ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member LLC, C.A. No. 5843-VCL (Del. Ch. July 9, 2012).  In this opinion the Court of Chancery awarded attorneys’ fees, based on a fee-shifting provision of the LLC agreement, of more than $3.2 million. The recent Chancery decision on the merits of this case, on which the award of fees is based, was highlighted on these pages here.

Issue Addressed

Whether the fee-shifting provisions of an LLC Agreement justified an award of fees to the prevailing party for litigation conducted simultaneously in four different courts.

Short Answer: Yes.

Brief Background

The background details of this case were highlighted in a May 2012 decision by the Court of Chancery linked above, which addressed the merits of a dispute involving the interpretation of several related LLC Agreements, and the decision of the Court to reform the related LLC Agreements based on a scrivener’s error.

One key issue in this case was whether the four separate litigations in four separate courts could be combined for purposes of awarding fees to the prevailing party.

In describing the procedural genesis of this case, the Court said that: “logic and efficiency cried out for a single forum, preferably with a decision-maker knowledgeable about Delaware law.  Scion eschewed the efficient course.”  Instead of agreeing to litigate all the issues in Delaware, the defendant filed three separate additional actions in three separate federal courts in Illinois, Wisconsin and Florida.  Motions to stay were filed, briefed and decided in each of the federal cases.  Motions to dismiss were filed, briefed and decided in all four cases.  Motions for summary judgment were filed, briefed and decided in all four cases.  Multiple courts heard motions on discovery in pretrial issues.  At least two emergency applications were made to the Court of Chancery for an expedited decision to help avoid a “multi-jurisdictional train wreck.”

The prevailing parties sought $3.2 million in fees and costs for the successful effort in the Court of Chancery, as well as in the three separate federal cases.  After the Court of Chancery decision in May of 2012, the parties dismissed the three federal cases by stipulation.  [By comparison, a separate decision from the Court of Chancery also within the last few days, awarded fees based on the bad faith exception to the American Rule, under different factual circumstances, as summarized here.]

Analysis

When parties by agreement have consented to a shifting of fees that requires a non-prevailing party to reimburse the prevailing party for reasonable fees and costs in connection with enforcement of an agreement, the focus of the Court is:  “principally on enforcing the parties’ agreement to make the prevailing party whole.”  Prior decisions of the Court of Chancery have generally upheld such a provision entitling the prevailing party to fees, and the Court has found that such a provision:  “will usually be applied in an all-or-nothing manner.”

Explanation of the Difference between “Good Faith” and “Fair Dealing” as Components of Fiduciary Duty, as Compared to the Implied Covenant of Good Faith and Fair Dealing  

In the course of explaining why it would award attorneys’ fees under the fee-shifting provision of the LLC Agreements, the Court was called upon to discuss the basis of a claim for a breach of the implied covenant of good faith and fair dealing–and to compare the “good faith component” of that covenant, and the “fair dealing component” of such a claim, with the fair dealing concept under the fiduciary duty law of Delaware, and the good faith aspect of the fiduciary duty law of Delaware, and how those concepts differ.  See Slip op. at 5-7.

The Court emphasized that fair dealing for purposes of the good faith and fair dealing covenant imposed on every contract in Delaware as an implied covenant is, unlike its fiduciary duty namesake under the entire fairness doctrine, a commitment to deal consistently with the terms of the agreement of the parties and the agreement’s purpose.

Likewise, the good faith component of the covenant of good faith and fair dealing does not envision loyalty to the other party to the contract, but rather:  “Faithfulness to the scope, purpose, and terms of the parties’ contract.  Both necessarily turn on the contract itself and what the parties would have agreed upon had the issue arisen when they were bargaining originally.”

In connection with its analysis, the Court also reviewed basic contract principles including Delaware’s recognition of “efficient breach” of contract and that the:  “traditional goal of the law of contract remedies has not been compulsion of the promissor to perform as promised but compensation of the promissee for the loss resulting from the breach.  ‘Willful’ breaches have not been distinguished from other breaches . . .”  See footnote 6.  Moreover, the Court emphasized that proving a breach of contract claim does not depend on the breaching party’s mental state.

The Court also emphasized that proof of fraud violates the implied covenant not because breach of the implied covenant requires fraud, but because “no fraud” is an implied contractual term.  That is, the law implies that the parties never would have agreed to fraud as a term of an agreement.

The Court also recited the four situations when an at-will employee can claim a violation of the implied covenant.  See footnote 8.

In discussing the way that the concept of fraud interfaces with a claim for breach of the implied covenant, the Court explained that proving fraud is simply one way of establishing a breach of the implied covenant of good faith and fair dealing, but not the only way.  This is so, because proving fraud represents a specific application of the general implied covenant test; that is:  “What would the parties have agreed to when bargaining initially?”  Specifically, they would have agreed that fraud would not be allowed.  The Court explained that the implied covenant of good faith and fair dealing is, in essence, a contract claim and not a tort claim.

The Court also cited to other decisions to support the view that even when separate actions and separate lawsuits were pending in different jurisdictions, if they were related to one essential dispute, then a fee award would be entirely proper that included those separate actions which were deemed to be one continuous piece of litigation, and the net result of all the actions resulted in the settlement of the differences of the parties.

Reasonableness of the Fee Award

The Court described the standards that would be used to determine the reasonableness of fee awards based in part on Rule 1.5(a) of the Delaware Lawyers’ Rules of Professional Conduct. As applied to the facts of this case, the Court reasoned that simply because the rates that one firm charges are higher does not make them unreasonable.  In addition, the fact that an attorney for one party spent more than twice as many hours for the same task does not make that number of hours unreasonable.  For example, the Court referred to the attorney for the prevailing party spending 67 hours to prepare for an expert deposition, and that at trial the prevailing attorney “destroyed” the credibility of the opposing party’s expert.  The losing party, by contrast, was unshaken on cross examination and that party’s attorney spent less than half the number of hours (31) preparing for the expert deposition.

Practical Perspective

One of the many lessons that can be learned from this opinion, is that Delaware courts do not often second guess the amount of fees charged by attorneys in situations where the fees are awarded based on a fee shifting provision in an agreement, such as this case, or when they were awarded pursuant to the bad faith exception to the American Rule.  See, e.g., Auriga case highlighted here, and the very recent Coughlin case, highlighted here.

Awarding $875,000 in attorneys’ fees and expenses for an action regarding the internal affairs of a Delaware corporation, Vice Chancellor Laster provided a roadmap of potential recovery in future cases. In re Emerson Radio Shareholder Derivative Litigation, C.A. No. 3992-VCL (Mar. 28, 2011). Read opinion here.

This summary was prepared by Ryan P. Newell of Connolly Bove Lodge & Hutz LLP.

                                                                                                                                

Background

  

After obtaining majority control of Emerson Radio Corporation (“Emerson”), The Grande Holdings Limited (“Grande”) became the subject of an inspection by the Emerson Audit Committee for transactions that allegedly benefited Grande’s subsidiaries at the expense of Emerson. As a byproduct of the audit, the Emerson board adopted a number of recommendations regarding financial controls and corporate governance. Two derivative actions were filed challenging Grande’s alleged related-party transactions. After document discovery, depositions, and motion practice, Grande agreed to pay $3,000,000 to Emerson which in turn agreed to implement augmented governance procedures for related-party actions. Plaintiffs sought $1.5 million in fees. 

 

Sugarland Factors 
 

In Delaware, attorneys’ fees and expenses are awarded when a suit challenging actions related to the internal affairs of a corporation confers a benefit upon the stockholders. The measure of those fees and expenses falls within the discretion of the Court based upon factors set forth in Sugarland Industries v. Thomas:

 

(i) the amount of time and effort applied to the case by counsel for the plaintiffs; (ii) the relative complexities of the litigation; (iii) the standing and ability of petitioning counsel; (iv) the contingent nature of the litigation; (v) the stage at which the litigation ended; (vi) whether the plaintiff can rightly receive all the credit for the benefit conferred or only a portion thereof; and (vii) the size of the benefit conferred.

 

The Court awarded $875,000 in fees based on the following analysis.

 

Monetary Benefits Conferred

 

Where the benefit is quantifiable, the Court will generally “apply a ‘percentage of the benefit’ approach.” Where a case settles early and before trial (e.g., initial factual investigation, no depositions, no motions), the Court tends to award 10-15% of the benefit conferred. Where the case settles after some greater involvement (e.g., a number of depositions, motion practice), the Court tends to award 15-25% of the benefits conferred. The Court will award no greater than 33% – an amount reserved for cases that progress much further than discovery and perhaps go to adjudication. 

 

In this case, counsel recovered $3,000,000 for the Plaintiffs by engaging in significant discovery – hundreds of thousands of pages of documents were produced, eleven depositions were taken and two discovery motions were addressed. As a result, the Court deemed this to be in the middle tranche of cases where the award is generally 15-25% of the recovery. The Court started at 25% of the $3,000,000 award (or $750,000).

 

Non-Monetary Benefit

  

While the Plaintiffs obtained a number of corporate governance reforms, two facts mitigated the value of those benefits. First, the Audit Committee had already instituted many similar reforms. Second, many of the reforms were required by federal law and stock exchange standards. Estimating that the potential harm the corporate governance measures saved Emerson at $500,000, the Court applied the 25% cap to that amount to arrive at $125,000 for therapeutic benefits.

 

Time and Effort of Counsel

  

In considering the potential for a windfall, the Court placed a “cross-check on the reasonableness of a fee award” by considering the amount of hours worked. The Court held that 2,136 billable hours at roughly $410 per hour would “not confer an unwarranted windfall on plaintiffs’ counsel.” 

 

Relative Complexity of the Litigation

 

The Court held that this case did not warrant an adjustment – up or down – for complexity.

 

Contingency Risk

  

The Court gave weight to the contingency risk endured by Plaintiffs’ counsel: “[u]nlike when entrepreneurial plaintiffs’ firms routinely file representative actions against mergers, knowing that the defendants’ ability to issue supplemental disclosures and the hydraulic pressure of deal closure will combine to create a ready-made settlement opportunity, plaintiffs’ counsel here did not get into the case with an obvious and well-marked exit in sight.” But for this risk, the Court would have considered an award reduction.

 

Standing and Ability of Counsel

 

 With well-known practitioners, this factor did not require any adjustment.

 In Re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. March 16, 2010), read opinion here. This is a Court of Chancery opinion that is certain to generate copious commentary. The Court removed the original Co-Lead Counsel and appointed new Co-Lead Counsel for the class.

A cursory review makes it clear that this opinion is destined to be cited often for several reasons. For example, it describes the practice and some history of firms who file class actions in the Court of Chancery very soon after a public announcement of a transaction and the ensuing battle for lead counsel among firms filing competing complaints involving the same contested transaction. Footnotes refer to law review articles and prior Chancery decisions that chronicle the issues that arise in this context, often involving the same firms that the Court refers to as "frequent filers" in this Court. The Court also refers to this phenomenon as the "opening steps in the Cox Communications Kabuki dance." (Slip op. at 8.)

The opinion includes scholarly analysis regarding the criteria employed by the Court in its selection of lead counsel in class actions, noting that the size of plaintiff’s holding is not always determinative. Without any intent to "name names" and having no interest in identifying firms on this blog that suffered in this case, it must be noted that the Court concluded that original counsel did not "provide adequate representation."

The Court cites to many academic sources that discuss the policy issues that arise in these types of cases, as well as the "pros and cons" of what the Court refers to as "entrepreneurial litigators" who have a portfolio of class action cases. There is much more to commend this decision as must-reading for any lawyer or plaintiff who files a representative action in the Delaware Court of Chancery. A fuller synopsis will follow soon.

Although this remarkable opinion is only 44-pages in the “slip opinion format,” it speaks volumes about the practical and theoretical aspects of representative litigation, as well as the standards that the Court enforces on all counsel that appear before it.

Much of the opinion discusses the types of class actions that arise in the context of what the Court referred to as the Cox Communications ritual, referring to the case of In re Cox Communications, Inc., 879 A.2d 604, 608 (Del. Ch. 2005). That “ritual” as to the Court describes it, involves a common practice in many representative suits that are hastily filed very shortly after the announcement of a controlling shareholder transaction. The Court has referred to these hastily prepared and hastily filed complaints as part of the “medal round of filing speed Olympics to seek lead counsel status.” See footnote 2. In footnotes 1 and 4, the Court cites to a law review article that refers to an academic analysis that concluded: “Firms who are early filers are frequently early settlers,” (leading some wags to label them “Pilgrims.”) In addition to referring to it as a ritual, the Court also refers to the situation in this case as “part of a Cox Communications Kabuki dance which involves two tracks.” The first track involves representative counsel doing “not very much” in the litigation, while the controlling shareholder and the special committee for the company move forward along the transactional track.

That procedure followed form in this case with a twist. The financial advisor for the Special Committee indicated that it would not be able to render a fairness opinion for the transaction and the Special Committee therefore could not recommend the proposed transaction. However, the controlling shareholder in the company did a “end run” around the Special Committee by proposing a slightly new transaction to the whole entire board and not the Special Committee. Thus, the Special Committee declared that its work was complete and disbanded.

Although the board declined to make any recommendation to stockholders on whether or not to tender their shares, the board did authorize Revlon to proceed with the proposed transaction.

The Litigation Track Restarts and the Parties Enter into a Memorandum of Understanding

The Cox Communications ritual was described by the Court as follows: Once the corporation and the controlling shareholder reached an unofficial agreement on the terms of the transaction, the plaintiffs were brought in to “bless the deal.” The transaction provided for consideration for a settlement and the payment of attorneys’ fees and a broad transaction-wide release for all defendants. The minor tweaks in the transaction followed in what the Court called this “traditional choreography.” The transactional tweak traditionally involves lowering the termination fee which would only become operative in the event of a topping bid and supplemental disclosures which provide convenient ways to settle litigation over a deal that has already been exposed to the market for some time, by which point it is relatively clear to the parties that an interloper is unlikely to appear.

Importantly, one of the tweaks made in this case by the parties was already required by Delaware case law in order to render a controlling stockholder tender offer as non-coercive. The court suggested that the provision would have been included anyway as a requirement under Delaware law that a controlling stockholder tender offer be conditioned upon tenders from a majority of the outstanding unaffiliated shares. The Cox Communications case is known for requiring that if a tender offer by a controlling shareholder is to be considered no-coercive, when enough shares are tendered such that the remaining holders can be eliminated for a short-form merger, then the squeezed-out stockholders would receive securities and the surviving corporation substantially identical to the shares it would have received.
The court regarded the changes to the ultimate terms of the deal as being the result of very little if any influence by the plaintiff’s counsel and the Memorandum of Understanding (MOU) exaggerates the role of counsel in obtaining settlement. The Court refers throughout the opinion to “Old Counsel” as the counsel that it replaced.

New Actions Filed

After the MOU was entered into, new representative actions were filed that challenged the transaction. Unlike the original actions filed by Old Counsel, Fox challenged a negotiable proposal, the new actions challenged in actual transaction. New counsel argued that there was a conflict between the positions of the tendering stockholders that they represented and the non-tendering stockholders represented by the Old Counsel.

The Court quoted extensively from terms of the Amended Complaint filed by plaintiffs’ Old Counsel with a purpose to protect “defendant’s turf and the settlement” which was inconsistent with the record before it.

The Court was also critical of defense counsel who supported the settlement and also made statements to defend the settlement that the Court regarded as “not quite accurate” (my phrase).

Legal Analysis

The Court cites to a treatise and to several federal decisions to support its statement that the Court has both the power and the duty to either select or remove class counsel. Although there may not be substantial case law in the Court of Chancery on this topic, comparatively speaking, the Court cited to several cases which list the factors that are important in choosing lead counsel, such as the quality of the pleading, the willingness and ability to litigate vigorously on behalf of an entire class, and the enthusiasm or vigor with which the various contestants have prosecuted the lawsuit. See Hirt v. U.S. Timberlands Serv. Co., 2002 WL 1558342 at *2 (Del. Ch. July 3, 2002) and Wiehl v. Eon Labs, 2005 WL 696764, at *1 (Del. Ch. May 22, 2005). Notably, the Court emphasized that the size of plaintiff’s share ownership is not a determinative factor in selecting lead counsel.

Transaction was not a Voluntary, Non-coercive Tender Offer that Avoided Entire Fairness Review

The Court made it clear that this was not a transaction that avoided entire fairness review based on the case of In Re Siliconix, Inc. Shareholders Litigation, 2001 WL 71677 (Del. Ch. June 19, 2001). The Siliconix case rests in part on the non-involvement of the target board from the Delaware corporate law perspective. Rather, as a series of cases noted, corporate action by the target board takes a transaction out of the Siliconix framework. See, A.G. Andra v. Blount, 772 A.2d 183, 195 n. 30 (Del. Ch. 2000).

The Court also noted other reasons why the entire fairness standard would apply to the deal in this case in part because none of the following safe harbor provisions applied: (1) There was no affirmative recommendation from an independent committee of the target board; (2) It was not subject to a non-waivable condition that a majority of outstanding unaffiliated shares tender; and (3) There was no commitment by the controller to effect a prompt back-end merger. Moreover, in this case the outside directors believed that they could not obtain a fairness opinion for the deal. The Court observed that if there was ever a case that warranted the entire fairness review standard, this may be one of those cases.

Policy Considerations

The Court recognized the important role of representative cases as a check on management, and that many cases achieve meaningful results. The Court recognized also the sound policy reasons for the Court to police representative counsel.

At footnote 6, the Court cited to multiple law review articles, and addressed the pros and cons of representative cases and what the Court refers to as “entrepreneurial litigators” who specialize in handling these types of cases. This opinion made it clear that the Court will act as a very “strict policeman,” and the Court recognizes that one possible consequence of that approach would be that “frequent filers” may accelerate their efforts to populate their portfolio of cases by filing in other jurisdictions. The Court recognized also that while “in the short run policing frequent filers may cost some members of the bar financially, in the long run it enhances the legitimacy of our State and its law not to facilitate a system of transactional insurance through quasi-litigation.”

The Court requires New Counsel to Perform Confirmatory Discovery

In addition to appointing new lead counsel, the Court specifically at pages 43 and 44 outlined in detail minimum discovery that new counsel had to conduct through both traditional written discovery methods and through depositions in this case. The itemized description on pages 43 and 44 of the slip opinion is in some ways unique to this case, but it provided a road map for confirmatory discovery that will be a useful reference in some respects for representative counsel seeking to have the Court approve class action settlements in the future.

UPDATE:  I want to draw readers’ attention to two transcripts of subsequent hearings in separate, unrelated cases by the same author of this opinion, here  and here, where the Court "softened the impact" of the references in this opinion to some of the firms involved in this case in a manner that would tend to prevent use of the opinion against those firms in the future. The ruling in this case, and the above-linked transcripts, are indications of the special emphasis that the Court places on the role of Delaware lawyers in a case populated with many "out of town counsel".

Deloitte LLP v. Flanagan, No. 4125-VCN (Del Ch., Dec. 29, 2009), read opinion here.  Prior Delaware opinions dealing with the Deloitte firm and its former partners have been highlighted on this blog here.

Overview

This Delaware Court of Chancery opinion addresses claims against a former Deloitte partner for breach of contract, breach of fiduciary duty and fraud in connection with allegations of insider trading with information obtained from clients for whom Deloitte performed audit services.

Procedural  Posture

The procedural context was a motion for partial summary judgment which was granted in favor of Deloitte. The Court’s description of the standard for summary judgment, and it various nuances, is more complete than I have seen in most opinions, including reference to Rule 56(c) that allows for partial summary judgment on liability only. See Slip op. at 6 and 7.  Also explained is the well-established truism that breach of contract claims are especially appropriate for summary judgment motions. See footnotes 52 and 53.

Issues Addressed

The agreement that the former Deloitte partner involved in this case signed with Deloitte required him to refrain from trading in the shares of companies for whom Deloitte provided audit and related services. Also required contractually was a periodic reporting of the shares held by all Deloitte partners. The Court was satisfied with the evidence presented of multiple examples of the former partner both failing to abide by this contractual obligation and misrepresenting his non-compliance. The same evidence also satisfied the elements for a breach of the elements of a fiduciary duty claim, but at this stage, when only liability was being decided, the Court determined that it need not delve into the issue of whether the contract claim and fiduciary duty claim overlapped, or whether one needed to be chosen over the other. See page 17 and footnote 68. See also footnote 78 discussing the AICPA standards for auditors, requiring independence and the need to avoid the appearance of impropriety.

The Court also discussed the elements of common law fraud compared with equitable fraud (also  sometimes called negligent misrepresentation.) See pages 18 and 21.

The definition of the term “scienter” was discussed in the context of fraud claims related to insider trading. See page 21. This discussion includes an excellent weaving of the elements of a state law claim with concepts often used in connection with securities law claims. Also notable was the defendant’s use of his Fifth Amendment right not to incriminate himself 800 times in his deposition and the Court’s observation that in a civil case (unlike in a criminal case), the exercise of that right may result in an adverse inference. See footnote 90.

UPDATE: Francine McKenna on her blog Re:The Auditors here, provides insightul background details as well as follow-up on this interesting case. Also, the Chicago Tribune has a story here about the efforts of the defendant to have the Court’s opinion sealed. In addition, Reuters has an article here about the defendant’s criminal trial.

Sutherland v. Sutherland, 2008 WL 1932374 (Del. Ch., May 5, 2008), read opinion here.

[This is one of four opinions issued on May 5 by the Chancery Court, two of which were written by the same vice-chancellor. I hope to post on the other 3 opinions issued on May 5 by tomorrow.]

Factual background details can be obtained from the three prior decisions by the Chancery Court involving these parties, and summarized on this blog here, here and here. This latest opinion in this ongoing internecine Sutherland family squabble denied a motion to dismiss, despite the great weight often given to the recommendation of the Special Litigation Committee (SLC), on which the defendant companies relied for their motion to dismiss. The reason for rejecting the SLC’s conclusions: After having considered the briefs, affidavits, limited discovery and arguments of the parties, the Chancery Court reasoned that:

"the special litigation committee [consisting of one man] has not satisfied the court that it acted in good faith and conducted a reasonable investigation."

The opinion also discusses the issue of independence, the third requirement that the SLC needs to satisfy pursuant to the decision in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), as well as closely scrutinizing whether the SLC satisfied the other requirements of good faith and reasonable investigation.

One lesson from this opinion that can be learned by "negative example" is how "not to constitute"" an SLC (if one wants to have maximum "protection") , and how "not to conduct an SLC investigation" (if one wants to increase the odds of not  having the court disregard the SLC’s conclusions.)

The court noted that the SLC has the burden of establishing its good faith, reasonable investigation and independence, based on Rule 56 standards, although the review has some aspects of a Rule 12(b)(6) motion. The court also referred to the decision in Kaplan v. Wyatt , 484 A.2d 501, (Del. Ch. 1984), that requires the SLC’s conclusions to be supported by a "thorough record". The court may also apply its own business judgement to the conclusion of the SLC even if the SLC satisfied all other prerequisites.

A central theme in the complaint was that the directors were allegedly using the company’s assets for their own personal benefit via such things as personal use of the corporate jet, lavish personal expenses charged to the company for chartered private railroad cars, private parties, club memberships, expensive hotels, rental cars, and other examples of opulence not required by their position at the company.

The court provided reasoning and examples of why the one-man committee’s investigation was not adequate. He only spent  less than one full-day at the company’s office reviewing records. He arrived at 8:30 and then met with various accounting and management personnel before reviewing records. He took a one-hour lunch and then left at 3:30. The following quote from the opinion provides more details:

Perhaps more notable than what Jeffrey did is what Jeffrey [the one-man committee] did not do. Jeffrey testified at his deposition that, although he is a certified public accountant, he did not arrive at the companies’ offices with a plan for how he was going to conduct the review. He did not take any notes. Thus, there is no written record of what he did. Jeffrey testified that he did not review a statistically significant number of invoices when testing whether the accounting records were accurate. He did not verify that the vendor number he asked the accounting department to run was Perry’s only vendor number. And he conducted no search for payments the companies may have made to third parties on Perry’s behalf. For instance, if Perry used Maysville and Maysville then invoiced the companies rather than Perry, Jeffrey’s investigation would not have found the check sent to Maysville on Perry’s behalf.FN33  Nor, as Jeffrey testified, would he have found checks the companies made to credit card issuers on Perry’s behalf. Indeed, Jeffrey testified that his review of the ledgers would have failed to capture the two large payments made to King on Perry’s behalf.

 In Melzer v. CNET  Networks, Inc., 2007 WL 4146237 (Del. Ch., Nov. 21, 2007), read opinion here, the Delaware Chancery Court provides a careful review of the Delaware law relating to a shareholder’s right to demand books and records under DGCL Section 220. This is the third part of a trilogy. The prior two decisions in this case are summarized on this blog here and here. (Hat tip and thanks to Delaware lawyer David Finger for sending us the opinion today). This opinion will be especially noted for ruling that the shareholder was entitled to books and records for a period of time prior to the date of stock ownership in order to allow for the detail necessary to plead a sustained and systemic failure of oversight by the board, as described in the famed Caremark case.

First I’ll cover an entertaining footnote and then I’ll address the meat of the decision. In the concluding sentence of the opinion, after explaining in a comprehensive and scholarly fashion why the defendant company must provide the requested documents, the court used a colorful means of telling the defendant to return to California where the parties were involved in a separate lawsuit (in which the judge had urged the parties to use DGCL Section 220 before amending the complaint in that case). Here is what the last sentence of the opinion stated:

"get  ‘going, going/back, back/ to Cali, Cali’"

(citing THE NOTORIOUS B.I.G., Going Back to Cali, on LIFE AFTER DEATH (Bad Boy Records 1997)).

As previously noted on these pages, here, in connection with prior summaries of Chancery Court decisions, and on The Wall Street Journal Law Bloghere, the Chancery Court has "spiced up" other scholarly opinions with footnote references to popular music. It makes for fun and entertaining reading in what might otherwise be necessarily sober stuff.

The first footnote in this Chancery opinion is to a front page article in The Wall Street Journal in March 2006 about backdated stock options, which the court notes was the genesis of a large number of lawsuits filed in connection with backdated stock options. In this matter, a derivative suit was initially filed in 2006 in federal court in California. Even though in this case the company admitted to the backdating of options, the federal court dismissed the case on procedural grounds with leave to amend, but also specifically instructed the parties to cooperate to allow the plaintiff shareholder to obtain books and records pursuant to Section 220 of the  DGCL (Delaware General Corporation Law — 8 Del. C. Section 220). When a demand letter proved fruitless, the plaintiff filed the instant lawsuit in Delaware.  Compared to the many other Section 220 opinions  summarized on this blog, (see, e.g., here, here, herehere and here), this opinion includes among the most succinct overviews of this important "corner" of Delaware corporate litigation, such as prerequisites to successfully pursuing a demand for books and records that are not readily obvious from a reading of the statute.

In addition to the last entertaining footnote, two of my favorite footnotes in this opinion include one that refers to a leading treatise on Delaware corporate law where one will find examples of  the "proper purpose" element of a successful Section 220 action. Footnote 18 provides as follows:

 See 1 EDWARD P. WELCH, ANDREW J. TUREZYN, & ROBERT SAUNDERS,  FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 220.6.3 (supp. 2007-2) (listing well over ten examples of broad categories of proper purposes under section 220).

My next favorite footnote (coincidentally also the next chronologically), needs to be quoted to get the full flavor. The court recognized some scholarly criticism of the Delaware jurisprudence in Section 220 cases, in connection with citing a Delaware Supreme Court decision regarding pleadings standards, and then in a gentlemanly fashion with surgical precision, the court dissects and rejects the basis for the different academic point of view. (It also is another example of how blogs by law professors are being cited by courts more and more.) Footnote 19 provides as follows:

 Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 118 (Del. 2006). Delaware courts have been harshly criticized for this requirement. See, e.g., J. Robert Brown’s Inspection Rights under Delaware Law, http://www.thereacetothebottom.org (Nov. 20, 2007, 6:16 a.m.) (arguing that the Seinfeld decision “illustrates that courts deliberately discourage the use of inspection rights by shareholders, using not the language in the statute but excessive pleading standards”). Such sensationalized criticism may make for an entertaining blog, but it is both unfair and incorrect. First, there is nothing “excessive” about requiring a petitioner to plead the elements of the statute under which he or she petitions the court. Section 220 makes inspection available only for shareholders with a “proper purpose.” If a shareholder could satisfy this burden by conclusorily repeating words previously used to describe a proper purpose, the requirement would be rendered meaningless, and well settled canons of statutory construction prevent such absurd results. Second, as Justice Holland explained in Seinfeld, permitting a single shareholder to hound a corporation with exclusively personal requests for books and records is a waste of corporate resources that engenders no benefit for the shareholders in general. The proper purpose requirement protects against such wealth-reducing outcomes. Finally, the “credible basis” standard is “the lowest possible burden of proof” in Delaware jurisprudence, and this can hardly be characterized as an excessive pleading standard. Seinfeld, 909 A.2d 117 at 123.

This opinion is  also replete with footnote references to the opinion of the federal judge in California who specifically instructed the defendant to cooperate in the Section 220 demand in order to allow plaintiff to obtain details necessary to plead demand futility with particularity.

Thus, this Chancery Court opinion  also includes useful analysis of the demand futility standards under Aronson v. Lewis and related Delaware cases.

Much more could be written about the gems of Delaware law contained in this opinion, but in keeping with the attempted brevity of blog posts, and in light of this one being longer than usual, I encourage readers to access the first link above and read the whole thing.

 This case was so good that I wanted to blog about it before I officially start my Thanksgiving  holiday and while my family is sleeping.  For students of Delaware corporate law, this opinion issued the day before Thanksgiving was just in time for a "Thanksgiving  feast" for the mind. Happy Thanksgiving to all my loyal readers and thanks for visiting these pages.

SupplementHere is a post I did about this case on The Harvard Law School Corporate Governance Blog.

UPDATE: Here is a characteristically insightful commentary on the case by Prof. Eric Chiappinelli. UPDATE II: Here is a blurb on the case from The Wall Street Journal Law Blog.

By: Francis G.X. Pileggi and Bernard G. Conaway
Much has been written about recent developments in electronic discovery, and the topic easily lends itself to a law review article as opposed to a short essay such as this. Nonetheless, the narrow scope of this article will be to highlight a few recent developments that should be of great importance to any litigator. For example, the United States District Court for the District of Delaware recently developed non-binding electronic discovery guidelines. As of this writing, neither the Delaware Chancery Court nor the Delaware Superior Court have formally adopted any amendments to their rules of civil procedure that specifically relate to electronic discovery issues similar to the new guidelines promulgated by Chief Judge Robinson of the District Court.

Continue Reading A Short Overview of Recent Developments in Electronic Discovery