SIGA Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 314, 2012 (May 24, 2013). This Delaware Supreme Court decision was the subject of a BloombergBusinessweek article on Sunday, May 26. The Court of Chancery’s opinion was highlighted on these pages at this link. Also, several other prior Chancery decisions in this case were also outlined on these pages.

Issue Addressed: Is an agreement to negotiate in good faith in accordance with a term sheet an enforceable obligation?

Short Answer: Yes, and a court may award expectation damages if the record supports a finding that an agreement would have been reached but for the defendant’s bad faith negotiations. This aspect of the trial court’s 117-page decision was upheld, but Delaware’s high court reversed and remanded the damages award to reconsider damages in light of this opinion.

One Takeaway from this Supreme Court Opinion: The detailed facts must be tethered to any lesson or principle of law taken from this opinion, but at least one ineluctable result of this ruling is that any attorney or businessperson who sends a term sheet to another party in the context of having a duty to negotiate in good faith, must read this opinion in order to determine whether liability will attach as a result of refusing to finalize a definitive agreement in a manner that may be construed, based on this opinion, to be based on less than good faith.

Brief Background

The prior decisions linked above provide more background, but a bare bones distillation of the factual setting involves SIGA and PharmAthene negotiating simultaneously for a license agreement and a merger agreement, with the goal that if the merger was not consummated that at least a license would result. After trial, the Court of Chancery found that the term sheet contained the essential terms for the license and that if a merger was not consummated, that a final and formal license agreement would be entered into. See Supreme Court Slip op. at 9.

Key fact: The parties signed a merger agreement which provided that if the merger were terminated, the parties agreed to negotiate in good faith a definitive license agreement based on the term sheet. (Notably, at the bottom of the two-page term sheet was a “footer” that stated: “non binding terms”.  In the context of the other overwhelming facts, that footer was not determinative.)

Bullet Points on Legal Principles from Opinion

  • Delaware’s high court discussed choice of law principles but determined that it was not necessary to decide the issue because New York and Delaware law were not meaningfully different on the relevant issues. See footnotes 34 to 36 and accompanying text. Nonetheless, the court discussed the reasoning that can be employed when two related, and somewhat overlapping contracts, have two different choice of law provisions.
  • In the context of proposing terms substantially different than the term sheet, the court described “bad faith” as:

 “not simply bad judgment or negligence, but rather it implies the conscious doing of a wrong because of dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that it contemplates a state of mind affirmatively operating with furtive design or ill will.” See footnote 66 and related text.

  • The elements of a promissory estoppel claim were recited and then the court reasoned that such a claim does not apply to this case because a fully enforceable contract governs the promise at issue–that is, the merger agreement with its provision to negotiate in good faith. See Slip op. at 30-31.
  • Two types of “agreements to negotiate in good faith” are referred to as “Type I” and “Type II” based on federal decisions described in footnotes 82 and 85 and accompanying text. Type II agreements do not guarantee the parties will reach agreement on a final contract due to good faith differences that may arise, but a Type II agreement: “does, however, bar a party from renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement”. Footnote 85.
  • DAMAGES: The Delaware Supreme Court announces new law in this opinion: When the parties have a Type II agreement to negotiate in good faith, and the record supports the trial court’s finding that the parties would have reached an agreement but for the defendant’s bad faith negotiations, the plaintiff is “entitled to recover contract expectation damages.” Slip op. at 37.  Expectation damages presuppose that “the plaintiff can prove damages with reasonable certainty.” See footnote 99. Because this is the first time the Delaware Supreme Court clarified this issue of damages, it reversed and remanded for Chancery to reconsider the award of damages in light of this opinion.
  • Attorneys’ Fees: The Court of Chancery awarded fees based on both the bad faith exception to the American Rule as well as a fee-shifting provision in the Bridge Loan Agreement between the parties. The high court affirmed the award of attorneys’ fees based on the fee-shifting provision and a finding that the fees requested were reasonable. See footnote 110 and related text.
  • The high court did not address the bad faith basis for awarding fees except to note in footnote 109 that the Court of Chancery has inherent equitable authority to award fees–separate from the award of costs pursuant to 10 Del. C. Section 5106 (citing Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 2013 WL 1914714  at *12 (Del. May 9, 2013)).
  • The Supreme Court also remanded for the Court of Chancery to reconsider the award of expert fees  so as to tailor them to the bases of liability on which PharmAthene prevailed. See footnotes 111 and 112.

A majority of the Delaware Supreme Court recently ruled that a settlement agreement contained an enforceable obligation to negotiate in good faith with the goal of reaching a separate definitive contract within the parameters outlined in the settlement agreement–although the court recognized that such a contractual obligation did not assume that a definitive agreement would necessarily be reached.

In Cox Communications, Inc. v. T-Mobile, Inc., Del. Supr., No. 340, 2021 (March 3, 2022), Delaware’s High Court explained both basic principles and sophisticated nuances of Delaware contract law that should be required reading for anyone who needs the know the latest iteration of Delaware law on this topic, especially in the context of preliminary or transitional agreements that contemplate a more comprehensive second-stage agreement.

Why This Decision Is Noteworthy:

A common situation where familiarity with this decision will be required is when a lawsuit is settled after a long day of mediation and basic terms are signed while all the parties are present, or otherwise available, to confirm the terms of a settlement–but a more complete, formal agreement is contemplated. One lesson that this decision teaches is to make certain that the abbreviated memorialization of essential terms is expressly stated to be enforceable, in the event a more formal, comprehensive agreement is never finalized. This, of course, applies beyond settlement agreements–for example, in the context of any deal where essential terms are agreed upon before a more comprehensive, formal agreement is completed (assuming the parties may want to enforce those essential terms, which may not always be the case.)

Key issue:

The expedited appeal in this case turned on the interpretation of a single provision in a settlement agreement and whether it should be construed as either: (i) an unenforceable “agreement to agree”, or (ii) an enforceable “Type II preliminary agreement” requiring the parties to negotiate in good faith.

Basic Background Facts

Cox and Sprint signed a settlement agreement in 2017 that resolved litigation between the parties. T-Mobile later purchased Sprint. Section 9(e) of that settlement agreement contained a sentence that was the crux of the dispute over contract interpretation that the Court decided. The disputed provision provided that:

Before Cox or one of its Affiliates (the “Cox Wireless Affiliate”), begins providing Wireless Mobile Service (as defined below), the Cox Wireless Affiliate will enter into a definitive MVNO agreement with a Sprint Affiliate (the “Sprint MVNO Affiliate”) identifying the Sprint MVNO Affiliate as a “Preferred Provider” of the Wireless Mobile Service for the Cox Wireless Affiliate, on terms to be mutually agreed upon between the parties for an initial period of 36 months (the “Initial Term”).

T-Mobile, as the successor to Sprint’s rights in the settlement agreement, argued that the above language required Cox to enter into an agreement with it for a term of 36 months before it could provide wireless services with any other carrier. On the other hand, Cox read the above provision to merely require it to negotiate in good faith to “try” to reach an agreement. The Court of Chancery agreed with T-Mobile’s view of the provision. The Supreme Court did not.

Basic Principles and Nuances of Delaware Contract Law Underscored

  • Delaware adheres to an objective theory of contracts. See footnotes 47-48.
  • Extrinsic evidence is only considered if the text is ambiguous. n.49.
  • A contract provision is “not rendered ambiguous simply because the parties in litigation differ as to the proper interpretation.” n.51.
  • When a provision “leaves material terms open to future negotiations” as the High Court found Section 9(e) did, it is “a paradigmatic Type II agreement” of the kind we recognized in SIGA v. PharmAthene. n.52. (That Supreme Court decision and related decisions were highlighted on these pages.)
  • Unlike the old, superseded view that an incomplete agreement was not enforceable, Delaware recognizes that “parties may make an agreement to make a contract…if the agreement specifies all the material and essential terms including those to be incorporated in the future contracts.” n.53.
  • Delaware recognizes two types of enforceable preliminary agreements: Type I and Type II.
  • Type I agreements reflect a “consensus on all the points that require negotiation” but indicate the mutual desire to memorialize the pact in a more formal document. n.55. Type I agreements are fully binding.
  • Type II agreements exist when the parties “agree on certain major terms, but leave other terms open for future negotiation.” n.56 Type II agreements “do not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith.” n.57.

Selected Excerpts of Court’s Reasoning

  • The Supreme Court read Section 9(e) to leave open a number of essential terms, such as price, which barred it from being categorized as a Type I agreement. n.60. That is, it specifically contemplates a future “definitive” agreement and provides that open terms will be “mutually agreed upon between the parties”–though it is not completely open-ended. Practice note:  If the parties want a settlement agreement to be a Type I binding agreement–as compared to an agreement to negotiate in good faith–a fair observation based on the Court’s decision in this case is to avoid the reference to a future “definitive” agreement, and make sure to include essential terms such as price.
  • Type II agreements do not guarantee the parties will reach agreement on a final contract because “good faith differences in the negotiation of the open issues may preclude final agreement.” n.63
  • The provision at issue in this case did not include a promise to do anything other than negotiate in good faith–which is where the Supreme Court parted ways with the Court of Chancery’s post-trial ruling. See also n.71 ( explanation of why the majority  parted ways with the dissenting justices in this case, and did not think it was necessary to address extrinsic evidence.)
  • The Court’s reasoning including diagramming of the sentence in the disputed provision to parse the syntax and structure of the language at issue, by identifying the single subject, single verb, and singled object–as well as which clause modified the predicate and which clause modified the object.
  • The quality or quantify of consideration in a contract should not be second-guessed. n.86. Moreover: “obligations to negotiate in good faith” are recognized in Delaware as “not worthless”. n.81.

Postscript: A candid observation that reasonable people can differ on these contract issues is buttressed by the fact that the brightest legal minds in Delaware who decide what the law is in Delaware were not unanimous in their view of the law as applied to the facts of this case. That is, three members of the Delaware Supreme Court saw it one way, two members of that High Court saw it another way, and a member of the Court of Chancery arguably viewed the law as applied to the facts of this case in a third way.

SIGA Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 20, 2015 (Dec. 23, 2015). Why This Case Is Noteworthy: Any lawyer interested in the latest iterations of contract law by the Delaware Supreme Court needs to read this opinion. More specifically, any lawyer who advises clients on the binding nature or enforceability of letters of intent, or preliminary agreements, for example, in connection with mergers, needs to read this opinion. The Delaware Supreme Court affirmed a decision from the Court of Chancery in which two types of preliminary agreements were upheld as enforceable. The first, known as a Type I agreement, involves an agreement where the parties have consented to the essential terms but may not have formalized their agreement in a fully executed document. The next type of enforceable preliminary agreement is known as a Type II. This category of preliminary agreement refers to an “agreement to negotiate in good faith,” when all essential terms have not been agreed to, and that was the type of preliminary agreement involved in this opinion in which the Supreme Court upheld expectation damages of $113 million.

Procedural history: This decision is the second opinion by the Delaware Supreme Court in this case. Highlights of the prior Delaware Supreme Court opinion in this case, and a few of the multiple decisions by the Delaware Court of Chancery in this case have been highlighted on these pages, and are available at this hyperlink.

Key facts: The factual basis for this decision is a merger agreement entered into between the parties which provided that if the merger was not consummated for whatever reason, then the parties would negotiate in good faith to enter into a license agreement. The merger was not consummated. The Court of Chancery found that SIGA, in bad faith, refused to negotiate a license agreement when the merger was terminated. Parenthetically, after the judgment was entered by the trial court, SIGA filed for bankruptcy. The facts are available in the prior Delaware opinions highlighted at the above link, and also are described in the first 37-pages of the 57-page majority opinion.

Also notable about this decision is that it features a divided Delaware Supreme Court which is not common, as well as a 28-page dissent that is quite vigorous in its opposition.

Key Takeaways: One of the more notable takeaways from this seminal contract pronouncement by Delaware’s high court is on the issue of contract damages, and the distinction between the need to prove the existence of damages with reasonable certainty, which must be distinguished from a completely separate analysis of the amount of damages. Although expectation damages for breach of contract must be proven with reasonable certainty, and no recovery can be had for loss of profits which are determined to be uncertain contingent, conjectural, or speculative, it is also true that less certainty is required of the proof establishing the amount of damages.

As the Supreme Court explained: “The injured party need not establish the amount of damages with precise certainty where the wrong has been proven and injury established.” The trial court found that PharmAthene firmly established the fact of damages. The Supreme Court upheld the Court of Chancery’s statement of the law that where the proof of the fact of damages is certain, the “proof of the amount can be an estimate, uncertain or inexact.” See footnote 78.

Wrongdoer Rule: The court also explained the “wrongdoer rule” as it applies to breach of contract damages. The wrongdoer rule applies where the wrongdoer’s breach contributed to uncertainty over the amount of damages. Where the existence of damages is certain, and the only uncertainty relates to the amount, “the burden of uncertainty as to the amount of damages falls upon the wrongdoer.” See footnote 132. Moreover, the court may consider post-breach evidence when determining the reasonable expectation of the parties in connection with calculating damages, and may consider the willfulness of the breach.

In addition, where there is a willfulness involved in the breach, the court may take that into account in deciding whether to require a lesser degree of certainty. Also: “Damages need not be calculable with mathematical accuracy and are often at best approximate.” See footnote 138.

Dissent: The spirited dissent offers a scholarly contrary perspective but highlights of it will not be included in this short post as it does not currently represent the prevailing law in Delaware. Nonetheless, the heavily footnoted dissent remains worth reading for those interested in a fuller understanding of the issues and the law addressed in this case.

 

Top Ten 2013 Delaware Corporate and Commercial Decisions

By: Francis G.X. Pileggi and Kevin F. Brady

This is our ninth annual review of key Delaware corporate and commercial decisions. During 2013, we reviewed and summarized over 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues. Among the decisions with the most far-reaching application and importance during 2013 are the “top ten” that we are highlighting in this short overview. Prior annual summaries are linked in the right margin of this blog.Photo of the Supreme Court Courthouse in Dover (The Supreme Court’s stately building in Dover is featured in the photo from the Court’s website.)

Whenever a “Top Ten” list is prepared, there remains a risk of omitting some opinions that also are noteworthy, so we encourage readers to send us suggestions for additions to this list. Hyperlinks below lead to both a synopsis and each slip opinion. Of course, all the opinions we reviewed in 2013 are available on this blog for those who would like to read all of them and make their own list. In chronological order, the winners are:

Supreme Court Determines that There is No Fiduciary Duty to Structure Executive Compensation to Take Advantage of Corporate Tax Deduction. Freedman v. Adams. This decision is another example of how difficult it remains to challenge compensation decisions on the basis of Delaware corporate law.

Supreme Court Enforces Duty to Negotiate in Good Faith. SIGA Technologies v. PharmAthene. Most lawyers will be surprised to know that an obligation to negotiate can be enforced in Delaware even when a term sheet is not complete or final.

Supreme Court Upholds Presumption of Good Faith in Agreement to Bar Claims. Norton v. K-Sea Transportation. This is one of many recent examples where an LP agreement waived all duties except the non-waivable implied duty of good faith, but the agreement also created a presumption of good faith that made it almost impossible to challenge wrongdoing. N.B. Waivers will be enforced. Read before signing to know what duties and rights are being waived.

Chancery Clarifies Fiduciary Duty of Disclosure Owed by Directors and Majority Shareholders when Purchasing Shares or Selling Shares to Existing Shareholders. In re: Wayport, Inc. Litigation. This opinion provides a textbook-style explanation of the duty of disclosure in general, as well as in the context of selling and buying shares among existing shareholders.

Supreme Court Establishes New Standard for Trial Courts to Determine Appropriate Penalty when Pretrial Deadlines are Not Met. Christian v. Counseling Resource Associates, Inc. This is a must-read for lawyers (and their clients) to understand when court approval is needed to extend pre-trial deadlines and the consequences of missing pre-trial filing deadlines.

Chancery Emphasizes Duty of Oversight Owed by Directors Includes Corporate Operations in Foreign Countries. Rich v. Chong and Puda Coal and In re:  China Agritech, Inc. Shareholder Derivative Litigation. This trio of decisions, all involving operations in China of Delaware corporations, should worry directors of companies with far-flung operations in distant countries unless they make visits to those countries or otherwise make themselves sufficiently aware of those operations.

Business Judgement Rule Announced as Standard Applicable to Controlling Shareholder Transactions with Safeguards.  In Re MFW Shareholders Litigation. This iconic Chancery decision provides a clear standard to practitioners who formerly had less definitive guidance (and multiple conflicting standards) to advise clients on the standard that would apply in Delaware to controlling shareholder freezeouts. This decision was appealed and on December 18, 2013, the Supreme Court heard oral argument en banc. When that decision is published, we will highlight it.

Chancery Addresses Whether Notice Required Before Board Ousts CEO/Controlling Shareholder. Klaassen v. Allegro Dev. Corp. et al.,. This Chancery decision is the subject of an expedited appeal to the Delaware Supreme Court. Among the issues to be addressed by Delaware’s high court is whether the actions of a board to dismiss the CEO, who also had voting power over a controlling percentage of shares, are void — as compared to voidable. The trial court opinion considering a motion for a stay pending appeal provides a mini-treatise on the Delaware law applicable to notice requirements for board meetings and the consequences of ineffective notice. The opinion is also must-reading for anyone interested in the proper approach to contests for control among warring factions of dissident directors and competing shareholder groups.

Supreme Court Addresses Business Combination Not Requiring Shareholder Vote. Activision Blizzard Inc. v. Hayes, et al., No. 497-2013, order issued (Del. Oct. 10, 2013). In a rare ruling from the bench, after oral argument, the Delaware Supreme Court reversed an injunction granted by the Court of Chancery in  Hayes v. Activision Blizzard Inc., No. 8885, 2013 WL 5293536 (Del. Ch. Sept. 18, 2013).  The formal written Supreme Court opinion was issued on Nov. 15, 2013. The issue addressed was whether the structure of the deal qualified as the type of business combination that required a vote by public shareholders. In a unanimous ruling, Delaware’s high court ruled that no vote was required. Notably, merely a month or so transpired between the date of the complaint being filed and the Supreme Court’s oral ruling after its review of an injunction that was issued by the trial court. Especially in a major case like this, that remains remarkable celerity.

Chancery Addresses State Insider Trading Claims Twice in Two Weeks (Two cases tied for the last spot in top ten list). In re Primedia, Inc. Shareholders Litigation. In connection with discussing the elements of the claim, this opinion addressed whether equitable tolling of the state insider trading claim applied to extend or suspend the statute of limitations. In Silverberg v. Gold, for the second time in as many weeks, a state insider trading claim, called a Brophy claim in Delaware, was analyzed in a Chancery opinion. This 40-page decision denied a motion to dismiss based on an alleged failure to make pre-suit demand on the board.

UPDATE: The Harvard Law School Corporate Governance Forum published a version of this annual review on their blog.

Among the key corporate and commercial Delaware decisions that we have highlighted on these pages during the first five months of 2013, the following decisions either clarified existing Delaware law or announced new law on important substantive or procedural topics. This is a supplement to the annual review of cases we have provided on this blog for the last eight years. Other cases decided so far in 2013 may have been the subject of more commentary elsewhere, but we think that among the 80 or so cases we have reviewed from January through May of 2013, those listed below have the most wide-ranging importance and relevance.

The list was intentionally kept relatively short, which increased the risk of omitting some opinions that also are noteworthy, so we encourage readers to send us suggestions for additions to this list. Hyperlinks below lead to both a synopsis and each slip opinion.

Supreme Court Determines that There is No Fiduciary Duty to Structure Executive Compensation to Take Advantage of Corporate Tax Deduction (Freedman v. Adams). This decision is another example of how difficult it remains to challenge compensation decisions on the basis of Delaware corporate law.

Supreme Court Enforces Duty to Negotiate in Good Faith (SIGA Technologies v. PharmAthene). Most lawyers will be surprised to know that an obligation to negotiate can be enforced in Delaware even when a term sheet is not complete or final.

Supreme Court Upholds Presumption of Good Faith in Agreement to Bar Claims (Norton v. K-Sea Transportation). This is one of many recent examples where an LP agreement waived all duties except the non-waivable implied duty of good faith, but the agreement also created a presumption of good faith that made it almost impossible to challenge wrongdoing. N.B. Waivers will be enforced. Read before signing to know what duties and rights are being waived.

Chancery Clarifies Fiduciary Duty of Disclosure Owed by Directors and Majority Shareholders when Purchasing Shares or Selling Shares to Existing Shareholders (In re: Wayport, Inc. Litigation). This opinion provides a textbook-style explanation of the duty of disclosure in general, as well as in the context of selling and buying shares among existing shareholders.

Supreme Court Establishes New Standard for Trial Courts to Determine Appropriate Penalty when Pretrial Deadlines are Not Met (Christian v. Counseling Resource Associates, Inc.). This is a must-read for lawyers (and their clients) to understand when court approval is needed to extend pre-trial deadlines and the consequences of missing pre-trial filing deadlines.

Chancery Emphasizes Duty of Oversight Owed by Directors Includes Corporate Operations in Foreign Countries (Rich v. Chong and Puda Coal and In re:  China Agritech, Inc. Shareholder Derivative Litigation). This trio of decisions, all involving operations in China of Delaware corporations, should worry directors of companies with far-flung operations in distant countries unless they make visits to those countries or otherwise make themselves sufficiently aware of those operations.

Business Judgement Rule Announced as Standard Applicable to Controlling Shareholder Transactions with Safeguards (In Re MFW Shareholders Litigation). This iconic Chancery decision provides a clear standard to practitioners who formerly had less definitive guidance (and multiple conflicting standards) to advise clients on the standard that would apply in Delaware to controlling shareholder freezeouts.

Brinckerhoff v. Enbridge Energy Company, Inc., Del. Supr., No. 574, 2011 (May 28, 2013). This is the third Delaware Supreme Court decision in two consecutive business days that addressed the issue of good faith in the context of an agreement. This is the second decision on the same day that addressed the provision in an LP agreement that creates a presumption of good faith based on the reliance on a expert consultant. This short 10-page decision made quick work of explaining why Delaware’s high court was affirming Chancery’s dismissal of the claims for failure to establish bad faith.

The other two very recent Supreme Court decisions addressing good faith in the contractual context are highlighted on these pages at this link for the Norton  v. K-Sea case, and this link for the SIGA v. PharmAthene case.

The Chancery decision appealed from in this case was highlighted on these pages here. Another prior Chancery decision in this case, with more background, was also summarized on these pages.

Norton v. K-Sea Transportation Partners, L.P., Del. Supr., No. 238, 2012 (May 28, 2013). This Delaware Supreme Court decision is the second in consecutive business days that addresses the concept of good faith in the contractual context. See SIGA Technologies, Inc. v. PharmAthene, Inc., highlighted on these pages. (Photo: Supreme Court Building in Dover.)

Photo of the Supreme Court Courthouse in DoverIssue Addressed: Did provision of LP agreement that provided for the presumption of good faith, bar claims based on an alleged conflict of interest? Short Answer: Yes.

Brief Background

The Court of Chancery’s opinion in this case was highlighted on these pages and provides more background details. This opinion is a relatively short and pithy 28 pages in the slip opinion format and readers interested in this topic should read the whole thing. At this time I will simply provide a bare bones overview. In essence, the context was a merger of K-Sea Transportation Partners L.P. and Kirby Corporation. The LP’s general partner (GP) held incentive distribution rights (IDR) which had value separate from the interests of the common unitholders. With affiliates, the GP controlled the LP.

The plaintiff, Norton, claimed that the GP had a conflict of interest when deciding to approve the merger due to compensation payable to the GP, for the IDR, that was not payable to the other unitholders. A Conflicts Committee hired independent financial and legal advisors, and unanimously recommended the merger to the full board, which also approved it.

Bullet Points from Court’s Legal Analysis

  • The high court recited fundamental Delaware contract interpretation principles, such as the following gem: “A meaning inferred from a particular provision cannot control the agreement if that inference conflicts with the agreement’s overall scheme.” See footnote 23 and related text.
  • The truism was underscored that the Delaware LLP Act gives maximum effect to the principle of freedom of contract and also allows the parties to expand, restrict or eliminate any fiduciary duties a partner may owe–except that the implied duty of good faith and fair dealing cannot be eliminated from the LP agreement. See Section 17-1101 (a) and (c).
  • The court construed the LP agreement to waive all fiduciary duties and replace them with a contractual fiduciary duty which merely required the GP to “reasonably believe that its action is in the best interest of, or not inconsistent with, the best interests of the Partnership.”
  • Importantly, the parties did not raise on appeal, and the high court did not address, the discussion by the Court of Chancery about how the presumption of good faith contained in the agreement interfaced with the implied duty of good faith and fair dealing. See footnotes 62 and 67.
  • Although the facts supported an inference that the GP “may not have” acted in good faith, and extracted an excessive amount for its IDRs at the expense of the limited partners, section 7.10(b) of the LP agreement provided a “conclusive presumption” that the GP acted in good faith if the GP relies on a competent expert’s opinion as to matters the GP reasonably believes to be within that person’s expertise. The court found that the fairness opinion relied on by the GP satisfied this provision of the agreement.
  • If the unitholders were not happy with the terms of the merger, they still had an opportunity to vote against it. Thus, the court explained that their remedy was “the ballot box, not the courthouse”. They should have realized that their remedies were otherwise limited due to the waivers and restrictions in the agreement that bars claims for breach of fiduciary duty that would apply, for example, in the corporate context.
  • Delaware’s high court also rejected claims against the board members of the GP, reasoning that there was no cognizable claim against them for causing the GP to take an action that did not breach the GP’s duties under the LP agreement. See footnote 66.

Supplement: The Delaware Supreme Court issued several other decisions in 2013, in addition to this one, that explored the nuances and contours of good faith in the context of alternative entity agreements. See, e.g., Gerber v. Enterprise Products Holdings, LLC, Del. Supr., No. 46, 2012 (June 10, 2013), highlighted on these pages.

PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-VCP (Del. Ch. May 31, 2012).
Issue Decided: In response to a request for a post-decision proposed form of Order, the Court reviewed different proposed forms of Order with 30 different points of disagreement submitted by the parties regarding the form of Order to implement the post-trial written decision in this case, that was summarized on these pages here, and in which the Court imposed as part of its judgment a right to future profits from the sale of a product–as a penalty at least partially due to a failure to negotiate in good faith.

The decision denying a motion for reargument of the post-trial ruling was the focus of a summary here. Other prior decisions by the Court of Chancery in this case, which of course also provide more background details, have been highlighted on these pages here, here and here.

Brief Overview

The multitude of issues regarding the exact form of Order needed to implement the Court’s decison are not of widespread applicability and so for purposes of this brief blurb, I will refer merely to the more noteworthy aspects of the opinion.  One of those is a reference to Section 4734 of Title 10 of the Delaware Code, which the Court referred to as directing the Prothonotary of the Superior Court to enter a judgment calling for the payment of a sum of money in accordance with Section 4734.  This reference is useful for those Chancery practitioners that need to enforce a judgment by the Court of Chancery for a sum certain.

The Court also discussed Court of Chancery Rule 54(d) which refers to costs that are awarded by right pursuant to a judgment, but those costs do not include attorneys’ fees. However, the Court enforced a provision in the parties’ agreement that shifted attorneys’ fees to the prevailing party.

UPDATE: BloombergBusinessweek reports that the final Order has been appealed.

Noteworthy 2011 Corporate and Commercial Decisions from Delaware’s Supreme Court and Court of Chancery.

By:  Francis G.X. Pileggi and Kevin F. Brady.

Introduction

This is the seventh year that we are providing an annual review of key Delaware corporate and commercial decisions. During 2011, we reviewed and summarized approximately 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues.  Among the decisions with the most far-reaching application and importance during 2011 include those that we are highlighting in this short overview.  We are providing links to the more complete blog summaries, and the actual court rulings, for each of the cases that we highlight below. Prior annual summaries are linked in the right margin of this blog.

Top Five Cases from 2011

We begin with the Top Five Cases on corporate and commercial law from Delaware for 2011 and we are glad to see that at least four of them have some support from the bench as these were the cases that four Vice Chancellors highlighted as important decisions in a recent panel presentation that they offered in New York City in early November 2011.  Those cases were the following:  In Re: OPENLANE Shareholders Litigation; In Re: Smurfit Stone Container Corp. Shareholder Litigation; In Re: Southern Peru Copper Corp. Shareholder Litigation and Air Products and Chemicals, Inc. v. Airgas Inc., and Kahn v. Kolberg Kravis Roberts & Co., L.P.

In Re: OPENLANE Shareholders Litigation. In what many commentators referred to as a “sign and consent” transaction, in which the majority shareholders and the board of directors had sufficient control to provide the statutorily required consent, the Court of Chancery determined that the Revlon standard was satisfied and fiduciary duties were not breached notwithstanding the Omnicare case and even without customary safeguards such as a fairness opinion. See fuller summary here.

 In Re: Smurfit Stone Container Corp. Shareholder Litigation. The Court of Chancery denied a motion for preliminary injunction and determined that the Revlon standard applied to a merger for which the consideration was split roughly evenly between cash and stock. See fuller summary here.

In Re: Southern Peru Copper Corp. Shareholder Litigation. In what may be the largest award granted in the Court of Chancery’s venerable history, a judgment was entered for $1.2 billion (later amended to $1.3 billion) for breach of fiduciary duties in connection with an interested transaction. With interest, the total is expected to be $2 billion.  The Court later awarded attorneys’ fees of 15% which amounts to $300 million, in this derivative action. See fuller summary here.

Air Products and Chemicals, Inc. v. Airgas Inc. This magnum opus of over 150-pages in length will be the focus of scholarly analysis for many years to come. For purposes of this short blurb, it ended a year-long takeover battle between two determined companies, with the Court of Chancery ruling, among other things, that the target company was not required to pull its poison pill when the board determined that the offer for the company was too low. See fuller summary here.

Kahn v. Kolberg Kravis Roberts & Co., L.P.  This Delaware Supreme Court decision reversed and remanded an opinion by the Court of Chancery interpreting “a Brophy claim as explained in Pfeiffer.”  The issue before the Court was whether a stockholder had to show that the company had suffered actual harm before  bringing  a breach of loyalty claim that a fiduciary improperly used the company’s material, non-public information (a Brophy claim).  The Supreme Court rejected that part of the Chancery’s decision in Pfeiffer v. Toll which requires a showing of actual harm to the company.  See fuller summary here.

We also selected the following additional noteworthy cases:

Shareholder Litigation

In Re: John Q. Hammons Hotels, Inc. Shareholder Litigation.  Despite the application of the entire fairness standard, the Court concluded that the merger price was entirely fair, the process leading to the transaction was fair, that there was no breach of fiduciary duty, and therefore no claims for aiding and abetting fiduciary duty.  See fuller summary here.

Reis v. Hazelett Strip-Casting Corp.  The Court applied an entire fairness analysis and held that the attempt to cash out minority shareholders via a reverse split was neither the result of a fair process nor did it involve a fair price.  See fuller summary here.

In re: Del Monte Foods Co. Shareholders Litigation. This first of three rulings enjoined a shareholder vote on a premium LBO transaction and the buyers’ deal protection devices.  The Court also held that the advice that the target board received from a financial advisor (who also did work on the deal for the bidder) was so conflicted as to give rise to a likelihood of a breach of fiduciary duty and the Court indicated that the financial advisory firm could face monetary damages due to aiding and abetting the potential breach.  See fuller summary here.

In re: Massey Energy Company Derivative and Class Action Litigation.  The Court declined to enjoin a proposed merger.  The Court noted that the derivative claims that the plaintiffs argued were not being fairly valued as part of the merger, would become assets of the surviving corporation.  The Court reasoned in part that the shareholders should decide for themselves whether to exchange their status as Massey stockholders for a chance to receive value from a third party in an arms-length merger.  See fuller summary here.

Frank v. Elgamal.  This decision exemplifies the different approach taken by different members of the Court in connection with an application for interim fees in a class action.  (Compare the different approach in the Del Monte case.)  See fuller summary here.

Krieger v. Wesco Financial Corp.  This decision determined that holders of common stock were not entitled to appraisal rights under Section 262 when they had the option of electing to receive consideration in the form of publicly traded shares of the acquiring company.  See fuller summary here.

In re: The Goldman Sachs Group, Inc. Shareholder Litigation.  In this first corporate opinion by Vice Chancellor Glasscock, the Court dismissed a derivative action brought against Goldman’s current and former directors based on a failure to make a pre-suit demand.  At issue was Goldman’s allegedly excessive compensation structure.  See fuller summary here.

Contested Director Elections

Genger v. TR Investors, LLC.  In this opinion, the Delaware Supreme Court addresses electronic discovery issues and contested elections for directors involving DGCL Section 225. See fuller summary here.

Johnston v. Pedersen.  This opinion determined that directors breached their fiduciary duties when issuing additional stock and as a result were not entitled to vote in connection with the removal of the incumbent board and the election of the new directors.  See fuller summary here.

Section 220 Cases

King v. VeriFone Holdings, Inc. This Delaware Supreme Court ruling reversed a Chancery decision that found a lack of proper purpose in a suit by a shareholder seeking books and records pursuant to Section 220.  Delaware’s High Court explained that it remains preferable to file Section 220 suits for books and records prior to filing a derivative suit, but holding that such a chronology is not, per se, a fatal flaw in a Section 220 action.  See fuller summary here.

Espinoza v. Hewlett Packard Co. This affirmance of Chancery’s denial of a §220 claim was based on the requested report to the board being protected by the attorney/client privilege.  (This is one of several decisions in this matter.) See fuller summary here.

Graulich v. Dell., Inc.  This is a Section 220 case in which Chancery denied a request for books and records due to the underlying claims being barred by a previous release and due to the shareholder not owning the shares during the period of time for which he was requesting documents.  See fuller summary here.

Alternative Entity Cases

CML V, LLC v. Bax.  This Delaware Supreme Court decision determined that creditors of an insolvent LLC are not given standing by the Delaware LLC Act to pursue derivative claims unlike the analogous situation in the corporate context.  See fuller summary here.

Sanders v. Ohmite Holding, LLC.  This decision clarified the rights of a member of an LLC that demanded books and records of an LLC.  The Court determined that pursuant to Section 18-305 of the Delaware LLC Act a member may seek records for a period prior to becoming a member of the LLC.  See fuller summary here.

Achaian, Inc. v. Leemon Family LLC.  This opinion addressed the transferability of interests of a member of an LLC and specifically whether one member of a Delaware LLC may assign its entire membership interests, including voting rights, to another existing member, notwithstanding the provision in an agreement that requires the consent of all members upon the admission of a new member.  See fuller summary here.

Jurisdictional or Procedural Issues

Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC.  In this decision, a Delaware Supreme Court determined that Delaware would not follow the standards for a motion to dismiss under Rule 12(b)(6) announced by the U.S. Supreme Court in the Twombly or Iqbal opinions.  See fuller summary here.

Hamilton Partners, LP v. Englard.  This decision addressed the issue of personal jurisdiction over directors and interlocking entities, as well as demand futility in the context of a double derivative shareholders suit.  (Although this was decided at the end of 2010, it was important enough to include in this list as it was issued after our deadline for our compilation last year). See fuller summary here.

Encite LLC v. Soni.  This decision rejected a request for an extension of a deadline for submitting expert reports because the Court did not approve an amendment to the Scheduling Order.  See fuller summary here.

Whittington v. Dragon Group.  In this latest iteration of multiple decisions in this long-running saga, the Court examines the doctrine of claim preclusion, issue preclusion and judicial estoppel.  See fuller summary here.

In re: K-Sea Transportation Partners, L.P. Unitholders Litigation.  This decision provides a useful recitation of the standard used in Chancery for deciding whether to grant a motion to expedite proceedings, and it also reviews language in a limited partnership agreement which arguably was an effective waiver of traditional fiduciary duties as allowed by the LP statute.  See fuller summary here.

Sagarra Inversiones, S.L. v. Cemento Portland Valderrivas, S.A.  This ruling determined that the standard of “irreparable harm” granting injunctive relief was not satisfied based on the financial condition of the defendant which was “not poor enough” to convince the Court that a money judgment would not make the plaintiff whole.  (This is one of several decisions in this matter.) See fuller summary here.

ASDC Holdings LLC v. The Richard J. Malauf 2008 All Smiles Grantor Retained Annuity Trust.  This decision discussed the enforceability of forum selection clauses and in particular when those clauses will be enforced despite a related case being filed first in another forum.  See fuller summary here.

Gerber v. ECE Holdings LLC.  This decision discusses the difference between a motion to supplement and a motion to amend a complaint.  See fuller summary here.

Advancement

Fuhlendorf v. Isilon Systems, Inc.  This decision addresses the advancement of fees incurred by officers and directors sued in connection with their corporate roles.  The specific issue in this case was whether the corporation should pay for all of the costs of a Special Master appointed to review the interim application for fees.  The case also discusses the common procedure employed to review disputed monthly legal bills in advancement cases.  See fuller summary here.

Receiver or Dissolution

Pope Investments LLC v. Benda Pharmaceutical Inc.  This decision rejected the application for the appointment of a receiver on the grounds that while the plaintiff demonstrated that the defendant was insolvent, the plaintiff failed to show that “special circumstances existed which would warrant the appointment of a receiver.”  See fuller summary here.

Stephen Mizel Roth IRA v. Laurus U.S. Fund, L.P.  This decision rejected a request to dissolve a limited partnership and refused to appoint a receiver in the context of an investment fund that was in liquidation mode but was not dissolved, nor was it winding-up as that term is used in the statute.  See fuller summary here.

Legal Ethics

BAE Systems Information and Electronics Systems Integration, Inc. v. Lockheed Martin Corp.  This opinion addresses Delaware Lawyers’ Rule of Professional Conduct 3.4(b) and discusses those situations in which a fact witness may be compensated for the “lost time” away from his “day job” suffered while testifying.  See fuller summary here.

Judy v. Preferred Communications Systems, Inc.  This decision addresses the issue of legal ethics involved in determining whether an attorney may assert a retaining lien over the documents of a former or delinquent client.   See fuller summary here.

Common Law v. Statutory Claims

Overdrive, Inc. v. Baker & Taylor, Inc.  In this last formal decision  by Chancellor Chandler, the Court discussed how the Delaware Uniform Trade Secrets Act displaces conflicting tort and other common law claims that are grounded in the same facts which would support the statutory misappropriation of trade secret claims.  See fuller summary here.

Damages for Breach of Agreement to Negotiate in Good Faith

PharmAthene, Inc. v. SIGA Technologies, Inc. This Court of Chancery decision awarded damages for breach of a contractual obligation to negotiate in good faith and fashioned an equitable remedy that required the sharing of profits from the production of a product that the defendant failed to negotiate the license of in good faith. There are several decisions involving contract law by the Court of Chancery in this matter, the most recent ruling denying a motion for reargument. See fuller summary of the most recent decision here.

Postscript

On a final note, the last week of 2011 saw the sudden and sad passing of one of the nation’s foremost experts on alternative entities, Professor Larry Ribstein, who was often cited in opinions of the Delaware Courts. He coined the word “uncorporations” to refer to alternative entities and was the author of many treatises, law review articles and other publications on uncorporations, jurisdictional competition, the business of law firms and related topics involving the intersections of law and business. He was an iconic figure in the law, and the legal profession is better because of his many contributions.

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UPDATE: The Harvard Law School Corporate Governance Blog published this post here. The NACD’s Directorship.com site kindly published this article as a lead story on Jan. 5, 2012, available here. Professor Stephen Bainbridge graciously commented on this summary in his post available here. Professor Joshua Fershee on the Business Law Prof  Blog linked to this summary with kind references here.

PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-VCP (Del. Ch. Dec. 16, 2011), read opinion denying a motion for reargument here. The Court of Chancery’s original 117-page decision from September 2011 involving the award of damages for breach of an “agreement to negotiate in good faith” was highlighted on these pages here. Other Delaware decisions in this matter were summarized on posts available here.

The gist of this decision was to explain the doctrinal basis and justification for the wide range of discretion that a court of equity has in fashioning a customized remedy – – and clarifying why it is not bound by the more conventional rules that a court of law would be constrained by in awarding damages and determining lost profits with reasonable certainty.  As a remedy for breaching the express contractual obligation to negotiate a license agreement in good faith, in its decision a few months ago, the Court awarded the following remedy: “once SIGA earns $40 million in net profits or a margin from net sales of ST-246, PharmAthene shall be entitled to 50% of all net profits from such sales thereafter for a period from entry of this judgment until the expiration of ten years following the first commercial sale of any product derived from ST-246.”

Court’s Analysis

The Court determined its original remedy to be reasonable compensation for the lost expectancy of what PharmAthene would have received had a license agreement been negotiated in good faith, and was consistent with the Court’s broad discretion to form an “appropriate remedy for a particular wrong” and was necessary to provide “such relief as justice and good conscience may require.”

In addition to examining the nuances of Court of Chancery Rule 59(f), the Court distinguished the differences between waiving an argument that is not properly raised in a brief and the authority of a court of equity to fashion a remedy that may be different from what was specifically articulated by one of the parties.

The Court emphasized that it did not misapprehend the law of remedies, but to the contrary, it found the imposition of a constructive trust, and a judgment in the nature of an equitable lien in future profits, to be applicable to the circumstances of this case and was a tailored remedy necessary to redress a wrong and to prevent injustice.  See footnote 34 (citing to cases and commentary providing for a constructive trust or an equitable lien where one party advances money for the purchase of property which is titled in a name of another).

Conclusion

In this 19-page decision, the Court went to great lengths to describe why it did not misapprehend the facts and why there was a sound basis in both law and fact for the particular structure of the customized equitable remedy imposed in its original decision.