Search results for: rule 3.7

In a recent letter ruling, the Court of Chancery deferred any decision on whether or not there was a violation of Rule 3.7(a) of the Delaware Lawyers’ Rules of Professional Conduct. In Re Straight Path Communications Inc. S’holder Litig., C.A. No. 2017-0486-VCG (Del. Ch. July 12, 2021).

Rule 3.7 generally prohibits a lawyer from simultaneously appearing as a trial advocate and as a witness, but Rule 3.7(a), when used as a sword, is problematic and disfavored.

Although the court explains what must be demonstrated in order to successfully apply the rule to prevent a lawyer from being both an advocate and a witness in the same case, the court deferred decision because the issue had not been properly “teed-up.”

Moreover, the court acknowledged a principle previously made clear by the Delaware Supreme Court, that only the Delaware Supreme Court has the authority to enforce the Rules of Professional Conduct, with a limited exception.

The Court of Chancery did not decide whether that limited exception applied to the facts of this case, and declined to determine whether or not a violation of ethical precepts affected the ability of the trial court to do justice. Such a finding would allow the trial court to enforce the Rules of Professional Conduct as an exception to the Delaware Supreme Court’s exclusive jurisdiction to rule on that issue.

The latest Chancery decision in hotly contested litigation captioned In re Oxbow Carbon LLC Unitholder Litigation, Consol., C.A. No. 12447-VCL, (Del. Ch. July 28, 2017), addresses several issues that are of practical importance for all trial lawyers. Several prior Delaware decisions in this case that have been highlighted on these pages  provide additional background.  Among the key principles addresses in this decision is the application of Rule 3.7(a) of the  Delaware Lawyers’ Rule of Professional Conduct, which generally bars a lawyer from acting as an advocate at the same trial in which the lawyer is likely to be a necessary witness – – with three exceptions.  After a careful application of the rule to the facts of this case, the Delaware Court of Chancery reasoned that, on balance, the lawyer involved should not be prevented from testifying, although his testimony would be approached with care.

Court’s Analysis

The opinion explained that the lawyer involved was present during the trial but that he was not acting as an advocate to the extent that he did not have a speaking role. This was intentional because it was expected that he might be needed as a rebuttal witness.

Importantly, the court emphasized that his testimony would not undermine the fairness of the proceedings, especially because it is a bench trial and the court fully understood the difference between the role of a fact witness and the role of a counsel for one of the parties. The court provided ample citations to authority including the well-known Delaware Supreme Court decision entitled Appeal of Infotechnology, Inc., 582, A.2d 215, 221 (Del. 1990), which generally stands for the principle that a non-client litigant only has standing to enforce a rule of professional conduct such as an alleged conflict “when he or she can demonstrate that the opposing counsel’s conflict somehow prejudiced his or her rights.”  Moreover, the court is aware that rules of professional conduct are sometimes used as a tactical weapon to seek inappropriately to disqualify opposing counsel. See footnotes 22 through 24.

Trial Practice Tips from the Court

This opinion also features a practical commentary from the court with insights on trial practice regarding the order that witnesses are called, and the preference of calling a witness only once when he will be both an adverse witness and a witness favorable to the other party. The alternatives in calling an adverse witness for a party’s case in chief, involve the court deciding whether or not the party calling the adverse witness will question the party first as part of his case-in-chief.  In this case, the court decided to permit counsel to conduct a direct examination first, followed by the cross examination by the adverse party.  This approach allowed the party who has the burden of proof to determine the order of witnesses by calling adverse witnesses for its case-in-chief.  But that party here did not have the opportunity to question an adverse witness from the outset as a hostile witness.  Instead, counsel for the witness had the opportunity to present the witness first, after which opposing counsel would cross-examine.  The court preferred this approach as a more efficient use of trial time, although it deprives the party with the burden of proof of calling and questioning a hostile witness from the outset.

The author of this opinion also explained that generally he prefers to give the party with the burden of proof the ability to first question – – even an adverse witness, but in this case because both sides had asserted interrelated claims and defenses where they each technically bore the burden of proof, there was less ability to view one side as having the burden such that they should also receive the tactical advantages that accompany that burden.

Lastly, the opinion included a useful discussion of Delaware Rule of Evidence 615 regarding sequestration of witnesses and the ability of the court at the request of a party to order witnesses excluded from the trial so that they can hear the testimony of other witnesses – – with the exception of a party who was a natural person, or an officer or an employee of a party which is not a natural person, or a person whose presence is necessary to the presentation of the cause.

In denying a motion to disqualify counsel based on a claim that the opposing attorney might be a witness in violation of Rule 3.7, the court viewed the motion as a tactical maneuver. The court focused on the procedural context as relevant to the nature of enforcement, but not the need to enforce the rule. The court found that the movant would not be prejudiced at this stage of the case, the opposing party would not receive an advantage, and disqualification could cause undue economic impact. The motion was denied without prejudice to renewing it at a later time. Benge v. Oak Grove Motor Court, Inc., download file.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.  

The Delaware Court of Chancery, citing the milestone Corwin decision, recently dismissed a suit by Anaplan Inc. shareholders who claimed post-merger pact equity grants for some officers and directors cheated them out of $400 million of the original $10.7 billion price pursuant to a merger agreement requiring Thoma Bravo (not a typo) to pay for the business planning software company in In re Anaplan Inc. Stockholders Litigation, C.A. No. 2022-1073-NAC (June 21, 2024).

Vice Chancellor Nathan Cook ruled that whether defendants breached fiduciary duties, giving rise to a derivative suit, or whether they violated direct contract duties by mismanaging the deal–justifying a direct action–the suit fails the Corwin test because there was no proof that the Anaplan deal was inadequately disclosed or that the shareholders were coerced. See Corwin v. KKR Fin. Holdings LLC (Del. 2015).

Under Corwin, the Delaware Supreme Court held that the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully-informed, uncoerced majority of the disinterested stockholders. 

The opinion’s comprehensive examination of Corwin’s requirements to prove structural or situational coercion and what disclosures fully inform investors, is worthwhile reading for corporate law specialists. 

The court ruled that although the final price the Anaplan investors got took a big cut when their officer and director grants gave the original offer a $400 million “haircut,” the investors were not forced to accept a deal that gave them “nothing” because even the reduced offer provided a substantial premium over market value for their shares.

Background

The dispute began shortly after Anaplan accepted private equity firm Thoma Bravo’s March 2022 acquisition offer, when a handful of Anaplan officers and directors gave themselves $400 million in equity grants—an amount that, Bravo charged, violated the merger agreement.  Anaplan and Bravo later negotiated an amended merger agreement that provided $63.78 rather than the original $68.00 a share.  That pact still provided Anaplan investors with a premium but Pentwater Capital Management LP and other Anaplan shareholders filed suit to recover the $400 million, charging that three ex-officers and three former directors breached the merger pact’s $105 million limit on grants to employees and reduced the worth of plaintiffs’ shares.

Defendants’ motion to dismiss the claims argued that the charges are derivative, not direct, as plaintiff contended, because the alleged conduct only affected Anaplan’s stock price, but plaintiffs responded that it was only their stock value that was directly affected.

Plaintiffs also argued that the officer defendants violated their continuing Revlon duty to get the best price for the company, but defendants countered that a majority of the directors were not implicated as Revlon requires. 

No need to resolve

The court noted that, “To put it mildly, the parties have raised very interesting questions. They are not, however, questions I need to answer to resolve the Motion.”  But under Corwin, the Vice Chancellor said, “Plaintiff’s claims must be dismissed because they do not survive the informed and uncoerced vote of Anaplan’s stockholders approving the Merger.”

 He said Corwin enables parties to “avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves. And I do not read our Court’s Corwin decisions, or the policy rationale underlying Corwin, as intended to apply Corwin narrowly.”

A fully informed vote?

Under Delaware law, when directors solicit stockholder action, they must “disclose fully and fairly all material information within the board’s control,’ the vice chancellor said, but he noted that “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” However, that doesn’t mean the standard requires “proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote,” he added.

In this case, the shareholders got a proxy that acknowledged a dispute between Anaplan and Thoma Bravo over the grants, but the disclosure stated that the company believed no wrongs were committed, so investors could make up their own minds whether to take the offer or take the risk of losing it, the court said in ruling that disclosure was adequate.

Was there coercion?

Plaintiffs asserted that the approval vote was coerced because “stockholders had a metaphorical gun to their head” when asked to approve a merger that was ”either situationally or structurally coercive.”  

However, the court defined an uncoerced vote as one that simply gives stockholders a “free choice between maintaining their current status and taking advantage of the new status offered by” the proposed transaction,” adding that, “The status quo may be undesirable or unpleasant, but that fact does not render the transaction coercive.”

Situational coercion—”arises when the status quo is so unattractive that it prevents a stockholder vote from operating as a clear endorsement of a transaction. ”It is “[t]he situational backdrop of an unacceptable status quo [that] calls into question the meaning of a stockholder vote such that it should not be given cleansing effect.”

The vice chancellor ruled that there was no situational coercion because, ‘”Although at a discount to the Original Merger Agreement, the Revised Merger Agreement still reflected a substantial premium both to Anaplan’s unaffected share price and to its expected share price if stockholders voted not to approve the Merger.”

Structural coercion— is simply “a vote structured so that considerations extraneous to the transaction likely influenced the stockholder-voters, so that [the Court] cannot determine that the vote represents a stockholder decision that the challenged transaction is in the corporate interest.”

Vice Chancellor Cook ruled that ”Plaintiff does not allege self-dealing or other extraneous factors that might warrant calling upon the principle of structural coercion.”

Was there waste?

Corwin includes no cleansing provision for waste, the court said, but it noted that, in addition to numerous other benefits and concessions, the final merger offer provides 10.4 billion in cash.

No new D&O route

Perhaps with a different set of facts, plaintiffs’ claims might have survived a motion to dismiss, but “acquiree fiduciaries are already disincentivized from acting in ways that jeopardize a merger’s closing,” the Vice Chancellor concluded. “Although this case presents what some might view as hard facts, it is not at all clear to me that the correct response is to open a new route for director and officer liability. “

Prior blog posts over the last 19-plus years on these pages have addressed the difficulty of succeeding on a motion to disqualify counsel. The recent Delaware Court of Chancery decision in Brex Inc. v. Su, C.A. No. 2022-0758-MTZ (Del. Ch. May 22, 2024), is no exception.

This ruling explains why disqualification of counsel was denied based on an alleged violation of Rule of Professional Conduct 3.7(a), which provides the general prohibition of an attorney acting as a necessary witness and an advocate in the same trial. See prior blogs posts on these pages with highlights of court decisions addressing this rule.

Rule of Professional Conduct 1.9 may bar current representation of a client that is adverse to a prior representation of a former client. But in this case, delay in seeking disqualification on this basis, was the reason why the court determined that the argument was waived. See prior blog posts on these pages with highlights of court decisions addressing this rule.

Homsey Architects, Inc. v. Nine Ninety Nine, LLC, C.A. No. 4412-VCP (Del. Ch. June 14, 2010), read opinion here.

This 31-page opinion from the Delaware Court of Chancery addressed the definition of “substantial performance” in connection with rejecting a statute of limitations defense relating to an AIA agreement between an architect and a developer.

Key Issues

1) The discussion in this opinion of “substantial performance” as that term is defined in the standard AIA Agreement between architects and owners will be useful for the many parties who use that widely exercised agreement.

2) The Court also addresses the 2009 amendments to the Delaware Uniform Arbitration Act (“DUAA”) which eliminated the provision that formerly gave the Court of Chancery jurisdiction to address the statute of limitations defense to an arbitration claim.

3) The Court addressed the difference between substantive arbitrability and procedural arbitrability in terms of whether those issues are to be addressed by the Court or by the arbitrator.

Overview

This dispute between an architectural firm and a developer addressed whether the developer could proceed with an arbitration claim against the architectural firm in connection with issues that arose regarding design services on a townhome complex.

This opinion will be of interest to anyone who uses or needs to interpret the AIA document: B141-1997 “Standard Form of Agreement Between Owner and Architect.” The AIA refers to the American Institute of Architects and their agreements are the most commonly used in construction contracts. In this case, the architect incorporated by reference into the agreement the proposals of the consultants used by the architect for engineering, mechanical and electrical matters.

The agreement required that all claims and disputes arising out of the agreement be submitted to arbitration pursuant to the Construction Industry Arbitration Rules of the American Arbitration Association. The agreement also included an accrual clause which provided that the statute of limitations defense would not commence to run any later than the date when the services of the architect were substantially completed. See Section 1.3.7.3 of the agreement. The agreement also contained the definition of “substantial completion” at Section 9.8.1.

The Court’s opinion provides complete and detailed descriptions of the factual foundation of the dispute between the parties. On a procedural level, the architect had sued to obtain an injunction to prevent the developer/owner from proceeding with arbitration based on the argument that the statute of limitations of three years had expired prior to the date that the arbitration demand was made. The Court explained all the factual reasons why it determined that the services of the architect were not substantially completed within three years of the arbitration demand being made. The work of the consultants for the architect was not substantially completed until well after the architect’s services were completed. As indicated, the services of the architect were defined to include the services of his consultants which were incorporated by reference into the AIA agreement.

The Court observed that neither party cited to any Court decision that defined when the services of an architect were considered to be “substantially completed,” as those words are used in the AIA agreement. See footnote 68 (referring to the definition in the AIA agreement). See also footnotes 71 to 74 and accompanying text. The conclusion of the Court’s decision was that the owner/developer was allowed to proceed with his arbitration claims against the architect.

 

 

Although I only occasionally summarize on this blog decisions of the Delaware Superior Court,  the trial court of general jurisdiction in Delaware,  for example, when they are of special commercial import or they apply generally to business litigators, this is such an instance. 
In Dunlap v. State Farm Fire and Casualty Co., 2007 WL 2390682 (Del. Super. 2007),  read opinion here, the Delaware Superior Court granted a Motion to Disqualify filed by one party, based on Rule of Professional Conduct 3.7 which prohibits attorneys advocating in a trial to also serve as witnesses, but then, sua sponte, (which for the non-Latin lovers among my readers, means "on its own"), the Court also disqualified the opposing attorney who filed the motion. The Court reasoned that: both attorneys  "… used some very strong language about positions the other side has taken….[and] it is beyond proper  vigorous advocacy. Both counsel have lost too much professional detachment in their "vigorous" advocacy.The Court, therefore, believes that both sides need new counsel."

Far be it from me to  pontificate, as there but for the grace of God go I, though it is easy to observe that litigation should not be about the lawyers, and as hard as it is to do, even if the other attorney is insulting and boorish, the goal is to focus on the issues in the case. Here and here are two separate follow-up opinions denying a motion for reargument and denying a motion for "clarification" of the ruling.