Two relatively prompt decisions in the same month involving DuPont, kept a case in Delaware, but then the Chancery Court frowned on its request for injunctive relief.

The first case,  E.I. duPont de Nemours and Company v. Bayer Cropscience LP, 2008 WL 2673376 (Del. Ch., July 2, 2008), read opinion here , denied a motion to dismiss the case on forum non conveniens grounds even though North Carolina law applied.

In E.I. duPont de Nemours and Company v. Bayer Cropscience LP, 2008 WL 2916498 (Del. Ch., July 29, 2008),  read here , the separate, second decision addressed the interpretation of a disputed license and supply agreement–and denied the request for preliminary injunction that in effect sought a declaratory judgment and specific performance.  

 

 

 

 

 Though the attention by the press to the Yahoo takeover dance has waned, in light of Carl Icahn’s deal to get on the board, and Microsoft playing coy, the three relatively recent Chancery Court decisions are compiled all in one place below.

In Re Yahoo! Inc. S’holders Litig., 2008 WL 2721800 (Del. Ch. July 2008). The Chancery Court exercised its discretion to grant a motion to stay discovery pending dispositive motions. See footnotes 2 and 4 for the factors to be considered in such a motion.  

In the preceding Yahoo decision at 2008 WL 2627851 (Del. Ch., June 2008), read opinion here, the Chancery Court denied a motion to "set a trial date" which the court construed as a second motion to expedite, but based on detailed reasoning,  the court said that if the parties did expedited briefing, it would rule on a pending motion to dismiss prior to the Yahoo shareholders meeting scheduled for August 1.

A prior decision in the case regarding documents under seal, was summarized here.

In Marie Raymond Revocable Trust and Richard and Sharon Brower v. MAT Five LLC, et al.,(Del. Ch., June 26, 2008), read opinion here, the Chancery Court granted a motion for expedited proceedings in a class action seeking a preliminary injunction in connection with disclosure claims. The Court also addresses the first-filed rule under the McWane doctrine.

 

In Troy Corp. v. Schoon, (Del. Ch., July 18, 2008), read opinion here, the Chancery Court addressed the issue of collateral estoppel and found that certain claims were barred due to prior litigation in which the plaintiffs had the opportunity to raise the same claims that are now being pursued in this current matter. The Court was not persuaded by the argument that the prior proceeding involved was a "summary proceeding", but rather reasoned that it was a strategy of the plaintiff not to pursue the particular discovery and the specific issues that it had the ability to prosecute in the prior action- which has now resulted in those claims being barred from the litigation in the instant case.

The five (5) prior opinions in this case that were summarized on this blog are available here.

Courtesy of Professor Bainbridge is a link to an article by Professor Bob Thompson on the seminal  Delaware Supreme Court decision in Sinclair Oil v. Levien, from 1971, that addressed key issues of fiduciary duty and judicial review standards. Here is an excerpt from a quote that Professor B. included in his post about the article.

Sinclair provides room for “selfish” ownership for a majority shareholder, so long as the minority shareholders receive a proportional benefit, a standard that at the time seemed to expand the discretion for majority shareholders. Viewed from a point decades later, this part of Sinclair has not proved to be a template for broader applications and other doctrines have developed to constrain the actions of majority shareholders.

Keywords: director action, judicial review of corporate action, business judgment rule, intrinsic fairness, enhanced scrutiny, controlling shareholders, fiduciary duty

UPDATE: Here is an insightful analysis by Professor Larry Ribstein of the Sinclair case highlighted in Professor  Thompson’s article. A quote  from Professor R’s extensive discussion of the "contract aspect of the case"  follows:

Once you’re outside of fiduciary land, as you are in Sinclair, parties in a commercial relationship can act selfishly to each other, governed by their contracts. Sometimes the contract is implied and not obvious. But the court should look hard for these contractual guideposts. The fog of fiduciary language often obscures the search. This is the basic lesson of Sinclair

Courtesy of associate Carl Neff is a summary of a decision from the U.S. Bankruptcy Court for the District of Delaware in a case styled: In re Troll Communications, LLC , 385 B.R. 110, 113 (2008). This Bankruptcy Court  in Delaware is often called upon to apply Delaware corporate law and frequently applies it in the context of a claim brought by a trustee for a bankrupt corporation against the former directors and officers. This is such a case.

In this Bankruptcy Court decision, a Chapter 7 trustee (the “Trustee”) brought adversary proceedings for breach of fiduciary duty, and fraudulent and preferential transfers. The Trustee filed an amended complaint and the defendants moved to dismiss. The motions to dismiss were granted in part and denied in part.

A. Count One: Claims for Breach of Fiduciary Duty Against Individual Defendants.

Count One of the amended complaint alleged claims for breach of fiduciary duty against Troll Communications directors and officers. See id. at 113. In support of these claims, the Trustee cited: (1) the board and officers’ suspect authorization of the use of proceeds from an equity transaction to pay debts owed by Quad Ventures Partners SBIC (“Quad”); and (2) the board and officers’ failure to prevent Troll’s deepening insolvency. See id. at 117. Supporting their motions to dismiss, the defendants cited: (1) the Trustee’s failure to plead around the business judgment rule; (2) the amended complaint’s lack of specificity regarding the officers’ knowledge and participation; and (3) the invalidity of a “deepening insolvency” cause of action. See id. at 119-122.

First, the court held that the business judgment rule was not a basis for dismissal of a breach of loyalty claim against the board of directors. See id. at 119. Count One alleged that certain members of Troll’s board of directors breached the duty of loyalty when they authorized the use of proceeds from an equity transaction in September 2002 to pay debts owed by Quad. See id. at 117. The complaint alleged that a majority of the directors had a financial interest in both Troll and Quad and one director failed to perform an independent review of the decision. See id. at 119. The defendants argued that the Trustee failed to plead around the business judgment rule and therefore the count should be dismissed. See id. at 118. The court rejected this argument because the complaint sufficiently pled facts questioning the disinterestedness of a majority of the directors. See id. at 119. Accordingly, the motion to dismiss was denied. See id. at 120.

Also under Count One, the court dismissed claims against Troll’s officers for breach of fiduciary duty because the complaint failed to allege specific details about the officers’ knowledge and participation. See id. at 120-21. To state a valid claim for breach of fiduciary duty, the Trustee must demonstrate: “(1) the existence of a fiduciary relationship; (2) a breach of that relationship; and (3) knowing participation by the defendant in the fiduciary’s breach.” See id. at 120. The complaint failed to allege with sufficient detail the officers’ knowing participation in the payments to Quad. See id. at 120. Therefore, the court dismissed the allegations, gave the Trustee leave to amend and directed him to specify which officers breached, or aided and abetted in the breach, of the fiduciary duty. See id. at 120-21.

Finally, the court dismissed Count One’s request for relief based on deepening insolvency, because deepening insolvency is not a valid cause of action under Delaware law. See id. at 121. Count One alleged that by failing to take prompt corrective action in the face of the company’s financial decline, the directors and officers “caused the corporate life of the debtors to be artificially extended beyond the point of economic viability.” See id. at 121. Although the Trustee did not explicitly assert this as an action for deepening insolvency, the court interpreted it as such. See id. Noting that the Delaware Supreme Court had rejected deepening insolvency as a cause of action, the court dismissed Count One’s request for relief based on this theory. See id. at 121 (citing Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007), aff’g Trenwick Am. Litig. Trust v. Ernst & Young, LLP, 906 A.2d 168, 204-07 (Del.Ch. 2006)).

B. Counts Two and Three: Avoidance and Recovery of Fraudulent and Preferential Transfers
Both counts Two and Three of the amended complaint sought avoidance and recovery of three specific payments from Troll to Quad. See id. at 122. Count Two sought avoidance and recovery of the payments under the theory that they were fraudulent transfers. See id. Count Three sought avoidance and recovery of the same three transfers under the theory that they were preference payments. See id. at 123. The defendants moved to dismiss these counts arguing that (1) the Trustee did not sufficiently allege facts establishing Troll’s insolvency at the time of the transfers; and (2) the Trustee failed to plead the fraud claim with the requisite specificity. See id. The court denied the motions to dismiss.

The Trustee adequately alleged Troll’s insolvency at the time of the challenged payments. See id. at 124. To state a valid fraudulent transfer claim, the complaint must allege that the debtor was insolvent at the time of transfer. See id. The amended complaint, referencing Troll’s internal financial statements, alleged that at the time of the transfers Troll had “a negative net worth and was unable to meet maturing obligations.” Id. The court accepted the allegations as true and rejected the defendants’ argument that the facts alleged only a “mere suspicion” of insolvency. See id. The Trustee sufficiently alleged Troll’s insolvency, therefore the court denied the defendants’ motion to dismiss. See id. The amended complaint sufficiently pled fraud with the specificity required by Federal Rule of Civil Procedure 9(b). See id. at 125. The defendants argued that the Trustee’s pleading was deficient because it failed to identify a creditor and other factual information. See id. at 124. The court rejected the defendants argument holding that courts do not “require a trustee to plead the existence of an unsecured creditor by name.” See id. at 125. Additionally, the court held that the amended complaint contained sufficient factual information including: (1) the applicable statutory language; (2) the date and amounts of each transfer; (3) a claim that the transferees were insiders; and (4) specifics regarding Troll’s financial status. See id. The amended complaint sufficiently pled fraud with the requisite specificity, therefore the court denied the defendants’ motion to dismiss. See id.

C. Trustee’s Request to Further Amend the Amended Complaint.
The Trustee requested the opportunity to add certain corporate entities to Count One, Two and Three. See id. at 125. The defendants objected to the addition of one business entity to Count One arguing that the Trustee could not meet the requirements for relation back under Federal Rule of Civil Procedure 15(c). See id. The court scheduled a hearing to address the issue of whether the Trustee may further amend the complaint as requested. See id. 

 

 In Orr v. Travelers Insurance Company, 95  Delaware County (PA) Reports 145 (2008), read opinion here, the Delaware County (PA) Court of Common Pleas discusses the high standard in Pennsylvania that must be met for overturning a binding arbitration decision. The court held that the failure of one of the arbitrators to disclose a prior affiliation with one of the parties was enough to trigger the "irregularity" threshold as a basis to set aside the award.

 

Although I do not publish as many articles as I once did, due to the time it takes for my writing on this blog (which I suppose is also publishing),  I don’t think I listed here on this blog the few most recent ones, so below is a list of a few of the articles I published in the last several months. I also just finished an article on Delaware LLCs for a Bloomberg corporate publication that I will post as soon as I can.

Chancery Gives Victory to Freedom of Contract, The Harvard Law School Corporate Governance Blog, http://blogs.law.harvard.edu/corpgov/2008/05/23/chancery-gives-victory-to-freedom-of-contract/ (May 23, 2008)

Texas Court Rejects Claims against Law Firm for Exceeding Litigation Budget and Raising Fees, The Bencher (July/August 2008)

Co-author, Court Rejects Bid Due To Use of Wrong Bond Form, DCA News (May 12, 2008)

Co-author, Non-Delaware Lawyers Sued in Delaware for Advising on Delaware Law, Business Law Today (March/April 2008)

Class Member Not Entitled to Full Panoply of Attorney/Client Relationship Benefits, The Bencher (March/April 2008)

In Hoag v. Amex Insurance Company, (Del. Supr., July 21, 2008), read opinion here, the Delaware Supreme Court upheld the trial court’s imposition of the penalty of dismissal of a complaint against a plaintiff that failed repeatedly to comply with orders compelling discovery of data that was key to the claims and defenses in the case. The Court recited in detail the multiple orders that the appellant simply failed to comply with depsite ample opportunity.

Delaware’s High Court acknowledged the severity of the penalty but reasoned that it  was warranted in light of the circumstances. The opinion includes "good quotable" language about the importance to the legal system of compliance with discovery obligations.