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.

Periodically we report on rule changes in the federal courts so that practitioners are away of these changes and how they might affect litigation practice in Delaware courts.  On December 8, 2011, the District of Delaware revised its Default Standard for Discovery Including Electronically Stored Information (the “Revised Default Standard”), which applies if the parties are unable to reach agreement on various discovery issues.  This is the third version of the default standard.  The Revised Default Standard updates the default rules regarding electronically stored information (“ESI”), taking into consideration changes in technology, as well as problems the Court and litigants have experienced in handling ESI issues and problems. The Revised Default Guidelines are available here. 

The Revised Default Standard expressly covers preservation of discoverable information, privilege logs, the initial discovery conference, initial disclosures, and electronic discovery procedures.  In addition, with the heavy docket that the District of Delaware has in terms of patent cases, there are specific procedures related to initial infringement and invalidity contentions in patent cases.  But, more broadly, the Default Standard for Discovery reiterates the Court’s expectation that litigants will meet and confer early in the litigation about all aspects of discovery, and that the parties will agree on reasonable limits to discovery that are proportional and tailored to the parties and the issues.

Some of the key features of the Revised Default Standard include:

Preservation

  • The parties shall preserve non-duplicative discoverable information currently in their possession, custody, or control but no modification of back-up or archival procedures is needed absent a showing of good cause.
  • The Court has identified specific categories of ESI in Schedule A to the Standard that presumptively need not be preserved absent a showing of good cause.  The list includes, among other things, deleted data, slack space, RAM, data in metadata fields that are frequently updated automatically, transient data such as temporary internet files, and instant messages (IM) that are not ordinarily printed or maintained in a server dedicated to IM.  This puts the requesting party on notice and shifts the burden onto the party requesting documents to advise the other side of the information it wants to have preserved.

Search Terms and Production Issues

  • Search terms shall be disclosed by the producing party, if used.  The requesting party may request up to 10 additional “focused” terms.
  • Search terms shall be used on non-custodial data sources and emails and other ESI maintained by the 10 custodians most likely to have discoverable information.
  • No on-site inspection of electronic media is allowed absent a showing of specific need and good cause.
  • Format of production:
  • Litigants must produce single-page TIFF images and associated multi-page text files containing extracted text or OCR with Concordance and Opticon load files with metadata;
  • Litigants may only produce native versions of files not easily converted to image format, such as Excel and Access files;
  • Litigants must preserve and produce the following metadata to the extent it exists:
  • Custodian;
  • Filename, File Path, File Size, File Extension, MD5 Hash;
  • Author, Email Subject;
  • Conversation Index;
  • From, To, CC, BCC;
  • Date Sent, Time Sent, Date Received, Time Received, Date Created, Date Modified;
  • Control Number Begin, Control Number End, Attachment Range, Attachment Begin, and Attachment End (or the equivalent thereof).

Privilege Logs

  • The parties must meet and confer about privilege logs, whether certain categories of information can be excluded from the logs, and whether alternatives to document by document logs can be exchanged.
  • The default rule is that parties need not log information generated after the filing of the complaint.
  • Preservation efforts are protected by the work product doctrine.
  • The parties must confer on a non-waiver order.  See Fed. R. Evid. 502.  The default rule is that privileged information, if produced, must be returned if it appears on its face to have been inadvertently produced or if notice of inadvertent production is provided within 30 days.

Custodians and Initial Disclosures

  • Initial disclosures must contain the following:
  • The party’s 10 custodians most likely to have discoverable information, ranked from most to least likely.
  • A list of non-custodial data sources (e.g., enterprise systems, databases, Sharepoint, etc.) from most likely to contain discoverable information to least.
  • Notice of (i) any ESI that is not reasonably accessible, (ii) third party discovery, and (iii) information subject to third-party privacy concerns or that may need to be produced from outside the U.S.

It is important to note that the Revised Default Standard refers to custodians and not key players.  While it is important to identify the key players early on in the litigation, it is assumed that the key players related to the litigation will be disclosed in the initial disclosures and discussed at the Rule 26(f) meet and confer.

Discovery in Patent Cases

The Revised Default Standard contains some specific “default” procedures for initial discovery in patent cases as follows:

(1) Within 30 days of the scheduling conference, the patentee shall identify the accused products and the asserted patents, and produce the file history for each patent.

(2) Within 30 days of (1), the accused infringer(s) shall produce core technical documents (operation manuals, product literature, schematics, and specifications) related to the accused products.

(3)  Within 30 days of (2), the patentee shall produce an initial infringement claim chart relating each accused product to the asserted claims.

(4)  Within 30 days of (3), the accused infringer(s) shall produce initial validity contentions for each asserted claim, with invalidating references.

As emphasized in a footnote, this discovery is “initial” and may be supplemented.  Finally, the Standard provides that discovery in patent cases is limited to the period extending 6 years before the filing of the complaint, except as to asserted prior art, conception, and reduction to practice.

Conclusion

There is an over-arching theme of cooperation, proportionality, reasonableness and collaboration that is reflected throughout the Revised Default Standard.  The Court wants the parties to work together to come up with reasonable solutions for handling ESI, especially in some of the more important areas such as privilege logs where the Court is looking to the parties to reduce the enormous time and expense that is devoted to creating privilege logs dealing with ESI.

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.  Kevin is a member of the District Court’s Default Standard committee that worked on these rule changes

Best wishes to all of our readers for a happy, healthy and prosperous 2012. Thanks to all who helped us win the ABA award for one of the Top 100 Law Blogs in the U.S. and the award from LexisNexis for being one of the Top 25 Business Law Blogs. We will soon be posting our annual summary of key Delaware corporate and commercial decisions.

For those who ever wondered why January 1 is the date we all mark as the first day of the year, instead of the beginning of say, March or September, for example, an article available here describes its genesis in the appointment of new consuls for the government of the Roman Empire in about 153 B.C., as well as the papal decree of Pope Gregory XIII  in 1582 A.D. The article also explains the Roman origins of the Latin names we still use for each month of the year in what continues to be known, appropriately enough, as the Gregorian calendar.

Miller v. Metal Exchange Corporation (In re:  IH 1, Inc. f/k/a Indalex Holdings Finance, Inc.), Adv. Case No. 11-51329 (PJW) (Bankr. D. Del., Dec. 30, 2011), read opinion here.

This summary was prepared by Tara Lattomus of Eckert Seamans.

Issue Addressed

Whether a Chapter 7 trustee could amend a preference complaint pursuant to Federal Rule of Civil Procedure 15 to add a defendant and relate the amendment back to the date of the original filing to avoid the expiration of the statute of limitations with respect to the claims against such defendant?

Short Answer

The motion to amend was granted and the amendment related back to the date of the original filing because:  (1) the amendment asserted a claim arising out of the same transaction described in the original complaint; (2) the new defendant had received notice of the action within 120 days of the original filing and would not be prejudiced by defending the action; and (3) the new defendant knew or should have known that it would have been originally named as a defendant but for a mistake concerning its proper identity.

Background

On March 20, 2009, IH 1, Inc. and several related companies filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.  Subsequently, the cases were converted to cases under Chapter 7 and George L. Miller was appointed as the Chapter 7 trustee. 

Approximately two years later on March 14, 2011, the trustee filed a complaint against Metal Exchange Corporation (“MEC”) seeking to avoid and recover preferential transfers.  The original complaint was amended once to correct a formatting error.  MEC was named as a sole defendant in both versions of the complaint.  However, both complaints also indicated that the trustee sought to avoid the preferential transfers from MEC and another entity named Pennex Aluminum Company (“Pennex”) described as a trade name of MEC.  The complaint stated that the debtor had transacted business with the defendant as MEC and Pennex although separate invoicing and billing was used. 

Prior to the preference complaint being filed, the trustee sent two demand letters; one addressed to the defendant as MEC and one addressed to Pennex requesting the return of the preferential transfers.  The trustee received no response from MEC, but received a preference defense letter from the law firm Bryan Cave LLP on behalf of Pennex.  Although Bryan Cave did not respond to the demand letter on behalf of MEC, it did subsequently represent MEC in the preference action and filed an answer to the amended complaint on its behalf.  MEC’s answer indicated that it had only done business with the debtor under the name MEC and also asserted that Pennex was a separate Missouri limited liability company.  Approximately three months after MEC filed its answer, the trustee filed a motion for leave to file a second amended complaint to add Pennex as a separate defendant.  The trustee also sought a ruling that the amendment would relate back to the date of the original filing as the statute of limitations had run on the claims against Pennex.

Analysis

The Bankruptcy Court first addressed the ability of the amendment to relate back to the original filing date because due to the expiration of the statute of limitations, an amendment that could not relate back would be futile.  The Court noted that under Federal Rule of Civil Procedure 15(c), a complaint can be amended to name a new party and the amendment will relate back to the date of the original filing if three conditions are met.  First, the amendment must assert a claim arising out of the same transaction or occurrence described in the original pleading.  Second, a new party must have received notice of the action within 120 days of the original filing and not be prejudiced by defending on the merits.  Third, during that 120 day period, the new party must have known or should have known that but for a mistake concerning the party’s identity, it would have been named in the original complaint.

The parties agreed that the claim against Pennex arose out of the same transaction as described in the original complaint and also that Pennex received notice of the action within 120 days of the filing.  However, the parties disagreed over whether Pennex knew or should have known that it would have been named as a defendant but for a mistake concerning its identity.  The Court confirmed that the first condition was met because the transfers to Pennex were clearly described in the original complaint.  The Court also found that Pennex had received constructive notice of the filing because Pennex shared an attorney with MEC as well as a registered agent.  The only dispute concerned the third condition; whether Pennex knew or should have known that but for a mistake about its identity it would have been named as a defendant.  MEC argued that since Pennex sent a response to the demand letter and the trustee failed to file suit before the statute of limitations period ran, Pennex reasonably concluded that the trustee had accepted its defenses and decided not to file suit.  The problem with this reasoning was that the response letter was dated three days after the original complaint was filed.  Putting all other factual issues aside, the Court held that the only reasonable explanation for the trustee to seek recovery of the transfers made to Pennex from MEC was the trustee’s mistaken belief that Pennex was a trade name of MEC.  Accordingly, the Court concluded that all three factors of Rule 15(c) had been met and the amendment would be allowed to relate back to the date of the original complaint.  The Court also granted the trustee leave to amend given the absence of prejudice and the lack of undue delay, bad faith or dilatory motive.

James J. Gory Mechanical Contracting Inc v. BPG Residential Partners V LLC, et al., Del. Ch., C.A. No. 6999-VCG (Dec. 30, 2011), read opinion here .

This summary was prepared by a former associate of Eckert Seamans.

In this short-and-to-the-point opinion, the Court of Chancery recounts “the blackest of black-letter law that an enforceable contract requires an offer, acceptance, and consideration.”

Plaintiff, a construction company, sued defendant, a developer, for breach of contract. Plaintiff asserted that it fully performed the terms of the contract and that defendant owed plaintiff almost $300,000. Rather than answering the complaint, defendant filed a motion for judgment on the pleadings pursuant to Rule 12(c). The Court converted the motion to a 12(b)(6) motion to dismiss since the defendant never filed a pleading, and the motion for judgment on the pleadings was therefore premature.

In its motion, defendant argued that the parties entered into a superseding agreement that deferred defendant’s payment obligations under the original contract until it was able “to sell a minimum number of condominiums.” First, the Court held that the superseding “contract” was unenforceable because it lacked consideration because a promise to fulfill a pre-existing duty is not consideration. Second, the Court found that even if there was sufficient consideration, that the terms of the alleged superseding “contract” were ambiguous since they did not specify the number of condos that defendant would have to sell before resuming payments.

As a final effort, defendant argued that plaintiff waived its right to payment under the original contract by signing the superseding “contract.” The Court disagreed, and heralded the words heard by every first year law school student: “A waiver must be unequivocal.” The alleged superseding “contract” was not an unequivocal relinquishment of plaintiff’s right to collect money it was owed. Accordingly, the Court denied the motion to dismiss.

Hurd v. Espinoza and Hewlett-Packard Company, No. 167, 2011 (Del. Supr., Dec. 28, 2011; corrected on Dec. 29, 2011), read Delaware Supreme Court opinion here. The Chancery decision appealed from was highlighted on these pages here. The New York Times online article about this  Supreme Court decision is available here. The separate Delaware Supreme Court decision last month addressing the underlying Section 220 issues in this case was summarized on this blog here.

Issue Addressed:  The issue addressed in this decision was whether a particular document filed with the Court should be kept under seal pursuant to Court of Chancery Rule 5(g). That document was a letter that included sundry allegations against the former CEO of Hewlett-Packard Co., which eventually led to his resignation.

Brief Overview and Background

Although the extensive media coverage regarding the document sought to be kept under seal in this matter focused on the aspects of the issue that are commonly found in tabloids, for purposes of corporate litigation, the Delaware Supreme Court appropriately focused on the issue of whether the prerequisites of Rule 5(g) were satisfied in order to maintain a document under seal (i.e., to keep it from public access).

The document sought to be kept under seal was a letter about the former CEO of Hewlett-Packard that was attached as an exhibit to the complaint filed in this case under DGCL Section 220 to obtain books and records of Hewlett-Packard Company.  At the time, Mark Hurd was the CEO of Hewlett-Packard (“HP”), until a lawyer for a former girlfriend of Hurd sent a letter alleging improper behavior which led to the resignation of Hurd as the CEO of HP.  That letter is the subject of this decision.  Although neither the shareholder who filed the §220 action nor HP regarded the letter as confidential, Hurd intervened in this case to argue that the letter was confidential and should be kept under seal and not revealed to the public (even though it was filed as part of the Section 220 lawsuit).  The Court of Chancery, in a 71-page opinion released in March, explained why the details of the letter, however embarrassing, should not remain under seal (for the most part), even based on California law, which is the primary basis on which Hurd sought to maintain its confidentiality.

Analysis

The Delaware Supreme Court did not rely on California law and instead affirmed the trial court based on an analysis of Court of Chancery Rule 5(g), which describes the prerequisites that must be satisfied in order to maintain a document under seal when it is filed with the Court.  In a pithy decision, Delaware’s High Court explained in a businesslike manner that in order to place a document under seal that has been made part of the public record, and in order to justify a denial of public access to that document, “good cause” must be established.  “Good cause” has been found to be a basis to seal documents when the documents contain trade secrets, non-public financial information, and third-party confidential material.  Information that is “mildly embarrassing” does not suffice to protect it from disclosure.  See In Re Yahoo!, Inc. S’holders Litig., 2008 WL 2268354 (Del. Ch.); Romero v. Dowdell, 2006 WL 1229090 (Del. Ch.); Khanna v. McMinn, 2006 WL 1388744 (Del. Ch.).

The Court explained that the letter at issue did not contain any trade secrets, non-public financial information or other proprietary information.  Therefore, the limited issue before the Court was whether the letter contained any third-party confidential information.  The Court reasoned that even if the letter contains some embarrassing detail about the behavior of Hurd, it does not describe any intimate conversations or conduct, and was sent to Hurd in his capacity as the CEO of HP at the company’s address, and involved claims against both HP and Hurd.

In affirming the decision of the Court of Chancery (in a decision that was only 10% as long), the Court also observed that most of the claims made in the letter were already widely reported in “virtually every media.”

Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., No. 425,2011 (Del. Supr., Dec. 28, 2011), read opinion here. The Chancery decision appealed from was highlighted on these pages here. A related Chancery decision in this case was summarized on this blog here. 

Issue addressed:  Whether the pre-suit demand requirements of Spanish law or Delaware law should apply to a claim brought derivatively on behalf of a wholly-owned subsidiary of a corporation formed under the laws of the country of Spain.   

Brief Overview

Delaware’s High Court provided a flow chart to illustrate the related companies involved and which explained that the plaintiff filing this suit was a shareholder in a parent corporation formed in Spain, and that parent entity controlled an intermediate subsidiary entity formed in the Netherlands, which then controlled a “tier-three” entity that was a subsidiary of the entity formed in the Netherlands.” The shareholder that filed the suit in Delaware, alleging breach of fiduciary duty involving the Delaware entity, was only a shareholder in the Spanish parent entity.

The Court explained that this could be described as a “triple derivative suit,” but that in any event under the internal affairs doctrine and established Delaware law, where a wholly-owned subsidiary existed prior to the wrongdoing, and the plaintiff owns stock only in the parent, a demand can only be made, and a derivative action can only be brought, at the parent level, and not at the subsidiary level.  By analogy, in the context of a double derivative suit, the Court had previously ruled that the basis for standing in a case of this type is the ability of the parent to enforce the claim of the subsidiary by its direct exercise of control over the subsidiary.  The Court applied that principle in this decision to explain that the standing of the plaintiff to sue derivatively, including its pre-suit demand obligations, were governed by the rules applicable at the parent level, which in this case was the country of Spain.  See Lambrecht v. O’Neal, 3 A.3d 277, 282 (Del. 2010).

Notably, the Court in an extensive footnote 13, went to great lengths to explain that dictum in a separate Chancery decision which suggested that some language in the Lambrecht case was inconsistent with provisions of the Delaware General Corporation Law, was wrong.  The Supreme Court emphasized that “those assertions warrant comment, lest this Court’s silence be regarded as tacitly blessing Hamilton Partners’ characterization of Lambrecht as containing ‘technical misteps.’”  See Hamilton Partners, L.P. v. Englard, 11 A.3d 1180, 1203-05, 1206 (Del. Ch. 2010). 

The Court also relied on comity as a basis for its decision, and explained that: although “a Delaware entity may be involved in the corporate structure, the Court is mindful of the important interest of affording comity to foreign business law governing the internal affairs of a foreign corporation.”

Recently, the U.S. Securities and Exchange Commission issued some guidance for when publicly listed companies must disclose hacking incidents or other breaches of their cyber security to investors.  See SEC Release here.  The SEC said that if there is a breach of cyber security that leads to losses, then companies should “provide certain disclosures of losses that are at least reasonably possible.” The link on the SEC website to the SEC Guidelines is available here.

The SEC noted that companies may need to disclose known or threatened cyber incidents to put the discussion of cyber security risks in context. For example, if a company experienced a material cyber attack in which customer data was compromised, it likely would not be sufficient for the company to disclose that there is a risk that such an attack may occur. Instead, the company “may need to discuss the occurrence of the specific attack and its known and potential costs and other consequences.”

The SEC said that companies need to address cyber security risks and cyber incidents in their Management Discussion and Analysis of Financial Condition and Results of Operations sections “if the costs or other consequences associated with one or more known incidents or the risk of potential incidents represent a material event, trend, or uncertainty that is reasonably likely to have a material effect on the registrant’s results of operations, liquidity, or financial condition or would cause reported financial information not to be necessarily indicative of future operating results or financial condition.”  If it is reasonably likely that the attack will lead to reduced revenues, an increase in cyber security protection costs, including related to litigation, the company is required to discuss the possible outcomes, including the amount and duration of the expected costs, if material. Alternatively, if the attack did not result in the loss but it prompted the company to materially increase its cyber security protection expenditures, the company should discuss those increased expenditures.

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.

Wimbledon Fund LP – Absolute Return Fund Series v. SV Special Situations Fund LP, C.A. No. 4780-CS (Del. Ch., Dec. 22, 2011), read letter ruling here. Read summaries of prior Delaware decisions in this matter here.

This is the latest iteration of several prior Delaware decisions in this case involving a hedge fund that sought to withdraw its investment in an LP.  In sum and substance, this latest installment addresses the reasons why the Court decided to shift fees, and make the plaintiff hedge fund responsible for the fees of the defendant based on, primarily, the litigation tactic of the hedge fund not to seek discovery after a cross-motion for summary judgment was filed, and to appeal the loss of a summary judgment motion without referring to additional evidence that the plaintiff had in its file.  The Supreme Court remanded and required the trial court to allow the record to be supplemented and directed the trial court to conduct an additional hearing based on that new evidence.

There are many other background details and  nuances as well as copious citations to caselaw that provided the theoretical underpinning for the award of attorneys’ fees in this ruling that expresses the displeasure of the Court of Chancery with certain litigation tactics employed in connection with the summary judgment motions.

This letter is educational for litigators who are faced with either a summary judgment motion or a cross-motion for summary judgment, and who have to make a decision about whether they want to seek additional discovery before responding to the motion, or before asking the court to rule on the motion.

S. Muoio & Co., LLC v. Hallmark Entertainment Investment Co., No. 172, 2011 (Del., Dec. 20, 2011), is a very short Order of the Delaware Supreme Court affirming the decision of the Court of Chancery dated March 9, 2011, which was highlighted on these pages here.  The Chancery decision addressed the fairness of a recapitalization plan and found that it satisfied the entire fairness standard.  Even though this Order of the Delaware Supreme Court was only a few lines long, it was an en Banc decision which gives it added importance. Thanks to Wilmington lawyer Kurt Heyman for forwarding a copy of the Order.