The Delaware Business Court Insider again published this year’s Annual Review, reprinted below with the courtesy of The Delaware Business Court Insider. (c) 2020 ALM Media Properties, LLC. All rights reserved.

This is the 17th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery, often with co-authors. This list does not attempt to include all important decisions of those two courts that were rendered in 2021. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available here.

This year’s list focuses, with some exceptions, on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications. Links are also provided below to the actual court decisions and longer summaries.

DELAWARE SUPREME COURT DECISIONS

Supreme Court Confirms Impact of Bankruptcy on LLC Membership

A recent Delaware Supreme Court ruling endorsed the reasoning of a Delaware Court of Chancery decision holding that federal bankruptcy law does not entirely preempt the Delaware LLC Act to the extent that the LLC Act provides for a member of an LLC to become an assignee only, with economic rights, upon the filing of bankruptcy by that member, in Zachman v. Realtime Cloud Services LLC, 228 A.3d 1065 (Del. April 20, 2021).

Delaware High Court Finds First State Charter Outweighs Other Factors in Dole Foods Choice-of-Law Ruling

The Delaware Supreme Court decided a consequential case in 2021 addressing choice-of-law and fraud-exclusion issues in connection with requiring D&O insurers to pay settlements with investors who claimed that the CEO of Dole Foods Company Inc. cheated them in a going-private buyout.  RUSI Indemnity Co. Inc. v. Murdock, et al., No. 154, 2020 (Del. March 3, 2021).  Among the reasons that this decision is noteworthy is because it established the applicability of Delaware law to the insurance policy of a company incorporated in Delaware, but which had many contacts elsewhere.  Also, importantly, the court determined that insurance coverage would not be defeated simply because it covered payment for the settlement of fraud allegations.  The high court added that Delaware does not have a public policy against the insurability of losses occasioned by fraud, reasoning that Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance against any liability whether or not the corporation has the power to indemnify against such liability.

Delaware Rules Shareholder Franchise Right Question Tops Entire Fairness Test

In Coster v. UIP Companies, Inc., et al., No. 29, 2020 (Del. June 28, 2021), the unanimous opinion of Delaware’s high court en banc required that on remand the Court of Chancery determine if a board acted for inequitable purposes or in good faith, but for the primary purpose of disenfranchisement without a “compelling justification,” in connection with a stock sale intended to shift the power balance between rival deadlocked stockholder fashions, even if the sale were fairly negotiated.  If the trial court found after remand that the transaction was intended for inequitable purposes without a compelling justification, the trial court could consider available remedies including cancelling the stock sale and considering the appointment of a custodian.  Chief Justice Seitz wrote for the Supreme Court that the sanctity of the shareholder franchise superseded entire fairness review based on the circumstances of this case.

Supreme Court Clarifies Test for Direct v. Derivative Stockholder Claims

Although this is a decision that has already received widespread commentary, the Supreme Court decision in Brookfield Asset Management, Inc. v. Rosson [TerraForm], No. 406, 2020 (Del. Sept. 20, 2021), is a seminal decision that every corporate litigator must be aware of because it redefines and clarifies the test in Delaware to distinguish between a direct stockholder claim and a derivative stockholder claim.

Supreme Court Clarifies Pre-Suit Demand Analysis

Another Supreme Court decision that has already been the subject of extensive analysis but is still required reading for all corporate litigators is United Food and Commercial Workers’ Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, No. 404, 2020 (Del. Sept. 23, 2021), because it clarifies and restates the law in Delaware for the analysis of pre-suit demand futility for purposes of pursuing a derivative stockholder claim.

Supreme Court Decides Important Contract Dispute in Sale of Business

The Supreme Court of Delaware affirmed an epic Delaware Court of Chancery decision that found a breach of an agreement of sale that permitted the buyer to avoid consummation of the purchase for failure to comply with the “ordinary course covenant” in connection with how the business was managed between the date the agreement of sale was signed and the date of closing.  See AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, Del. Supr., No. 71, 2021 (Dec. 8, 2021).  The Supreme Court explained that the seller was required to obtain the prior written consent of the buyer before making the changes that it made, and distinguished the separate reasoning that applied to the material adverse change clause.

DELAWARE COURT OF CHANCERY DECISIONS

Company’s Privileged Communications Must Be Provided to Board Members

The Court of Chancery decided an issue of first impression in Delaware by rejecting the argument that the management of a Delaware corporation has the authority to unilaterally preclude a director of the corporation from obtaining privileged information of the corporation.  See In re WeWork Litigation, No. 2020-0258-AGB (Del. Ch. Aug. 21, 2021).

Recent Chancery Decision Addresses Dissolution Based on LLC Deadlock

The Delaware Court of Chancery penned a seminal decision that explains the analysis necessary to determine when a deadlock in an LLC might be the basis for a dissolution.  In Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021), the court addressed whether there was a failure to achieve the votes necessary for board action and whether the board deadlock was genuine or merely manufactured to force the appearance of a deadlock.

Chancery Keeps Dissolution Case Despite Mandatory NY Forum Clause

Although the general rule in Delaware is that forum selection clauses will be upheld, even if they require litigation to be conducted in states outside of Delaware, an exception to the rule was applied to keep a dissolution case in Delaware notwithstanding a contrary mandatory forum selection clause, in Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. March 30, 2021).

Self-Sacrifice Not Required of Controlling Stockholder

A useful Chancery decision that is bound to be of widespread applicability is the ruling in RCS Creditor Trust v. Schorsch, C.A. No. 2017-0178-SG (Del. Ch. March 18, 2021), in which the court explained that the fiduciary duties of a majority or a controlling stockholder do not require self-sacrifice, nor do they mean that such a fiduciary forfeits her contractual rights.

Chancery Addresses Forum Non Conveniens

Delaware law has evolved regarding the nuances of forum non conveniens, and those most recent iterations are explained in the Chancery decision styled Sweeny v. RPD Holdings Group, LLC, C.A. No. 2020-0813-SG (Del. Ch. May 27, 2021).

Chancery Recognizes Reverse Veil-Piercing

The Delaware Court of Chancery recently recognized “outside reverse veil-piercing,” as compared to “insider reverse veil-piercing.”  The former iteration was explained based on the unusual circumstances present in Manichaean Capital, LLC v. Exela Technologies, Inc., C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021).

Chancery Clarifies Standard to Shift Fees for Improper Litigation Conduct

The Court of Chancery’s pithy ruling in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. July 22, 2021), remains noteworthy for its guidance that provides litigators in general, and corporate litigators in particular, with a definition of “glaringly egregious,” and helps to clarify where the line is drawn for determining when fees will be shifted for inappropriate litigation conduct.  This decision gives greater instruction for what behavior will be sufficient to trigger the exception to the general American Rule that each party pays its own legal fees.

Can Fiduciary of a Debtor Assist a Creditor-Entity that Fiduciary Has Interest In?

The Court of Chancery addressed the titular topic in Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited, C.A. No. 2018-0059-JRS (Del. Ch. July 28, 2021).

Chancery: LLC Managers Breached Fiduciary Duties

The Chancery decision in Stone & Paper Investors, LLC v. Blanch, C.A. No. 2018-0394-PAF (Del. Ch. July 30, 2021), deserves attention for its treatment of well-established principles of fiduciary duty with widespread applicability in the LLC context, absent unambiguous waiver.  Also noteworthy, is the explanation about why the circumstances of this case allowed breach of contract claims to proceed to the extent that they did not overlap the fiduciary claims–and why both were permitted to be pursued through trial.

Chancery Explains Policy Limits to Contractual Restrictions on Fraud Claims

In connection with perennial post-closing claims related to the sale of a business, the Chancery decision in Online Healthnow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021), explains the consequential nuances about what specific language in an agreement of sale will allow, or will bar, certain types of fraud claims.  The money quote from the decision provides the best insight into its holding: “Under Delaware law, a party cannot invoke provisions of a contract it knew to be an instrument of fraud as a means to avoid a claim grounded in that very same contractual fraud.”

Chancery Clarifies When Forum Selection Clause Binds Non-Signatory

While it may be surprising to some, quite a few Delaware decisions have bound non-signatories to forum selection clauses.  The Chancery decision in Florida Chemical Company, LLC v. Flotek Industries, Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021), provides the most thorough analysis of the titular topic, with scholarly insights and copious citations that explain the theoretical and public policy underpinnings that support the decision to bind a non-signatory to a forum selection clause, and the prerequisites for doing so.

Chancery Does Deep Dive into Corporate Dissolution Details and Winding-up Process

Those interested in the not self-evident winding-up process in connection with the dissolution of a corporation under Delaware law need to read the Court of Chancery decision styled:  In re Altaba, Inc., C.A. No. 2020-0413-JTL (Del. Ch. Oct. 8, 2021), which provides an extensive analysis of the statutory provisions for the dissolution of corporations and a description of the corresponding winding-up process.

Chancery Declines to Follow First-Filed Rule in Advancement Case

A recent Chancery decision explained why the first-filed rule was not applied in an advancement case under Section 145 of the Delaware General Corporation Law.  See Lay v. Ram Telecom International, Inc., C.A. No. 2021-0631-SG (Del. Ch. Oct. 4, 2021).

Chancery Provides Guidelines for Non-Delaware Lawyers Issuing Formal Delaware Legal Opinion Letters

The Court of Chancery in Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Nov. 12, 2021), provides comprehensive detail of the factual background of the issuance of a formal legal opinion letter in connection with a transaction, and provides a thorough analysis of problems with that letter in a 194-page decision which also offers guidance to lawyers around the country who are involved in issuing a formal opinion letter based on Delaware law.  The court found that the formal opinion letter given in the transaction at issue was not rendered in good faith, and explained what lawyers need to do in order to make sure the formal opinion letters that they grant do not suffer the same fate.

Chancery Clarifies Officer Consent Statute

Several years ago the Delaware Supreme Court expanded the prior interpretation of Delaware’s consent statute that imposes personal jurisdiction on directors and officers who agree to service in that capacity for Delaware corporations.  The contours of that expansion continue to be clarified and defined for those situations where there has been no breach of fiduciary duty.  See BAM International, LLC v. MSBA Group, Inc., C.A. No. 2021-0181-SG (Del. Ch. Dec. 14, 2021).

______________________________________________________________________________________________



SUPPLEMENT: Professor Stephen Bainbridge, one of Delaware’s favorite corporate law scholars, and one of the most prominent corporate law expert’s in the country, was kind enough to link to this article and described it as “essential reading”.



*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

**Ciro C. Poppiti, III practices in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

***Cheneise V. Wright is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

A recent Delaware Court of Chancery decision deserves a passing reference for its analysis of the statutorily-granted equitable jurisdiction to enforce the Delaware Stormwater Management Act. The opinion in Nieves v. Insight Building Co., LLC, C.A. No. 2019-0464-SG (Del. Ch. Aug. 4, 2020), begins with an entertaining history lesson about the Nanticoke Indians in southern Delaware and their participation in the Methodist Church during the 1800s. The introduction also features a reference to the book of Exodus and that biblical description of the seven plagues as resembling in some ways the allegations in the amended complaint of the infestation of homes with various insects due to water-related problems experienced at new homes in a housing development.

Three bullet points will, I hope, suffice for a high-level identification of the substantive legal issues addressed by the court in the event readers would find an opinion that analyzes these issues in a scholarly manner to be useful:

  • The Delaware General Assembly, by statute, gave the Court of Chancery jurisdiction to grant injunctive relief when warranted to enforce the Delaware Stormwater Management Act.
  • The Court delves into the doctrinal underpinning of fiduciary relationships and why they are not typically found between parties to commercial contracts. The Court explains why it did not impose those heightened duties on the developer of a housing community based on the facts presented.
  • The often insurmountable threshold that must be overcome to successfully pierce the corporate veil in Delaware was explained in this decision, along with the reasons why the facts alleged did not satisfy the exacting requirements for such a claim. Those interested in this last issue should consider reading the book Professor Bainbridge, a friend of the blog and a nationally-recognized corporate law expert, co-authored on this topic.
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A recent Delaware Court of Chancery opinion explained the meaning of undefined terms in a limited partnership agreement which required the general partner in the Limited Partnership to use “best efforts” and “sound business practices.” In connection with claims that the general partner breached the agreement, the court in Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS (Del. Ch. July 6, 2018), explained that it would use dictionary definitions to help illustrate the meaning of those undefined terms. See page 25 and footnotes 91 to 93.

The court did not refer to the more common standard of “commercially reasonably efforts”, but that somewhat related contractual standard has been discussed in cases highlighted on these pages. Instead, the court’s application of dictionary definitions of the terms “best efforts” and “sound business practices” were applied to deny the motion to dismiss for breach of contract.The court also provided helpful contract interpretation principles in connection with how to define terms not defined in an agreement. See footnote 25.

Additional Noteworthy Principles Applicable to Commercial Litigation:

  • The court reiterated the well-known Delaware principle that unless expressly disclaimed, alternate entities such as limited partnerships will be subject to default fiduciary duties. See footnote 3.
  • The court explained that when fiduciary duties are disclaimed, and a new contractual standard is inserted to replace default fiduciary standards, the appropriate nomenclature for a claim for breach of that standard is a simple breach of contract, and not a breach of a “contractual fiduciary duty.” See pages 35 and 36.
  • The court observed in passing what the elements of a claim for piercing the corporate veil are, and even though the plaintiffs did not use that terminology, that is how the court interpreted their claim. The court described why the elements for such a claim were not met. See pages 37 and 38.
  • In connection with granting the motion to dismiss the claim for breach of fiduciary duties, the court discussed the well-recognized concept in Delaware that the controllers of a corporate general partner of a limited partnership may owe fiduciary duties to the limited partnership, if such persons exercise control over the limited partnership’s property—but that claim cannot be made if the limited partnership disclaims all fiduciary duties. See pages 42 and 43 and accompanying footnotes. The Delaware decision that articulated that cause of action against controllers of a corporate general partner of an L.P.is known as In re USA Cafes, L.P. Litigation, 6 A.2d 43 (Del. Ch. 1991).

The Court of Chancery recently allowed, after trial, a claimant to disregard the corporate entity, which the court found was involved in a fraudulent conveyance. The case styled: Fringer v. Kersey Homes, Inc., C.A. No. 9780-VCG (Del. Ch. June 25, 2018), begins with the following three sentences:  “The great advantage of the corporate form is that it permits investment and ownership without risk of personal liability for entity debt.  This advantage has its limits, obviously.  One such limitation is involved here.” (FYI: There is no typo in the Plaintiff’s name in the above case caption.)

For those interested in the topic of “piercing the corporate veil,” friend of the blog, Professor Stephen Bainbridge, has co-authored a book that includes an in-depth scholarly analysis of the topic. The good professor has published a lengthy list of books and articles on corporate law that are often cited by the Delaware courts.

Although the net result is the same, this decision does not undertake a “conventional analysis” that directly addresses piercing the corporate veil, and the facts of this case are not likely to be repeated, but a number of more traditional “piercing the corporate veil” cases have been highlighted on these pages over the last 13 years.

Brief Background:

The corporation involved, Kelsey Homes, Inc., was a defendant in a prior lawsuit based on allegations of fraud in connection with an agreement to sell a modular home. At the time of that agreement, Kelsey Homes, Inc. was “moribund.”  By the time trial approached in the prior fraud suit, its only asset was the modular home at issue in the litigation.  Kersey Homes, Inc. had transferred its only asset in a back-dated bill of sale to a relative of one of the stockholders, and then defaulted on the fraud action.

The court found that the stockholders of the corporate defendant were wrong when they thought that a judgment against the now-insolvent Kersey Homes, Inc. would be beyond the reach of the resulting judgment creditors.

The court held that the “sale” of the only corporate asset to a related party was a “sham” and the transfer was fraudulent under Delaware’s Uniform Fraudulent Transfer Act. The court granted the plaintiff in this case  a levy on the property, to receive the sales proceeds in an amount sufficient to satisfy the judgment.

Procedural History:

The prior fraud suit against Kersey Homes, Inc. regarding the sale of the modular home, resulted in a judgment being entered by the Superior Court.  Although Kersey Homes, Inc. had initially defended the Superior Court action, shortly before trial they informed the court that they would not defend it.  The modular home that was the subject of the Superior Court lawsuit, was transferred by Kersey Homes, Inc. to an affiliated party in exchange for discharging a prior debt of Kersey Homes, Inc.  This transfer of the only asset of Kersey Homes, Inc. was made about one year into the litigation over the home that was the subject of the transfer and about two months prior to judgment being entered shortly before the trial date.

The instant litigation in the Court of Chancery was commenced about two weeks after the judgment was obtained in the Superior Court. The Chancery complaint sought relief against Kersey Homes, Inc. (which filed a certificate of dissolution several months after the Chancery complaint was filed), as well as the principal stockholder of Kersey Homes, Inc. and the related party that had received the fraudulent transfer.  Kersey Homes, Inc. did not defend the Chancery litigation.

The court did not believe the testimony of the principal stockholder in part because the transfers were not documented and the only person available to testify about the transfer was the transferor.

The court determined that a more likely explanation for what happened was that the principals of Kersey Homes, Inc. realized they might be liable for a judgment and decided to take steps to evade any judgment that might be obtained. At the time of the fraudulent transfer, Kersey Homes, Inc. was already out of business and insolvent, without assets to satisfy a judgment.  But about a year earlier, the only asset of Kersey Homes, Inc. had been transferred for no consideration.  In an effort to defend a potential fraudulent conveyance claim, the principals of Kersey Homes, Inc. attempted to cover their tracks and create a story about a backdated transfer one year earlier.  The court found that those transfers were intended to avoid execution on a judgment.

Key Legal Principles:

The court reviewed the elements of a claim under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) whose purpose the court described as providing a remedy to creditors who were defrauded by debtors who transfer assets or incur obligations with the intent to hinder, delay or defraud any creditor or, without receiving reasonably equivalent value. The court described the elements of a claim as recited in Section 1304(a) of Title 6 of the Delaware Code.

There are eleven factors that the statute lists as non-exclusive factors to consider in determining whether there was actual intent to defraud. It is not necessary that all the factors support a finding of intent.  In this case, the court found that seven of the factors supported a finding of actual intent to defraud.

The court also found that Kersey Homes, Inc. violated Section 1305(a) which provides that a transfer is fraudulent as to a creditor whose claim arose before the transfer was made, if the debtor made the transfer without receiving a reasonably equivalent value or the debtor became insolvent as a result of the transfer. See footnote 117.

The opinion also discussed the broad latitude that a court has to craft a remedy subject to applicable principles of equity. Even though the original judgment was against a defunct corporation, the court traced the fraudulently transferred assets of the corporation to its current owner who was a stockholder in that corporation.

In sum, the court allowed the plaintiff to levy execution on the home involved in order to satisfy the judgment obtained in the Superior Court. The court also required the defendants to account for rental receipts on the house, and to the extent the sale of the property is insufficient to satisfy the judgment, the shortfall shall be made up from the rental receipts.

Because of a statute that applied in the Superior Court to grant treble damages for consumer fraud on senior citizens, the court found it inequitable to depart from the American Rule on fees.

The Delaware Court of Chancery is a court of equity with limited jurisdiction. Contrary to what some may assume, not all corporate and commercial litigation can be heard in this famous court. (Delaware’s trial court of general jurisdiction is the Superior Court.) A recent opinion has practical application for litigators to the extent that it applies the well-traveled, but not often well understood, nuances of the limited scope of the equitable jurisdiction of the Delaware Court of Chancery. Yu v. GSM Nation, LLC, C.A. No. 12293-VCMR (Del. Ch. July 7, 2017).  This letter decision explains the three ways to secure equitable jurisdiction, but the court reminds practitioners that the mere incantation of key words invoking equitable relief will not suffice.

The background of this case includes a request to pierce the corporate veil, about which the Court of Chancery has exclusive jurisdiction. In addition to serving as an example of how difficult it is to successfully pierce the corporate veil, this decision explains why the Superior Court could provide adequate relief to the plaintiff by providing a money judgment.  There was insufficient detail in the pleadings to explain why a money judgment could not be paid, and therefore the court dismissed the complaint with leave to refile or transfer the case to the Superior Court within 60 days pursuant to 10 Del. C. § 1902. See generally footnotes 7, 9 and 10 regarding equitable jurisdiction, and also 10 Del. C. § 342, re: Chancery’s limited jurisdiction.

Also of practical application is the discussion by the court in this letter ruling of the exclusive jurisdiction that Chancery has over equitable fraud claims, but in this case there was no basis for an equitable fraud claim. The use of the words alone to allege equitable fraud claims is not enough.

In addition, the court explained that in some instances the Superior Court and the Court of Chancery may both entertain claims for unjust enrichment, but if the unjust enrichment claim, as in this case, is merely a contract-related theory of recovery that accompanies a breach of contract allegation, then the claim is only legal, and not equitable. See footnote 25.

Professor Stephen Bainbridge, a nationally-recognized corporate law scholar whose scholarship has been cited in the opinions of Delaware courts, has added another book to the list of his prolific publications. He has co-authored with Professor Todd Henderson, a book entitled “Limited Liability: A Legal and Economic Analysis“. It has been favorably reviewed in The Economist magazine, and the publisher’s flyer has additional details.

For those interested in the latest cutting-edge analysis of LLC law by leading experts, this book should be on your shelf. One of the gems found in this book is a discussion of how the concept of piercing the corporate veil is applied in the context of an LLC for purposes of imposing personal liability on an LLC member.

The Chancery opinion in Revolution Retail Systems, LLC v. Sentinel Technologies, Inc., C.A. No. 10605-VCP (Del. Ch. Oct. 30, 2015), discusses many issues in connection with the breach of contract for the sale of a business. The sale involved an ongoing collaborative relationship. Although Texas law applied to many aspects of the case, the court cited to applicable Delaware case law on the enforceability of covenants not to compete. See, e.g., footnote 182 (citing Merrill Lynch, Pierce Fenner & Smith, Inc. v. Price, 1989 WL 108412 at *5 (Del. Ch. Sept. 13, 1989) (this case enforced a covenant not to compete against a former broker who had competed against his former firm with a customer list he took with him).

In connection with enforcing the covenant not to compete, the court also reviewed the prerequisites for a permanent injunction which was also granted in this case. The court also reviewed claims for loss profits and observed that when measuring money damages for an unproven technology, it is nearly impossible not to be speculative, which does not satisfy the basis for awarding lost profits. See footnote 193 (citing Amaysing Techs. Corp. v. CyberAir Commc’ns, Inc., 2004 WL 1192602, at *5 (Del. Ch. May 28, 2004)(case involving product with unproven technology).

A permanent injunction was also issued to remedy a breach of a confidentiality provision, in addition to the enforcement of the covenant.

There are many other substantive parts of this 73-page decision, but for purposes of highlighting the most practical aspects with the widest application, I have focused on the enforcement of a covenant not to compete and the grant of an injunction as a remedy.

In Re: Dole Food Co., Inc., Stockholder Litigation, Cons., CA. No. 8703-VCL (Del. Ch. Feb. 27, 2015). This Delaware Court of Chancery opinion concluded after careful reasoning that in order to serve as an expert witness, one must have a body and a brain and, therefore, a corporation as an entity cannot serve as an expert. This opinion provides a useful review of the rules of evidence that require a human being to serve as a witness, and the truism that a corporation can only act through its agents, but a witness cannot act through an agent, or if stated differently, a witness cannot testify through a proxy. For example, due to its incorporeal nature, a corporation cannot satisfy the statutory requirement that a person take an oath “with uplifted hand.”

The court described the corporation as being a purely metaphysical creature, despite other contexts in which the law “appropriately personifies corporations.” In this context the net result is that the expert witness who was an agent of the corporation was entitled to testify on its own behalf.

My initial reaction is that this holding is not necessarily inconsistent with the recent Supreme Court decision in Hobby Lobby, and related observations by legal experts such as Professor Bainbridge who have observed that based on the “reverse veil piercing theory”, and other theories, an entity controlled by a natural person may be considered to be acting through that entity for purposes of expressing or complying with individual religious beliefs.

This decision is a small aspect of a consolidated case now in the middle of trial on both appraisal and fiduciary claims in connection with a going private transaction involving Dole.

Theravectys SA v. Immune Design Corp., C.A. No. 9950-VCN (Del. Ch. Oct. 31, 2014). This Court of Chancery opinion is useful for those engaged in Delaware corporate litigation to the extent that it clarifies when a subpoena served on a subsidiary can be used to obtain documents from the corporate parent of that subsidiary.

Brief Overview:

This letter decision involves a non-party that moved for a protective order under Court of Chancery Rule 26(c). The motion arises in the context of litigation against Immune Design Corp. (“IDC”) based on claims by Theravectys SA (“TVS”) that non-party Henogen manufactured products for IDC in violation of a contract between Henogen and TVS.  In order to obtain discovery to establish its case, TVS served a subpoena on Novasep US, a corporate affiliate of Henogen.  Novasep US and Henogen, neither of which is a party to this litigation, share a corporate parent headquartered in France. Novasep US is based in Pennsylvania.

Court of Chancery Rule 34(a) provides that a party may only request documents “which are in the possession, custody or control of the party upon whom the request is served.”

In this context, control has been defined to include “the legal right to obtain the documents requested upon demand. Thus, the key inquiry is whether the company has the power, unaided by the court, to force production of the documents.”  See footnotes 4 and 5. In these instances, separate corporate identities are generally respected except in rare circumstances justifying the application of the alter ego doctrine to pierce the corporate veil of a subsidiary. The courts in Delaware decline to broaden the scope of control to include an inquiry into the practical ability of the subpoenaed to a party to obtain the documents.

The court did not address the arguments that the attempt to obtain these documents violated the applicable law in the foreign countries where the parent corporation and an affiliate were based.

The court found that Novasep US was not required to produce documents that were not in its possession, custody or control. The court allowed TVS discovery to allow it to attempt to demonstrate that the corporate structure of Novasep US and its relationships with its affiliates would allow it to determine whether the requested documents were within its control.