James v. National Financial LLC, C.A. No. 8931-VCL (Del. Ch. Dec. 5, 2014).

Why This Decision is Noteworthy: This Delaware Court of Chancery opinion reiterates the important practice guideline that the Court of Chancery does not recognize the concept of “local counsel”.  That is, Chancery will require Delaware counsel serving with out-of-state counsel to have full responsibility for any filings with the court, and also to take an active role in all aspects of discovery.  This is the polar opposite of the view that some have of using local counsel as a mere mail drop or to use local counsel to merely sign whatever out-of-state counsel would like to file.  See, e.g., summary of related standards in an article that we published on this blog. See also Practice Guidelines for Chancery promulgated by the Court.

This decision also features other notable observations about Delaware discovery practice in general.

Background:

This case is a class action filed by a person who obtained a payday loan and was charged an interest rate of over 800%.  The initial loan was for $200 and the cost of the credit was $1,420.  This opinion focuses on discovery issues and failure to comply with discovery orders resulting in the grant of a motion for sanctions.

After an exhaustive description of the multiple failures to comply with prior orders of the court granting motions to compel, as well as inconsistent answers to the same questions and conflicting explanations for failure to comply, the court reviewed the basis for the award of sanctions for discovery abuses pursuant to Court of Chancery Rule 37, including the types of sanctions that a court can impose for violating a discovery order under Rule 37(b)(2).

Highlights of Key Principles:

The court recited several basic discovery “first principles” as announced in Delaware decisions over the years.  For example, a fundamental first principle recited by the court was that:  “Candor and fair-dealing are, or should be, the hallmark of litigation and required attributes of those who resort to the judicial process.  The rules of discovery demand no less.”  (citation omitted.)  See generally, Rule 1 of the Delaware Rules of Professional Conduct.

Among the problems with the discovery responses by the defendant in this case, was the admission that a notarization was provided even though the signatory did not personally appear before the notary.  The court explained that the failure to appear in person before a notary when a signature is notarized makes the notarization invalid.  It also exposes the persons involved to various penalties.  See Slip op. at 24 and footnotes 3 and 4.

Also noteworthy is that the court referred to the recent amendment to Rule 1.1 of the Delaware Rules of Professional Conduct, and Comment 8 thereto, which address the requirement that attorneys maintain familiarity with technological developments in order to maintain technological competence in connection with the practice of law.  The court confirmed that:  “Technological incompetence is not an excuse for discovery misconduct.”

Role of Local Counsel Not Recognized in Court of Chancery:

The court also explained that when forwarding (out-of-state) counsel has been admitted pro hac vice and is taking a lead role in the case, “the Court of Chancery does not recognize the role of purely ‘local counsel.’” See State Line Ventures, LLC v. RBS Citizens, 2009 WL 4723372, at *1 (Del. Ch. Dec. 2, 2009).  Relying on Rule 170 of the Delaware Court of Chancery Rules, the court also emphasized that:  “The admission of an attorney pro hac vice shall not relieve the moving attorney from responsibility to comply with any Rule or order of the Court.”

The court also made clear that Delaware lawyers are “ultimately responsible for the documents they file with the court and serve on the opposing party” and that “our Rules make clear that the Delaware lawyer who appears in an action always remains responsible to the Court for the case and its presentation.  (citing State Line Ventures.)

The court also explained that Delaware counsel “are expected to police the behavior of their out-of-state colleagues and insure that that out-of-state counsel understand the standards expected by Delaware courts.  (This standard is in full recognition of the large number of out-of-state counsel who routinely engage in corporate litigation in Chancery.) See generally recent Delaware Supreme Court decision publicly reprimanding an attorney admitted pro hac vice for failing to comply with a court order.

Delaware Counsel Must Be Involved in Discovery:

Moreover, the court explained that:

the court expects Delaware counsel to play an active role in the discovery process, including in the collection, review and production of documents.  If Delaware counsel does not directly participate in the collection, review and production of documents, then at a minimum Delaware counsel should discuss with co-counsel the court’s expectations.”

Slip op. at 27.

Conclusion:

In granting the motion for sanctions the court ruled that it will be deemed established for purposes of trial that the interest rates charged on the loans were outside of the tolerances set forth in the Federal Truth in Lending Act.  In addition, the court awarded attorneys’ fees for Defendant’s failure to comply with prior court orders.

A non-Delaware lawyer who had been admitted pro hac vice for a matter pending before the Delaware Court of Chancery, was subject to a private admonition/probation for participating in a conference call with the court–but without his local Delaware counsel. His local counsel did not become aware of the call until after it was over. The court referred the non-Delaware attorney to the Office of Disciplinary Counsel, which is an arm of the Delaware Supreme Court.

When admitted pro hac vice in Delaware, non-Delaware lawyers agree to be bound by “all Rules of the Court”. Rules of the Court of Chancery require a Delaware attorney to be present for all court proceedings–including phone calls with the court. This is a helpful reminder for the many non-Delaware attorneys who are routinely admitted pro hac vice in Delaware. For a more detailed review of the rules and procedures for non-Delaware attorneys admitted pro hac vice, see the guidelines that appear on these pages here.

Noteworthy 2012 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 eighth year that we are providing an annual review of key Delaware corporate and commercial decisions. During 2012, we reviewed and summarized over 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues. (We also provided partial lists of key cases throughout 2012.) Among the decisions with the most far-reaching application and importance during 2012 include those that we are highlighting in this short overview. We are providing links below 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. We welcome comments if readers think we missed a decision that should be included.Photo of the Supreme Court Courthouse in Dover (The Supreme Court’s stately building in Dover is featured in the photo from the Court’s website.)

Top 5 Decisions of 2012

We begin with our selection of the Top Five Cases from 2012. In no particular order, we chose the following decisions as especially noteworthy:

Gatz Properties LLC v. Auriga Capital Corp., No. 148, 2012 (Del. Supr. Nov. 7, 2012) (Per Curiam). Issue Addressed: Delaware’s High Court held that the manager of an LLC violated a contracted-for fiduciary duty that adopted the equitable standard of entire fairness in a conflict of interest transaction between the LLC and its manager. The Supreme Court also declared as dicta, any statements by the trial court that Delaware law imposed default fiduciary duties in the LLC context. Summary available here.

In Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012), in a 110-page opinion, the Delaware Supreme Court upheld the Court of Chancery’s 100-plus page decision awarding over $2 billion in damages based on a breach of fiduciary duty claim in connection with the sale of a company. Delaware’s High Court also upheld an award of attorneys’ fees in the amount of $300 million. Highlights available here. The trial court decision, styled as In re Southern Peru Copper Corporation Shareholder Derivative Litigation, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011), was highlighted on these pages here and here.

South v. Baker, C.A. No. 7294-VCL (Del. Ch. Sept. 25, 2012). Issues Addressed: This decision is a candidate for inclusion in the pantheon of iconic Delaware Court of Chancery opinions addressing the following issues: (1) When derivative plaintiffs and their counsel will be presumptively found to provide inadequate representation resulting in the complaint’s dismissal with prejudice; (2) When dismissal of one derivative suit will not bar another derivative suit involving the same corporation; (3) When a Caremark claim will be dismissed with prejudice if Section 220 is not used beforehand; and (4) How to successfully allege pre-suit demand futility in connection with making a Caremark claim. Summary available here.

In Re: Encore Energy Partners LP Unitholder Litigation, Cons., C.A. No. 6347-VCP (Del. Ch. Aug. 31, 2012). Issue Presented: Whether the terms of an LP Agreement protected the general partner from claims regarding what would otherwise be a self-interested transaction, without breaching any duty owed to its limited partners? Short Answer: Yes. Summary available here.

Soterion Corp. v. Soteria Mezzanine Corp., C.A. No. 6158-VCN (Del. Ch. Oct. 31, 2012). Why This Case is Noteworthy: This decision addresses for the first time in Delaware the applicable standard to determine when the threat of a lawsuit can be tortious interference with prospective business relationships. This opinion also features the rare instance when attorneys’ fees are assessed based on an exception to the American Rule (as compared with Rule 37 for motions to compel). Summary available here.

Honorable Mention goes to the new Practice Guidelines, discussed below, which the Court of Chancery adopted and which provide comprehensive tips and instructions for both procedural matters and substantive discovery obligations that practitioners must follow if they hope to avoid the wrath of the bench.

We also selected the following additional cases from 2012 that deserve special attention:

Supreme Court Decisions

On December 27, 2012, the Delaware Supreme Court overruled in part and remanded a decision of the Court of Chancery which denied a large investor, BVF Partners L.P. (“BVF”), the right to opt-out of a shareholder class action settlement. In the case of In Re Celera Corp. Shareholder Litigation, No. 212, 2012 (Dec. 27, 2012), the Delaware Supreme Court, en banc, addressed the issue raised on appeal by objector-appellant BVF of the Court of Chancery’s certification of plaintiff/appellee New Orleans Employees’ Retirement System (“NOERS”) as class representative in an action challenging the acquisition of Celera Corporation (“Celera”) by Quest Diagnostics, Inc. (“Quest”). BVF also appealed from the Court of Chancery’s approval of a class action settlement without an opt out right for BVF. This decision is likely to have a significant impact on efforts to bring closure to class action settlements of litigation that involve objectors with substantial holdings. Summary available here.

Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 254, 2012 (Del. Supr., July 12, 2012). Our blurb about the Supreme Court’s Order of May 31, 2012 in this case is available here. Highlights of the 138-page Court of Chancery opinion on these pages is available here. Issue Presented: Whether a violation of a confidentiality agreement can be a basis to preclude a hostile tender offer. Short Answer: Yes. The Delaware Supreme Court affirmed the decision of the Delaware Court of Chancery in this expedited appeal. Summary available here.

EMAK Worldwide, Inc. v. Kurz, No. 512, 2011 (Del. Supr., April 17, 2012). Issue Addressed: Whether the Court of Chancery properly granted an interim fee award in a shareholders’ suit which did not produce an immediate monetary benefit. Short Answer: Yes. Summary available here.Cambium Ltd. v. Trilantic Capital Partners, No. 363, 2011 (Del. Supr., Jan. 20, 2012.) This Order of the Delaware Supreme Court applied the recent decision of Delaware’s High Court in the Central Mortgage case in which it clarified that Delaware has not adopted the federal standard for motions to dismiss under Rule of Civil Procedure 12(b)(6) as described in the U.S. Supreme Court’s Twombly and Iqbal decisions, despite the truism that the Delaware Rules of Civil Procedure are generally based on the Federal Rules of Civil Procedure. Highlights available here. A fuller overview is available here. The recent Delaware Supreme Court decision in Central Mortgage taking this position was highlighted here.
 
Court of Chancery Rulings

Shareholder Litigation

Rich v. Fuqi Int’l, Inc., C.A. No. 5653-VCG (Del. Ch. Nov. 5, 2012). Why this opinion is noteworthy: The Delaware Court of Chancery in this summary proceeding reaffirms in this pithy opinion that the Delaware General Corporation Law’s requirement in Section 211 that a shareholders’ meeting must be held annually, will not be suspended due to arguably conflicting provisions of the federal securities laws. That seems counterintuitive in light of the supremacy clause, but the court explains in a scholarly manner why a corporation will not be relieved of its obligation under DGCL Section 211 simply because of federal securities laws or regulations that may also impose certain prerequisites to holding an annual meeting. Summary available here.

In a transcript ruling in Dent v. Ramtron Int’l Corp., C.A. No. 7950-VCP (Del. Ch., November 19, 2012), the Court denied the plaintiff’s motion for a preliminary injunction to enjoin a shareholder vote on a merger between Ramtron and Cypress Semiconductor Corp. Issue Addressed: Whether the Court should preliminarily enjoin a shareholder vote on a merger on allegations that the company’s proxy statement is false and misleading in that the company failed to provide disclosures of financial projections thereby prohibiting the company’s stockholders from making an informed decision on whether to vote in favor of the merger or seek appraisal. (Transcript rulings are often cited in Delaware briefs as persuasive authority.) Summary available here.

Louisiana Municipal Police Employees’ Retirement System v. Lennar Corp., C.A. No. 7314-VCG (Del. Ch. Oct. 5, 2012). Issue Presented: In this summary proceeding, the Court considered whether newspaper articles announcing a federal investigation of the company, together with prior lawsuits that were settled without an admission of fault, satisfy the requisite threshold of “some evidence” to establish a credible basis of wrongdoing needed to allow a books and records demand under DGCL Section 220 to proceed. Short Answer: Not under the facts of this case. Summary available here.

In re Synthes, Inc. S’holder Litig., C.A. No. 6452-CS (Del. Ch. Aug. 17, 2012). Issue Addressed: Whether the controlling stockholder breached its fiduciary duty by refusing to consider an acquisition offer that would have cashed-out all the minority stockholders of Synthes, Inc., but required the controlling stockholder to remain as an investor in Synthes. Short Answer: No. Summary available here.
 
New Jersey Carpenters Pension Fund v. infoGroup, Inc., C.A. No. 5334-VCN (Del. Ch. Aug. 16, 2012). Issue: Can Plaintiff compel the expert report prepared by the company’s counsel for the board in anticipation of litigation? Short Answer: No, based on the facts of this case. Importantly, the Court of Chancery ruled that Rule 26(b)(3) is the standard that applies to determine if a report for the board must be produced as an exception to the work product doctrine—and not the less strenuous standard for board reports in the context of fiduciary litigation when the attorney-client privilege is at issue, in which case the standard used is often traced to Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). See also, Ryan v. Gifford, 2007 WL 4259557, at *3 n.4 (Del. Ch. Nov. 30, 2007). The Court did not follow the Garner test even though in dictum from a 1993 case the Delaware Supreme Court suggested that the Garner standard would govern the discovery of work product materials. See footnote 17. Summary available here.
 
Keyser v. Curtis, C.A. No. 7109-VCN (Del. Ch. July 31, 2012). Issues Presented: (i) In this summary proceeding, the Court considered whether plaintiffs are entitled to a declaration, pursuant to 8 Del. C. § 225, that they comprise the board of directors of Ark Financial Services, Inc.; (ii) whether one of the signatories to the 2011 Written Consent actually owned the shares he purported to hold; (iii) whether a December 13, 2011 written consent purporting to elect the plaintiffs to the Board was valid; and (iv) whether a December 2010 issuance of Ark super-voting stock to Ark’s then sole Board member was invalid. Short Answers: Yes to (i) though (iv). Summary available here.
 

Gentili v. L.O.M. Med. Int’l, Inc., C.A. No. 7600-VCG (Del. Ch. Aug. 17, 2012). Issue: Whether non-unanimous written consents of shareholders were sufficient to thwart a challenge to the election of directors at an annual meeting? Short answer: No. Summary available here.

In Re: Appraisal of Orchard Enterprises, Inc., C.A. No. 5713-CS (Del. Ch. July 18, 2012). Issue Addressed: In this post-trial decision in an appraisal action arising out of a merger, the Court determined the fair value of the shares, relying on the discounted cash flow method of valuation. Summary available here.

Shocking Technologies, Inc. v. Michael, C. A. No. 7164-VCN (Del. Ch. April 10, 2012). Issue Addressed: Whether the Court of Chancery has the inherent authority to remove a director for breach of fiduciary duty, other than via DGCL Section 225? Short answer: The issue was not directly decided, but based on the facts of this case, the Court was not inclined to exercise such an inherent power, if such a power exists, prior to the expedited trial. Summary available here.

In re Delphi Financial Group Shareholder Litigation, Cons. C.A. No. 7144 -VCG (Del. Ch. Mar. 6, 2012). This is the third Delaware Court of Chancery decision in as many weeks that denied injunctive relief, in an expedited opinion, in response to a challenged transaction–despite criticism in two of the cases, of the process and the players, but ultimately leaving it up to the shareholders to decide whether to accept offers of a substantial premium to sell their shares. Summary available here. See In Re El Paso, summarized here, and In Re Micromet, summarized here.

In Re El Paso Corporation Shareholder Litigation, Consol. C. A. No. 6949-CS (Del. Ch. Feb. 29, 2012). Chancellor Strine denied the stockholder plaintiffs request for a preliminary injunction to enjoin a merger between El Paso Corporation and Kinder Morgan, Inc. While the Court in a 33-page opinion, severely criticized the actions of a number of the players, in the end the Chancellor decided to give the shareholders of El Paso the opportunity to decide for themselves if they liked the price being offered to them. Summary available here. The Court’s opinion in this matter marks the second time in the span of only a few months that the Delaware Court of Chancery has strongly criticized Goldman Sachs for conflict of interest issues in multi-billion dollar transactions. The most recent high-profile criticism was in the Court of Chancery’s 100-plus page decision in the Southern Peru Copper case highlighted on these pages here. Our LexisNexis videocast on this opinion is available here.

Dweck v. Nasser, C. A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), found that Dweck, the former CEO, a director and 30% stockholder in Kids International Corporation (“Kids”), and Kevin Taxin, Kids’ President, breached their fiduciary duties of loyalty to Kids by establishing competing companies that usurped Kids’ corporate opportunities and converted Kids’ resources. The Court also imposed liability on an officer of the company for approving the reimbursement with company funds of the personal expenses of his superior. Summary available here.

Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012). Issue Addressed: This opinion addressed the issue of whether representative plaintiffs in a putative class action should be in sanctioned for trading on the basis of confidential information obtained in the litigation. The motion was granted. Summary available here.

Paul v. China MediaExpress Holding, Inc., C.A. No. 6570-VCP (Del. Ch. Jan. 5, 2012). Issues Addressed: (1) Whether a Section 220 case should be stayed pending the outcome of a related federal securities suit; and (2) Whether the shareholder in this case established a proper purpose to inspect books and records under DGCL Section 220. Short Answer: (1) Based on a three-part test as applied to the facts of this case, the Court refused to stay this action in favor of a pending related federal securities suit, even though a motion to stay was also pending in the federal court. (2) In this post-trial opinion, the Court determined that the shareholder established a proper purpose and was entitled to the documents necessary to investigate that proper purpose. Summary available here.

LLC and Other Alternative Entity Litigation

In Feeley v. NHAOCG, LLC , C.A. No. 7304-VCL (Del. Ch. Nov. 28, 2012)(“Feeley IV“), the Delaware Court of Chancery addressed–for the first time since the recent Delaware Supreme Court decision in Gatz Properties v. Auriga Capital, highlighted on these pages here, the issue of default fiduciary duties in the LLC context. (This is the fourth Chancery ruling that we have posted about in the Feeley case.) Highlights available here.

New Media Holding Co., LLC v. Brown, C.A. No. 7516-CS (Del. Ch. Nov. 14, 2012). Issue addressed: Does Delaware have jurisdiction over the manager of a limited liability partnership (LLP) accused of breach of fiduciary duty claims, based on acts taken in the course of his work for the LLP, absent acts taken in Delaware in furtherance of the alleged wrongdoing? Short answer: No. Summary available here.

Feeley v. NHAOCG, LLC, (“Feeley II”), C.A. No. 7304-VCL (Del. Ch. Oct. 12, 2012). This is the second of four Chancery rulings in this case that we highlighted on these pages in 2012. What this case is about: This Delaware Court of Chancery opinion addresses a dispute regarding management and control of an LLC based on an interpretation of the LLC agreement, and deserves extra attention because it is the first opinion to apply DGCL Section 144 to the LLC context. Summary available here.

Policemen’s Annuity and Benefit Fund of Chicago v. DV Realty Advisors LLC, C.A. No. 7204-VCN (Del. Ch. Aug. 16, 2012). Issue Addressed: How to define “good faith” for purposes of a limited partnership agreement that required a good faith determination for removal of a general partner. Short Answer: The Court compared the common law definitions of good faith in the fiduciary context as compared to contract law, and also referred to the definition in the Uniform Commercial Code. See Slip op. at 33 and 34, and footnote 101. Summary available here.

In Re K-Sea Transportation Partners LP Unitholders Litigation, C.A. No. 6301-VCP (Del. Ch. April 4, 2012). The prior Chancery decision in this case was highlighted on these pages here. Issues Addressed: The issues addressed by the Court of Chancery in this matter were whether the fiduciary duty claims and the contractual claims were barred by the provisions in the limited partnership agreement, including whether a provision in the agreement that established a presumption of good faith barred claims for breach of the implied covenant of good faith and fair dealing. Summary available here.

Matthew v. Laudamiel, C.A. No. 5957-VCN (Del. Ch. Feb. 21, 2012). Apparently no prior Delaware law directly addressed the issue of whether the dissolution and cancellation of an LLC transformed derivative claims into direct claims held proportionately by the members of the LLC. The Court concluded that, after the filing of the certificate of cancellation, such claims must be brought in the name of the LLC by a trustee or a receiver appointed under 6 Del. C. Section 18-805, or directly by the LLC, or derivatively by its members after reviving the LLC by obtaining a revocation of its certificate of cancellation. Summary available here.

Gerber v. Enterprise Products Holdings, LLC, et al., C.A. No. 5989-VCN (Del. Ch., Jan. 6, 2012). Issue Addressed: This decision speaks to the limitations imposed by 6 Del. C. § 17-1101 on Delaware courts to address sanctionable conduct by partners and members of alternate entities that have contracted away their fiduciary duties. Summary available here.

Rulings Regarding Practice, Procedure and Jurisdictional Issues (including attorneys’ fees as exception to the American Rule)

Duff v. Innovative Discovery LLC, C.A. No. 7599-VCP (Del. Ch. Dec. 7, 2012).

Issues Addressed: The Court of Chancery addressed the following issues in this opinion: (1) Whether a forum selection clause providing for “sole” jurisdiction in California courts should be honored when a conflicting forum selection clause in a related agreement provided for jurisdiction in Delaware courts; (2) Whether 6 Del. C. § 18-111 provided a basis for equitable jurisdiction when the agreement that gave the Court of Chancery jurisdiction only provided for money damages; (3) Whether reformation as a remedy will be allowed when the complaint did not specifically request reformation but provided notice of the elements of that form of relief.

Court of Chancery Announces Rule Changes, New Discovery Guidelines

On December 4, 2012, the Court of Chancery announced (here) that it is updating Rules 26, 30, 34 and 45 regarding discovery effective January 1, 2013, “to account for modern discovery demands” regarding electronically stored information (“ESI”) and to “bring the Court’s rules in line with current practice.” The Court also announced that it is expanding its Guidelines for Practitioners, originally released in January 2012, to include guidelines regarding discovery and in particular, ESI (the “Discovery Guidelines”). The Practice Guidelines published by the Court of Chancery are entitled: “Guidelines to Help Lawyers Practicing in the Court of Chancery“. They are a quite formidable 28 pages (after a 3-page index.) Kevin Brady, a member of the Court’s Rules Committee, provided a helpful overview of the 28-page Guidelines on these pages here.

Bessenyei v. Vermillion, Inc., C.A. No. 7572-VCN (Del. Ch. Nov. 16, 2012). Issues Addressed: (1) Whether a notarized signature signed in the absence of a notary results in an invalid verification; and (2) Whether knowingly presenting an improperly notarized verification is a basis to dismiss the complaint under Delaware Court of Chancery Rule 41(b). Short Answers: (1) Yes; and (2) Under the circumstances, dismissal of the complaint is appropriate. Summary available here.

In another Delaware “first in the nation,” Vice Chancellor Laster of the Court of Chancery on October 15, 2012, in EORHB, Inc. v. HOA Holdings LLC (C.A. No. 7409-VCL) ordered the parties to “show cause” why computer assisted review should not be used for discovery of electronically stored information (“ESI”) in that matter. After a hearing on a motion for partial summary judgment and a motion to dismiss a counterclaim, Vice Chancellor Laster, sua sponte, raised the issue of computer assisted review in discovery for the balance of the case, saying: “[t]his seems to me to be an ideal non-expedited case in which the parties would benefit from using predictive coding. I would like you all, if you do not want to use predictive coding, to show cause why this is not a case where predictive coding is the way to go.” Transcript at 66.

Coughlin v. South Canaan Cellular Investments LLC, C.A. No. 7202-VCL (Del. Ch. July 6, 2012). Issue Addressed: Whether bad faith exception to American Rule applied to impose attorneys’ fees for litigation tactics. Short Answer: Yes. Summary available here.

Manning v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an important decision of the Delaware Court of Chancery on legal ethics as applied to non-Delaware attorneys who appear before the Court pro hac vice. Issues Addressed: Whether lack of complete candor to the Court in a Motion for Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or (ii) revoke the admission pro hac vice. The Court also addressed standards (articulated in this context for the first time), of candor and full disclosure, regarding potential conflicts, that those seeking admission pro hac vice must now follow. Summary available here.

Advancement and Indemnification Claims

Feeley v. NHAOCG, LLC, (“Feeley III“), is a transcript ruling in a pending Chancery case involving issues that relate to a contest for control, and which has thus far generated two opinions, highlighted on these pages here and here. A transcript of an oral argument in this case has recently been made available, regarding a claim in the case that, as of the date of this transcript, had not yet been the subject of an opinion by the court, but the transcript at pages 66 to 79, reveals “practice tips” about the mechanics of submitting bills in connection with a claim for advancement of legal fees for applicable officers or managers. ( We have often explained on these pages that transcripts of rulings in the Delaware Court of Chancery are often cited in briefs as valid authority).

Danenberg v. Fitracks, C.A. No. 6454-VCL (Del. Ch. Mar. 5, 2012), addressed important issues of advancement and indemnification and established a protocol for resolving the amount of fees payable pursuant to the grant of advancement rights. Summary available here.

Hermelin v. K-V Pharmaceutical Company, C.A. No. 6936-VCG (Del. Ch., Feb. 7, 2012). Issues Addressed: The Court of Chancery addressed an issue of first impression in Delaware regarding: “what evidence is relevant to an inquiry into whether an indemnitee acted in good faith for the purposes of permissive indemnification” under DGCL §§145(a) and (b). The Court also addressed: (1) Whether the former CEO is entitled to mandatory indemnification as a matter of law; (2) Whether additional discovery is required to determine whether the former CEO acted in good faith (in which case he would be entitled to statutorily permissive indemnification pursuant to his rights under an indemnification agreement.) Summary available here.

Request for Appointment of Receiver

Badii v. Metropolitan Hospice Inc., C.A. No. 6192-VCP (March 12, 2012), involves a post-trial decision on an action under 8 Del. C. § 291 for the appointment of a receiver for an insolvent, closely held corporation, Metropolitan Hospice, Inc. (“MHI”) which owed, among other things, approximately $2 million to the IRS for back taxes, penalties, and interest. Summary available here.

BonusPractitioners’ Guide with Practice Tips for non-Delaware Lawyers using “local counsel” in Delaware

Supplement: Professor Bainbridge graciously describes our annual review as a “must read”. The Columbia Law School’s new blog on corporate law, called The CLS Blue Sky Blog, reprinted our annual summary on the first day of the blog’s unveiling.

The Court of Chancery hosted a seminar for practitioners on December 7, 2012 in Wilmington, in order to explain its recently promulgated Practice Guidelines as well as recent amendments to the rules governing confidentiality and electronic discovery.

N.B. In August 2021, the Court updated the Guidelines.

The materials discussed and distributed are “must reading” for both lawyers practicing in the Court and those out-of-state counsel (and their clients) who want to be familiar with the very detailed requirements of the very specific, high standards that the Court expects counsel and parties appearing before it to uphold. The Court also provides sample forms that will be provided below as links in this post, for such things as outlines for collecting electronic documents (ESI) and sample scheduling orders.

The Practice Guidelines published by the Court of Chancery are entitled: “Guidelines to Help Lawyers Practicing in the Court of Chancery“. They are a quite formidable 28 pages (after a 3-page index.) Kevin Brady, a member of the Court’s Rules Committee, provided a helpful overview of the discovery aspects of the Guidelines on these pages here.

The Guidelines address matters from the mundane to the sublime. For example, the proper attire in the Court is addressed, as is the use of conference rooms in the Courthouse to have lunch delivered during a trial. Detailed guidance is given for the special nuances applicable to discovery for expedited cases such as for a preliminary injunction, as well as the confounding but critical aspects of correctly preparing a privilege log. Among the tips provided by the Court are to limit cross-motion briefing to four sets of briefs, and not to file a “retaliatory” motion to compel on the same issue so as to get the last brief filed.

The following samples and outlines are provided from the Court’s website. Especially noteworthy is the Court’s provision of a sample stipulation for a “clawback or quick-peek” order that may be appropriate when large volumes of documents need to be produced in an expedited manner and there is not sufficient time to review each document for privileged or confidential material:

Also necessary for practitioners to know is the new Rule 5.1 (superseding Rule 5(g) as of Jan. 1, 2013), which governs filings with the Court of confidential documents (formerly referred to as filings under seal). Kevin Brady, a member of the Court’s Rules Committee, previously highlighted the new Rule 5.1 here. The actual redlined amendments to Rules 26, 30, 34, and 45 are available here.

Local Counsel Guidelines, with an overview of relevant caselaw, including references for those admitted pro hac vice, have been compiled on these pages here, for those many lawyers from outside Delaware who collaborate on Delaware cases with Delaware counsel.

One “takeaway” from these extensive “rules of the road” for practice in the Delaware Court of Chancery is that “those not familiar with these somewhat Byzantine and intricate procedural expectations” should not file or litigate a case in Chancery unless they are prepared to meet these expectations (and their client can pay for the extra work these guidelines require–which assume that the economics of the case justify the first-class lawyering that these guidelines demand.) Stated another way, if a case does not have a minimum threshold of value, meaning a fairly substantial amount of money is in dispute, the requirements for litigating in this Court make it cost-prohibitive for “smaller” cases.

Lake Treasure Holdings Ltd. v. Foundry Hill GP, No. 6546-VCL (Del. Ch. Sept. 11, 2012).

Why this case is noteworthy: This ruling provides practical insight into the logistical realities of discovery practice in the Delaware Court of Chancery and the gravitas required from out-of-state attorneys who may not be familiar with the seriousness with which the court treats this aspect of litigation that in some states is not given great importance.

Procedural Background: The procedural context of this case is a motion to compel discovery. The case involves a failed business relationship and a plaintiff who is trying to salvage his investment or determine if anything is salvageable from it.

Practical Insights

Regular readers will know that transcript rulings are often cited in this court as valid authority. This ruling provides several reminders why non-Delaware lawyers who practice in Chancery need to be prepared to justify objections to discovery requests, and explain to the court their failure to reply fully and promptly to discovery requests. Attorney’s fees are routinely shifted to the party losing the motion to compel. It is not uncommon or unprecedented for the fees incurred, and awarded, after full briefing and oral argument, on a motion to compel, to exceed $25,000 to $40,000. See, e.g., cases highlighted here and here.

The court referred to the Chancery decision in the Aveta, Inc. v. Bengoa case, highlighted here, for guidance if a dispute arose about the amount of fees. The Aveta case was one of three cases in as many months that, by coincidence, each separately imposed fees of $700,000 as penalties, (one of which, highlighted here, was for discovery deficiencies.) Recent Chancery cases have explained the Delaware “pizza principle”, regarding disputes over the exact amount of fees awarded, as noted in cases reviewed here and here.

Highlights of Ruling

  • The court will make Delaware counsel responsible for the failures of non-Delaware counsel who are admitted pro hac vice. This is a well-settled principle in Delaware. See Transcript (linked above) at 23.
  • The court specifically reviewed several common objections to the discovery requested, which the court referred to as mere “noise” and not valid objections. For example:
  •  (i) An objection was made alleging that the discovery requests were unduly burdensome as “they seek information already in the custody or control” of the requesting party. Among the reasons the court rejected this objection is that it would require the objector to be a psychic to know everything the other party had.  Tr. at 20-21.
  • (ii) An objection was made to requests “to the extent they purport to impose obligations beyond those established by the Rules of Civil Procedure”.  Among other reasons the court rejected this objection is because it does not explain what, if any, documents are being withheld on this basis. Tr. at 21-22
  • (iii) The court expressed displeasure with “general objections, all of which were meaningless”, followed by: “Notwithstanding the foregoing specific objections”, of which the only one was relevance. The court explained that the refusal to provide information on this basis was not appropriate. Tr. at 26
  • (iv) If an objection to production is based on the assertion that something is a “public record” it is necessary to specify exactly what is not being produced. Tr. 28-29
  • (v) Likewise, if an objection is made based on a document “being equally available” to the other side, one must specify what those documents are, which are not being produced. Tr. 29-30.
  • Finally, in the case of documents that are confidential, that is no excuse for non-production. Even for those documents that may be true trade secrets, the routine procedure in Chancery is for both a protective order to be entered and a restriction for “attorneys’ eyes only”. Tr. at 42

SUPPLEMENT: By way of comparison, and perhaps as an indication of how unpredictable the outcome of motions to compel can sometimes be, the same member of the court in another unrelated case did not shift fees in connection with ruling on a motion to compel, in World Market Center Venture, LLC v. NAMA Holdings, LLC, C.A. No. 5131 (Del. Ch.  Sept. 4, 2012). In the NAMA case, the court was displeased with both parties and perhaps because both parties were equally at fault, the court did not assess attorneys’ fees. The transcript linked above is helpful for gaining an insight into what the court regards as meaningless and obfuscating discovery objections.  See, e.g., transcript at 16 and 21-22. The court instructed the parties to: spend more time doing meet and confer, avoid gamesmanship with evasive objections, and refrain from what the court referred to as “urinary escalations” in the context of discovery instransigence. Id. at 51. Prior Chancery decisions in the NAMA case that provide background are available on these pages here.

These guidelines for collaboration between Delaware counsel and non-Delaware lawyers were prepared by Francis G.X. Pileggi and Kevin F. Brady. 

This is a compilation of selected key Delaware court decisions, rules, and customs to guide Delaware attorneys serving as “Delaware Counsel” (or “local counsel”), and out-of-state attorneys admitted to practice in Delaware pro hac vice, or non-Delaware lawyers who collaborate on Delaware litigation with Delaware counsel.

The Role of Delaware Counsel

The Delaware Court of Chancery does not recognize the limited role of “local counsel” to the extent that it implies a less than plenary role of Delaware counsel—even if non-Delaware counsel are overseeing the litigation or taking the “laboring oar.”[i]  The Court of Chancery emphasizes that a Delaware attorney of record is responsible for every action taken by his or her client—from the content of the pleadings to the fulfillment of discovery obligations. “[T]he Delaware lawyer who appears in an action always remains responsible to the Court for the case and its presentation,” without reference to who drafted the document at issue or was responsible for certain actions.[ii] See generally, Principles of Professionalism for Delaware Lawyers.

The Court of Chancery has published Guidelines to Help Lawyers Practicing in the Court of Chancery, which make clear that the concept of “local counsel” does not exist in Delaware as a role with less than full responsibility. [iii] Those Guidelines provide in part as follows:

1. Role of Delaware Counsel

a. The concept of “local counsel” whose role is limited to administrative or ministerial matters has no place in the Court of Chancery. The Delaware lawyers who appear in a case are responsible to the Court for the case and its presentation.

b. If a Delaware lawyer signs a pleading, submits a brief, or signs a discovery request or response, it is the Delaware lawyer who is taking the positions set forth therein and making the representations to the Court. It does not matter whether the paper was initially or substantially drafted by a firm serving as “Of Counsel.”

c. The members of the Court recognize that Delaware counsel and forwarding counsel frequently allocate responsibility for work and that, in some cases, the allocation will be heavily weighted to forwarding counsel. The members of the Court recognize that forwarding counsel may have primary responsibility for a matter from the client’s perspective. This does not alter the Delaware lawyer’s responsibility for the positions taken and the presentation of the case.

d. Non-Delaware counsel shall not directly make filings or initiate contact with the Court, absent extraordinary circumstances. Such contact must be conducted by Delaware counsel.

e. It is not acceptable for a Delaware lawyer to submit a letter from forwarding counsel under a cover letter saying, in substance, “Here is a letter from my forwarding counsel.”

Former Chancellor William Chandler summarized the duties of “Delaware Counsel” in a recent interview, where he explained that Delaware attorneys have a duty to review all filings to make certain that the arguments and positions are consistent with Delaware’s rules and laws.[iv] The former chancellor also spoke about the obligation of Delaware attorneys to inform out-of-state counsel about Delaware courts’ customs and traditions.

Attorneys Admitted Pro Hac Vice

The Delaware courts also strictly regulate the pro hac vice admission of out-of-state attorneys, and the rules require a Delaware attorney moving the admission of an out-of-state attorney to determine and certify to the admitting court that the lawyer to be admitted is reputable and competent.[v] Out-of-state counsel also must certify that they have reviewed Delaware’s Principles of Professionalism for Delaware Lawyers. Even after being admitted to practice in Delaware pro hac vice, an out-of-state attorney may not (1) sign pleadings; (2) file documents with the Court;[vi] (3) communicate directly with the Court; or (4) attend proceedings without Delaware counsel (including calls with the court, mediation and arbitration proceedings), without express permission by the Court.[vii] However, out-of-state counsel who are admitted pro hac vice may take or defend depositions in the pending action without the presence of their Delaware counsel.[viii]

The fee for pro hac vice admission is assessed on an annual basis, and varies by court. The District of Delaware, which recently announced its “Pro Hac Vice Enhancements,” now allows District of Delaware registered CM/ECF users to pay the $25 annual fee for attorneys admitted pro hac vice through the Court’s electronic filing system.[ix]

An out-of-state attorney’s pro hac vice status may be revoked upon a motion to the Court.[x] Inappropriate conduct by out-of-state attorneys will not be tolerated by the courts, and can lead to revocation of an attorney’s pro hac status and submission of specific matters to the bar of the attorney’s home state as well as Delaware’s Office of Disciplinary Counsel.[xi] Examples of inappropriate conduct are provided below.

Delaware’s pro hac vice rules apply with equal force to Delaware-barred attorneys who do not maintain an office in Delaware. Maintaining an office in Delaware is a prerequisite to serving as an attorney of record in Delaware pursuant to Sup. Ct. R. 12(a)(i); if a Delaware attorney retires, or practices in another state, and his firm does not maintain a bona fide Delaware office, then that attorney will need to be admitted pro hac vice before filing documents with or arguing before any Delaware court.

The Delaware Supreme Court’s Office of Disciplinary Counsel compiled materials and case excerpts relevant to the practice of law in Delaware for attorneys admitted pro hac vice.[xii] These materials provide guidance on issues frequently encountered by Delaware counsel when assisting out-of-state counsel, as well as guidance for counsel admitted pro hac vice, including:

  • Out-of-state counsel’s desire to impermissibly limit the scope of retention of Delaware Counsel;
  • Identifying the client: distinguishing the underlying client in the litigation from out-of-state counsel who directs Delaware counsel and pays the bills;
  • Special consideration required when both Delaware counsel and out-of-state counsel are associated with the same firm, including the proper form of signature blocks; and
  • Procedures for Delaware-barred attorneys who practice out of state and do not maintain a bona fide Delaware office.

As a supplement to the extensive materials provided by the Office of Disciplinary Counsel, the following cases provide distinct examples of attorney conduct that will not be tolerated by the Delaware courts and how the courts address such conduct:

  • Sample v. Morgan, 935 A.2d 1046 (Del. Ch. 2007) (holding that a non-Delaware lawyer and her law firm could be sued in Delaware for providing advice and services to a Delaware corporation, its directors, and its managers on matters of Delaware corporate law, including the preparation of a certificate of incorporation, which they provided to a service agent to be filed in Delaware) (Ex. 12 hereto).
  • Beck v. Atl. Coast PLC, 868 A.2d 840 (Del. Ch. 2005) (sanctioning and fining out-of-state counsel under Rule 11 and Rule 37 for filing a deceptive complaint, improperly certifying that the plaintiff was fit to serve as class representative, and intentionally withholding relevant non-privileged documents responsive to discovery requests) (Ex. 13 hereto).
  • Auriga Capital Corp. v. Gatz Props., LLC, 2012 Del. Ch. LEXIS 19 (Del. Ch. Jan. 27, 2012) (shifting fees where plaintiff and his counsel acted in bad faith by “splatter[ing] the record with a series of legally and factually implausible assertions,” allowing defendant to collect responsive documents without legal supervision, and failing to preserve relevant documents and information) (Ex. 14 hereto).
  • Griffin v. The Sigma Alpha Mu Fraternity, C.A. No. 09C-04-067 JAP (Del. Super. Mar. 15, 2012) (imposing a $500 fine against plaintiffs for allowing out-of-state counsel, who was not admitted pro hac vice in Delaware, to conduct a deposition in a Delaware case) (Ex. 15 hereto).
  • In re Asbestos Litig. Limited to Ronald Carlton, C.A. No. 10C-08-216 ABS (Del. Super. May 14, 2012) (warning Delaware counsel of possible sanctions and/or rejection of documents filed for failure to adhere to the requirement that all correspondence to the Court be submitted on Delaware counsel’s letterhead and signed by Delaware counsel) (Ex. 16 hereto).

Electronic Discovery Duties

Electronic data preservation, collection, and production are also governed by the Delaware courts. Both the District of Delaware and the Court of Chancery provide guidelines on preserving electronically stored information (ESI) on their websites.

The District of Delaware implemented both a Default Standard for Discovery, Including Discovery of Electronically Stored Information[xiii] and a Default Standard for Access to Source Code.[xiv] These standards require counsel for all parties to confer on several topics concerning the production of ESI to avoid costly litigation of discovery disputes.

The Court of Chancery has adopted Guidelines for Preservation of Electronically Stored Information that require counsel to develop and oversee a process to preserve all relevant ESI.[xv] This process should include, at a minimum, identifying all custodians of potentially relevant information, disseminating litigation hold notices to those custodians, and conferring with opposing counsel to discuss whether they will limit or forgo discovery of ESI.

—          —          —

These guiding Delaware principles are further refined by the individual courts, each having its own rules for the admission of out-of-state attorneys, and the requirements of Delaware counsel. In addition, Delaware charges fees on an annual basis to renew a pro hac vice motion to enable out-of-state counsel to maintain his or her pro hac vice status in a particular case.

Because electronically stored information has created unique and unusual situations for lawyers and their clients in terms of discovery and trial, this topic is currently under review by many courts in Delaware.

**The exhibits referred to in this column are available by contacting the authors.

—————————————————————————————

[i]           State Line Ventures, LLC v. RBS Citizens, N.A., 2009 Del. Ch. LEXIS 233, at * 1 (Del. Ch. Dec. 2, 2009)

[ii]            Id.

[iii]          Delaware Court of Chancery, Guidelines to Help Lawyers Practicing in the Court of Chancery (2012), http://courts.state.de.us/Chancery/docs/CompleteGuidelines.pdf

[iv]          Francis G.X. Pileggi and Kevin F. Brady, Interview with Chancellor William Chandler from the Delaware Court of Chancery, Delaware Corporate & Commercial Litigation Blog (June 17, 2011), https://delawarelitigation.com/2011/06/articles/commentary/interview-with-chancellor-william-chandler-from-the-delaware-court-of-chancery/

[v]              Delaware Supreme Court and Delaware State Bar Association, Principles of Professionalism for Delaware Lawyers, at ¶ C (Nov. 1. 2003), http://courts.delaware.gov/forms/download.aspx?id=39428

[vi]          The Court of Chancery issued an Order to clarify that only members of the Delaware Bar can be signed up with the LexisNexis eFiling system as eFilers and to receive eFiling notifications by email. See Delaware Court of Chancery, Standing Order (Aug. 5, 2008) http://courts.delaware.gov/chancery/docs/ ChanceryStandingOrder_Out-Of-StateAttorneys_080408.pdf

The Court of Chancery also issued a Notice informing Delaware lawyers that it is a violation of Rule 79.1 to share their eFiling passwords or add non-Delaware lawyers to the electronic service list. See Francis G.X. Pileggi, Chancery Clarifies and Admonishes: eFiling Passwords for Delaware Lawyers Only, Delaware Corporate & Commercial Litigation Blog (May 6, 2008), https://www.delawarelitigation.com/2008/05/articles/ commentary/chancery-clarifies-and-admonishes-efiling-passwords-for-delaware-lawyers-only/

[vii]         See Andrea L. Rocanelli, Pro Hac Vice: Ethical Challenges of Serving as Delaware Counsel, Office of Disciplinary Counsel of the Delaware Supreme Court (Jan. 25, 2008), https://www.delawarelitigation.com/int86.PDF (citing Forte Capital Partners, LLC v. Bennett, Del. Ch., C.A. No. 1495-N (2005) (rejecting pleadings, motions, and letters to the Court signed by out-of-state counsel; also rejecting the appearance before Court in a teleconference by an attorney admitted pro hac vice when Delaware counsel was not present for the conference)). See also https://www.delawarelitigation.com/2008/01/articles/ commentary/delaware-litigation-via-pro-hac-vice-admissions/ (suggesting that Delaware lawyers provide these materials to out-of-state lawyers when asked or retained to serve as local counsel).

[viii]         See Griffin v. Sigma Alpha Mu Fraternity, 2012 Del. Super. LEXIS 119 (Del. Super. Ct. Mar. 15, 2012) (holding that out-of-state counsel is not permitted to question a deposition witness in a Delaware action—even if “supervised” by Delaware counsel—“unless, and until, counsel is admitted pro hac vice.”)

[ix]          United States District Court for the District of Delaware, Pro Hac Vice Enhancements (July 13, 2012), http://www.ded.uscourts.gov/pro-hac-vice

[x]           See State ex rel. Secretary of the DOT v. Mumford, 731 A.2d 831 (Del. Super. Ct. 1999) (revoking the pro hac vice admission of out-of-state attorney who “demonstrated a lack of civility and professionalism by ‘coaching the witnesses’ during the depositions, by failing to control or attempt to control the objectionable conduct of his client, and by encouraging the [inappropriate] conduct of his client.”)

[xi]          Manning v. Vellardita, 2012 Del. Ch. LEXIS 59 (Del. Ch. Mar. 28, 2012) (holding that while out-of-state attorney’s failure to fully disclose law firm affiliation “fell short of the level of candor this Court expects of attorneys practicing in Delaware,” there was no basis to revoke attorney’s pro hac vice status; however, Court referred the matter to the bar association of attorney’s home state and the Delaware Office of Disciplinary Counsel).

[xii]         See supra note 7.

[xiii]         United States District Court for the District of Delaware, The Default Standard for Discovery, Including Discovery of Electronically Stored Information (Dec. 8, 2011), http://www.ded.uscourts.gov/sites/default/files/Chambers/ SLR/Misc/EDiscov.pdf

[xiv]          United States District Court for the District of Delaware, The Default Standard for Access to Source Code (Dec. 8, 2011), http://www.ded.uscourts.gov/sites/ default/files/Chambers/SLR/Misc/DefStdAccess.pdf

[xv]          See Delaware Court of Chancery, Guidelines for Preservation of Electronically Stored Information (Jan. 18, 2011), http://courts.delaware.gov/forms/download.aspx?id=50988. See also Francis G.X. Pileggi, Delaware Court of Chancery Issues Non-Binding Guidelines to Help Lawyers Navigate Their Cases Through the Court More Efficiently, Delaware Corporate & Commercial Litigation Blog (Jan. 15, 2012), https://delawarelitigation.com/2012/01/ articles/chancery-court-updates/delaware-court-of-chancery-issues-non-binding-guidelines-to-help-lawyers-navigate-their-cases-through-the-court-more-efficiently/.

The following key Delaware corporate and commercial decisions from the first four months of 2012 are a follow-up to our summary of the key decisions that we featured from 2011. We highlight on these pages all the corporate and commercial opinions from Delaware’s Supreme Court and Court of Chancery, and we have chosen the following 2012 rulings as being especially noteworthy, as the month of April comes to a close. Comments are welcome if readers think we missed a decision that should be included in this list.Photo of the Supreme Court Courthouse in Dover
Supreme Court Decisions

EMAK Worldwide, Inc. v. Kurz, No. 512, 2011 (Del. Supr., April 17, 2012).  Issue Addressed: Whether the Court of Chancery properly granted an interim fee award in a shareholders’ suit which did not produce an immediate monetary benefit. Short Answer: Yes. Summary available here.  (The Supreme Court’s stately building in Dover is featured at right.)

Cambium Ltd. v. Trilantic Capital Partners, No. 363, 2011 (Del. Supr., Jan. 20, 2012. This Order of the Delaware Supreme Court applied the recent decision of Delaware’s High Court in the Central Mortgage case in which it clarified that Delaware has not adopted the federal standard for motions to dismiss under Rule of Civil Procedure 12(b)(6) as described in the U.S. Supreme Court’s Twombly and Iqbal decisions, despite the truism that the Delaware Rules of Civil Procedure are generally based on the Federal Rules of Civil Procedure. A fuller overview is available here. The recent Delaware Supreme Court decision in Central Mortgage taking this position was highlighted here.

Court of Chancery Rulings

Shocking Technologies, Inc. v. MichaelC. A. No. 7164-VCN (Del. Ch. April 10, 2012). Issue Addressed: Whether the Court of Chancery has the inherent authority to remove a director for breach of fiduciary duty, other than via DGCL Section 225? Short answer:  The issue was not directly decided, but based on the facts of this case, the Court was not inclined to exercise such an inherent power, if such a power exists, prior to the expedited trial. Summary available here.

In Re K-Sea Transportation Partners LP Unitholders Litigation, C.A. No. 6301-VCP (Del. Ch. April 4, 2012). The prior Chancery decision in this case was highlighted on these pages here. Issues Addressed: The issues addressed by the Court of Chancery in this matter were whether the fiduciary duty claims and the contractual claims were barred by the provisions in the limited partnership agreement, including whether a provision in the agreement that established a presumption of good faith barred claims for breach of the implied covenant of good faith and fair dealing. Summary available here.

Manning v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an important decision of the Delaware Court of Chancery on legal ethics as applied to non-Delaware attorneys who appear before the Court pro hac vice. Issues Addressed: Whether lack of complete candor to the Court in a Motion for Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or (ii) revoke the admission pro hac vice. The Court also addressed standards (articulated in this context for the first time), of candor and full disclosure, regarding potential conflicts, that those seeking admission pro hac vice must now follow. Summary available here.

Badii v. Metropolitan Hospice Inc., C.A. No. 6192-VCP (March 12, 2012), involves a post-trial decision on an action under 8 Del. C. § 291 for the appointment of a receiver for an insolvent, closely held corporation, Metropolitan Hospice, Inc. (“MHI”) which owed, among other things, approximately $2 million to the IRS for back taxes, penalties, and interest. Summary available here.

In re Delphi Financial Group Shareholder Litigation, Cons. C.A. No. 7144 -VCG (Del. Ch. Mar. 6, 2012). This is the third Delaware Court of Chancery decision in as many weeks that denied injunctive relief, in an expedited opinion, in response to a challenged transaction–despite criticism in two of the cases, of the process and the players, but ultimately leaving it up to the shareholders to decide whether to accept offers of a substantial premium to sell their shares. Summary available here. See In Re El Paso, summarized here, and In Re Micromet, summarized here.

In Re El Paso Corporation Shareholder Litigation, Consol. C. A. No. 6949-CS (Del. Ch. Feb. 29, 2012). Chancellor Strine denied the stockholder plaintiffs request for a preliminary injunction to enjoin a merger between El Paso Corporation and Kinder Morgan, Inc. While the Court in a 33-page opinion, severely criticized the actions of a number of the players, in the end the Chancellor decided to give the shareholders of El Paso the opportunity to decide for themselves if they liked the price being offered to them. Summary available here. The Court’s opinion in this matter marks the second time in the span of only a few months that the Delaware Court of Chancery has strongly criticized Goldman Sachs for conflict of interest issues in multi-billion dollar transactions. The most recent high-profile criticism was in the Court of Chancery’s 100-plus page decision in the Southern Peru Copper case highlighted on these pages here. Our LexisNexis videocast on this opinion is available here.

Danenberg v. Fitracks, C.A. No. 6454-VCL (Del. Ch. Mar. 5, 2012), addressed important issues of advancement and indemnification and established a protocol for resolving the amount of fees payable pursuant to the grant of advancement rights. Summary available here.

Matthew v. Laudamiel, C.A. No. 5957-VCN (Del. Ch. Feb. 21, 2012). Apparently no prior Delaware law directly addressed the issue of whether the dissolution and cancellation of an LLC transformed derivative claims into direct claims held proportionately by the members of the LLC. The Court concluded that, after the filing of the certificate of cancellation, such claims must be brought in the name of the LLC by a trustee or a receiver appointed under 6 Del. C. Section 18-805, or directly by the LLC, or derivatively by its members after reviving the LLC by obtaining a revocation of its certificate of cancellation. Summary available here.

Hermelin v. K-V Pharmaceutical Company, C.A. No. 6936-VCG (Del. Ch., Feb. 7, 2012). Issues Addressed: The Court of Chancery addressed an issue of first impression in Delaware regarding: “what evidence is relevant to an inquiry into whether an indemnitee acted in good faith for the purposes of permissive indemnification” under DGCL §§145(a) and (b). The Court also addressed: (1) Whether the former CEO is entitled to mandatory indemnification as a matter of law; (2) Whether additional discovery is required to determine whether the former CEO acted in good faith (in which case he would be entitled to statutorily permissive indemnification pursuant to his rights under an indemnification agreement.) Summary available here.

Auriga Capital Corp. v. Gatz Properties LLC, C.A. No. 4390-CS (Del. Ch., Jan. 27, 2012). What this Case is About and Why it is Important: This case establishes a high-water mark in terms of providing the most comprehensive explanation, based on legislative history and a review of Delaware cases, to explain why the default standard in the LLC context is that fiduciary duty principles will apply to managers of an LLC unless those duties are expressly and clearly limited or eliminated in an LLC agreement. Summary available here.

Dweck v. Nasser, C. A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), found that Dweck, the former CEO, a director and 30% stockholder in Kids International Corporation (“Kids”), and Kevin Taxin, Kids’ President, breached their fiduciary duties of loyalty to Kids by establishing competing companies that usurped Kids’ corporate opportunities and converted Kids’ resources. The Court also imposed liability on an officer of the company for approving the reimbursement with company funds of the personal expenses of his superior. Summary available here.

Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012). Issue Addressed: This opinion addressed the issue of whether representative plaintiffs in a putative class action should be in sanctioned for trading on the basis of confidential information obtained in the litigation. The motion was granted. Summary available here.

Gerber v. Enterprise Products Holdings, LLC, et al., C.A. No. 5989-VCN (Del. Ch., Jan. 6, 2012). Issue Addressed: This decision speaks to the limitations imposed by 6 Del. C. § 17-1101 on Delaware courts to address sanctionable conduct by partners and members of alternate entities that have contracted away their fiduciary duties. Summary available here.

Paul v. China MediaExpress Holding, Inc., C.A. No. 6570-VCP (Del. Ch. Jan. 5, 2012). Issues Addressed: (1) Whether a Section 220 case should be stayed pending the outcome of a related federal securities suit; and (2) Whether the shareholder in this case established a proper purpose to inspect books and records under DGCL Section 220. Short Answer: (1) Based on a three-part test as applied to the facts of this case, the Court refused to stay this action in favor of a pending related federal securities suit, even though a motion to stay was also pending in the federal court. (2) In this post-trial opinion, the Court determined that the shareholder established a proper purpose and was entitled to the documents necessary to investigate that proper purpose. Summary available here.

Bonus

An important development during the first 4 months of 2012 was the promulgation by the Court of Chancery of its inaugural Practice Guidelines, highlighted here.

Supplement

The Delaware State Bar Association’s annual seminar on Developments in Corporate and Alternative Entity Law will be presented in Wilmington on May 22 as described in more detail on these pages here.

Postscript: Professor Bainbridge kindly linked to this post on his blog.

Courtesy of LexisNexis and their Corporate and Securities Practice page comes a videocast in which Steve Berstler of LexisNexis tapes yours truly in a short clip that discusses the recent Delaware Chancery decision in Manning v. Vellardita, highlighted on these pages, which addresses a motion to disqualify counsel based on an argument that the movant failed to disclose in his motion for admission pro hac vice that he was a member of a firm that had represented a party adverse to his client.

In my latest ethics column for The Bencher, the national publication for the American Inns of Court, I highlight here a recent unpublished decision of the U.S. Court of Appeals for the Fifth Circuit that reversed a decision of a trial judge imposing penalties on lawyers admitted pro hac vice, as well as others, for allegedly impugning the trial judge’s character. The appellate court also required that another judge hear the case on remand.

A special feature of the article is a link to a compilation prepared by the former chief counsel for the Office of Disciplinary Counsel, an arm of the Delaware Supreme Court, of decisions and private ethics rulings in Delaware regarding standards for lawyers admitted pro hac vice. That compilation is available here.

Scully v. Nighthawk Radiology Holdings, Inc., C.A. No. 5890-VCL (Mar. 11, 2011)(Report of Special Counsel). This Report concluded that there was neither forum shopping nor collusive behavior in the settlement of a class action related to the $170 million merger of Nighthawk Radiology and Virtual Radiologic Corporation.

Issues Addressed (as quoted from the Special Counsel’s Report):

1. Is forum-shopping for purposes of securing an advantageous settlement a wrong under existing law, taking into account Prezant v. De Angelis, 636 A.2d 915 (Del. 1994), and other authorities? What is (or should be) the standard for determining when a settlement is collusive?

2. What role, if any, should the disfavored forum (here, the Court of Chancery) have when it receives notice of what appears to be a collusive
settlement?

3. My principal concern has been that, given the manner in which representative action settlements typically are presented, the court in the favored forum (here, the Arizona Superior Court) would not have reason to learn about (i) forum shopping efforts or (ii) prior adverse rulings or commentary by the court in the disfavored forum. Is this concern valid and, if so, how should it be addressed?

4. Lawyers are the repeat players in the multi-jurisdictional litigation process. What remedy, if any, should there be if counsel is found to have engaged in a collusive settlement? Should the pro hac vice status of forwarding counsel be revoked? Should the revocation go beyond the civil action relating to the collusive settlement? If Delaware counsel participates in a collusive settlement, what action should be taken?

5. How should the answers to the foregoing questions be applied to the facts
of this case? 

Procedural Setting

The Delaware Court of Chancery appointed a Special Counsel to address the above issues "from the point of view of Delaware and the public interest". If not sui generis,  the appointment of a Special Counsel in this context is unusual for corporate litigation in Delaware, and may be compared in the world of corporate law, in an academic sense, with the unfortunate tremors experienced in Japan a few days ago. The genesis of the Special Counsel’s decision was a status conference in December, held in the Court of Chancery in connection with the approval of a class action lawsuit in Arizona. The status conference was memorialized in a transcript ruling here. The class action involved in this matter related to the merger of Nighthawk Radiology and Virtual Radiologic Corp. The Court of Chancery raised issues sua sponte about a possible "reverse auction" and the exploitation of several cases pending in multiple forums (or fora). The Court of Chancery was concerned about whether a settlement reached in a related Arizona case was intended to avoid the scrutiny of the Delaware Court and if there was pressure for the Delaware counsel to join the Arizona settlement or "lose out on fees."

The Special Counsel’s Report (the "Report")

The Special Counsel appointed by the Court of Chancery in this matter was the highly-regarded veteran corporate litigator Gregory P. Williams of Richards Layton and Finger in Wilmington. The Report was filed with the Court two days ago in the form of a "Brief of Special Counsel" authored by the Special Counsel and Richards Layton associate Blake Rohrbacher. Their 42-page magnum opus is available here. Likely to be as widely read as a major decision from the court, it includes a reference to many transcript rulings from the Court of Chancery in recent cases. Transcript rulings are often cited in briefs to the Court of Chancery in corporate litigation. An index to the voluminous Compendium of transcript rulings referred to in the brief is available here, and the actual Compendium of transcript rulings (weighing in a 627-pages) is available here.

Short Overview of the Special Counsel’s Report

The AmLaw Daily blog has a short post that provides a brief synopsis of the Special Counsel’s brief, which we refer to as the Report, here.  According to The AmLaw Daily, the stakes involved in the outcome of the Report included at least one lawyer’s continuing ability to "litigate in the country’s most important business court" as well as "the rules and guidelines for plaintiffs’ and defense lawyers litigating a swell of merger-related class actions." This momentous Report could easily stimulate a long commentary the length of a typical law review article, but the goal here is much more modest. I will attempt merely to highlight a few of the key aspects of the Report and encourage readers to make time to read the entire document linked above. It is truly "must reading" for anyone interested in the latest developments in Delaware law on this topic.

The Special Counsel describes the three-part background of the Report, before he addresses the issues listed above, as follows: 

First the brief discusses forum-shopping in the context of multi-jurisdictional class actions, including the “reverse auction” phenomenon, in which plaintiffs’ counsel are said to underbid each other to settle with defendants and secure higher attorneys’ fees. Next, the brief discusses the effects of the “settlement class” procedure, in which the Court does not certify a class until the settlement is approved. Then, the brief addresses the Court’s review of settlements, particularly those involving issues of potential collusion.

Forum Shopping

Regarding the topic of forum-shopping in the context of multi-jurisdictional class actions, the Report quotes from a recent Chancery transcript ruling as follows:

"Plaintiffs gain some leverage by filing deal litigation in multiple courts. As this Court has recognized, plaintiffs’ lawyers may choose multiple forums to gain advantage in the contest for lead counsel status; they also do so to force defendants to engage with their individual suits.See, e.g., In re Compellent Techs., Inc. S’holder Litig., C.A. No. 6084-VCL, at 20 (Del. Ch. Jan. 13, 2011) (TRANSCRIPT) (“[W]hen everybody is filing in the same forum, you’re not guaranteed to get control of a case. But if you then go and file in another forum, you do have control of that case and then the defendants have to deal with you. You may get control of the entire action but, at a minimum, you get control of a piece of the litigation for purposes of the fee negotiations.”)."  Report at 2.

The Report also cites to the duty of an attorney to zealously represent her client as required by the Rules of Professional Conduct, as a consideration in determining the best forum in which to file suit. See also Delaware Principles of Professionalism at A(4).

Related to the discussion of forum-shopping in corporate litigation, is the increased attention given by scholars and practitioners to non-Delaware courts deciding issues of Delaware law–perhaps due to the aversion that some plaintiffs may have to the greater scrutiny they might find in Delaware. See, e.g., Professor Larry Ribstein’s discussion of this topic and the related issue of jurisdictional competition, available here. See also the discussion available here, of a related article by Professors John Armour, Bernard Black and Brian Cheffins. Also notable is the analysis by Professor Joseph Grundfest here and Professor Stephen Bainbridge’s discussion here of a somewhat related issue of "choice of forum provisions" in bylaws and corporate charters. See also the draft article by Professor Brian Quinn here about plaintiffs bringing Delaware-law based claims in non-Delaware courts.

The Special Counsel concludes that: "… forum-shopping for purposes of securing an advantageous settlement is not an independent wrong under existing Delaware law. That is, such forum-shopping should not be equated with a collusive settlement".

Collusion

After a review of the leading commentary by scholars as well as court decisions from around the country, the Special Counsel formulated the following definition:

a collusive settlement in the context of stockholder deal litigation appears to involve, at its core, an explicit or implicit agreement between counsel for plaintiffs and counsel for defendants to require less consideration for the settling class in exchange for (1) exclusive dealings with particular plaintiffs’ counsel and/or (2) more consideration for plaintiffs’ counsel.  Factors that should give rise to heightened scrutiny for collusiveness include the following: settlement consideration disproportionately weak in comparison to the strength of the claims asserted; settlement with a plaintiff’s firm that typically does not litigate aggressively when other, more formidable, firms are involved in the litigation; and an agreement to pay attorneys’ fees significantly higher than are typical given the settlement consideration.  Report at 26-27.

The Report explains with detailed reasoning why there was no collusion based on the facts of this case. Advice on best practices is also provided for those involved in multi-jurisdictional deal litigation that is pending in the Delaware Court of Chancery and is courts of another state:

… all counsel should be aware that this Court will play some role, either in reviewing a potential settlement or in dismissing a case following a settlement approved by another court.  Therefore, best practice for counsel negotiating a settlement of such litigation in a jurisdiction outside of Delaware—recognizing this Court’s focus on representative settlements—would be to substantively involve Delaware counsel in the negotiations. 

The Report also discussed the public policy aspects of the role that state courts play in multi-jurisdiction settlements within our system of federalism. See, e.g., footnote 12 (citing several transcript rulings within the last few months in which the Court of Chancery addresses the public policy issues.)

The Role of the Non-Settlement Forum

At the request of the Court, the Special Counsel made the following suggestions for the role of the non-settlement forum in multi-jurisdiction deal litigation:

1). The non-settlement forum should ensure that all courts involved in the multi-jurisdictional case are operating on the same information. The Special Counsel is also the Chair of the Court of Chancery Rules Committee and will follow-up to determine if the Court of Chancery is amenable to a new rule that would require disclosure to the settlement forum where the Court of Chancery is the non-settlement forum.

2). The non-settlement forum could maintain an open line of communication with the settlement forum.

3). The non-settlement forum could require the common parties to provide it with copies of the settlement documents filed in the settlement forum.

Remedies for Collusive Behavior and Basis for Revocation of Pro Hac Vice Admissions

Because the Special Counsel did not find the need for any remedies or revocations in this case, I will merely commend the last section of the Report for future reference on the following topics, the second one being of wide applicability beyond the world of class action settlements:

1).  What penalties, if any, can or should courts impose upon a finding of collusive behavior; and

2).  What is the standard for the Court revoking the grant of a motion for admission pro hac vice.

Supplement: Though not related to this particular matter, conceptually relevant to the general topic is an article in Forbes here that discusses from a business columnist’s point of view, some of the merger litigation issues generally addressed in this post.