, and by encouraging the [inappropriate] conduct of his client.”)

[xi]          Manning v. Vellardita, 2012 Del. Ch. LEXIS 59 (Del. Ch. Mar. 28, 2012) (holding that while out-of-state attorney’s failure to fully disclose law firm affiliation “fell short of the level of candor this Court expects of attorneys practicing in Delaware,” there was no basis to revoke attorney’s pro hac vice status; however, Court referred the matter to the bar association of attorney’s home state and the Delaware Office of Disciplinary Counsel).

[xii]         See supra note 7.

[xiii]         United States District Court for the District of Delaware, The Default Standard for Discovery, Including Discovery of Electronically Stored Information (Dec. 8, 2011), http://www.ded.uscourts.gov/sites/default/files/Chambers/ SLR/Misc/EDiscov.pdf

[xiv]          United States District Court for the District of Delaware, The Default Standard for Access to Source Code (Dec. 8, 2011), http://www.ded.uscourts.gov/sites/ default/files/Chambers/SLR/Misc/DefStdAccess.pdf

[xv]          See Delaware Court of Chancery, Guidelines for Preservation of Electronically Stored Information (Jan. 18, 2011), http://courts.delaware.gov/forms/download.aspx?id=50988. See also Francis G.X. Pileggi, Delaware Court of Chancery Issues Non-Binding Guidelines to Help Lawyers Navigate Their Cases Through the Court More Efficiently, Delaware Corporate & Commercial Litigation Blog (Jan. 15, 2012), https://delawarelitigation.com/2012/01/ articles/chancery-court-updates/delaware-court-of-chancery-issues-non-binding-guidelines-to-help-lawyers-navigate-their-cases-through-the-court-more-efficiently/.