The Delaware Court of Chancery opinion styled:  In re PLX Technology Inc. Stockholders Litigation, Cons. C.A. No. 9880-VCL (Del. Ch. April 18, 2022), described its opinion as a public service.  It addressed the payment logistics and administration for the settlement of a class action.  An impasse arose because the Depository Trust Company (“DTC”) implemented a policy that required the recipients of the payments to sign a letter agreeing to certain provisions before DTC would distribute the settlement proceeds.  This put the administrator in the untenable position of being required to distribute settlement proceeds through DTC when DTC refused to proceed without the letters, and some recipients refused to sign those letters.

The court approved a revised procedure to distribute the settlement proceeds and explained that:

  “The court has issued this decision largely as a public service announcement.  Corporate litigators need to be familiar with the bug in this particular settlement technology and understand the fix.”

Slip op. at  2.

When the Court of Chancery makes an announcement that it states: “corporate litigators need to be familiar” with, smart practitioners will pay attention.  The court’s announcement of a “fix to a bug,” makes it important to include on this blog.  The above link provides access to the entire opinion which is required reading for any corporate litigator involved in the distribution of settlement proceeds in a Delaware class action case.

 

 

 

A recent Chancery decision is notable for the following quote:  “A party cannot act intentionally to create harm, then invoke equity in relief of that harm.  If that is not a traditional equitable maxim, it should be.”  Pentwater Capital Management LP v. Kaz, C.A. No. 2021-1087-SG, Slip op. at 14 (Del. Ch. April 8, 2022).

The introductory sentence to this opinion is also noteworthy: “The power of the common-law courts is largely limited to awards of damages. Not so with this court of equity which in addition to damages may use its equitable puissance to order litigants to refrain from, and even to take, actions.”  Slip op. at 1. The court in this case largely refused to enforce a forum selection clause due to delay and other procedural infelicities by the moving party.  (Use of the word “puissance” should be noted.)

Countless highlights of decisions and commentary have been provided on these pages regarding forum selection clauses.  Adding to that scholarship is a recent law review article, unrelated to this case, entitled: John F. Coyle, Contractually Valid Forum Selection Clauses, 108 Iowa Law Review (2022 Forthcoming).

 

 

 

The Delaware Court of Chancery opinion styled:  Zhou v. Deng, C.A. No. 2021-0026-JRS (Del. Ch. April 6, 2022), is notable for addressing two useful aspects of Delaware corporate and commercial litigation:

First, DGCL Section 225 is a very narrowly focused summary proceeding that is considered to be “in rem”.  This limits the ability to join others who might not be subject to the personal jurisdiction of the court.  See Slip op. at 8-9.

Second, this opinion features useful references to authority that describe when issues will be considered waived: for example, when they are raised for the first time in a pretrial brief, or only “generally addressed,” such as in background facts.  See footnotes 61 and 64.

In the Chancery decision of Hawkins v. Daniel, C.A. No. 2021-0453-JTL (Del. Ch. April 4, 2022), the court found that an irrevocable proxy was ambiguous and it did not state that it would “run with the shares” based on the “special principles of contract interpretation” applicable to proxy agreements.  This 85-page opinion needs to be read by anyone who wants to know the latest Delaware law on enforceability of proxies.

In the case styled:  Sorenson Impact Foundation v. Continental Stock Transfer & Trust Co., C.A. No. 2021-0413-SG (Del. Ch. April 1, 2022), the Delaware Court of Chancery denied a motion to dismiss filed by former stockholders of an acquired company who did not receive the proceeds from the sale of their shares in their company because the wire transfer from the buyer to them for the purchase of their shares was hacked.  An intermediary transfer agent was used to disburse the funds and transfer the stock.

This, of course, is a nightmarish situation that anyone who expects to receive wired funds wants to avoid. For a graphic display of the various parties involved and at what point the hacking occurred, a chart appears as an exhibit attached to the last page of the opinion linked above.

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

Corporate lawyers have a unique opportunity to influence American companies to benefit by practicing the ethical standards their mission statements and codes of conduct espouse, a Villanova Law School professor told a gathering of Delaware’s bench and bar recently.

After a two-year pandemic pause, jurists and attorneys returned to the Hotel DuPont in Wilmington for the 36th Annual Francis G. Pileggi Distinguished Lecture in Law to hear Business Ethics: What Everyone Needs to Know,’ presented by J.S. Nelson, an Associate Professor at the Harvard Business School and an Associate Professor at Villanova Law School.

Nelson began by popping what she identified as numerous myths about ethics

Compared to the statutes and rules that corporate lawyers deal with, ethics is rather esoteric

Ethics–essentially, man’s instinct to do the right thing–is not a theoretical subject, but is rather the foundation for the formulation, interpretation, application and enforcement of laws, Nelson said.  “Ethics is nothing like what you think it is.”

Ethics are just a matter of subscribing to a set of principles

It’s more complicated than that because humans have a dual nature regarding ethics, she pointed out.  On one hand, they proudly endorse certain values and behaviors and believe they are ethical, but on the other, they are very susceptible to pressure from certain institutions and situations to compromise or suspend even fervently held values and principles—often with famously disastrous results.

The people who said they were “just following orders” during the Holocaust were unique

Nelson told the group that extensive behavioral studies have repeatedly produced the exact opposite conclusion: regardless of ethnic, cultural or religious background more than two thirds of test subjects will yield to consistent unified pressure to join with an institution or group’s program –when the program directly contradicts the subject’s core ethical principles.

She said this dynamic applies in the corporate world when employees confront a corporate culture that tolerates or even promotes lax quality control, poor safety or working conditions, gender inequality or sexual harassment or questionable financial practices.  They will often do what they must to get along in the world in which they find themselves.

Ethical management does not produce a better bottom line.

Actually, in the long run, a management that provides good working conditions with equal pay, benefits and opportunities and prioritizes quality and safety over short-term operating cost savings will attract and retain more engaged, efficient staff, enjoy greater profits, and “won’t have to worry about where the next scandal will be coming from,” Nelson predicted.

But to have that positive proactive effect, the institution must present a consistent unified position against even small ethical wrongs, because it’s all too easy for a company’s effect on ethics to reverse and snowball in the negative direction, she said.

The Boeing example

For example, Nelson said, the Boeing Company had a stellar safety record until its management and board decided to create a higher passenger capacity version of its workhorse 737 jetliner without a complete redesign.  Instead, they opted to essentially hang bigger engines on its wings to lift the greater weight and when that caused a tippy fore/aft balance problem, they devised a computer program to help pilots compensate, but the program had deadly flaws that allegedly caused two crashes with the loss of all aboard, she explained.

That triggered an FAA investigation that grounded the entire 737 MAX fleet for 20 months and a successful shareholder suit in the Delaware Chancery Court that claimed Boeing’s directors were liable for lax safety that caused large financial losses. In Re the Boeing Company Derivative Litigation, No. 2019-0907-MTZ opinion issued, (Del. Ch. Sept. 9, 2021).

As this blog has reported, ethical failure allegations played a key role in Vice Chancellor Morgan Zurn’s Sept 9, 2021 landmark ruling which found plaintiffs’ derivative director oversight claims met the tough pleading standards of the Delaware Supreme Court’s Marchand ruling with well-supported allegations that a majority of the directors are likely liable for Boeing’s billions of dollars in losses and penalties. Marchand v. Barnhill, 212 A.3d 805 (Del. 2019).

Importantly, Vice Chancellor Zurn’s ruling repeatedly pointed to the Marchand standards in finding that Boeing’s directors:

  1.  Got no regular safety information on the 737 MAX or any of its planes due to their “complete failure” to establish a committee or regular board reports on safety issues,
  2.  After the first crash, did not immediately investigate what caused the 737 MAX to repeatedly push its nose down in a series of disastrous dives at low speeds and instead virtually ignored the problem even though safety was a “mission critical” area,
  3. Intentionally misled federal regulators about the scope and seriousness of a computer pilot training program meant to help them use software that would allegedly minimize nose-down dives,
  4. Allegedly lied to the public and regulators about how comprehensive, how much in good faith and how quickly implemented their post-crash safety program was.
  5. Never pressed the CEO for more information or questioned his conclusions when he repeatedly told the board the 737 MAX was safe and blamed the crashes on pilot and maintenance errors.

But Nelson pointed out that rulings on alleged low points in corporate behavior often prompt positive changes in ethical standards, “and sometimes today’s ethics become tomorrow’s laws.”

In my latest article for the current issue of The Delaware Business Court Insider, I provide highlights of a recent Chancery decision that involved virtually no damages for non-compliance with a confidentiality provision. Courtesy of that publication, the article is reprinted below.

A recent noteworthy Delaware Court of Chancery decision should be kept handy by corporate and commercial litigators for its practical and persuasive analysis of noncompliant handling of confidential documents: AlixPartners v. Mori, C.A. No. 2019-0392-KSJM (Del. Ch. April 14, 2022).

Key Aspects of Decision

This litigation is based on the defendant’s departure from AlixPartners to work for a client of AlixPartners in Italy.

 

The court awarded virtually no damages for noncompliance with the confidential designation given to certain documents. The introductory paragraph in the court’s 58-page post-trial opinion includes a money quote that captures the essence of this decision. In connection with the end of his employment with the plaintiffs:

“… the defendant copied thousands of the plaintiffs’ confidential documents onto his personal devices. He did so to use them in a follow-on employment lawsuit in an Italian court [—he lived in Milan—], although he also used certain of the documents for other innocuous, personal ends—to update his curriculum vitae and email goodbyes to his former clients.” Slip op. at 1 (emphasis added).

 

One could infer that the court was less than enthused that plaintiffs “pressed on with their claims,” on this issue—notwithstanding the return of the documents defendant had copied other than those he needed for his separate employment lawsuit with the plaintiffs.

Key Background Facts

The defendant, Giacomo Mori, was a managing director in the Milan, Italy, office of AlixPartners.

Italian law applied to some aspects of this dispute and experts on Italian law testified that Mori had a right to take and use documents from AlixPartners that he needed for his lawsuit with AlixPartners about his departure. See AlixPartners v. Mori, 2019 WL 6327325 (Del. Ch. Nov. 20, 2019) (prior decision in this case addressing jurisdictional issues). See generally Slip op. at 20 and n. 92 (observing that the court often grapples with employment disputes that the parties make into partnership agreement disputes, citing a recent case as another example.)

Breach of Confidentiality Obligations

This post-trial opinion features an application of the Italian Constitution, as well as a discussion of decisions of various courts throughout Italy, in addition to Italian statutory authority and various opinions of experts on Italian law.

Importantly, regarding whether there was a defense to a breach of a confidentiality provision for Mori to use some of the documents in connection with his separate employment litigation, the court relied on Section 178(1) of the Restatement (Second) of Contracts for the statement of law that a promise or other term of an agreement is unenforceable in some instances on grounds of public policy. Section 178(3) identifies four additional factors to consider “in weighing a public policy against enforcement of a term.”

The court assumed that Italian law provided a strong public policy to permit Mori to use confidential documents for use in his Italian litigation, based on either Section 178(1) of the Restatement (Second) of Contracts, or Section 187(b) of the Restatement (Second) of Conflict of Laws, regarding the law of the state chosen by the parties to govern their contractual rights and which state has an applicable fundamental policy relevant to an issue in dispute. The court also cited to Williston on Contracts, Section 19:8.

Nonsolicitation

The court found no violation of a nonsolicitation clause, and employed reasoning that has widespread applicability. The court explained that a non-solicitation provision “should not be construed to prohibit a former employee from responding to unsolicited inquiries. Otherwise, a former employee would have to be on guard at every turn and possibly barred from responding to a host of acceptable communications.”

Trade Secrets Under Italian Law

The court determined that Italian law applied to the issue of trade secrets and that the Delaware Uniform Trade Secret Act does not have extraterritorial effect. The court emphasized the challenge it faced to independently test the parties’ Italian law contentions by being unable to conduct its own independent research in original Italian sources, and that it was entirely reliant on the information provided by the parties, one of whom appeared pro se. Therefore the court cautioned that the precedential value of its decision on Italian trade secret law should be understood to be limited to the facts of this case and the law presented by the parties. Nonetheless, the court regaled the reader with a discussion of multiple decisions of several courts throughout Italy that decided trade secret issues under Italian law.

Permanent Injunction and Damages Denied

The court provides the reasons why permanent injunctive relief was denied. Notably, an Italian court awarded the defendant in this case nearly $2 million against AlixPartners regarding employment claims.

The Court of Chancery awarded a mere $7 in nominal damages, which was the amount requested by the plaintiffs, and which for all practical purposes, as an economic matter, is the functional equivalent in the context of this case, of no damages awarded for the breach of confidentiality provisions.

 

The 36th Annual Francis G. Pileggi Distinguished Lecture in Law (named after the father of this blog’s primary author), is presented by The Delaware Journal of Corporate Law of Widener University’s Delaware Law School

This year’s topic is

Business Ethics: What Everyone Needs to Know

Professor J. S. Nelson
Visiting Associate Professor at the Harvard Business School
Associate Professor at Villanova Law School

Monday, April 25, 2022
8:00 a.m. Breakfast; 8:45 a.m. Lecture

Hotel DuPont, du Barry Room
11th and Market Streets
Wilmington, Delaware 19801

Many of the prior 35 Annual Distinguished Lectures have been highlighted on these pages.

One ethics CLE credit available in Delaware, Pennsylvania and New Jersey. The brochure is available at this link.

Online registration form available at delawarelaw.widener.edu/pileggi2022

For additional information or for accessibility and special needs requests, contact Carol Perrupato at caperrupato@widener.edu or 302-477-2178.

A recent decision of the Delaware Court of Chancery acknowledged longstanding precedent which prohibits a state court from enjoining proceedings in a federal court.  In Schwartz v. Cognizant Technologies Solutions Corporation, C.A. No. 2021-0634-LWW (Del. Ch. March 25, 2022), the court recited several well­-established principles barring it from issuing an injunction to interfere with a federal court proceeding–which should be compared to the many decisions that have been discussed on these pages over the last 17 years regarding the well-settled enforceability of forum selection clauses.

Extensive background facts about the underlying advancement litigation appears in a Reuters article that describes the dispute between the parties as “lurid”. Extensive commentary on advancement cases have appeared on these pages over the last 17 years, but this case provides an usual procedural twist.

Highlights:

  • The court relied on several United States Supreme Court decisions for the principle that a state court cannot enjoin proceedings in a federal court. See Slip op. at 7-11.  The court described it as “black letter law” that an anti-suit injunction was not permissible in this context.  Cf.  Suits to enforce Delaware forum selection clauses.
  • The court distinguished the enforcement of forum selection clauses involving cases in other state courts. See Slip op. at 12.
  • The court explained that the federal court where related litigation is pending is the court that will decide whether the forum selection clause before that court should be enforced, and cited several cases where federal courts have routinely enforced forum selection clauses.  See Slip op. at 13.

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

Vice Chancellor Sam Glasscock recently declined to certify a class action challenge to an allegedly unfair side deal in Straight Path Communications Inc.’s 2018 sale to Verizon Communications Inc. until he scrutinizes the use of non-public information in stock trades of Straight Path and its parent by lead plaintiff representative candidates in the matter styled In re Straight Path Communication’s Inc. Consolidated Shareholder Litigation, No. 2017-0486, (Del. Ch. Mar. 11, 2022).

In the five-year-old Delaware Chancery Court litigation, the Vice Chancellor on March 11 rejected a motion to certify a class without a proper class representative.  And he said that determination could not be made without a detailed investigation into whether prospective representative plaintiff mutual fund The Arbitrage Fund had profited by intentionally misusing access to confidential information from the plaintiffs’ law firm.  Meanwhile, the plaintiffs and the court continue to look for a suitable class representative.

The court noted that although class representative qualifications under Chancery Rule 23(a) or (b) include factors of typicality, adequacy, commonality, and numerosity, here, “no motion is pending naming an adequate lead plaintiff.” Therefore, it said, the inquiry must still focus on whether TAF and its affiliates traded on non-public information, as so doing would be “incompatible with the circumspection expected of voluntary fiduciaries, and thus would make TAF an inappropriate lead plaintiff.”

The finest loyalty

That’s important, the Vice Chancellor said, because, “Using non-public information obtained as a fiduciary for personal gain is not consistent with the behavior expected of a self-designated fiduciary.” And as an appointed fiduciary, the representative plaintiff owes the class a “duty of the finest loyalty,”

The decision comes at a pivotal point in the litigation.  In a February 17 opinion, he had denied a defense motion for summary judgment and refused to dismiss Straight Path ex-shareholders’ charges that they were shortchanged by $600 million in the Verizon purchase because insiders at Straight Path and its parent, IDT Corp. likely breached a fiduciary duty by concocting a side deal that wrongly diverted a valuable company asset to themselves.  That brought the plaintiffs a step closer to winning a judgment or settlement—if they could get certified as a class. Straight Path Commc’ns Inc. Consol. S’holder Litig., 2022 WL 484420 (Del. Ch. Feb. 17, 2022).

Vice Chancellor Glasscock, in his March 11 ruling, compared the worthiness of several plaintiffs for the role of class representative and made some important distinctions concerning access to, use of and misuse of confidential information for profit in stock trades in the two companies central to the challenged deals in this litigation.

JDSI LLC

The Vice Chancellor noted that one investor fund, JDSI LLC, had dropped out of contention for the class representative after discovery revealed that it had, at various times, held short positions in IDT after receiving non-public information, which the court said would be “troubling’’ and “disqualifying if true,” because it is “inconsistent with the actions this Court expects of a volunteer fiduciary.”

TAF

He said TAF’s situation regarding improper trading allegations of misuse of confidential info is ”more attenuated” in that while TAF itself did not trade in IDT, it did trade in  Straight Path, and its affiliates traded in IDT and Straight Path.   “But it does not necessarily follow that TAF Affiliates were barred from trading in IDT, depending on their decisionmakers’ access to non-public information,” the Vice Chancellor wrote.  “Again, the pertinent inquiry is not merely whether the TAF Affiliates had direct access to non-public documents; the Court must also consider whether the TAF Affiliates had access to TAF’s counsel such that the TAF Affiliates indirectly could obtain non-public information.”

If TAF still seeks the class representative role an evidentiary hearing to determine whether the TAF Affiliates’ trades were improper will be required, he ruled.

But the Vice Chancellor noted that “written caselaw where the purported representative plaintiff trades in the company that allegedly suffered the injury is comparatively slim and tends toward a sale of shares” but the same general concerns apply, as elucidated by In re Celera Corporation Shareholder Litigation,  in which the sales occurred after “all material information regarding the lawsuit, settlement, and transaction were disclosed to the marketplace.” In re Celera Corp. S’holder Litig., 2012 WL 1020471, at *1 (Del. Ch. Mar. 23, 2012), aff’d in part, rev’d in part on other grounds, 59 A.3d 418 (Del. 2012)

Accordingly, the Celera court certified the representative, although with numerous warnings.

Intervenor-Plaintiff Ardell Howard

The court suggested that an intervenor plaintiff might provide an easier path to a class representative. Ardell Howard was approved as an intervener/additional plaintiff in the case in July 2021 and has expressed an interest in serving as class representative, he said.  The IDT defendants had previously said they would want to conduct some discovery into Howard’s suitability for this position.

Vice Chancellor Glasscock continued the class certification motion with respect to TAF with leave to supplement the record and asked the parties to “confer and inform me as to their preference for moving forward.”