Top Ten 2013 Delaware Corporate and Commercial Decisions

By: Francis G.X. Pileggi and Kevin F. Brady

This is our ninth annual review of key Delaware corporate and commercial decisions. During 2013, we reviewed and summarized over 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues. Among the decisions with the most far-reaching application and importance during 2013 are the “top ten” that we are highlighting in this short overview. Prior annual summaries are linked in the right margin of this blog.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.)

Whenever a “Top Ten” list is prepared, there remains a risk of omitting some opinions that also are noteworthy, so we encourage readers to send us suggestions for additions to this list. Hyperlinks below lead to both a synopsis and each slip opinion. Of course, all the opinions we reviewed in 2013 are available on this blog for those who would like to read all of them and make their own list. In chronological order, the winners are:

Supreme Court Determines that There is No Fiduciary Duty to Structure Executive Compensation to Take Advantage of Corporate Tax Deduction. Freedman v. Adams. This decision is another example of how difficult it remains to challenge compensation decisions on the basis of Delaware corporate law.

Supreme Court Enforces Duty to Negotiate in Good Faith. SIGA Technologies v. PharmAthene. Most lawyers will be surprised to know that an obligation to negotiate can be enforced in Delaware even when a term sheet is not complete or final.

Supreme Court Upholds Presumption of Good Faith in Agreement to Bar Claims. Norton v. K-Sea Transportation. This is one of many recent examples where an LP agreement waived all duties except the non-waivable implied duty of good faith, but the agreement also created a presumption of good faith that made it almost impossible to challenge wrongdoing. N.B. Waivers will be enforced. Read before signing to know what duties and rights are being waived.

Chancery Clarifies Fiduciary Duty of Disclosure Owed by Directors and Majority Shareholders when Purchasing Shares or Selling Shares to Existing Shareholders. In re: Wayport, Inc. Litigation. This opinion provides a textbook-style explanation of the duty of disclosure in general, as well as in the context of selling and buying shares among existing shareholders.

Supreme Court Establishes New Standard for Trial Courts to Determine Appropriate Penalty when Pretrial Deadlines are Not Met. Christian v. Counseling Resource Associates, Inc. This is a must-read for lawyers (and their clients) to understand when court approval is needed to extend pre-trial deadlines and the consequences of missing pre-trial filing deadlines.

Chancery Emphasizes Duty of Oversight Owed by Directors Includes Corporate Operations in Foreign Countries. Rich v. Chong and Puda Coal and In re:  China Agritech, Inc. Shareholder Derivative Litigation. This trio of decisions, all involving operations in China of Delaware corporations, should worry directors of companies with far-flung operations in distant countries unless they make visits to those countries or otherwise make themselves sufficiently aware of those operations.

Business Judgement Rule Announced as Standard Applicable to Controlling Shareholder Transactions with Safeguards.  In Re MFW Shareholders Litigation. This iconic Chancery decision provides a clear standard to practitioners who formerly had less definitive guidance (and multiple conflicting standards) to advise clients on the standard that would apply in Delaware to controlling shareholder freezeouts. This decision was appealed and on December 18, 2013, the Supreme Court heard oral argument en banc. When that decision is published, we will highlight it.

Chancery Addresses Whether Notice Required Before Board Ousts CEO/Controlling Shareholder. Klaassen v. Allegro Dev. Corp. et al.,. This Chancery decision is the subject of an expedited appeal to the Delaware Supreme Court. Among the issues to be addressed by Delaware’s high court is whether the actions of a board to dismiss the CEO, who also had voting power over a controlling percentage of shares, are void — as compared to voidable. The trial court opinion considering a motion for a stay pending appeal provides a mini-treatise on the Delaware law applicable to notice requirements for board meetings and the consequences of ineffective notice. The opinion is also must-reading for anyone interested in the proper approach to contests for control among warring factions of dissident directors and competing shareholder groups.

Supreme Court Addresses Business Combination Not Requiring Shareholder Vote. Activision Blizzard Inc. v. Hayes, et al., No. 497-2013, order issued (Del. Oct. 10, 2013). In a rare ruling from the bench, after oral argument, the Delaware Supreme Court reversed an injunction granted by the Court of Chancery in  Hayes v. Activision Blizzard Inc., No. 8885, 2013 WL 5293536 (Del. Ch. Sept. 18, 2013).  The formal written Supreme Court opinion was issued on Nov. 15, 2013. The issue addressed was whether the structure of the deal qualified as the type of business combination that required a vote by public shareholders. In a unanimous ruling, Delaware’s high court ruled that no vote was required. Notably, merely a month or so transpired between the date of the complaint being filed and the Supreme Court’s oral ruling after its review of an injunction that was issued by the trial court. Especially in a major case like this, that remains remarkable celerity.

Chancery Addresses State Insider Trading Claims Twice in Two Weeks (Two cases tied for the last spot in top ten list). In re Primedia, Inc. Shareholders Litigation. In connection with discussing the elements of the claim, this opinion addressed whether equitable tolling of the state insider trading claim applied to extend or suspend the statute of limitations. In Silverberg v. Gold, for the second time in as many weeks, a state insider trading claim, called a Brophy claim in Delaware, was analyzed in a Chancery opinion. This 40-page decision denied a motion to dismiss based on an alleged failure to make pre-suit demand on the board.

UPDATE: The Harvard Law School Corporate Governance Forum published a version of this annual review on their blog.

Among the key corporate and commercial Delaware decisions that we have highlighted on these pages during the first five months of 2013, the following decisions either clarified existing Delaware law or announced new law on important substantive or procedural topics. This is a supplement to the annual review of cases we have provided on this blog for the last eight years. Other cases decided so far in 2013 may have been the subject of more commentary elsewhere, but we think that among the 80 or so cases we have reviewed from January through May of 2013, those listed below have the most wide-ranging importance and relevance.

The list was intentionally kept relatively short, which increased the risk of omitting some opinions that also are noteworthy, so we encourage readers to send us suggestions for additions to this list. Hyperlinks below lead to both a synopsis and each slip opinion.

Supreme Court Determines that There is No Fiduciary Duty to Structure Executive Compensation to Take Advantage of Corporate Tax Deduction (Freedman v. Adams). This decision is another example of how difficult it remains to challenge compensation decisions on the basis of Delaware corporate law.

Supreme Court Enforces Duty to Negotiate in Good Faith (SIGA Technologies v. PharmAthene). Most lawyers will be surprised to know that an obligation to negotiate can be enforced in Delaware even when a term sheet is not complete or final.

Supreme Court Upholds Presumption of Good Faith in Agreement to Bar Claims (Norton v. K-Sea Transportation). This is one of many recent examples where an LP agreement waived all duties except the non-waivable implied duty of good faith, but the agreement also created a presumption of good faith that made it almost impossible to challenge wrongdoing. N.B. Waivers will be enforced. Read before signing to know what duties and rights are being waived.

Chancery Clarifies Fiduciary Duty of Disclosure Owed by Directors and Majority Shareholders when Purchasing Shares or Selling Shares to Existing Shareholders (In re: Wayport, Inc. Litigation). This opinion provides a textbook-style explanation of the duty of disclosure in general, as well as in the context of selling and buying shares among existing shareholders.

Supreme Court Establishes New Standard for Trial Courts to Determine Appropriate Penalty when Pretrial Deadlines are Not Met (Christian v. Counseling Resource Associates, Inc.). This is a must-read for lawyers (and their clients) to understand when court approval is needed to extend pre-trial deadlines and the consequences of missing pre-trial filing deadlines.

Chancery Emphasizes Duty of Oversight Owed by Directors Includes Corporate Operations in Foreign Countries (Rich v. Chong and Puda Coal and In re:  China Agritech, Inc. Shareholder Derivative Litigation). This trio of decisions, all involving operations in China of Delaware corporations, should worry directors of companies with far-flung operations in distant countries unless they make visits to those countries or otherwise make themselves sufficiently aware of those operations.

Business Judgement Rule Announced as Standard Applicable to Controlling Shareholder Transactions with Safeguards (In Re MFW Shareholders Litigation). This iconic Chancery decision provides a clear standard to practitioners who formerly had less definitive guidance (and multiple conflicting standards) to advise clients on the standard that would apply in Delaware to controlling shareholder freezeouts.

In Christian v. Counseling Resource Associates, Inc., Del. Supr., No.  460, 2011 (Jan. 2, 2013) (revised March 26, 2013), the Delaware Supreme Court promulgated a new standard for trial courts to apply in determining what the penalty should be when a pre-trial deadline is not met by one of the parties in the case.

Why this decision is important: This is one of several cases decided on the same day by Delaware’s High Court, addressing the trial court’s dismissal of a case due to a missed pre-trial deadline.

New Standard Announced:  This decision modifies the previous standard announced in a 2010 Supreme Court opinion. The new standard that trial courts in Delaware need to follow henceforth to determine the appropriate penalty when a pre-trial deadline is missed, based on the strong public policy in Delaware to decide cases on their merits, was explained as follows:

This is one of four appeals that the Court has considered together because, in each case, the plaintiff’s claims were dismissed without being heard on the merits. (1)

For the past two years, the trial courts have been applying the factors set forth in Drejka v. Hitchens Tire Service Inc. (2) when deciding whether a case should be dismissed for the attorneys’ failure to obey scheduling orders. Because experience has shown that sanctions are not always effective, to achieve the goal of eliminating this problem, the Court has determined that it is necessary to refine the Drejka analysis.

Henceforth, parties who ignore or extend scheduling deadlines without promptly consulting the trial court, will do so at their own risk. In other words, any party that grants an informal extension to opposing counsel will be precluded from seeking relief from the court with respect to any deadlines in the scheduling order. By the same token, if the trial court is asked to extend any deadlines in the scheduling order, the extension should not alter the trial date. Counsel may face a compressed time period to complete discovery, or the filing of dispositive motions, but the most important aspect of the scheduling order – the trial date – will be preserved.  In the unusual circumstance where the trial court does decide to postpone the trial date, litigants should expect that the trial will be rescheduled after all other trials already scheduled on the court’s docket.

1.  Hill v. DuShuttle, No. 381, 2011, ___A.3d ___ (Del. 2013); Adams v. Aidoo, No. 177, 2012, ___ A.3d ___(Del. 2013); and Keener v. Isken, No. 609, 2011, ___ A.3d___ (Del. 2013).

2.  15 A.3d 1221 (Del. 2010).

Another key quote from the case:

If one party misses a discovery deadline, opposing counsel will have two choices – resolve the matter informally or promptly notify the court. If counsel contacts the court, that contact can take the form of a motion to compel, a proposal to amend the scheduling order, or a request for a conference. Any one of these approaches will alert the trial court to the fact that discovery is not proceeding smoothly. With that knowledge, the trial court will be able to take whatever steps are necessary to resolve the problem in a timely fashion. If the party chooses not to involve the court, that party will be deemed to have waived the right to contest any late filings by opposing counsel from that time forward. There will be no motions to compel, motions for sanctions, motions to preclude evidence, or motions to continue the trial. It is entirely possible, under this scenario, that some vital discovery will not be produced until the day before trial. Still, the party prejudiced by the delay accepts that risk by failing to promptly alert the trial court when the first discovery deadline passes.

Each of the bevy of cases decided as a group, and cited above, had different factual backgrounds, as one might expect, but the common theme was that a pre-trial deadline of some type was missed, and the trial court dismissed each of the cases for failure to meet the deadline. (Careful readers may recall decisions from the Court of Chancery that barred the introduction of expert reports that were not submitted by the deadline in the scheduling order. Query if those decisions would have been decided differently if this new standard were applied.)

Each of the cases decided in this “collection of decisions” are different enough that they should be consulted by anyone confronted with this type of unpleasantness. For example, in the Hill case cited above, an attorney failed to submit an expert report in a “trip and fall” case, because he did not think one was necessary despite being subject to a motion to compel. Although that stubbornness was not exemplary, the Court reasoned that a “less harsh penalty” should have been employed prior to the ultimate penalty of dismissal.

In the Keener case cited above, a reasonable explanation was provided for filing a reply to a summary judgment motion only a few dates late, when the case was only a few months old and no scheduling order had been in place yet. This was not the type of situation, the Court reasoned, where justice would be served by a dismissal of the case, and would violate the strong public policy of Delaware to decided cases on the merits and not on some procedural technicality.

Any lawyer who has been practicing long enough will confront a situation where she or an opposing lawyer has missed a pre-trial deadline, for either very good reasons or otherwise. This new decision from the Delaware Supremes shows a kinder and gentler approach to the practice of law–while at the same time upholding the high standards that the country has come to expect from the Delaware Bench and Bar.

IQ Holdings, Inc. v. Am. Comm. Lines, Inc., C.A. No. 6369-VCL (Del Ch. Aug. 30, 2012).

Short Overview:

This short letter ruling addressed the effort of the plaintiff in an appraisal proceeding to submit an updated expert report beyond the deadline for submitting such reports. The updated report also changed the substance of the same expert’s earlier report in a material manner. The Court of Chancery explained why the supplemental revised report, and any testimony regarding it, would not be admissible at trial.

Why this case is noteworthy:

This decision is useful for litigators to keep handy because is explains the importance (in the Delaware Court of Chancery) of adhering to the various deadlines in scheduling orders, and how unlikely it is for the Court of Chancery to agree to change those deadlines, or allow extensions of those deadlines, especially as trial becomes imminent.

The Court also provides copious citations to cases that support the public policy behind pre-trial disclosures being made as early as possible, and the need to avoid “trial by surprise”, as well as the need to avoid the prejudice that may result from belated disclosure.

Although the Court acknowledges the benefit, especially in an appraisal case, of updated expert reports where concessions may be made to reach agreement with all parties on a particular issue to reduce the matters to be addressed by the Court, in this case the change was material, new and contested, so that to allow it would be contrary to the principle that supports the compliance with deadlines in order to avoid surprise that “deprive[s] the opposing party of an orderly process in which to confront and respond to the expert’s views.” See generally, Ams. Mining Corp. v. Theriault, __ A.3d __, __, 2012 WL 3642345, at *21 (Del. Aug. 27, 2012)(recent Delaware Supreme Court opinion upholding the exclusion of a witness sought to be offered for trial testimony after the applicable deadline passed for identifying witnesses).

Pryor v. IAC/InterActiveCorp., C.A. No. 6884-CS (Del. Ch. June 7, 2012).

Issues Presented: (1)  Whether the challenge to an arbitration award via a Chancery complaint was timely; and (2) Whether a collateral attack of the award was permissible.

Short Answer: The Court dismissed the complaint as untimely and any related issues would be subject to the arbitration clause for the arbitrator to determine.

Background

This case involved the challenge to an arbitration award pursuant to a binding arbitration clause in a stockholders agreement in connection with the determination of the value of shares.  The Court determined that the Federal Arbitration Act (the “FAA”) was controlling, and most of the decisions cited in this Court of Chancery opinion were rulings from federal courts interpreting the FAA.  The Court explained that the FAA requires a challenge to the arbitration decision to be served within three months of the award.  The Court found that the three month deadline was not met in this case.  In addition, the Court determined that the attempt to collaterally attack the arbitration award did not satisfy the prerequisites of the FAA, but that in any event it was an issue within the scope of the arbitration clause and which would need to be determined by the arbitrator.

Analysis

This relatively short 19-page decision by the Court of Chancery applied federal law regarding the FAA.  The opinion addressed whether the three month deadline by which an arbitration decision must be challenged begins to run from the date that the arbitration award is filed or delivered.  See footnote 16.  There was some discussion about whether the arbitration award was received or mailed by a certain date. 

The Court explained that because the award was e-mailed by the arbitrator,it would be deemed to be received on the date that it was e-mailed.  In addition, there was an issue about whether the “designated stockholder representative” was deemed to have received the award on behalf of the other stockholders that he represented.  The Court found that receipt by the representative was deemed to be receipt for those other stockholders whom he represented, based at least in part on principles of agency.

The Court provides an extended analysis both in the text of the decision and in the expansive footnotes regarding the basic agency principle that:  “A notification given to an agent is effective as notice to the principal if the agent has actual or apparent authority to receive the notification.”  See footnote 49.

In addition, the Court explained why the concept of equitable tolling would not apply, and cited what it referred to as “distinguished federal courts” that supported the inapplicability of that equitable exception to deadlines involved in this case.

The Court also explained why the separate claims for breach of contract and breach of fiduciary duty failed as being impermissible collateral attacks on the arbitration award, and not satisfying the prerequisites of the FAA to make such an attack.

In one of the many fulsome footnotes the Court referred to an argument by one of the parties as an “epistemological hole.”  See footnote 56.  Also notable was the reference in footnote 61 to one of the treatises authored by the valuation icon, Shannon Pratt.

Lastly, the Court provides extensive citations to authority both on the federal and Delaware level, which explain the high threshold that must be met before a Court will set aside an arbitration decision.

Dishmon v. Fucci, No. 784, 2010 (Del. Supr., Nov. 10, 2011) (en banc), read Delaware Supreme Court decision here.

A former associate of Eckert Seamans prepared the overview of this case.

Although tangential to the substantive topic of commercial and corporate litigation, this negligence case is relevant to corporate and business litigators because it establishes an important rule applicable to procedural aspects of all cases before the Delaware courts. The gist of this opinion is that procedural defects caused by excusable neglect should not prevent a litigant from having her day in court for an adjudication of her case.

Background

In December 2006, plaintiff filed a complaint alleging that medical negligence caused the death of his father. In medical negligence cases, Delaware statute requires a plaintiff to submit an Affidavit of Merit with a complaint. An Affidavit of Merit is a statement signed by an expert witness supporting the plaintiff’s assertion that there are reasonable grounds to support a medical negligence claim. Affidavits of Merit are not discoverable by defendants, and must be submitted to the court in a sealed envelope marked “CONFIDENTIAL.”

Procedural History

With his complaint, plaintiff filed a motion for extension of time to file his Affidavit of Merit. That motion was granted, and the plaintiff thereafter submitted Affidavit of Merit to the court within the newly prescribed deadline. Four months later, the court dismissed plaintiff’s complaint (it is unclear from the Delaware Supreme Court’s written decision whether a motion to dismiss was pending) for failure to comply with the statutory requirements governing the submission of an Affidavit of Merit. In dismissing the case, the court found that plaintiff failed to submit his expert’s curriculum vitae with the Affidavit of Merit. Plaintiff moved for relief from judgment in a timely fashion.

More than three years passed before the court denied plaintiff’s motion (without explanation–i.e., no explanation for the delay or for denying the motion).

On appeal, the Delaware Supreme Court reversed and held that a procedural defect that does not prejudice the defendants in any way should not bar a litigant from receiving his day in court:

[W]e conclude, as a matter of law, that trial courts must give weight to Delaware’s well known public policy that favors permitting a litigant to have his day in court. In these circumstances, the absent curriculum vitae should have been viewed as a procedural defect, but not an independent basis for dismissal.

The court further admonished the trial court for the inexplicable and regrettable delay in ruling on the motion for relief from judgment.

Comparison to Recent Chancery Decision Refusing to Extend Pre-Trial Deadline, in:  Encite LLC v. Soni, 2011 Del. Ch. LEXIS 58 (Apr. 15, 2011). See highlights of that opinion here.

In one of Chancellor Chandler’s final decisions, summarized at the link above, the Court of Chancery declined to allow counsel to submit an expert report after the court-ordered discovery deadline had passed. The overarching holding of Dishmon—that procedural defects should not deny a plaintiff his right to his day in court—was a peripheral issue in Encite. The starkly different decisions in these cases are noted and compared briefly as practice points:

The decision in Encite was not dispositive of the merits. Disallowing a party to file an expert report is not the equivalent of dismissing a plaintiff’s case in its entirety, as happened in Dishmon. In Encite, the plaintiff still was allowed its day in court.

The procedural defect in Encite was not due to excusable neglect. In Encite, plaintiff’s counsel proffered to the court that the parties had reached an agreement to extend the deadline to submit expert reports, but defendants’ counsel did not concur. Further, plaintiff’s counsel only moved the court to extend the applicable deadlines after the deadline had passed, and only days before dispositive motions were set to be filed.

In contrast, in Dishmon, the Delaware Supreme Court found that counsel’s failure to confirm that the expert’s curriculum vitae was included in the sealed envelope was excusable because administerial tasks like sealing an expert report and accompanying documents in an envelope are not typically completed by an attorney.

The defendant in Dishmon was not prejudiced. Unlike the clearly prejudicial effect of submitting an expert report to opposing counsel within days of the dispositive motion deadline (and where expert reports were intended to be submitted simultaneously by all parties), there was no prejudice in Dishmon since Affidavits of Merit are not submitted to, or discoverable by, defendants.

Conclusion

Procedural defects can result in myriad outcomes; but they should never result in denying a litigant of his day in court.

Encite LLC v. Soni, et al., C.A. No. 2476-CC (Del. Ch. April 15, 2011), read letter decision here.

Holding

Court of Chancery rejected a request for the extension of a deadline for submitting expert reports.

Brief Overview

 

This 7-page letter ruling is a useful tool for the toolbox of Chancery practitioners who deal with the issue of extending deadlines imposed by a Scheduling Order.

 

Court of Chancery Rule 6(b) applies to motions to extend deadlines after the expiration of the prescribed period, during which the Court may grant an extension “if the failure to act was the result of excusable neglect.” Excusable neglect has been defined in other circumstances by the Delaware Supreme Court as “neglect which might have been the act of a reasonably prudent person under the circumstances.” (citing Dolan v. Williams, 707 A.2d 34, 36 (Del. 1998)). The Court reasoned in this decision that the foregoing standard was not met.

 

I love it when the Court uses Latin. In this decision the Court explained that: “Informal agreements among counsel do not operate, ex proprio vigore, to modify a Court’s Order.” 

 

The salient background facts of this case involve a conversation with counsel in which one of the attorneys thought that there was an oral agreement to extend the deadline for submitting expert reports. That oral understanding was not confirmed in writing and one of the attorneys denied having that understanding.

 

The bottom line “takeaways” from this ruling are at least three-fold: 

 

(1) No modifications of the deadlines in a Scheduling Order will be effective, regardless of written confirmation among counsel, unless and until the Court approves such modifications of the Scheduling Order;

 

(2) Even if all counsel agree in writing to a modification of the Scheduling Order, and even if they are deadlines that do not impact dispositive motions or trial dates, those modifications must be submitted to the Court for approval prior to the expiration of the applicable deadlines; and

 

(3) Requests for modification after the expiration of the deadlines in the Scheduling Order are subject to the “excusable neglect” standard under Court of Chancery Rule 6(b). Because that standard was not met here, the Court determined that the plaintiff’s “thirteenth-hour attempt to modify the Scheduling Order is denied.” The Court relied on a recent Delaware Supreme Court decision upholding a trial court’s refusal to include an expert report that was submitted after the deadline in the Scheduling Order. See Jackson v. Hopkins Trucking Company, Inc., 2010 WL 3397478, at * 3 (Del. Aug. 30, 2010).

 

Parenthetically, in closing, although the Court did not address it and did not rule on it, the Court mentioned “in passing” but did not condemn the position of one party who required that a discovery request made during a deposition be submitted in writing afterwards.

 

UPDATE: A motion for reconsideration was denied in a letter ruling on April 26, 2011, available here.

On Thursday, Feb. 24 from 1:00 p.m. EST to 2:30 p.m. EST, a webinar will be presented on key 2010 Delaware court decisions on mergers and acquisitions, corporate governance, class actions, alternative entities and related issues. A more detailed description follows:

Description

During 2010, Delaware’s Supreme Court and Court of Chancery issued hundreds of decisions addressing mergers and acquisitions, corporate governance and alternative entities. The rulings address the use of poison pills and top-up options, director terms, fiduciary duties and insolvent LLCs. The new Delaware rulings will shape the way corporate counsel approach M&A deals, corporate governance issues and alternative entity practice going forward.

The panel will provide legal and practical takeaways that corporate and deal counsel should immediately apply.

Following the speaker presentations, you’ll have an opportunity to get answers to your specific questions during the interactive Q&A. More details are available here.

Faculty

Kevin F. Brady, Partner
Connolly Bove Lodge & Hutz, Wilmington, Del.

He is the Chair of the firm’s Business Law Group. He is experienced as lead counsel or co-counsel on significant matters in the Delaware Court of Chancery, the Delaware Superior Court and the District of Delaware as well as multiple jurisdictions outside of Delaware. He represents clients in a variety of areas including corporate litigation, commercial litigation and electronic discovery. (Kevin is also a frequent contributor to this blog.)

Peter J. Walsh, Jr., Partner
Potter Anderson & Corroon, Wilmington, Del.

He is a corporate and commercial litigator. He has first-chaired many trials in the Delaware courts, and has successfully argued cases before the Supreme Court of Delaware and in the United States Court of Appeals for the Third Circuit. He regularly handles stockholder class and derivative actions, summary proceedings pursuant to the General Corporation Law and hostile takeover proceedings.

Kurt M. Heyman, Partner
Proctor Heyman, Wilmington, Del.

He focuses his practice on corporate governance, partnership and limited liability company disputes in the Delaware Court of Chancery. His practice involves representing both public and private companies and their directors in stockholder class actions and derivative suits involving mergers and acquisitions and other transactions that implicate directors’ fiduciary duties.

Francis G.X. Pileggi, Partner
Fox Rothschild, Wilmington, Del.

—————————————————————

Details about registration are available here. You may register for CLE credit processing before or after a program (application deadlines vary by state). Exception: PA attorneys must pre-register for CLE (please call 1-800-926-7926 ext. 10).

CLE credits are not available for DE, IN, KS, OH, and PR or for NY attorneys admitted within the last 2 years.

Avnet, Inc. v. H.I.G. Source Inc., C.A. No. 5266-VCP (Del. Ch. Sept. 29, 2010), read opinion here.

Short Overview

This opinion decided the recurring issue of arbitrability. Specifically the Court of Chancery decided whether the issue involving the post-merger price adjustment was within the scope of an arbitration clause in the merger agreement, and more specifically, whether that was a matter of substantive arbitrability for the Court to decide, or whether it was an issue of procedural arbitrability for the arbitrator to decide.

The general rule is that issues of procedural arbitrability, such as the conditions precedent for arbitration, are decided by the arbitrator. The Courts will presume, however, that the parties intended issues of substantive arbitrability (for example, the scope of and arbitration clause), to be decided by a Court, absent evidence that the parties “clearly and unmistakably intended otherwise.” See James & Jackson LLC v. Willie Gary LLC, 906 A.2d 76, 79 (Del. 2006). See here for summary of that seminal Delaware case on this topic.

Short Discussion

The Court cited to several other cases involving arbitrability in connection with post-merger price adjustment. See footnotes 38 to 40. The specific issue in this case was whether the arbitration clause in the merger agreement encompassed actions that did not conform with the specific process agreed upon by the parties for resolving disputes about the Closing Balance Sheet. Specifically, there was a four-step process that provided for deadlines by which disputes would be submitted and one of the parties missed that deadline by approximately one year. The Court reasoned that only those disputes that followed the procedure in the agreement were within the scope of the mandatory arbitration clause. That is, the parties did not agree to arbitrate issues that arose outside of those procedures.

Moreover, the Court regarded the dispute presented to it as a contractual issue that should be decided by the Court and not the arbitrator. Namely, the issue is whether the parties agreed to arbitrate the issue and not what rules would govern the arbitration procedure. In contrast, the issue did not include a condition precedent which would only involve whether the plaintiff was entitled to seek relief, and unlike the present case, would not involve the subject matter of the dispute. The question in this case is not whether a condition precedent was met; rather, it involves whether the parties have agreed to arbitrate the specific issues presented. Because that is a substantive matter of arbitrability for the Court to resolve, the Court denied a motion for judgment on the pleadings which sought to compel arbitration. 

As a closing aside, this case is a good example of why arbitration clauses do not always make the resolution of a dispute faster and cheaper, because there is often litigation about the arbitration issues before the merits of a dispute are ever addressed.
 

In Glen Rose Petroleum Corp., et al. v. Langston, C.A. No. 5387-CC (July 7, 2010), read opinion here, the Court of Chancery addressed the issue of whether the Delaware action was the first-filed action (which would require the Court to apply an “overwhelming hardship” standard as part of a forum non conveniens analysis) or whether the Delaware action was the second-filed action (which would require the Court to apply the doctrine from McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281 (Del. 1970)). This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.

Defendant filed a contract action in Texas on October 9, 2009 (although service of the petition was not even attempted until March 10, 2010). Plaintiffs filed a fraud and breach of fiduciary duty action in Delaware on April 1, 2010. The defendants in the Delaware action moved to dismiss the Delaware action on the basis of forum non conveniens (defendants also moved for a protective order). The plaintiffs filed a motion to strike and motion to compel. The Court addressed the motion to dismiss first, reasoning that if the defendant was successful on that motion, the others would be mooted.

Under the McWane doctrine, “litigation should be confined to the forum in which it is first commenced, and a defendant should not be permitted to defeat the plaintiff’s choice of forum in a pending suit by commencing litigation involving the same cause of action in another jurisdiction of its own choosing . . . .” See, McWane, 263 A.2d at 283. Moreover, “[w]here a party alleges that there is an earlier foreign action, McWane provides the appropriate analysis, holding that the discretion to grant a stay [or dismissal] should be exercised freely where (1) there is a prior pending action, (2) that involves the same parties and issues, and (3) the other court is capable of doing prompt and complete justice” (citation omitted).

After the Court determined that the Delaware action was the second-filed action, the Court turned to the issue of whether the identity of the parties and the issues in the earlier-filed Texas action were “substantially or functionally the same” as those in the later-filed Delaware action. After determining that the parties were “substantially or functionally” the same, the Court turned to whether the issues in the two actions (which on their face did not appear to be the same) were the same.

In finding that the two actions involved “substantially or functionally identical” issues, the Court stated:

There may be large differences in the nature of those claims and slightly different time periods involved between some of the contracts now in question and the alleged fraud and breaches of fiduciary duties, but the reality, it seems to me, is that this battle is one that involves why and how these parties went their separate ways — and that any breach of contract was a response to any fraud or breach of fiduciary duties. Other parties or issues may be involved, but at its core, this case appears to be the tit-for-tat I have described, and I see no reason why any complexity of parties or issues around that core merits a decision to disregard the spirit of McWane or the comity Delaware courts and judges feel for the capable courts and judges of our sister states and commonwealths, even when questions of Delaware law are in play.

As supporting authority for this analysis, the Court cited Diedenhofen-Lennartz v. Diedenhofen, 931 A.2d 439, 446 (Del. Ch. 2007) (“The two key issues are whether the parties and claims in this case are substantially similar to those raised in any of the cases that were filed earlier. The captions need not be replicas, nor must the counts in each complaint be identical. What is important is that the same individuals or entities be involved in each of the disputes and that the issues raised in each case arise out of a common nucleus of operative facts.”).

Because the Court found that the components of the McWane doctrine had been satisfied, it granted defendant’s motion to dismiss the Delaware complaint which mooted all of the other motions. However, the Court did mention an important procedural tip that litigants should keep in mind when filing a motion to dismiss or stay. In short, a motion to dismiss or stay does not include an automatic stay of discovery. In this action, the defendants had failed to meet filing deadlines and had failed to respond to plaintiffs’ discovery requests while the defendants’ motion to dismiss or stay was being briefed. The Court noted that “[p]arties seeking to dismiss or stay a case would serve themselves best — as well as serve opposing parties and this Court best — by filing a motion to stay discovery or a motion for protective order concurrently with any motion to dismiss or stay, rather than treat the latter as inherently including the former.”