Though this is not "breaking news", many readers may be interested in a derivative suit that was filed in Delaware Chancery Court involving BP and several other parties involved in the huge oil spill that is still unfolding in the Gulf of Mexico here.

Supplement: Professor Bainbridge comments here on the filing of this complaint.

Credit Suisse Securities (USA) LLC v. Investment Hunter LLC, C.A. No. 5107-VCN (Del. Ch. May 27, 2010), read opinion here  which affirmed an arbitration award that granted $1 million in punitive damages.

Because New York law applies to this case, I will give it a relatively short shrift. The bottom line in this case is that the Court of Chancery upheld an arbitration award that included punitive damages even though New York substantive law does not allow arbitrators to impose punitive damages.

The reasoning of the Court was that the arbitration was conducted under FINRA rules which do allow arbitrators to impose punitive damages. See footnotes 35 and 38. The "take away" from this case is that a contract must specifically prohibit punitive damages as opposed to simply referring to a choice of law, which may be in conflict with rules under which an arbitration is conducted.
 

Town Council of Ocean View v. Brown, C.A. No. 4969-VCL (Del. Ch. May 27, 2010).  read letter decision here.

This short letter decision provides, in a practical manner, a pithy overview of the basis for the limited subject matter jurisdiction exercised by the Court of Chancery, as well as the basis for the Court exercising personal jurisdiction.

In addition, on a theoretical level, by way of entertainment for those who may enjoy watching the History Channel or otherwise enjoy the legal aspects surrounding the history of our country, the Court provides a rather succinct overview of what it refers to as “the American foundational narrative” in a rather scholarly refutation of an argument by a pro se litigant. The pro se party argued that he was not bound by either the laws of the State of Delaware or the ordinances of his local municipality.

As an introduction to its tutorial, the Court recounts the inclusion of the three counties that now constitute the current State of Delaware, as part of the property of William Penn’s Pennsylvania. Penn obtained those three counties in the 1600s from the Duke of York. In 1704, however, those three counties were separated from Pennsylvania. The Court then chronicled the history of our country from the Declaration of Independence to the United States Constitution, to explain the legal underpinning for the obligation of a local resident to comply with the laws of its local municipality.

This short letter ruling provides citations to authority that would be of interest to history buffs as well, such as the date for the “shot heard ’round the world” in Concord, Massachusetts, that is often referred to as the formal commencement of hostilities between the North American colonies and the Crown. Also noteworthy is the legal explanation of the delegation of authority by the legislature to local municipalities, as well as the delegation to the States of power not otherwise given to the United States by the U.S. Constitution nor otherwise prohibited by it to be exercised by the States. See U.S. Const. amend. X.
 

In Re CNX Gas Corp. Shareholders Litigation, C. A. Consol. No. 5377-VCL (Del Ch. May 25, 2010), read 42-page opinion here. This will be a very short overview until a fuller synopsis can be provided at a later date.

Overview

The Delaware Court of Chancery denied a request for a preliminary injunction in this expedited matter in which the representatives of a putative class of minority stockholders challenged a controlling stockholder freeze-out structured as a first-step tender offer to be followed by a second-step short-form merger.

Applicable Standard of Review

The Court applied the unified standard for reviewing controlling stockholder freeze-outs described in the case of In Re Cox Communications, Inc., Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005), but explained first as follows at page 14 of the slip opinion:

" As knowledgeable readers understand all too well, Delaware law applies a different standard of review depending on how a controlling stockholder freeze-out is structured." (citing Kahn v. Lynch Communications Systems Inc., 638 A.2d 1110(Del. 1994)).

The entire fairness standard was applied to the facts of this case for several reasons: (i) the special committee did not recommend the transaction; (ii) the special committee was not provided with the authority to bargain with the controller on an arm’s length basis; and (iii) there was a reasonable question about the effectiveness of the majority-of-the-minority tender condition. The "flip side" of that is the reason the BJR did not apply .

That is, the BJR did not apply because there was no affirmative recommendation by the special committee AND there was no approval by the majority of unaffiliated stockholders.

Reason Why Preliminary Injunction Denied

The Court reasoned that in light of the fairness standard applying, any harm to the putative class could be remedied by a post-closing damages action. Moreover: (i) there was no viable disclosure claim; and (ii) the tender offer was not coercive.

POSTSCRIPT:

Professor Davidoff writes about the case here and summarizes it succinctly as follows:

Back on May 25, Vice Chancellor J. Travis Laster of Delaware’s Chancery Court issued an important opinion in In re CNX Gas Corp Shareholders Litigation on the legal standard governing “freeze-out” tender offers, transactions where a majority shareholder squeezes out the minority through a tender offer.

Vice Chancellor Laster’s opinion upset what the world thought had been the standard set by Vice Chancellor Leo E. Strine Jr. in the Pure Resources opinion. In that opinion, Vice Chancellor Strine ruled that a court would not strictly review a “freeze-out” transaction if it complied with certain procedural requirements, including allowing for a special committee of independent directors to recommend for or against the offer.

Vice Chancellor Laster modified the rule to require that the controlling shareholder receive “both the affirmative recommendation of a special committee and the approval of a majority of the unaffiliated stockholders”. In other words, the approval of the special committee is now required, whereas before the committee could recommend no, so long as it was allowed to do so. This substantially shifts the bargaining power to minority shareholders in freeze-out transactions.

The new opinion left people scratching their head as to which was the appropriate standard, …

***

This leaves controlling shareholders wondering what to do in structuring these transactions. The result is that shareholders will most likely pick the stricter standard, lest they risk getting assigned a judge who disagrees with Vice Chancellor Laster.

SUPPLEMENT:  Subequent to this opinion, the Court of Chancery authorized an interlocutory appeal of its decision here, seeking guidance from Delaware’s High Court regarding the correct, controlling applicable standard, but the Supreme Court here declined to accept the appeal.

Courtesy of The Courtroom View Network, here is a video/audio clip of the hearing on the preliminary injunction motion. Also available here is a review of the case, highlighting its support of a "unified standard", on the Harvard Law School Corporate Governance Blog.

Professor J.W. Verret writes here about the impact on Delaware corporate law of the pending federal legislation that seems likely to be signed into law in the near term. Professor Stephen Bainbridge provides his scholarly analysis to the debate here and here. Professor Larry Ribstein has been a prolific writer on this topic and he weighs in here.

In Concord Real Estate CDO 2006-1, Ltd. v. Bank of America N.A., C.A. No. 5219-VCL (Del. Ch. May 14, 2010), read opinion here, the Court of Chancery addressed the issue of whether notes issued as part of a collateralized debt obligation were discharged when the holder surrendered them voluntarily to the obligors with the intent that the notes be canceled. On cross motions for summary judgment by the issuers and the trustee of the indenture, the Court of Chancery construed the plain language of an indenture under applicable New York contract law and held that notes issued pursuant to the indenture could be voluntarily cancelled.

This summary was provided by Kevin F. Brady and Ryan P. Newell of Connolly Bove Lodge & Hutz LLP.

In 2006, the Plaintiffs issued notes (the “Notes”) as part of Concord Real Estate CDO 2006-1 (the “Concord CDO”), a collateralized debt obligation. Plaintiff Concord Real Estate CDO 2006-1, Ltd. (“Issuer”) was the Issuer of the Notes and Plaintiff Concord Real Estate CDO 2006-1, LLC (“Co-Issuer”) was the Co-Issuer. The Issuer and Co-Issuer were formed by Concord Debt Holdings LLC (“Concord Sponsor”). The Notes were issued subject to an Indenture Agreement (the “Indenture”). Defendant Bank of America N.A. (the “Trustee”) was the Trustee of the Indenture.

In December 2009, Concord Sponsor was concerned that Concord CDO might fail a par value test. If, as of a measurement date, the par value test was not met, “then funds that otherwise would be used to pay interest on the class of Notes at the level where the test failed and on any junior securities [would be] instead used to redeem the most senior class of Notes then outstanding.” This process continued until the test was satisfied or the senior Notes are redeemed. To avoid failing the par value test scheduled for February 2009, Concord Sponsor sought to cancel the Notes in January 2009. However, the Trustee would not cancel the Notes, believing instead that Notes could not be cancelled voluntarily under the terms of the Indenture.

To the extent the Notes were outstanding as of the February 2009 Measurement Date, then the par value test was not met. If the Notes were outstanding, Class A shareholders would receive $922,135.82 in redemptions and Class F Notes and Preferred Shares would not receive any interest payments. However, if they were not outstanding as of that date, then the test was met and the Class A shareholders would not receive those significant redemptions, but instead the Class F Notes would receive $38,226.32 and the Preferred Shares receive $548,110.93.

As the Indenture did not directly touch upon the issue of the surrender of Notes with an intent to cancel, the Court turned to New York common law and the Delivery Rule, under which “the delivery of a promissory note to the obligor with the intent to cancel the note discharges the obligation and cancels the debt.” Since there was no provision in the Indenture precluding the right to surrender the Notes, the Court held that Concord Sponsor had the right to surrender the Notes. Accordingly, the Notes were discharged when surrendered.

Finally, contrary to the Trustee’s argument that permitting cancellation would be contrary to the expectations of the Noteholders, the Court held that:

“[a]s long as the Coverage Tests are met on each respective Measurement Date and timely payments of principal and interest are made, then the Noteholders’ contractual expectations are being met. Provided that they do not run afoul of any other provision of the Indenture, the Issuer and Co-Issuer do not breach their contractual obligations by taking actions to remain in compliance with the Coverage Tests and avoid the mandatory redemption obligation. Permitting the cancellation of the . . . Notes in accordance with the Delivery Rule is thus consistent with and does not defeat the contractual expectations of the senior Noteholders.”

The Court found that the Issuer and Co-Issuer properly delivered the discharged notes for cancellation to the Trustee in its capacity as Notes Registrar and, therefore, the notes were discharged when the Issuer and Co-Issuer redeemed them voluntarily to the obligors with the intent that the notes be canceled. As a result, under the plain language of the Indenture, the notes at issue were not outstanding as of January 5, 2010, the date on which they were delivered for cancellation so the Court granted the plaintiffs’ motion for summary judgment.

Brown Investment Management, L.P. v. Parkcentral Global, L.P., C.A. No. 5248-VCL (May 24, 2010), read letter decision here. This short ruling by letter followed a decision from the bench after a one-day trial in which a limited partner sought the names and addresses of fellow limited partners of a defunct hedge fund. The Court’s letter explains why the motion to stay the decision pending appeal was denied.

Key Basis For Court’s Ruling 

The Court explained that: "Investors in Delaware business entities have a statutory right to access a list of their fellow investors. Delaware public policy favors the prompt production of the list." See 6 Del. C. Section 17-305 and DGCL Section 220(b).

Additional Reasoning

The Court also added that "Fabian tactics should not be rewarded". That is, the delay tactics used by the company, without apparent justification for not providing the requested data, would be exacerbated by imposing a stay of the Court’s decision pending appeal. [The term Fabian strategy refers to the Roman General of that name in about 200 B.C. who used delay tactics to defeat Hannibal’s attack on Italy, which took advantage of Fabian’s superior supplies and Hannibal’s difficulty in obtaining supplies far from home. Fabian prolonged the conflict by using evasive tactics and by avoiding direct battles with Hannibal’s superior calvary. Eventually, Hannibal was defeated in part because he ran out of supplies. Many litigators will recognize these tactics that still prevail among many defendants in lawsuits today.]

The Court applied the criteria for a stay pending appeal as outlined in Supreme Court Rule 32(a); Court of Chancery Rule 62(d) and the factors outlined in Kirpat, Inc. v. Del. Alcoholic  Beverage Control Comm’n, 741 A.2d 356, 357-58 (Del. 1998).

The Court also distinguished the 2006 Chancery decision in Wynnefield Partners v. Niagara Corp., based in part on the fact that the company involved in the instant case was a defunct entity and no harm would follow to the entity by a release of the limited partners’ names.