Professor Stephen Bainbridge is a nationally recognized expert and prolific scholar on corporate law topics. Judge Richard Posner is a prolific member of the U.S. Court of Appeals for the Seventh Circuit who writes many books on many topics. Professor Bainbridge writes here about his disagreement with Judge Posner’s recent writings about Catholicism, and in particular how the judge has his facts wrong, for example, as follows:  "Neither as a legal, theological, nor practical matter is the Roman Catholic church viewed as a single corporation." Read more at the above link for more detailed analysis regarding the "clash of the titans".

Postscript: Joseph Lawler adds his viewpoint here.

ASDI, Inc. v. Beard Research, Inc., Del. Supr., Consol. Nos. 296/301/308, 2010, (Nov. 23, 2010), read opinion here.  This is an appeal from two separate decisions of the Delaware Court of Chancery in the same case. The first decision dealt with penalties for spoliation of evidence. The second decision appealed from was a merits-based decision reported at 2010 WL 1644177. The Delaware Supreme Court affirmed both decisions. Although relying on what it described as the “well-written” opinions of the trial court, this short ruling provided an additional basis for the affirmance of the merits-based decision only. See discussion of opinions appealed from in the Court of Chancery here, here and here.

Issue Addressed
This decision clarified Delaware law that in a claim for tortious interference with contractual relations, the lawful termination of a contract by a third-party with the plaintiff will not by itself, bar a claim that the defendant tortiously interfered with that contract.

Brief Summary of Ruling
The Supreme Court emphasized that the focus of the claim for tortious interference with contractual relations is upon the defendant’s wrongful inducement of a contract termination, “not upon whether the termination itself was legally justified.” The Court referred to the Restatement (Second) of Torts, which “recognizes a claim for tortious interference with contractual relations where the defendant utilizes “wrongful means” to induce a third-party to terminate a contract.”

In addition to allowing a claim for tortious conduct which induces a third-party to terminate a contract with the plaintiff unlawfully, it is not essential to this cause of action that the termination be unlawful. Rather, conduct amounting to tortious interference has been found actionable even where the third-party lawfully is entitled to terminate a contract “at-will.”

Such claims have been recognized in other states in situations involving at-will employment contracts, commercial contracts such as attorney-client relationships, supply contracts and marketing contracts. See cases cited at footnotes 7 through 11. Relying on decisions from other jurisdictions, the Court explained that even when the termination of a contract is lawful, such a termination is not fatal to a claim of tortious interference with contractual relations because “the focus of the claim is on the defendant’s wrongful conduct that induces the termination of the contract, irrespective of whether the termination is lawful.”

In this six-page decision, Delaware’s High Court overruled two decisions of the Delaware Superior Court to the extent that they are inconsistent with the holding in this case. See footnote 15.

 

PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-VCP (Del. Ch. Nov. 23, 2010), read opinion here. See prior Chancery decision in this case summarized here.

Issue Decided
The issue decided in this 32-page decision of the Delaware Court of Chancery involved the enforceability of a term sheet for a licensing agreement and whether or not it had all of the essential elements of an enforceable agreement.

Brief Summary of Background Facts
This decision chronicles the latest stage in a long-running breach of contract case between PharmAthene and SIGA.  The opinion addresses a dispute over a Licensing Agreement Term Sheet (“LATS”). SIGA takes the position that the LATS was not binding, and was merely a “agreement to agree.” By contrast, PharmAthene claimed that the LATS was binding and sued to enforce the agreement. SIGA moved for summary judgment.

Highlights of Legal Principles Discussed
The Court began its legal analysis with a recitation of the standard for summary judgment and the important principle that the Court maintains the discretion to deny summary judgment “if a more thorough development of the record were helpful to clarify the law or its application.” Ultimately, that discretion was applied to deny summary judgment in this case.

The opinion focused on the essential elements necessary in order for a contract to be binding. Stated in another way, the Court had to decide what the essential terms are that contracting parties must agree on, in order for a contract to be binding. One general principle is that a contract cannot be enforced if it is subject to future negotiations which would make it, by definition, a mere “agreement to agree.” Sub-issues that must be addressed when discussing these applicable principles are as follows: (1) Whether the parties intended to be bound by the document; and (2) Whether the document contains all the essential terms of an agreement.

The Court recited the test stated by Chancellor Chandler in a previous decision for determining whether all essential terms have been agreed upon:

“Whether a reasonable negotiator in the position of one asserting the existence of a contract would have concluded, in that setting, that the agreement reached constituted agreement on all the terms that the parties themselves regarded as essential and thus that the agreement concluded the negotiations . . ..” See footnote 39. (emphasis in original).

Regarding the request for specific performance, the Court also noted that the same essential elements would be a prerequisite for specific performance. That is, under Delaware law, a party seeking the equitable remedy of specific performance “must prove the existence and terms of an enforceable contract by clear and convincing evidence.” The Court denied the summary judgment motion in order to allow for a more fully developed factual record and based on the well accepted equitable maxim that: “Equity will not suffer a wrong without a remedy.” See footnote 56. The Court reasoned that PharmAthene has adduced sufficient facts to support one or more of its claims that SIGA breached its agreement with PharmAthene.

The Court, however, expressed doubt that PharmAthene could adequately establish damages at trial based on the general rule that a plaintiff can only recover those damages which can be proven with reasonable certainty. See footnote 58. The Court also recognized that it is difficult to accurately predict damages related to a new business with an unproven technology. (citing Amaysing Techs. Corp. v. CyberAir Commc’ns, Inc., 2004 WL 1192602, at *4-5 (Del. Ch. May 28, 2004)).

On the issue of damages, the Court recognized the challenges but concluded that they were not insurmountable and allowed the claims to go to trial. Moreover, an issue arose about the general principle that damages must be established as of the date of the breach. The Court followed other case law which “suggests that courts must be circumspect about considering events that occurred after an alleged breach for purposes of calculating damages. Nevertheless, in limited circumstances, it is appropriate to do so.”

In this case, the Court concluded that PharmAthene would be allowed to show post-breach information relevant to determining appropriate damages or other form of relief. However, the Court rejected the argument that patent damages would be allowable because the Court held that this is not a patent infringement case, and therefore, patent damages would be inappropriate in this breach of contract action.
 

Fuhlendorf v. Isilon Systems, Inc., C.A. No. 5772-VCN (Del. Ch. Nov. 3, 2010), read letter ruling here.

Issue Addressed

This 4-page letter ruling of the Delaware Court of Chancery addresses an issue involving disputed amounts of fees where advancement in principal has already been established. The Court relied on the procedure previously announced in the case of Duthie v. CorSolutions Medical, Inc., 2008 WL 4173850 (Del. Ch. Sept. 10, 2008). That case set forth an appropriate procedure to follow when advancement was established but there was a dispute about the amount of fees to be paid on a monthly basis.

Summary of Ruling

In sum, the Court described the 5-step process to be employed by the parties (in order to avoid the unseemly involvement of the Court in reviewing monthly bills), as follows: (1) Plaintiff’s counsel certifies in good faith that the fees and expenses for which advancement has been sought were incurred reasonably as a matter of sound professional judgment; (2) The opposing party will identify those fees which it asserts fall outside the standard of Delaware law for advancement, and its counsel shall certify their good faith belief that the advancement of such fees is not appropriate; (3) The fees as to which there is no dispute shall be promptly paid; (4) The fees as to which any dispute remains shall be submitted to a Special Master; (5) The costs of the Special Master will be divided equally between the parties, except that the entire cost of the Special Master will be borne by the opposing party if it turns out that its objections to payment of the fees for which advancement has been sought have been made without good cause.

The Court noted in closing that a party taking a position that provides for paying only 50% of the fees requested – – pending a determination by the Special Master – – appeared to be somewhat arbitrary and that the interim amount that should be paid must be supported by a good faith belief
 

SV Investment Partners, LLC v. Thoughtworks, Inc., C.A. No. 2724-VCL (Del. Ch. Nov. 10, 2010), read opinion here. The 2006 Court of Chancery decision in this case was highlighted here.

Issue Addressed
This opinion addresses restrictions on the ability of a corporation to perform contractual obligations to redeem shares based on DGCL Section 160 and over a century of case law and commentary, despite an otherwise straightforward charter provision.

Brief Discussion
This 32-page decision should be required reading for anyone who needs to know the latest Delaware law on the restrictions that are imposed on a corporation notwithstanding what might otherwise be a clear contractual provision in the charter that one would expect to be enforced regarding the right of a shareholder or other party to have shares redeemed by the corporation.

The factual background to this case was previously provided in a 2006 Chancery decision highlighted on this blog here.

Among the several key principles of law recited in this opinion are the following: 

1)  Under Delaware law, a corporation is not required to redeem shares if to do so would render the corporation insolvent. 

2) The corporation is also not required to redeem shares if it does not have “legally available funds.”  The Court explained in scholarly detail why the term “surplus” is not the same as “legally available funds.” 

3) The restraints on the corporation’s ability to redeem shares are based in both Section 160 of the Delaware General Corporation Law, as well as over a century of court decisions and commentary that are provided in thorough detail, both in the text and in the footnotes of this gem of a decision.

4) The Court discusses the standard by which it will review a board’s decision on the issue of whether or not to redeem shares.  See page 24. The Court explained that: 

“Under Delaware law, when directors have engaged deliberatively in the judgment-laden exercise of determining whether funds are legally available, a dispute over that issue does not devolve into a mini-appraisal.  Rather, the plaintiff must prove that in determining the amount of funds legally available, the board acted in bad faith, relied on methods and data that were unreliable, or made a determination so far off the mark as to constitute actual or constructive fraud.”  (citations omitted.)

There is much more to commend this opinion which provides copious citations to scholarly treatises and court decisions that support its statement that:  “An unbroken line of decisional authority dating back to the late nineteenth century prohibits a corporation from redeeming shares when the payment would render the corporation insolvent.” 

The Court further reasoned that even if the corporation in this case were deemed to have “surplus,” it was not shown that the corporation had “funds legally available” from which to redeem the shares.  Therefore, a judgment was entered in favor of the corporation and against the party seeking a judgment that they had the right to have their stock redeemed.

 

On November 5, 2010, the Court of Chancery in Ion Geophysical Corp. v. Fletcher International, Ltd., C.A. No. 5050-VCP, read decision here, addressed cross-motions for summary judgment in a dispute about the interpretation of a preferred stock purchase agreement (“SPA”) under New York law. Kevin F. Brady of Connolly Bove Lodge & Hutz LLP provided this summary.

Plaintiff ION Geophysical Corp. (“ION”) brought an action for declaratory judgment against Fletcher International LTD to determine its rights under the SPA. The dispute focused on whether Section 6(b) of the SPA which sets forth a notice procedure for Fletcher, under certain circumstances, to increase the total number of ION common shares into which it may convert its preferred shares. The dispute was whether the language of that section of the SPA permitted Fletcher to issue only one notice or multiple notices. ION claimed that Fletcher had the right to issue only one notice in order to designate a larger number of shares it may receive upon converting its Preferred Stock while Fletcher argued that the SPA shows that Fletcher had the right if it chose to issue multiple notices and get multiple increases in the number of shares it would get. Fletcher also argued that ION breached the SPA by not complying with the second notice and as a result. Fletcher is entitled to reimbursement and indemnification for its reasonable legal fees and expenses. 

     

After an in-depth of the particular language discussing whether the SPA was ambiguous or not, the Court sided with Fletcher’s interpretation of the SPA that under Section 6(b), that Fletcher may issue one or more notices. The Court found that Fletcher was entitled to summary judgment in its favor regarding the language of the SPA but that Fletcher was not entitled to be indemnified or reimbursed for its legal fees and expenses because it had not shown that ION had committed an anticipatory repudiation of its obligations under the SPA or that it failed to deliver securities to Fletcher that it was entitled to receive. 

Airgas, Inc. v. Air Products and Chemicals, Inc., Del. Supr., No. 649, 2010 (Nov. 23, 2010), read opinion here. This Delaware Supreme Court opinion determined that the bylaw amendment by which Air Products attempted to shorten the number of months before the next "regularly scheduled" annual meeting, as a means of circumventing the otherwise lengthier process of removing staggered board members, was inconsistent with the charter of Airgas and the applicable statute. The relatively short 23-page decision is full of memorable quotes, but one snippet follows:

No party to this case has argued that DGCL Section 141(d) or the Airgas Charter requires that the three year terms be measured with mathematical precision. Nor is it necessary for us to define with exactitude the parameters of what deviation from 365 days (multiplied by 3) satisfies the Airgas Charter three year durational requirement. In this specific case, we may safely conclude that under any construction of "annual" within the intended meaning of the Airgas Charter or title 8, section 141(d) of the Delaware Code, four months does not
qualify. In substance, the January Bylaw so extremely truncates the directors’ terms as to constitute a de facto removal that is inconsistent with the Airgas Charter. (citations omitted).

Delaware’s High Court also regarded the net result of removing a staggered board member in this manner, prior to the end of his term, as failing to satisfy another provision in the charter that only allowed such removal based on a two-thirds’ vote of shareholders entitled to vote.

Due to the great importance of this decision, and the benefit in publicizing it promptly, we now provide this short overview and then will provide supplemental commentary at a later date. This short highlight presumes familiarity with the background facts and prior procedural history of this important case. Prior decisions and developments in this case (including the Court of Chancery’s decision that was reversed), have been highlighted on this blog here. An example of the many articles that will be written about this case in the mainstream press, trade publications, academic journals and blogs, is the article by Reuters here, which includes a quote from your friendly author by reporter Jonathan Stempel of Reuters. Professor Gordon Smith provides scholarly insights on the case here, and Professor Steven Davidoff provides analysis about the opinion here. Additionally, Prof. Davidoff comments here about a Dec. 2 letter ruling from the Chancellor that requires the parties to submit supplemental briefing on issues that need to be addressed as a result of the Supreme Court’s decision.

SUPPLEMENTAL FULLER SUMMARY:

DELAWARE SUPREME COURT REVERSES COURT OF CHANCERY’S DECISION VALIDATING AIRGAS’S BYLAW ACCELERATING ANNUAL SHAREHOLDER MEETING.

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

On November 23, 2010, the Delaware Supreme Court, in an en banc decision in  Airgas, Inc., et al. v. Air Products and Chemicals, Inc., No. 649, 2010, reversed the Court of Chancery’s decision validating the language of a bylaw that accelerated the next annual meeting of Airgas’ stockholders in order to replace three Airgas directors on its classified board who were supposed to serve three year terms.  The Supreme Court found that the bylaw was invalid because it “impermissibly shortens” the directors’ three year staggered terms as provided by the Airgas charter and it amounted to a de facto removal without cause of those directors without a supermajority vote also required by the Airgas charter.

Background

Airgas and Air Products are competitors in the industrial gas business.  Because Air Products launched several tender offers to acquire 100% of Airgas which were rejected, Air Products engaged in a proxy contest and nominated three directors who were elected.  Air Products also proposed a bylaw (“Bylaw”) that scheduled Airgas’s next annual shareholder meeting for January 2011, only four months after the 2010 shareholder meeting.  The Bylaw was approved by approximately 46% of the shares entitled to vote. 

Airgas then brought an action in the Court of Chancery claiming that the Bylaw was invalid because it was inconsistent with Section 141 of the DGCL and the Airgas corporate charter provision that creates a staggered board. Airgas’s charter requires an affirmative vote of the holders of at least 67% of the voting power of all shares to alter, amend, or repeal the staggered board provision, or to adopt any bylaw inconsistent with that provision. While the Court of Chancery concluded that the Airgas charter language defining the duration of directors’ terms was ambiguous, it approved the adoption of the Bylaw on the basis that the charter provided that directors serve terms that expire at "the annual meeting of stockholders held in the third year following the year of their election." Because the January 2011 meeting would occur "in the third year after the directors’ election," that was all that was required.

Language in Charter Ambiguous – Court Turns to Extrinsic Evidence

Section 141(d) of the DGCL permits corporations to implement staggered boards if the charter or the bylaws provide for them.  Article 5, Section 1 of the Airgas charter and Article III, Section 1 of its bylaws each state that each class of directors serves until the "third succeeding annual meeting following the year of their election."  So the issue on appeal was whether the Airgas Charter requires that each class of directors serves three year terms or whether it provides for a term that can expire at whatever time the annual meeting is scheduled in the third year following election.  The Court of Chancery and the Supreme Court both found that the language in the Airgas charter defining the duration of the directors’ terms was ambiguous so they both turned to extrinsic evidence for guidance on the meaning. 
 
To determine whether the Bylaw was inconsistent with the charter, the Supreme Court turned to Article 5, Section 1 of the charter.  While the Supreme Court had never been asked to interpret the exact language before, the Court noted that “the Delaware cases (including the recent Supreme Court case Versata Enters. v. Selectica) that involved similar charter language regard that language as creating a staggered board with classes of directors who serve three year terms.”  The Court next stated that there is support for this interpretation of the charter in the “real world” practice and understanding of similar charter language of corporations with staggered boards as well as corporations who have de-staggered their boards.  The Supreme Court viewed this evidence as “persuasive but not controlling.” Then the Court also examined the ABA’s Public Company Organizational Documents: Model Forms and Commentary which contained model language similar to the language from the Airgas charter.  The accompanying commentary, referencing Section 141(d) of the DGCL, also confirmed the Airgas’ view that “directors elected to succeed those whose terms expire shall be elected for a three-year term.”

Essential Enterprises v. Automatic Steel Products, Inc.,

The Supreme Court then turned its analysis to the 1960 Court of Chancery decision in Essential Enterprises v. Automatic Steel Products, Inc. (159 A. 2d 288 (Del. Ch. 1960)), where Chancellor Seitz in addressing the validity of a bylaw that authorized the removal of directors by a majority stockholder vote, the Court found that bylaw was inconsistent with a charter provision that provided for staggered, three-year terms for the corporation’s directors. The Court concluded: "the ‘full term’ visualized by the statute is a period of three years — not up to three years;’ and the bylaw would ‘frustrate the plan and purpose behind the provision for staggered terms . . ."

The Supreme Court concluded that the Court of Chancery “failed to give proper effect to the overwhelming and uncontroverted extrinsic evidence that establishes, and persuades us, that the [“annual meeting of stockholders to beheld in the third year following the year of election” language] and the [“three-year term” language] mean the same thing: that each class of directors serves three year terms.  The Supreme Court concluded:

No party to this case has argued that DGCL Section 141(d) or the Airgas Charter requires that the three year terms be measured with mathematical precision. Nor is it necessary for us to define with exactitude the parameters of what deviation from 365 days (multiplied by 3) satisfies the Airgas Charter three year durational requirement. In this specific case, we may safely conclude that under any construction of "annual" within the intended meaning of the Airgas Charter or title 8, section 141(d) of the Delaware Code, four months does not qualify. In substance, the [] Bylaw so extremely truncates the directors’ term as to constitute a de facto removal that is inconsistent with the Airgas Charter. The consequence of the [] Bylaw is similar to the bylaw at issue in Essential Enterprises. It serves to "frustrate the plan and purpose behind the provision for [Airgas’s] staggered terms and [] it is incompatible with the pertinent language of the statute and the [Charter]”
 

In Re:  Atlas Energy Resources, LLC, Unitholder Litigation, Cons., C.A. No. 4589-VCN (Del. Ch. Oct. 28, 2010), read opinion here.

Issue Addressed
The Court determined that the LLC Agreement waived fiduciary duties for officers and directors but did not waive the fiduciary duty that a controlling majority owner owed to minority owners, similar to the duty that a majority shareholder owes to minority shareholders.

Brief Summary of Decision
This 40-page decision should be read by anyone who seeks to argue that the terms of an LLC Agreement either waived all fiduciary duties or one who seeks to argue that less than all of the fiduciary duties of the parties were waived.  Citing prior decisions to support its reasoning, the Court of Chancery explained that because the parties to the LLC Agreement did not unequivocally contract for a different standard to apply, the corporate entire fairness standard, based on Kahn v. Lynch, would apply here to the controlling unitholder’s buyout of the minority. 

The Court explained in a detailed analysis why the agreement did not explicitly waive the fiduciary duties owed by the majority owners towards the minority–even though those duties were waived for officers and directors.  Due to the lack of a clear waiver, the Court applied the fiduciary duties that would govern in the corporate context. The issues addressed in the case are at the "cutting edge" of the law of alternative entities. Many cases highlighted on this blog, and much commentary discussed on this blog, have addressed this topic.

 

Connecticut General Life Insurance Company v. Pinkas, C.A. No.5724-VCN (Del. Ch. Nov. 1, 2010), read letter decision here. This short letter decision of the Delaware Court of Chancery modified an existing Status Quo Order regarding advancement.  The Court allowed a letter from counsel to satisfy a condition (based on the representation of counsel), in the applicable agreement that no other sources of advancement were available.
 

In Re Inergy L.P. Unitholder Litigation, Cons., C.A. No. 5816-VCP (Del. Ch. Oct. 29, 2010), read opinion here.

This 51-page opinion from the Court of Chancery deserves fuller treatment but for present purposes this lengthy analysis of the terms of a Limited Partnership Agreement will be reduced to the following bullet points: 

(1)  The plaintiffs sought to enjoin a transaction about which it was claimed that the general partner of the Limited Partnership and the directors that made up its board, breached their fiduciary duties by depriving the unitholders of the right to vote on a transaction, and using an unfair and unreasonable process to determine a dilutive price.

(2)   The Court reasoned that the plaintiffs did not satisfy the prerequisites for a preliminary injunction.

(3)    Of note, as a closing observation, is the timeline involved. The complaint was filed on September 14, 2010.  The Court granted a motion for expedited proceedings on Sept. 29, 2010.  After expedited discovery, the parties briefed and argued the motion for preliminary injunction by Oct. 22, 2010 and this decision was issued on Oct. 29, 2010. Thus, from the filing of the complaint, and through discovery and briefing until a final decision, about six weeks transpired. That is exemplary speed especially when the 51-page opinion of the Court included sophisticated analysis and 165 detailed footnotes.