In Sun-Times Media Group Inc. v. Black, 2008 WL 2933093 (Del. Ch., July 30, 2008), read opinion here, the Delaware Chancery Court once again was called upon to address issues involving Lord Conrad Black and his onging legal battles related to his publishing empire and affiliated entities. In this latest iteration, the issue was whether Lord Black:

 was entitled to advancement  of the millions in legal fees he has incurred, in light of the particular factual and procedural posture presented,  pending his appeal of a conviction by a federal court in Chicago. Here is a link to posts about prior court decisions and factual background–as well as a video clip on this blog of part of the oral argument leading up to this instant decision. ( Hollinger, a  corporate party in several of the prior court decisions, was the former name of the entity now known as Sun-Times.)

The court’s own pithy  formulation of the issue, and the holding, is as follows:

The crux of this dispute is the meaning of the words “the final disposition of such action, suit or proceeding” in the Sun-Times bylaws and § 145(e) of the Delaware General Corporation Law (the “DGCL”). Those words describe the point after which the Sun-Times is no longer obliged to continue advancing fees and expenses to the defendants under the advancement provision in its bylaws. The Sun-Times argues that the final disposition of a criminal proceeding occurs at the time of sentencing at the trial court level. The defendants argue that the final disposition of a proceeding FN2  does not occur until the final, non-appealable conclusion to that proceeding. After considering the language of the bylaws and § 145, the parties’ course of performance under the Sun-Times bylaws, and the practical and policy considerations related to the definition of that language, I conclude that the final disposition of a proceeding in this context is the final, non-appealable conclusion to that proceeding.

 This thorough decision (over 70 pages in its original format) could be the subject of a law review article instead of a short blog post. For now, I can only whet your appetite to read the whole magnum opus at the above link.  In technical terms, this is red meat for the cage of anyone who has reason to (or wants to) keep up to date on the cutting edge developments in the law relating to the rights (and defenses) to advancement of legal expenses for former directors of a company.

The court referred to the far-ranging importance of the specific issue decided, with the following description of what it was called upon to decide:

The core dispute between the Sun-Times and the defendants is over an issue that is relevant to virtually all corporations, directors, and officers who are affected by the advancement and indemnification provisions of § 145 of the DGCL. Although cast in terms of the specific Sun-Times’ Advancement Provision, the parties’ disagreement about the meaning of “final disposition,” “action, suit or proceeding,” and “defending” are a dispute over § 145 because the use of those terms in the Advancement Provision parallels the use of those terms in § 145(e). FN37  The Sun-Times Certificate makes clear that this dispute is a dispute about the extent of § 145 because it grants advancement and indemnification rights to its officers and directors “to the fullest extent permitted by applicable law.”FN38 Reduced to its core, the question is whether advancement and ultimate indemnification rights turn on every provisional ruling at various stages of the underlying action, suit or proceeding or whether they turn on only the final, non-appealable resolution of the underlying action, suit or proceeding.

A key part of the factual terms interpreted by the court include the following provisions:

"… The Sun-Times’ Bylaws (the “Bylaws”) also provide for mandatory advancement of attorneys’ fees and expenses to directors and officers upon the receipt of an undertaking. 

Under the Advancement Provision, advanced funds must be repaid to the Sun-Times if it is “ultimately determined” that the director or officer who received those funds is not entitled to be indemnified. The Bylaws condition indemnification on the state of mind of the director or officer and make clear that, among other things, the mere fact of a conviction of any kind does not create a presumption that the director or officer acted with a non-indemnifiable state of mind. …."

"Course of performance" as a contract interpretation tool was an important part of the court’s analysis. In particular, the court observed that:

When the terms of an agreement are ambiguous, “any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.”FN71 Here, the course of performance of the Advancement Provision is compelling and suggests that the Sun-Times interpreted that Provision as providing advancement through the appellate process. Directly on point is that the Sun-Times advanced funds to Black for his appeal of this court’s “Order and Final Judgment” awarding injunctive, declaratory, and monetary relief against Black.

The court also discussed at length the policy implications of its decision, and reasoned, in part, as follows:

As an interpretive matter, it is also important to consider the practical implications of the Sun-Times’ position. The system of advancement and indemnification that would result from the Sun-Times’ interpretation of final disposition as the final judgment at the trial court level would be odd, complex, inefficient, and capricious. Moreover, it is difficult to grasp completely because the Sun-Times is not entirely clear in explaining how that system would work. Nevertheless I attempt to explain that system and its consequences to show why it is that the final disposition of a proceeding must be the final, non-appealable conclusion of that proceeding

There is much more than can be said and that should be said about this decision of far-reaching importance, but on this Sunday summer afternoon, duty calls me to other obligations, though I hope to return to this case later.

McDowell v. Greenfield, (Del. Ch., Aug. 1, 2008), read opinion here, is a Chancery Court decision that reiterates the standard of review for a "report" by one of the Masters in Chancery that often hear cases and recommend decisions for review by the Court.  Chancery Court rules also address the matter. The review standard was described by the court as follows:

 “When considering objections to a master’s report, this Court reviews de novo the master’s legal and factual conclusions.”FN27  Significantly, the “master’s ‘rulings are not final until reviewed and adopted by a judge.’ “ FN28
 
    FN27. Aveta, Inc. v. Colon, 942 A.2d 603, 607 (Del. Ch. Jan. 15, 2008) (quoting DiGiacobbe v. Sestak, 743 A.2d 180, 184 (Del.1999)).

    FN28.  DiGiacobbe, 743 A.2d at 181.

 In Re Seneca Investments LLC, 2008 WL 2890955 (Del. Ch., July 18, 2008), read opinion here.

This case involved a motion for commission which was filed after the defendant had moved for stay of all discovery pending a resolution of a motion for judgment on the pleadings. The Chancery Court questioned the standing of the defendant company to object to a motion for commission directed to a third party but in any event granted the motion for commission finding that discovery was relevant to the counterclaims and the defense to those counterclaims.

 TD Ameritrade Inc. v. McLaughlin, Piven, Vogel Securities Inc., 2008 WL 2855116 (Del. Ch., July 24, 2008), read opinion here.

This case involved the review of an arbitration decision that was handled through the National Association of Securities Dealers (“NASD”). The court reviewed the very high standard under both the Delaware Uniform Arbitration Act and the Federal Arbitration Act that must be met before a court will overturn the decision of an arbitrator in binding arbitration. 

 Although the court cited two recent decisions by the United States Supreme Court that held that the statutorily enumerated circumstances are those to which a court is limited in granting a modification under the FAA of an arbitration award; still, the Chancery Court also emphasized that “neither the FAA nor the Delaware Uniform Arbitration Act derogates this Court’s inherent equity jurisdiction to enforce, modify or vacate arbitration awards. See footnotes 11 and 12.

 

 Sodano v. American Stock Exchange LLC, 2008 WL 2738583 (Del. Ch., July 15, 2008), read opinion here. 

 This Chancery Court decision interprets corporate documents and a settlement agreement to determine rights to advancement of legal fees. The court observes that the word “indemnification” as used by the parties in the relevant documents in this case was often used as a shorthand to also refer to the separate and distinct provisions for advancement. The court also addressed the obligations of the parties when a separate party is secondarily liable for the advancement obligation.

 

 

 Krupa v. Comprehensive Neuroscience, Inc., 2008 WL 2737766 (Del. Ch., June 30, 2008), read opinion here.  In this short one-page letter decision, the court reminded the parties that there is a deadline for filing a motion to reconsider under Chancery Court Rule 59(f) of five days after the filing of the court’s opinion or the receipt of the court’s decision. Failure to observe this rule led to the court’s denial of the motion to reconsider.

 

 

 Sprint Nextel Corp. v. iPCS, Inc., 2008 WL 2737409 (Del. Ch., July 14, 2008), read opinion here.

The issue addressed in this Chancery Court case (which was the subject of three prior opinions and a ten day trial on related issues), was presented on a motion to dismiss for lack of personal jurisdiction as to two of the defendants based on Chancery Court Rule 12(b)(2) and for failure to state a claim under Chancery Court Rule 12(b)(6) as well as a motion to dismiss or stay the action pending a parallel suit brought by three affiliated defendants in Illinois.

The court found that it did lack personal jurisdiction over defendants Horizon and Bright but it denied a motion to dismiss for failure to state a claim. On the third issue, the court denied the motion to dismiss or stay the action on forum non conveniens grounds. See here for summaries of prior related decisions. 

 

In Kamco Building Supply v. Kearney and Schweitzer, 95 Delaware County (PA) Reports 180 (2007), Pagano, J., read opinion here, the Delaware County (PA) Court of Common Pleas discussed the Pennsylvania Long Arm Statute and refused to find jurisdiction over a New Jersey lawyer in Pennsylvania when that lawyer was not licensed in PA and did not have an office in PA and apparently had no ties to PA other than suing a PA company in New Jersey.

This is another case summary by associate Carl Neff about another example of the Bankruptcy Court’s application of Delaware corporate law. The Harvard Corporate Governance Blog  also published their own summary of the case noted below.
 

In Bridgeport Holdings Inc. Liquidating Trust v. Boyer, et al., Adv. No. 07-51798, 2008 WL 2235330 (Bankr. D.Del. 2008), read opinion here,  a liquidating trust brought an action against the former officers and directors of Bridgeport Holdings, Inc., along with the restructuring professional appointed to the position of chief operating officer.

The liquidating trust asserted claims for breach of fiduciary duty and corporate waste. In granting in part and denying in part Defendants’ Motion to Dismiss, Bankruptcy Judge Peter Walsh held:

(i) Delaware’s statute of limitations barred certain claims for breach of fiduciary duty; (ii) the trust stated claims for breach of the duty of loyalty and acting in bad faith under Delaware law; (iii) the exculpatory provision in the certificate of incorporation did not defeat a claim for breach of duty of care by former directors; (iv) complaint failed to state claim for breach of duty of due care and lack of good faith against former officers; (v) complaint stated claim for breach of fiduciary duties against restructuring professional; and (vi) complaint failed to state claim for corporate waste.
In denying the motion as to the duty of loyalty claims, the Court held that the trust properly stated a claim for breach of duty of loyalty and acting in bad faith. The trust properly asserted that the breach of loyalty was premised upon the failure of a fiduciary to act in good faith, consistent with Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

 In denying the motion as to the duty of loyalty and acting in bad faith under Delaware law, the Court held that neither the exculpatory provision nor the business judgment rule vitiates this count. The Court relied on the Delaware Supreme Court decision in McMullin which held that a board of directors has a duty under 8 Del. C. § 251(b) to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders.

In the absence of a majority shareholder, the directors “may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement.”
Additionally, the Court granted the Motion to Dismiss as to the duty of care claims against the D&O defendants, as the Complaint is too short on facts regarding the conduct of the officers in pursuing the sale transaction to survive the motion to dismiss with regards to these counts.

Finally, the Court granted the Motion as to waste claims, holding that the Complaint did not allege facts that support the conclusion that no reasonable person would find $28 million adequate for the Assets of a failing entity. The Court added that only “extraordinary circumstances can justify a finding of waste and the Complaint here does not present those circumstances.”
 

 

In Ryan v. Lyondell Chemical Company, (Del. Ch., July 29, 2008), read opinion here, the Delaware Chancery Court rendered a decision that is "must reading" for anyone who needs to know the latest developments in Delaware corporate law involving mergers and acquisitions. 

One reason why this case will attract a great amount of attention in board rooms and law firms all over the world is due, at least in part, to the following particular aspect of the court’s decision–which I describe in my own words:

The court found that at the procedural stage of a summary judgment motion, it would allow to proceed to trial the issue of whether the independent directors should be exposed to personal liability  for their role in the sale of the company–despite selling the company to the only known buyer for a substantial premium.

 This 73-page decision cannot be fully explained in this short blog post on a busy day, but I will hit the highlights and encourage you to read the whole opinion at the above link (and look forward to future links by the corporate law professors that I predict will soon provide their scholarly analyses of what I expect to be an oft-cited Chancery Court case.)

The court’s introductory overview of the case, excerpted from the opinion, is as follows:

In this shareholder class action, Plaintiff Walter E. Ryan, Jr. (“Ryan”) challenges the $13 billion cash for shares merger transaction (the “Merger”) among Defendant Basell AF (“Basell”), its acquisition subsidiary, Defendant BIL Acquisition Holdings Limited, 1  and Defendant Lyondell Chemical Company (“Lyondell” or the “Company”). Before the Court are Defendants’ motions for summary judgment. 2  On its face, the Merger offering the Lyondell stockholders $48 per share in cash, a substantial premium to market, 3 was very attractive;
indeed, the Lyondell stockholders voted overwhelmingly in its favor, and the Merger was consummated on December 20, 2007. 4  Once one scratches the patina of this “blowout” market premium, however, a troubling board process emerges.

When this transaction materialized in the late spring and early summer of 2007, Lyondell was a financially strong and viable company. It was not in financial distress; it was not looking to raise capital; it was not looking to spin-off one of its divisions; and it was not otherwise “for sale” or “on the auction block.” Lyondell’s board of directors (the “Board”) had neither sought the advice of investment bankers to value the Company, nor was it actively seeking strategic business partners.5

In response to Basell’s unsolicited offer for the Company, the Board avoided an active role in negotiating the Merger, instead delegating much of that task to Lyondell’s Chairman and Chief Executive Officer, Dan F. Smith (“Smith”). The Board never conducted a formal pre-signing market check to determine whether a better price could be obtained; in addition, it was not able to negotiate successfully for a post-signing go-shop period and, thus, did nothing post-signing to confirm that a better price could not have been obtained. The final merger agreement also employed several deal protection devices, including a no-shop provision, matching rights, and a $385 million break-up fee.6  Moreover, the whole deal was considered, negotiated, and approved by the Board in less than seven days.

It is against that factual backdrop that Ryan brought this action and the Court considers the present motions. Notwithstanding the premium price and enthusiastic shareholder approval, Ryan alleges that the directors were looking out only for their own self-interest and that the process by which the Merger was approved and recommended to the Lyondell stockholders was fatally flawed for three reasons. First, the Board began and concluded its review of the transaction over the course of a mere seven day period. Given the frenetic pace at which this deal evolved, Ryan contends that the Board could not possibly have informed itself as to the value of the Company and the wisdom of this transaction for the Lyondell stockholders. Second, the Board never conducted a market check or otherwise shopped” Basell’s offer to determine if $48 per share was indeed the highest value reasonably attainable by the Lyondell stockholders. Third, Ryan claims that the deal protection devices agreed to by the Board were unreasonable and essentially “locked up” this transaction for Basell by precluding other bidders from making an offer for the Company.  (footnotes omitted)
 * * *
This case arises from the intersection of two fundamental tenets of Delaware corporate law. The first set of principles, known colloquially as “Revlon duties,” 8 requires a board, when it undertakes a sale of the company, to set its singular focus on seeking and attaining the highest value reasonably available to the stockholders. The Defendants extol the virtues of the “blowout” price paid by Basell. In this instance, however, the Board took no affirmative action to confirm that a better deal could not be obtained and, for summary judgment purposes, the record does not show that the Board was so knowledgeable about the value of the Company that no further effort was appropriate. 
     8 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). 

The second set of principles, generally addressed in Unocal 9 and Omnicare,10 requires that deal protection measures must not be preclusive or coercive and, more importantly for present purposes, that such measures be reasonable in light of the circumstances. The Defendants support the deal protection measures by arguing that they were reasonable and necessary to secure Basell’s offer for the Lyondell shareholders. They have not, however, been able to explain why deal protection measures of the scope adopted were appropriate under these circumstances. In short, the Board did nothing (or virtually nothing) to confirm the superiority of the price but, nonetheless, it provided Basell a full complement of deal protections. Maybe the price was the “blowout” the Defendants proclaim it to have been—it certainly was a “fair” price—and maybe the deal protection measures were reasonable and proportionate to the risks that the deal would not materialize otherwise, but those conclusions cannot be reached on the current record on summary judgment where the Court is precluded from choosing between plausible inferences. Accordingly, for the reasons that will be developed below, the Lyondell Defendants’ motion for summary judgment with respect to Ryan’s Revlon claims and his challenge to the deal protection measures will be denied.
  9 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
 10 Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).  

What some may view as an "eye-opener" is the following summary of the court’s decision relating to the personal liability of admittedly independent directors, which I quote from the opinion:

The Lyondell Defendants invoke the exculpatory provision of the Company’s charter authorized by 8 Del. C. § 102(b)(7). As explained more fully infra in Section III(B)(2)(d), that
defense is not now available on summary judgment because the Board’s apparent failure to make any effort to comply with the teachings of Revlon and its progeny implicates the directors’ good faith and, thus, their duty of loyalty, thereby, at least for the moment, depriving them of the benefit of the exculpatory charter provision. The Lyondell Defendants also point to the overwhelming support of their shareholders for the transaction as a basis for claiming shareholder ratification. Ratification, at this point, does not meet the objectives of the Lyondell Defendants for the reasons discussed infra in note 129. (emphasis added).

Time constraints won’t allow me today to cover the decision in detail, but here are a few key parts that deserve closer treatment when time allows:

1. The exception to the active sale process generally contemplated by Revlon was discussed with reference to the decision in Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del. 1989).

2. Deal protection measures were discussed at length. Footnote 99 observed that the shareholders were NOT given a Hobson’s Choice of selling the company or going into bankruptcy, as the company was viable with good long term prospects. Footnote 100 also emphasized that there is no algebraic formula for deal protections, which must be analyzed in the fact-specific context in which they are used.

3. The key quote that exposes the admittedly independent board to potential personal liability–despite Section 102(b)(7) of the DGCL, is on page 56 of the opinion (which the court’s reasoning lays the groundwork for on pages 51 to 55):

The record, as it presently stands, does not, as a matter of undisputed material fact, demonstrate the Lyondell directors’ good faith discharge of their Revlon duties—a known set of “duties” requiring certain conduct or impeccable knowledge of the market in the face of Basell’s offer to acquire the Company. Perhaps with a more fully developed record or after trial, the Court will be satisfied that the Board’s efforts were done with sufficient good faith to absolve the directors of liability for money damages for any potential procedural shortcomings. With a record that does not clearly show the Board’s good faith discharge of its Revlon duties, however, whether the members of the Board are entitled to seek shelter under the Company’s exculpatory charter provision for procedural shortcomings amounting to a violation of their known fiduciary obligations in a sale scenario presents a question of fact that cannot now be resolved on summary judgment.

4. Footnotes 128 and 129  (spanning over two full pages in length) discuss the need to seek prompt remedies for disclosure claims in the merger context–and how disclosure issues interface  with the concept of shareholder ratification which must be blessed with appropriate disclosures in order to be effective.

It’s back to work for now, but I hope I will have more to add later.

UPDATE: Professor Larry Ribstein provides scholarly commentary on this case here. In addition, the good professor addresses here the interface between this case and the recent Delaware Supreme Court opinion in Wood v. Baum that upheld an exculpation clause in an LLC agreement.

UPDATE II: Prof. Jeff Lipshaw explains his analysis of the case here.
UPDATE III: The Wall Street Journal picked up my blog post here.

UPDATE IV:  Prof. Eric Chiappinelli (the new dean of Creighton University Law School) comments on the case here.

UPDATE V:  Prof. Gordon Smith here provides an insightful analysis that includes an observation that a Revlon claim now comes in three flavors: breach of the duty of care; bad faith and disloyalty. He cites to a decision that supports that view that the 102(b)(7) protection still applies to a Revlon claim based on a duty of care violation (e.g., not following up on a higher bid), but that  it may be  easier to pursue a Revlon bad faith claim which does not require a showing of fraud or disloyalty.