Anyone interested in the most complete and recent explanation of the Garner exception to the attorney-client privilege needs to read the Delaware Court of Chancery’s ruling in Buttonwood Tree Value Partners, L.P. et al. v. R.L. Polk & Co., Inc., et al., C.A. No. 9250-VCG (Del. Ch. Jan. 10, 2018).

This letter ruling addresses a motion to compel production of communications that would otherwise be protected by the attorney-client privilege. In particular, the motion to compel was based on the Garner exception to the general rule that attorney-client privileged communications need not be produced during discovery.

Background:  The factual background involves derivative claims for breach of fiduciary duty in connection with a self-tender.  More detailed facts involving the underlying claims in this suit were highlighted in a synopsis of the prior Chancery decision in this matter on these pages.

Key Legal Principles:  The court recited the doctrinal underpinning and public policy reasons for Delaware Rule of Evidence 502(b) which codifies the attorney-client privilege, which stands in contrast to the bulk of the Rules of Evidence which are designed to provide for disclosure of relevant facts in a search for the truth.  Delaware recognizes the Garner “exception to the attorney-client privilege exception” to the general rule that relevant facts must be disclosed.

The Garner exception is based on the balancing of:  (i) the purpose of the attorney-client privilege that encourages open communication with counsel and client; with (ii)  the right of the stockholder to understand what advice was given to fiduciaries who are charged with breaching their duties.

There are nine factors that are generally considered in order for the court to determine whether to apply the Garner exception, but three in particular are given greater significance:  (1) The colorability of the claim; (2) The extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; (3) The apparent necessity or desirability of the shareholders having the information, and availability of it from other sources.  (citing Salberg v. Genworth Fin., Inc., 2017 WL 3499807 at *5 (Del. Ch. July 27, 2017)). The Salberg case, also a very useful and thorough explanation of the Garner exception, from last year, was highlighted on these pages.

The Delaware Supreme Court had described the Garner exception as “narrow, exacting, and intended to be very difficult to satisfy.” See Wal-Mart Stores, Inc., 95 A.3d at 1278 (that decision was previously highlighted on these pages).

The court in this decision determined that the first two factors were satisfied but they were only “gatekeeper criteria.” The third factor was not satisfied in this case based on the court’s finding that the same information could have been obtained through depositions.

The court also explained why the “crime-fraud exception” to the attorney-client privilege did not apply. See footnote 29. See Rule of Evidence 502(d)(1) for codification of the crime-fraud exception to the work-product doctrine.

The court also noted that the Garner factors overlap with the required showing under Rule 26(b)(3) pursuant to the work-product doctrine.

A recent Delaware Court of Chancery decision is essential reading for anyone who seeks to apply the exception to the attorney/client privilege known as the Garner exception. Salberg v. Genworth Financial, Inc., C.A. No. 2017-0018-JRS (Del. Ch. July 27, 2017). Garner is known to corporate litigation practitioners as an exception to the general prohibition on the production of privileged communications between attorney and client.

Key Principles

The Garner exception applies in certain circumstances where corporate fiduciaries who are defending claims brought against them by those to whom the fiduciary duty is owed, based on the application of a multitude of factors in which it is determined by the court that the documents otherwise withheld, should produce otherwise privileged documents.

The court in this opinion makes it clear that the application of the Garner exception is factually determinative, and even if all of the various factors apply, whether or not a fiduciary exception to the privilege will be recognized is within the discretion of the court.

The context of this case was a Section 220 demand made more complicated because it was preceded by a derivative action which was still pending at the time of this Section 220 case. During the pendency of the previously filed derivative action, a merger of Genworth was announced.  The Section 220 case sought records regarding the valuation of the pending derivative action as part of the decision to merge.

One of the factors that made it more challenging in this case for the application of the Garner exception, was the acknowledgement by the parties that they were seeking, at least arguably, in the Section 220 action, documents that they would not otherwise be entitled to obtain in the pending derivative action against the same company.

This opinion is must reading for anyone seeking to have a complete and nuanced understanding of the Garner fiduciary exception to the attorney/client privilege.  The court also discusses Delaware Rule of Evidence 502(b) in the context of the analysis, as well as the Delaware Supreme Court’s Section 220 decision in Wal-Mart Stores, Inc., in 2014, highlighted on these pages here, which endorsed the application of Garner, which had been applied for many years previously by the Court of Chancery.

In addition to the nine factors that the Garner case requires to be considered as informing the court about whether “good cause” exists, the Delaware courts have identified three of those as having particular significance. See footnotes 18 and 19.  Even though the Garner factors, including the three that the Delaware courts focus on, were arguably met, the biggest problem that the claimants faced in this case, and a key reason for the court’s decision, was that they were seeking to obtain in a Section 220 action what they otherwise would not be able to obtain through the previously filed and still pending derivative action.

The court emphasized that even if all of the Garner factors apply, they are not “talismanic” and that the court must use its discretion based on the unique circumstances of every case.  The court in this case was troubled that the documents sought would contain the mental impressions and assessments of the defendants and their counsel in the derivative action regarding the strengths and weaknesses of the derivative claims.  The company’s board would be understandably concerned that the production of those sensitive documents would give the plaintiffs an unfair advantage in the derivative action.  The general articulation of the Garner fiduciary exception recognizes that:

“Where the corporation is in suit against its stockholders on charges on acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public requires that the availability of the privilege be subject to the right of the stockholders to show “good cause” why the privilege should not apply.” See footnotes 10 and 11.

The exception is intended to be difficult to satisfy and generally does not entitle the party to the mental impressions about trial strategy of the lawyers regarding the lawsuit at issue. In sum, the court refused to apply the Garner exception in this case.

A recent ruling of the Delaware Court of Chancery provides a useful refresher on the standards that must be met for various exceptions or waivers of the attorney/client privilege to apply. In Drachman v. BioDelivery Sciences International, Inc., C.A. No. 2019-0728-LWW (Del. Ch. Aug. 25, 2021), the Court addressed the following theories which, if applicable, could prevent one from enjoying the protection of the attorney/client privilege, and might lead to the disclosure of otherwise privileged communications:

  • The Garner doctrine;
  • Crime-Fraud exception;
  • At-Issue exception (placing the privileged document in question “at issue” or using it as both a sword and a shield)

Selected Key Facts

The case involves a stockholder claim that the approvals required by DGCL Section 242 were not obtained for amendments to the corporate charter, and that the related actions of the board of directors were a breach of their fiduciary duties.

Selected Highlights

The Court began with the basics. Chancery Rule 26(b) essentially allows discovery of relevant data that is proportional to the needs of the case. But Delaware Rule of Evidence 502(b), which codifies the attorney/client privilege, insulates from discovery “confidential communications made for the purpose of facilitating the rendition of professional legal services to the client.”

Garner Doctrine

Sometimes referred to as the “fiduciary exception”, the Court notes that this is not actually an exception to the privilege rule. See n. 34. When applicable it provides that “when a stockholder sues a fiduciary for behavior inimical to the stockholder’s interests, she may invade the corporation’s privilege upon a showing of “good cause”.

There are 9 enumerated factors that must be considered, but the first two are “gatekeepers” and the parties in this case focused on the first three factors. Although the party who moved to compel “cleared the first two gates”, the movant did not demonstrate that the data was unavailable from other sources (discovery was in the early stages) or that the data was needed to prove her claim. See Slip op. at 10-17.

The At-Issue Exception

The Court noted that whether this is an exception or a waiver deserves attention but is not determinative in practice. See n. 62. After a thorough analysis and application of the facts, the Court explained why the moving party did not meet the threshold for this exception to apply.

Crime-Fraud Exception

Any reader who needs to know the necessary requirements to determine if this exception applies, should read pages 23 to 26 of this letter ruling to understand why the moving party did not persuade the Court that this exception applied.


This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Chancery Court recently allowed a Facebook Inc. shareholder plaintiff to inspect the directors’ electronic communications concerning how the company ended up paying $5 billion for a 2019 board settlement with government regulators that would cover founder/CEO Mark Zuckerberg’s liability in Employees Retirement System of Rhode Island v. Facebook Inc., No. 2020-0085-JRS memorandum opinion (Del. Ch. Feb.10, 2021).

Vice Chancellor Joseph R. Slight’s February 10 post-trial opinion granted part of an investor’s motion for access to two remaining groups of board-level documents in one of the long-running books-and-records battles under Section 220 of the Delaware General Corporation Law stemming from Facebook’s record-breaking settlement of Federal Trade Commission charges over the company’s data privacy practices.

Background

The Vice Chancellor’s ruling on whether Employees’ Retirement System of Rhode Island could inspect the directors’ decision to pay $4.9 billion more than the $104 million their defense firm advised was necessary to settle liability for Facebook alone was his second in two years on the scope of discoverable documents on whether the board had overpaid to get a settlement that would shield Zuckerberg.

In Vice Chancellor Slights’ May 2019 ruling, a consolidated set of shareholders in a parallel Section 220 action seeking documents and communications relating to Facebook’s Cambridge Analytica data privacy debacle won access to other categories of board level documents. In re Facebook, Inc. Section 220 Litig., 2019 WL 2320842, at *19 (Del. Ch. May 31, 2019).

And then there were two

The February ruling is important because the pension fund plaintiff asserted that the communications that would prove the directors breached their duty by wasting corporate assets to insulate their CEO in the settlement could now only be in two remaining categories:

1. Electronic communications from, to, or copied to a member of the board concerning Facebook’s settlement negotiations with the FTC

2. Hard-copy documents exclusively provided to, or generated by, any member of the Board relating to Facebook’s negotiations with the FTC.

Since his February ruling allowed the pension fund to inspect Facebook’s non-privileged electronic communications, if ERSI does not find the proof it seeks there, it could set up a future final Section 220 battle – likely combining all plaintiffs — over access to the final category— consisting of attorney-client privileged and attorney work-product documents.

The plaintiffs have argued that Facebook intended to make the attorney-client/work-product category the vault for all the sensitive communications and documents that exposed the directors’ plan to use corporate assets to shield Zuckerberg from personal liability. However, the Vice Chancellor said in the February ruling that as long as it is still possible that any other category of documents might contain the information the plaintiffs seek, it is too soon to open that vault.

Plaintiff “has not demonstrated good cause under the Garner fiduciary exception to the attorney-client privilege to justify compelling the company to produce privileged documents for inspection” the Vice Chancellor said in the February opinion, referring to the 5th U.S. Circuit Court of Appeals’ Garner decision that plaintiffs could not examine privileged documents until all non-privileged sources had been searched. Garner v. Wolfinbarger 430 F.2d 1093. That Garner decision and its principle were adopted by the Delaware Supreme Court in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW 95 A.3d at 1278–79.

In his February opinion, Vice Chancellor Slights said he granted access to all non-privileged board communications because “the documents already produced provide no insight into why Facebook would pay more than its (apparently) maximum exposure to settle a claim.”

No penalty for confidence

According to Facebook, the documents produced prior to this litigation, coupled with Plaintiff’s own trumpeting of confidence that it could survive a motion to dismiss in a plenary action by pleading the facts it already possesses, reveals that Plaintiff has received more than “sufficient” information to fulfill its stated purposes for inspection.

But the court said, “that a stockholder plaintiff believes it has a basis in facts already known to pursue claims of wrongdoing against company fiduciaries does not mean the stockholder should be denied use of the tools at hand to develop those facts further.”

Too soon for Garner exception

“While the attorney-client privilege may be asserted by a corporation that has sought legal advice, the privilege is not absolute and an oft-invoked exception applies in suits by minority shareholders,” the court said in finding that the availability of the privilege must “be subject to the right of the stockholders to show ‘good cause’ why the privilege should not apply.”

While Garner identifies multiple factors, the court might consider when assessing whether the stockholder has demonstrated “good cause,” which focuses the good cause inquiry on three factors:

(i) whether the claim is colorable,

(ii) the necessity or desirability of information and its availability from other sources and

(iii) the extent to which the information sought is identified as opposed to a blind fishing expedition.

But the Vice Chancellor noted that whether the privileged information sought “is both necessary to prosecute the action and unavailable from other sources” has been described as “the most important” of the Garner factors. ERSRI argued but could not demonstrate the privileged information it seeks is unavailable elsewhere “because it has not seen the responsive, non-privileged electronic communications that Facebook is withholding.”

Takeaways

The court thought it was “likely that non-privileged electronic communications among board members can provide ERSRI insight into why the board decided to enter the 2019 settlement without exposing the advice of counsel upon which, at least in part, that decision was based.”

But there are two other possibilities: the board’s discussions that led to its $5 billion settlement decision are restricted to the “privileged” vault, or they somehow reached a consensus with little or no formal discussions. Either possibility could lead to a novel third Facebook Section 220 ruling in the future.

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A recent Delaware Court of Chancery opinion involved a rare situation: A special litigation committee decided that the derivative plaintiff should be able to pursue a derivative suit that was filed against the company.  In the matter styled: In re Oracle Corporation Derivative Litigation, C.A. No. 2017-0337-SG (Del. Ch. Dec. 4, 2019), the court addressed the question of whether the derivative plaintiff should be given all of the documents that the special litigation committee reviewed and to which they had access. See prior Chancery decision in this case highlighted on these pages for additional background.

Compare this decision with the recent Chancery opinion in J.P. Morgan Trust Company of Delaware v. Fisher, C.A. No. 12894-VCL (Del. Ch. Dec. 5, 2019), which “confirmed as still good law” an analogous exception to attorney/client privilege between a trustee and a beneficiary, known as the Riggs exception, based on a Chancery 1976 decision by that name.

In this short highlight of the latest Oracle decision, I only want to focus on one or two points that would have the most widespread application to corporate and commercial litigators:

  • Although not exactly applicable to the somewhat rarified circumstances of this case, the court discusses the important and related exception to the attorney/client privilege that applies when a stockholder is seeking attorney/client privileged information from the directors of a company that is being sued. Often referred to as the Garner exception, based on the court decision that first announced the exception, the Garner doctrine is pertinent where legal advice has been rendered to fiduciaries–who are asserting the privilege over the advice received in the course of their fiduciary service against the stockholder-plaintiffs. See Slip op. at pages 49-43.
  • See also footnote 262 applying similar reasoning to documents withheld based on an assertion of the work-product immunity. See footnote 262. But compare Slip op. at 60 (discussing the common-interest doctrine.)

A recent short ruling from the Delaware Court of Chancery examined one of the exceptions to the general rule that attorney-client privileged information is not subject to production. In Tigani v. Tigani, C.A. No. 2017-0786-KSJM (Del. Ch. April 10, 2019), the court addressed a motion to compel documents from various law firms that were withheld as privileged or which were produced in redacted form.  The issue in the case is whether the fiduciary exception or the crime-fraud exception to the general rule applicable to attorney-client privileged information would require the production of documents.

Short Overview:

The parties relied on the decision in Riggs National Bank v. Zimmer, 355 A.2d 709, 710 (Del. Ch. 1976), in which the court granted a motion to compel filed by beneficiaries of a trust regarding privileged information prepared for their benefit.  By contrast, a Special Discovery Master in the instant matter recommended that the motion to compel in this case be denied based on a prior decision of the Court of Chancery in separate litigation involving the parties, issued in 2010, which held that the ultimate client of the law firm whose documents were sought to be produced was akin to an adverse party—based on the facts in 2010–and on that basis the motion in the 2010 decision was denied. The Special Discovery Master applied that same conclusion to the instant case. That 2010 decision referred to above, as well as related Chancery decisions involving the internecine Tigani litigation, have been highlighted on these pages here.

Court’s Reasoning:

Taking a different view than the Special Discovery Master, the court in the instant ruling determined that the situation between the parties currently was substantially different than it was in 2010–and now the party seeking the production was not clearly adverse as it was in prior litigation in 2010. The court observed that there was no pending litigation between the parties from August 2011 through September 2017, and that the documents requested were created during this “period of peace.” See footnote 58.

The court reasoned further that whether or not disclosure of the documents in question should be allowed “must be determined in light of the purpose for which it was prepared.” (citing Riggs).  In order to determine in this case the purpose for which the documents requested were prepared, the court determined that inspection in camera was appropriate.

The court ordered the production in camera within in five days so that the court could make its own determination. See generally, by comparison, the Garner exception to attorney/client privilege, that allows in some instances the production of otherwise privileged attorney-client communication, for example, in the context of a  stockholder who seeks copies of the legal advice given to fiduciaries who are the subject of claims that they breached fiduciary duties. Cases applying Garner have been highlighted on these pages.

The bottom line is that there are exceptions to the general rule that attorney-client privileged communications cannot be compelled, and this decision provides an example of one of those potentially applicable exceptions.

 

A recent Court of Chancery decision explains when an agreement will be deemed ambiguous such that extrinsic evidence will be allowed, and related contract interpretation principles.

Key Issue Addressed:

The court, in Zayo Group, LLC v. Latisys Holdings, LLC, C.A. No. 12874-VCS (Del. Ch. Nov. 26, 2018), described the “real controversy” in the matter as one arising from the parties’ disagreement about what the contract regarding the sale of a company provided in connection with whether a disclosure was required when a customer “failed to renew” as opposed to “terminated” its status as a customer. 

Key Legal Principles Addressed:

·     The court explained when an agreement will be considered ambiguous such that extrinsic evidence will be permitted.  The court emphasized that a contract is not rendered ambiguous simply because the parties do not agree on its proper construction.  Rather a contract is ambiguous only when the provisions in controversy are “reasonably or fairly susceptible of different interpretations or may have two or more different meanings.” See pages 34 to 35.

·     The court described the types of extrinsic evidence that will help to inform the court regarding the intent of the parties based on an objective theory of contracts, e.g., usage of trade and course of dealings, as well as the drafts of the agreement leading to a final document and the negotiation history of the parties.  See pages 36 to 37.

·     The court observed that although a basic rule of contract construction is not to render terms of a contract superfluous, that rule doesn’t apply to synonyms–in this matter the court referred to various sources to interpret the definitions in this context of “terminate” and “cancel” to be essentially synonymous. 

·     The extrinsic evidence in this matter revealed that the parties did not intend to equate the terms “terminate or cancel” with “non-renewal” of customer agreements such that it required disclosure of those customers who chose “not to renew.”  See 37 to 39.

·     Two other points supported the court’s reasoning.  Prior drafts of the agreement showed that the buyer tried to include as part of required disclosures, those customers who “refused to renew” but the seller rejected that language and it did not appear in the final agreement.  The court also referred to the hoary concept of caveat emptor.  This made it incumbent on the buyer to be explicit and precise about what risk it was–or was not–assuming.

·     Regarding damages, the court explained “benefit of the bargain damages” when the value of a sold company is impaired by misrepresentations.  See page 45 and footnote 200.

·     In addition to failing to prove breach of contract, the plaintiff also failed to establish the minimum damages or “basket” that had to be met before the indemnification duty was triggered in this matter. 

Compare: recent decision in the Great Hill Equity matter, highlighted on these pages, which interpreted an indemnification clause which had a “cap”–as opposed to the provision in this indemnification clause in this matter which had a “minimum basket” that had to be met (filled) before any indemnification obligations were triggered.

Compare also: recent article by Bryan Garner in the ABA Journal that discusses what the famous wordsmith refers to as “contractual busts” or provisions in contracts that “make no literal sense at all.”

Supplement: Regarding the meaning of words in contracts, Professor Gordon Smith, Dean at the Brigham Young University Law School and the co-author of the well-read blog called Conglomerate, discusses in a recent post a new approach to researching the meaning of words and the use of words, especially as a word is used during different periods of time, called “Corpus Linguistics.” He refers in the above-linked post to a recent United States Supreme Court decision that appears to refer to this approach, and the BYU-developed database on which it is based called the Corpus of Historical American English.

In the latest iteration of the ongoing litigation involving CBS Corporation and its controlling stockholder, the Court of Chancery recently provided a textbook summary of the general rule that directors have the right to unfettered access to corporate data, with three general exceptions. In the case styled In re CBS Corporation Litigation, Consol. C.A. No. 2018-0342-AGB (Del. Ch. July 13, 2018), the Delaware Court of Chancery explained that one of those exceptions to the general rule applied to prevent directors who were adverse to a Special Committee from obtaining communications with counsel for the Special Committee. This quintessential Delaware corporate litigation case has garnered extensive coverage in the trade press and most major media outlets.Cbs news logo1

The directors of CBS affiliated with the controller of CBS were prevented from obtaining the privileged communications between the CBS Board’s Special Committee and its counsel. The court found that other records requested fit in the category of the general rule that entitled the directors to communications between the company and its corporate counsel.  Still other document requests would require further factual development before a decision could be made on whether or not they should be produced.  A prior decision in this case was highlighted on these pages.

Three Exceptions to Directors’ Right to Corporate Data:

The three general exceptions to the rule that directors have unfettered access to corporate data are as follows: (1) based on an ex ante agreement among the contracting parties; (2) a board can act pursuant to DGCL § 141(c) and “openly with the knowledge of the excluded director to appoint a Special Committee.”  That committee would be free to retain separate legal counsel and its communications with that counsel would be protected; and (3) a board or a committee can withhold privileged information when sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation that he was a client of the board’s counsel. See Kalisman v. Freidman, 2013 WL 1668205 (Del. Ch. Apr. 17, 2013). See also SBC Interactive, Inc. v. Corporate Media Partners, 1997 WL 770715, at *6 (Del. Ch. Dec. 9, 1997).

 

 

The Delaware Supreme Court recently analyzed, for the first time, a common contractual standard in business agreements.  The legal meaning of the phrase “commercially reasonable efforts” does not enjoy clarity in the law. Lawyers and jurists alike should be excused if they view the law on this topic as not entirely self-evident.  The split decision of the Delaware Supreme Court in the case styled The Williams Companies, Inc. v. Energy Transfer Equity, L.P., Del. Supr., No. 330, 2016 (Mar. 23, 2017), proves the point. The Delaware high court decision in this matter featured a vigorous dissent from the Chief Justice in opposition to the majority’s affirmance of the Court of Chancery’s decision. The majority opinion was based on different reasoning than the trial court applied.

The background facts were included in the Court of Chancery’s opinion in this matter that was highlighted on these pages previously. The foregoing hyperlink also features links to scholarly commentary on this topic by the esteemed Professor Stephen Bainbridge. (The dissent of the Chief Justice will not be covered in this modest blog post, although those interested in this topic may want to read it, because it may provide ideas for opposing arguments on the topic, and in the future when a new majority exists on the Delaware Supreme Court, perhaps the reasoning in the dissent will garner a majority of votes.)

For now, the majority’s restatement of the latest Delaware law in connection with interpreting the meaning of the phrase “commercially reasonable efforts” includes the following important principles.  

Important Legal Principles Explaining the Legal Meaning of “Commercially Reasonable Efforts”:

Although the Delaware Supreme Court affirmed the post-trial opinion of the Court of Chancery, based on different reasoning, Delaware’s high court explained three errors in the Chancery decision, and in doing so the Supreme Court elucidated the correct principles of law applicable to an understanding of the phrase “commercially reasonable efforts.”

First, the Supreme Court explained that the Court of Chancery took an “unduly narrow view” of the decision in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008).  The Delaware Supreme Court emphasized in this opinion that it agreed with Chancery’s Hexion decision, which was highlighted on these pages. The Supreme Court quoted extensively from the Hexion opinion, and described that the buyer in the Hexion case required financing to complete a transaction.  The Court of Chancery in Hexion held that the agreement required action to the extent that such action was “both commercially reasonable and advisable to enhance the likelihood of consummation of the financing . . ..”  (Hexion, 965 A.2d at 749.) The Supreme Court in Williams quoted with approval the reasoning in the Hexion case even though the Hexion case involved a standard of “reasonable best efforts”–and not commercially reasonable efforts. See footnote 16 and accompanying text in the Williams decision for related analysis.

The Supreme Court in Williams also observed that in the Hexion case, after the buyer developed a more substantial concern about the solvency of a combined entity after the deal closed, the buyer “was then clearly obligated to approach the seller’s management to discuss the appropriate course to take to mitigate the solvency concerns.” Instead, the buyer in Hexion chose not to approach the seller’s management, and the court in Hexion reasoned that such a “choice alone would be sufficient to find that the buyer had knowingly and intentionally breached its covenants under the merger agreement.”  Hexion, 965 A.2d at 750.

The second error that the Supreme Court determined that the Court of Chancery made in the Williams case was the trial court’s focus on the absence of any evidence to show that Energy Transfer Equity, L.P. (ETE) caused the law firm to withhold the opinion that was a condition precedent to closing.  This is so, explained the Supreme Court, because there was evidence recognized by the Court of Chancery from which it “could have concluded that ETE did breach its covenants,” including evidence that ETE did not direct the law firm to engage more fully with counsel for the opposing party in the transaction in an attempt to negotiate any issues.

The third error the Supreme Court found with the Chancery opinion involved shifting of the burden of proof.  The Supreme Court in Williams ruled that “once a breach of a covenant is established, the burden is on the breaching party to show that the breach did not materially contribute to the failure of a transaction.”  See footnote 54. (Of course, one might note that an adjudication that a party was in breach is not usually made until after trial).  Moreover, the Supreme Court emphasized that a plaintiff “has no obligation to show what steps the breaching party could have taken to consummate the transaction.”

Nonetheless, the Supreme Court affirmed the decision of the Court of Chancery (just barely), because the end result in its post-trial opinion would have been the same even if the Court of Chancery applied the proper burden of proof – – in light of a footnote in the Chancery opinion noting that Williams did not present sufficient facts at trial to prevail even if the burden of proof were correctly applied.

Bottom Line: If you have a case that involves an issue of the meaning or application of the phrase “commercially reasonable efforts,” your first step is to read this opinion.  The next step is to determine how the facts of your case compare to the facts in this decision.

SUPPLEMENT: Scholarly commentary on this decision and the topic of “commercially reasonable efforts” in general, is provided by friend of the blog, Professor Stephen Bainbridge, whose scholarship is often cited in Delaware court opinions.