The case of Branin v. Stein Roe Investment Counsel, LLC, 2014 WL 2961084 (Del. Ch. June 30, 2014) raised the interesting question of whether the operating agreement in effect at the time the suit was filed or the operating agreement in effect at the time the indemnification claim was made will control the right to indemnification.  The first operating agreement had a broad indemnification provision, but was amended after suit was brought against an indemnified person to intentionally preclude indemnification for that particular claim.  The amended operating agreement clearly excluded indemnification for that claim, and the claim for indemnification was not made until after the operating agreement was amended.[1]

On cross-motions for judgment on the pleadings, the Chancery Court determined that the LLC’s liability for the indemnification claim was fixed upon the filing of the action; before the operating agreement was amended.  The Court noted that it generally looks to the operating agreement in place when the lawsuit is filed or the events giving rise to the suit occurred.  The decision was limited only to a denial of both motions for judgment on the pleadings; the court determined that a factual inquiry into whether Branin’s actions were in good faith was necessary before determining his entitlement to indemnification.

Interestingly, nothing in the LLC agreement prohibited the LLC from amending its operating agreement on a prospective basis, and a notable question, which was not argued by the parties, was whether the operating agreement could have been amended to eliminate liability from the date of the amendment forward, limiting the LLC’s exposure to legal fees already accrued as of the date of the amendment.

[1] Note that 8 Del. C. §145(f) explicitly prohibits an amendment to the certificate of incorporation or the bylaw providing for advancement and indemnification which eliminates or impairs the right to advancement or indemnification after the occurrence of the act or omission giving rise to the action for which advancement or indemnification is sought, unless the provision in question explicitly authorizes such amendment.

Pontone v. Milso Indus. Corp., et al., C.A. No. 7615-VCP, letter op. (Del. Ch. Sept. 3, 2014).  This decision denied a motion for reargument of an opinion regarding advancement of fees pursuant to DGCL section 145 available to officers and directors. The nuance addressed in this case involves the types of counterclaims that are available for advancement and indemnification. This decision reiterates that such a counterclaim must be considered a compulsory counterclaim, and “necessarily part of the same dispute” as the affirmative claims asserted against the advancee, and be advanced to “defeat or offset those claims.” See Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992).

Rule 59(f) motions for reargument are rarely granted, and this case was no exception to that statistical probability. In essence, the court regarded the motion as a reprise of previously rejected arguments, though perhaps providing additional details or nuances.

The prior decision in this case was recently highlighted on these pages.

 

LG Electronics, Inc. v. Interdigital Communications, Inc., C.A. No. 9747-VCL (Del. Ch. Aug. 20, 2014).

This decision applied the familiar first-filed rule, also known as the McWane Doctrine, to a first filed arbitration claim. The court dismissed a complaint that sought injunctive relief notwithstanding that the same issue had been presented in a previously-filed arbitration between the parties.  This appears to be the first time that the first-filed rule was applied (in Delaware) to bar a suit as a result of that doctrine, when a previously-filed arbitration proceeding between the same parties involving the same dispute was already pending, as compared to a prior suit filed in court.

In Re Astex Pharmaceuticals, Inc. Stockholders Litigation Cons., C.A. No. 8917-VCL (Del. Ch. Aug. 25, 2014).

This short letter ruling required the parties to comply with the notice provisions explained in a prior Chancery decision in connection with their request that fees be paid by the corporation for mooted claims.  The prior decision cited was In Re Advanced Mammography Sys., Inc. S’holders Litig., 1996 WL 633409 (Del. Ch. Oct. 30, 1996) (Allen, C.).

The National Association of Corporate Directors publishes a magazine called Directorship. They published my article on the recent decision of the Delaware Supreme Court in the Wal-Mart case, highlighted on these pages, which recognized an exception to the attorney client privilege when a stockholder sues a member of the board of directors of a company and there is no other method to obtain the requested information.

In Pontone v. Milso Industries Corp., C.A. No. 8842-VCP (Del. Ch. Aug. 22, 2014), the Delaware Court of Chancery addressed the rights to advancement and indemnification of attorneys’ fees for a corporate officer pursuant to both DGCL Section 145 and applicable agreements among the parties. The most notable aspect of this 65-page scholarly treatment of this recurring issue in corporate litigation is how indemnification claims will be treated when two parties have arguably overlapping obligations to indemnify, and what percentage of “fees on fees” will be awarded if a party is not 100% successful. This opinion deserves careful reading, not only by those who want to know the latest iteration of Delaware law on this topic, but also by those who want a primer on the prerequisites and nuances of Delaware law on the perennial issues presented that are of importance to directors, officers and the companies they serve. 

It remains remarkable how, despite hundreds of Delaware decisions on these issues, new cases seem to present nuances that have not been addressed before. I co-author a chapter of an annually updated multi-volume treatise on corporate litigation developments that surveys court decisions around the country on indemnification and advancement, and even though the majority of cases nationwide, by far, are decided in Delaware, subtle differences in the facts of new cases often present new complexities not previously addressed by the myriad of decisions already published.

A prior related Delaware decision in this matter was highlighted on these pages.

To paraphrase a former tag line for a former investment management firm, when Delaware Supreme Court Chief Justice Leo Strine, Jr. and Vice Chancellor J. Travis Laster of the Delaware Court of Chancery co-author an article on a cutting-edge topic of Delaware law, those lawyers who practice in the relevant field need to “pull up their socks” and take notice.

Their article, entitled: “The Siren Song of Unlimited Contractual Freedom“, available on SSRN, addresses the issues that arise in connection with the expansive freedom of contract available in alternative entities. The Delaware jurists propose a framework that would be “both fairer and more efficient than the current patchwork yielded by the unilateral drafting efforts of entity sponsors”. The full abstract of the article follows:

One frequently cited distinction between alternative entities — such as limited liability companies and limited partnerships — and their corporate counterparts is the greater contractual freedom accorded alternative entities.  Consistent with this vision, discussions of alternative entities tend to conjure up images of arms-length bargaining similar to what occurs between sophisticated parties negotiating a commercial agreement, such as a joint venture, with the parties successfully tailoring the contract to the unique features of their relationship.
As judges who collectively have over 20 years of experience deciding disputes involving alternative entities, we use this chapter to surface some questions regarding the extent to which this common understanding of alternative entities is sound.  Based on the cases we have decided and our reading of many other cases decided by our judicial colleagues, we do not discern evidence of arms-length bargaining between sponsors and investors in the governing instruments of alternative entities.  Furthermore, it seems that when investors try to evaluate contract terms, the expansive contractual freedom authorized by the alternative entity statutes hampers rather than helps.  A lack of standardization prevails in the alternative entity arena, imposing material transaction costs on investors with corresponding effects for the cost of capital borne by sponsors, without generating offsetting benefits.  Because contractual drafting is a difficult task, it is also not clear that even alternative entity managers are always well served by situational deviations from predictable defaults.
In light of these problems, it seems to us that a sensible set of standard fiduciary defaults might benefit all constituents of alternative entities.  In this chapter, we propose a framework that would not threaten the two key benefits that motivated the rise of LPs and LLCs as alternatives to corporations:  (i) the elimination of double taxation at the entity level and (ii) the ability to contract out of the corporate opportunity doctrine.  For managers, this framework would provide more predictable rules of governance and a more reliable roadmap to fulfilling their duties in conflict-of-interest situations.  The result arguably would be both fairer and more efficient than the current patchwork yielded by the unilateral drafting efforts of entity sponsors.

 

We have previously on these pages highlighted litigation involving a contract dispute in the Delaware Court of Chancery, and an appeal before the Delaware Supreme Court between AT&T and the U.S. cable network that Al Jazeera bought from a company in which former VP Al Gore was a major investor. The litigation in that case centered mostly on what portion of the court documents the parties could withhold from public view.

The Wall Street Journal’s Holman Jenkins, Jr. reports in today’s paper about the suit that Al Gore filed in the Delaware Court of Chancery against Al Jazeera claiming that they owe him money related to the sale. The WSJ article suggests that an early settlement may be likely due to the parties’ interest in avoiding disclosure about details of the deal.

After the Delaware Supreme Court decision in ATP Tour, Inc. v. Deutscher Tennis Bund, Del. Supr., No. 534, 2013 (May 8, 2014), highlighted on these pages, in which the court  upheld fee-shifting bylaws, a number of companies have adopted such bylaws, and several cases are now pending in the Delaware Court of Chancery to determine–based on the facts of those particular cases, whether there is an equitable exception applicable to the enforceability of such bylaws.

Frank Reynolds of Thomson Reuters has written an article about one pending Chancery case where the issue has been raised and Chancellor Bouchard has asked for additional briefing before determining whether he will address the issue. For those interested in corporate litigation, it doesn’t get much more cutting-edge. See Kastis et al. v. Carter et al., No, 8657, hearing held (Del. Ch. Aug. 15, 2014).

Bloomberg BNA Corporate Law and Accountability Report* recently published my short article on the corporate benefit doctrine as a basis for the award of attorneys’ fees, as applied by the Court of Chancery in Sutherland v. Sutherland, a decision summarized on these pages, which was the latest installment in a long-running battle about the management of a substantial family-owned enterprise that generated many published Delaware decisions on corporate governance, spanning nearly a decade of multiple levels of litigation.

*Reproduced with permission from Corporate Accountability Report, 12 CARE 34, 08/22/2014. Copyright 2014 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com