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The Delaware Court of Chancery recently published a comprehensive and scholarly analysis of the limited scope of the subject-matter jurisdiction of Delaware’s court of equity, and refused to accept a case that sought a permanent injunction, in a formal opinion styled: In re Covid-Related Restrictions on Religious Services, Consol. C.A. No. 2021-1036-JTL (Del. Ch. Nov. 22, 2022).

Practice Tip: Depending on the level of scrutiny given by the court, either sua sponte or in response to the arguments made by the parties, if any, the request in a complaint for injunctive relief may not be sufficient to satisfy the requirements for enjoying the capacious benefits of the jealously-protected, narrow, equitable subject-matter jurisdiction of the Court of Chancery.

This decision corrects several mistaken prior Delaware decisions, and persuasively describes the true prerequisites for obtaining a permanent injunction. See Slip op. at 46-47.

Prefatory Comments

Experienced equity practitioners should be forgiven if they discover when reading this thoughtful decision that the finer points and nuances of the circumscribed boundaries of the equitable jurisdiction of the Court of Chancery are not always absolutely clear–if only because the members of the court do not always uniformly give this somewhat esoteric issue the same level of scrutiny. In addition, there are cases where final decisions have been rendered but neither the parties nor the court sua sponte raised the issue of equitable jurisdiction.

Most veteran Delaware litigators naturally would think that if injunctive relief (a typical equitable remedy) were to be requested, that the Court of Chancery would have subject-matter jurisdiction–but that is not always true, and it was not true in the instant case.

For those experienced equity practitioners who thought they understood the equitable basis for the Court of Chancery’s limited jurisdiction, and wonder why the court in this case rejected subject-matter jurisdiction when injunctive relief was requested, perhaps their self-doubt might be assuaged by the court’s observation in the instant opinion that many prior Delaware decisions were wrong when they did not follow the majority view nationwide about what the requirements are for a permanent injunction. See Slip op. at 42-43 and n.9.

Although the Court of Chancery has, both recently and in the more distant past, awarded injunctive relief to enjoin the enforcement of unconstitutional statutes, and it remains well-settled generally that the violation of constitutional rights amounts to irreparable harm, see generally, Doe v. Coupe, C.A. No. 10983-VCP (Del. Ch. July 14, 2015)(highlighted on these pages), the instant case (and another recent letter ruling), found that the Court of Chancery lacked equitable jurisdiction notwithstanding the request for injunctive relief based on the violation of constitutional rights.

Procedural and Factual Overview of the Decision

This case sought permanent injunctive relief based on allegations that restrictions on religious worship during formal religious services imposed during the height of the Covid-19 pandemic by the Governor of Delaware were violations of fundamental constitutional rights. Those restrictions were eventually lifted more than two years ago, in part due to settlement of a federal lawsuit in Delaware making similar allegations–but the plaintiffs sought permanent relief to prevent similar future violations of their rights by the Governor. The Governor moved to dismiss for lack of subject-matter jurisdiction in Delaware’s court of equity.

The opinion begins with a overview of the almost two dozens Emergency Orders, as amended, that Delaware’s Governor issued, starting in early 2020, as the Covid-19 pandemic resulted in many public activities around the country and the world grinding to a halt.

Legal Analysis

In addition to engaging in a deep-dive into the underpinnings of equity jurisdiction, the court also provides a practical review of the basics.

The Basics

For example, the three typical triggers for equitable subject-matter jurisdiction that open the doors of Delaware’s court of equity generally include the following:

The court “can acquire subject matter jurisdiction in the first instance by three different means: (1) the invocation of an equitable right; (2) a request for an equitable remedy when there is no adequate remedy at law; or (3) a statutory delegation of subject matter jurisdiction.” Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 973 (Del. Ch. 2016) (cleaned up). “[W]here a remedy provided by a law court of the state would be sufficient, that is, complete, practical, and efficient, this Court is without jurisdiction.” Int’l Bus. Machines Corp. v. Comdisco, Inc., 602 A.2d 74, 78 (Del. Ch. 1991) (cleaned up).

Slip op. at 29.

Requirements for a Permanent Injunction–And Why Prior Delaware Cases Are Wrong on this Point

The court candidly explains why, understandably, several prior Delaware decisions that have described the requirements for obtaining a permanent injunction are simply wrong:

Sometimes a Delaware decision deviates from a settled or majority rule intentionally and for good reason.³ Other times, a little digging uncovers one of the inevitable spontaneous mutations generated by an adversarial process in which practitioners
understandably seek to depict authorities in the manner most favorable to their clients, and in which busy judges do not always have the time for reflective consideration of every legal issue in the case.

This opinion then provides detailed reasoning, with copious citations, for this conclusion:

Delaware’s customary framing of the standard for a permanent injunction errs by projecting onto the ultimate remedial determination the requirement from earlier phases of the case that a plaintiff show imminent irreparable harm. When a party seeks interim injunctive relief, such as through a TRO or preliminary injunction, the plaintiff must show why the court needs to act at an early stage, before a final adjudication. A plaintiff makes the necessary showing by pointing to a threat of something happening that cannot be addressed after a final adjudication during the remedial phase, i.e., a threat of irreparable harm. Additionally, the threat must relate to something that may transpire before the case can reach a final adjudication during the remedial phase, i.e., it must be imminent. To earn a TRO or a preliminary injunction, therefore, a plaintiff must show imminent irreparable harm. (Some citations omitted.)

But when a plaintiff seeks permanent injunctive relief after a final adjudication, a showing of irreparable harm is sufficient but not necessary. As a leading  procedural treatise explains, it should be noted that although a serious threat of irreparable injury usually must be shown on an application for a temporary-restraining order or a preliminary injunction, irreparable injury is not an independent requirement for obtaining a permanent injunction; it is only one basis for showing the inadequacy of the legal remedy.

Wright & Miller, supra, § 2944 (footnotes omitted). There is also no longer a near-term temporal requirement for the harm to take place before the court can review the matter further. Because the court is issuing its final ruling, the question is whether a permanent injunction is warranted because legal remedies are inadequate. The considerations driving that analysis need not be imminent; they need only be persuasive.

[The court divides into three parts its explanation for why imminent irreparable harm is not a requirement for a permanent injunction.]

This decision rejects the Governor’s argument that a permanent injunction requires a showing of imminent irreparable harm. The more detailed explanation unfolds in three parts. First, this decision describes the different forms of injunctive relief and the purposes they serve, which illustrates why imminent irreparable harm is a necessary element of the test for a TRO or a preliminary injunction but not for a permanent injunction. Second, this decision explains why the proper formulation of the standard for a permanent injunction should examine the inadequacy of other remedies. Finally, this decision explores how the irreparable injury prong entered Delaware’s permanent injunction test and confirms that it reflects an unintentional jurisprudential mutation rather than a conscious choice.

3 See Aranda v. Philip Morris USA Inc., 183 A.3d 1245, 1251–52 (Del. 2018)(“Although the federal courts and most state courts require an available alternative forum before dismissing for forum non conveniens, our Court never adopted this requirement. Admittedly, our cases have not directly addressed the question. But, several factors point to an implicit rejection of the requirement.” (footnotes omitted)); Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1059–64 (Del. Ch. 2006) (Strine, V.C.) (discussing the majority rule in Restatement (Second) of Contracts § 195 which prevents a contract from insulating a party from the consequences of its fraudulent conduct, then permitting a contractual anti-reliance clause to defeat a claim for extra-contractual fraud).

Slip op. at 32-34; and 42-43.

The court described the three different forms of injunctive relief that may be available–sometimes–in the Court of Chancery, and the subtle differences between them:

(i) TRO;

(ii) Preliminary Injunction; and

(iii) Permanent Injunction (which are further divided into mandatory and prohibitive injunctions.)

Slip op. at 34-38.

Inadequacy of Legal Remedy Required–But Irreparable Harm Not Needed for Permanent Injunction

Even experienced equity practitioners in Chancery who are familiar with equity practice may not be familiar with the minutiae discussed by the court in its explanation about why it must be demonstrated that a remedy at law would be inadequate–but notably: that irreparable harm is not a prerequisite for obtaining a permanent injunction. Slip op. at 38 and n.5. See also Slip op. at 44 and n.10-11.

After explaining why irreparable harm is not needed for a permanent injunction, though it remains one of several ways to show the inadequacy of a legal remedy, the court provided other examples of how the requisite inadequacy of a remedy at law may be demonstrated:

  • If the defendant is insolvent and a judgment would not be collectible, but the defendant is capable of performance to which plaintiff is entitled as an alternative to the money.
  • Defendant’s actions would require plaintiff to bring more than one suit to effectuate a legal remedy.
  • Money damages cannot be measured with any degree of accuracy, and are so speculative that any award would be inadequate.

Slip op. at 43.

The court also noted that in addition to the common formulation of money damages not being sufficient to make a party whole, the situation may exist when:

… the legal remedy is not as practicable and efficient toward the ends of justice as an injunction.

Slip op. at n.6

Proper Formulation for Requirements to Obtain Permanent Injunction–Correcting Prior Errant Chancery Decisions on this Topic

Practitioners take note: contrary to prior recitations in prior Chancery decisions, the correct list of prerequisites for a permanent injunction include the following:

  1. Actual success on the merits.
  2. Inadequacy of a remedy at law; and
  3. Balancing of the equities that favors an injunction.

Slip op. at 46.

Additionally, in order to satisfy the test for equitable subject-matter jurisdiction when seeking a permanent injunction, a threshold requirement is to allege facts that:

“create a reasonable apprehension of a future wrong.”

Slip op. at 46-47.

The Reasonable-Apprehension Test

Two competing considerations must be addressed when attempting to satisfy this requirement:

  • injunctions against future wrongdoing are generally unavailable–especially against government entities; but
  • “on the other hand”, … where there is a reason to believe that a defendant will resume his wrongful course of conduct, a court may issue a permanent injunction.

Slip op. at 47.

However, to invoke equitable jurisdiction, there must be more than “unsupported, subjective concern about a future harm….” Slip op. at 48.

Court’s Conclusion

The reasonable-apprehension requirement was not satisfied in this case to the extent that there was no likelihood that the restrictions imposed on churches during the height of the pandemic are likely to be repeated, especially in light of the Governor not imposing the initial restrictions, later lifted, when subsequent surges of Covid-19 arose two years after the initial orders were terminated–and in light of the Federal Court settlement in which the Governor agreed not to impose similar restrictions.

Caveat

In closing, the court provided a potential avenue for the plaintiff to return to the Court of Chancery if, in the future, the Governor were to fail to comply with the order of another Delaware court: in which case “… coercive relief from this court will be available.” Slip op. at 50.

A recent decision of the Delaware Court of Chancery acknowledged longstanding precedent which prohibits a state court from enjoining proceedings in a federal court.  In Schwartz v. Cognizant Technologies Solutions Corporation, C.A. No. 2021-0634-LWW (Del. Ch. March 25, 2022), the court recited several well­-established principles barring it from issuing an injunction to interfere with a federal court proceeding–which should be compared to the many decisions that have been discussed on these pages over the last 17 years regarding the well-settled enforceability of forum selection clauses.

Extensive background facts about the underlying advancement litigation appears in a Reuters article that describes the dispute between the parties as “lurid”. Extensive commentary on advancement cases have appeared on these pages over the last 17 years, but this case provides an usual procedural twist.

Highlights:

  • The court relied on several United States Supreme Court decisions for the principle that a state court cannot enjoin proceedings in a federal court. See Slip op. at 7-11.  The court described it as “black letter law” that an anti-suit injunction was not permissible in this context.  Cf.  Suits to enforce Delaware forum selection clauses.
  • The court distinguished the enforcement of forum selection clauses involving cases in other state courts. See Slip op. at 12.
  • The court explained that the federal court where related litigation is pending is the court that will decide whether the forum selection clause before that court should be enforced, and cited several cases where federal courts have routinely enforced forum selection clauses.  See Slip op. at 13.

This post was prepared by Delaware lawyer Evan Williford, an experienced corporate litigator, who practices with The Williford Firm LLC.

In re Forum Mobile, Inc., C.A. No. 2020-0346-JTL (Del. Ch., Feb. 3, 2022), a recent Chancery ruling, suggests that the Court may grant future valid petitions which revive defunct corporations with publicly traded stock to be sold and merged into existing companies via “reverse mergers”.  In that case, however, as a matter of first impression, it ruled that the authority of custodians appointed under 8 Del. C. § 226(a)(3) is limited to liquidating the company.

As the Court has recognized, a corporation’s ability to publicly trade stock “gives the company value” even if it is otherwise defunct.  Plaintiffs with stock in such corporations periodically petition the Court to allow such transactions, such as by appointing a custodian or ordering an annual meeting.  The Court has issued opinions denying several such petitions over the past two decades.

Last April in one such case, In re Forum Mobile, Inc., C.A. No. 2020-0346-JTL, the Court appointed an amicus curiae, Mark Gentile of law firm Richards Layton & Finger, P.A., to consult with the SEC and provide his independent view.  Forum Mobile was one of ten before the Court seeking similar relief.  The Court expressed concern about “the use of Delaware entities to circumvent the federal securities laws.”

In October, the SEC submitted a letter to the Court. In response to the Court’s concern, the SEC stated that “a reverse merger is not per se illegal under the federal securities laws.”  Nevertheless, the SEC expressed concern that where federal laws did not require periodic public filings, lack of information could “pose a significant risk to investors” and “contribute to incidents of fraud and manipulation”.

The amicus recommended that the Court grant the petition.  According to the amicus, granting the petition would further “Delaware public policy goals” including “avoiding the waste of corporate assets” and “permitting accretive transactions”.  The amicus listed existing protections for stockholders and creditors, including under federal securities laws and Delaware fiduciary duties.

The amicus proposed that the Court further protect stockholders by requiring the custodian to:

  • Have power limited to enabling stockholder appointment of directors at an annual meeting;
  • Nominate an independent director;
  • Via affidavit promise not to violate securities laws and disclose prior accused violations; and
  • Disclose significant additional information any agreements between nominated directors and the custodian or company.

On February 3, the Court denied the petition – but for a different reason.

The Court noted that the SEC’s submission “easily could have supported” the Court’s prior reverse merger policy, but instead “took no position on the Petition”.  According to the Court, “the SEC Letter made clear that granting Synergy’s requested relief would not enable the Company to circumvent federal securities laws.”  The Court therefore reasoned that the Court’s prior policy “provides no basis for denying relief.”  The Court noted the stockholder protections the amicus had proposed.

Rather, the Court as a matter of first impression, ruled that the authority of a custodian appointed under 8 Del. C. § 226(a)(3) was limited to liquidating the business.  Section 226(a)(3) applies where a corporation “has abandoned its business”.  Under Section 226(b), the authority of the custodian is to continue the business and not “to liquidate its affairs” – except “in cases arising under paragraph (a)(3)”.  The Court therefore reasoned that the authority for Section 226(a)(3) custodians “is limited to liquidating the affairs of the abandoned corporation and distributing its assets,” which did not allow petitioner’s proposed course of action.  The Court noted commentary questioning this limitation and commented that the Delaware legislature was “free to eliminate” it.

The Court’s reasoning implies that a future petition to enable a reverse merger by permissible means, perhaps by requesting an annual meeting under 8 Del. C. § 211, may be granted.  If and when such a petition is considered, the Court may consider additional appropriate stockholder protections.  The Court noted that the outcome of the case provided it no opportunity to consider the recommendations of the amicus “or discuss additional conditions that the court might have imposed.”

The Delaware Business Court Insider again published this year’s Annual Review, reprinted below with the courtesy of The Delaware Business Court Insider. (c) 2020 ALM Media Properties, LLC. All rights reserved.

This is the 17th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery, often with co-authors. This list does not attempt to include all important decisions of those two courts that were rendered in 2021. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available here.

This year’s list focuses, with some exceptions, on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications. Links are also provided below to the actual court decisions and longer summaries.

DELAWARE SUPREME COURT DECISIONS

Supreme Court Confirms Impact of Bankruptcy on LLC Membership

A recent Delaware Supreme Court ruling endorsed the reasoning of a Delaware Court of Chancery decision holding that federal bankruptcy law does not entirely preempt the Delaware LLC Act to the extent that the LLC Act provides for a member of an LLC to become an assignee only, with economic rights, upon the filing of bankruptcy by that member, in Zachman v. Realtime Cloud Services LLC, 228 A.3d 1065 (Del. April 20, 2021).

Delaware High Court Finds First State Charter Outweighs Other Factors in Dole Foods Choice-of-Law Ruling

The Delaware Supreme Court decided a consequential case in 2021 addressing choice-of-law and fraud-exclusion issues in connection with requiring D&O insurers to pay settlements with investors who claimed that the CEO of Dole Foods Company Inc. cheated them in a going-private buyout.  RUSI Indemnity Co. Inc. v. Murdock, et al., No. 154, 2020 (Del. March 3, 2021).  Among the reasons that this decision is noteworthy is because it established the applicability of Delaware law to the insurance policy of a company incorporated in Delaware, but which had many contacts elsewhere.  Also, importantly, the court determined that insurance coverage would not be defeated simply because it covered payment for the settlement of fraud allegations.  The high court added that Delaware does not have a public policy against the insurability of losses occasioned by fraud, reasoning that Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance against any liability whether or not the corporation has the power to indemnify against such liability.

Delaware Rules Shareholder Franchise Right Question Tops Entire Fairness Test

In Coster v. UIP Companies, Inc., et al., No. 29, 2020 (Del. June 28, 2021), the unanimous opinion of Delaware’s high court en banc required that on remand the Court of Chancery determine if a board acted for inequitable purposes or in good faith, but for the primary purpose of disenfranchisement without a “compelling justification,” in connection with a stock sale intended to shift the power balance between rival deadlocked stockholder fashions, even if the sale were fairly negotiated.  If the trial court found after remand that the transaction was intended for inequitable purposes without a compelling justification, the trial court could consider available remedies including cancelling the stock sale and considering the appointment of a custodian.  Chief Justice Seitz wrote for the Supreme Court that the sanctity of the shareholder franchise superseded entire fairness review based on the circumstances of this case.

Supreme Court Clarifies Test for Direct v. Derivative Stockholder Claims

Although this is a decision that has already received widespread commentary, the Supreme Court decision in Brookfield Asset Management, Inc. v. Rosson [TerraForm], No. 406, 2020 (Del. Sept. 20, 2021), is a seminal decision that every corporate litigator must be aware of because it redefines and clarifies the test in Delaware to distinguish between a direct stockholder claim and a derivative stockholder claim.

Supreme Court Clarifies Pre-Suit Demand Analysis

Another Supreme Court decision that has already been the subject of extensive analysis but is still required reading for all corporate litigators is United Food and Commercial Workers’ Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, No. 404, 2020 (Del. Sept. 23, 2021), because it clarifies and restates the law in Delaware for the analysis of pre-suit demand futility for purposes of pursuing a derivative stockholder claim.

Supreme Court Decides Important Contract Dispute in Sale of Business

The Supreme Court of Delaware affirmed an epic Delaware Court of Chancery decision that found a breach of an agreement of sale that permitted the buyer to avoid consummation of the purchase for failure to comply with the “ordinary course covenant” in connection with how the business was managed between the date the agreement of sale was signed and the date of closing.  See AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, Del. Supr., No. 71, 2021 (Dec. 8, 2021).  The Supreme Court explained that the seller was required to obtain the prior written consent of the buyer before making the changes that it made, and distinguished the separate reasoning that applied to the material adverse change clause.

DELAWARE COURT OF CHANCERY DECISIONS

Company’s Privileged Communications Must Be Provided to Board Members

The Court of Chancery decided an issue of first impression in Delaware by rejecting the argument that the management of a Delaware corporation has the authority to unilaterally preclude a director of the corporation from obtaining privileged information of the corporation.  See In re WeWork Litigation, No. 2020-0258-AGB (Del. Ch. Aug. 21, 2021).

Recent Chancery Decision Addresses Dissolution Based on LLC Deadlock

The Delaware Court of Chancery penned a seminal decision that explains the analysis necessary to determine when a deadlock in an LLC might be the basis for a dissolution.  In Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021), the court addressed whether there was a failure to achieve the votes necessary for board action and whether the board deadlock was genuine or merely manufactured to force the appearance of a deadlock.

Chancery Keeps Dissolution Case Despite Mandatory NY Forum Clause

Although the general rule in Delaware is that forum selection clauses will be upheld, even if they require litigation to be conducted in states outside of Delaware, an exception to the rule was applied to keep a dissolution case in Delaware notwithstanding a contrary mandatory forum selection clause, in Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. March 30, 2021).

Self-Sacrifice Not Required of Controlling Stockholder

A useful Chancery decision that is bound to be of widespread applicability is the ruling in RCS Creditor Trust v. Schorsch, C.A. No. 2017-0178-SG (Del. Ch. March 18, 2021), in which the court explained that the fiduciary duties of a majority or a controlling stockholder do not require self-sacrifice, nor do they mean that such a fiduciary forfeits her contractual rights.

Chancery Addresses Forum Non Conveniens

Delaware law has evolved regarding the nuances of forum non conveniens, and those most recent iterations are explained in the Chancery decision styled Sweeny v. RPD Holdings Group, LLC, C.A. No. 2020-0813-SG (Del. Ch. May 27, 2021).

Chancery Recognizes Reverse Veil-Piercing

The Delaware Court of Chancery recently recognized “outside reverse veil-piercing,” as compared to “insider reverse veil-piercing.”  The former iteration was explained based on the unusual circumstances present in Manichaean Capital, LLC v. Exela Technologies, Inc., C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021).

Chancery Clarifies Standard to Shift Fees for Improper Litigation Conduct

The Court of Chancery’s pithy ruling in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. July 22, 2021), remains noteworthy for its guidance that provides litigators in general, and corporate litigators in particular, with a definition of “glaringly egregious,” and helps to clarify where the line is drawn for determining when fees will be shifted for inappropriate litigation conduct.  This decision gives greater instruction for what behavior will be sufficient to trigger the exception to the general American Rule that each party pays its own legal fees.

Can Fiduciary of a Debtor Assist a Creditor-Entity that Fiduciary Has Interest In?

The Court of Chancery addressed the titular topic in Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited, C.A. No. 2018-0059-JRS (Del. Ch. July 28, 2021).

Chancery: LLC Managers Breached Fiduciary Duties

The Chancery decision in Stone & Paper Investors, LLC v. Blanch, C.A. No. 2018-0394-PAF (Del. Ch. July 30, 2021), deserves attention for its treatment of well-established principles of fiduciary duty with widespread applicability in the LLC context, absent unambiguous waiver.  Also noteworthy, is the explanation about why the circumstances of this case allowed breach of contract claims to proceed to the extent that they did not overlap the fiduciary claims–and why both were permitted to be pursued through trial.

Chancery Explains Policy Limits to Contractual Restrictions on Fraud Claims

In connection with perennial post-closing claims related to the sale of a business, the Chancery decision in Online Healthnow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021), explains the consequential nuances about what specific language in an agreement of sale will allow, or will bar, certain types of fraud claims.  The money quote from the decision provides the best insight into its holding: “Under Delaware law, a party cannot invoke provisions of a contract it knew to be an instrument of fraud as a means to avoid a claim grounded in that very same contractual fraud.”

Chancery Clarifies When Forum Selection Clause Binds Non-Signatory

While it may be surprising to some, quite a few Delaware decisions have bound non-signatories to forum selection clauses.  The Chancery decision in Florida Chemical Company, LLC v. Flotek Industries, Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021), provides the most thorough analysis of the titular topic, with scholarly insights and copious citations that explain the theoretical and public policy underpinnings that support the decision to bind a non-signatory to a forum selection clause, and the prerequisites for doing so.

Chancery Does Deep Dive into Corporate Dissolution Details and Winding-up Process

Those interested in the not self-evident winding-up process in connection with the dissolution of a corporation under Delaware law need to read the Court of Chancery decision styled:  In re Altaba, Inc., C.A. No. 2020-0413-JTL (Del. Ch. Oct. 8, 2021), which provides an extensive analysis of the statutory provisions for the dissolution of corporations and a description of the corresponding winding-up process.

Chancery Declines to Follow First-Filed Rule in Advancement Case

A recent Chancery decision explained why the first-filed rule was not applied in an advancement case under Section 145 of the Delaware General Corporation Law.  See Lay v. Ram Telecom International, Inc., C.A. No. 2021-0631-SG (Del. Ch. Oct. 4, 2021).

Chancery Provides Guidelines for Non-Delaware Lawyers Issuing Formal Delaware Legal Opinion Letters

The Court of Chancery in Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Nov. 12, 2021), provides comprehensive detail of the factual background of the issuance of a formal legal opinion letter in connection with a transaction, and provides a thorough analysis of problems with that letter in a 194-page decision which also offers guidance to lawyers around the country who are involved in issuing a formal opinion letter based on Delaware law.  The court found that the formal opinion letter given in the transaction at issue was not rendered in good faith, and explained what lawyers need to do in order to make sure the formal opinion letters that they grant do not suffer the same fate.

Chancery Clarifies Officer Consent Statute

Several years ago the Delaware Supreme Court expanded the prior interpretation of Delaware’s consent statute that imposes personal jurisdiction on directors and officers who agree to service in that capacity for Delaware corporations.  The contours of that expansion continue to be clarified and defined for those situations where there has been no breach of fiduciary duty.  See BAM International, LLC v. MSBA Group, Inc., C.A. No. 2021-0181-SG (Del. Ch. Dec. 14, 2021).

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SUPPLEMENT: Professor Stephen Bainbridge, one of Delaware’s favorite corporate law scholars, and one of the most prominent corporate law expert’s in the country, was kind enough to link to this article and described it as “essential reading”.

*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

**Ciro C. Poppiti, III practices in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

***Cheneise V. Wright is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

A recent Delaware Court of Chancery opinion should have a place in the toolbox of litigators who need to be familiar with the latest iteration of Delaware law on the nuanced aspects of the consent statute as a potential basis to impose personal jurisdiction on officers and directors of Delaware corporations by virtue of their service in that capacity.  In BAM International, LLC v. The MSBA Group, Inc., C.A. No. 2021-0181-SG (Del. Ch. Dec. 14, 2021), the court engaged in a thorough analysis of the multi-faceted determinations that need to be made if jurisdiction by virtue of the consent statute can be used as the basis for personal jurisdiction–when there is no breach of the fiduciary duty that the director or officer owes to the corporation or its stockholders.

Issue Addressed:

The court specifically addressed the issue of whether officers of a Delaware entity can be haled into a Delaware court for a contract-related claim despite having no relationship with Delaware other than their status as officers of a Delaware entity?  This opinion remains noteworthy because Delaware law on this topic has evolved since the Delaware Supreme Court changed Delaware law on this issue not long ago, and the trial courts are still trying to clarify the contours of the jurisdictional issues involved with the consent statute at 10 Del. C. § 3114(a) and § 3114(b).

Key Principles:

Section 3114(a) of Title 10 of the Delaware Code, applicable to directors, and Section 3114(b) applicable to officers of Delaware corporations, each impose personal jurisdiction on those who have consented to serve in those roles in two situations: (1) actions alleging breach of their duty to the corporation and its stockholders; or (2) where litigation is brought in Delaware involving the corporation, to which the officer or director is a “necessary” or “proper” party.  See Hazout (Delaware Supreme Court decision, and its progeny, highlighted on these pages).

The court in this recent decision determined that although Section 3114 was satisfied, due process was not satisfied given the nature of the action and the paucity of the contacts with the state.  The court observed that the plaintiffs in this case did not seek to rely on the long-arm statute, but instead relied only on the consent statute.

Jurisdiction by Contract:

By way of general reference, the court noted that parties can agree to personal jurisdiction by contract, in which case a minimum contacts analysis would not be required.  See Slip op. at 14.  The court described the 3-part test that Delaware employs to determine when a non-signatory is bound to a forum selection clause.  See footnote 68 and accompanying text.

Consent Statute:

The court provided the historical background of the consent statute which was originally enacted with respect to directors in 1977 and extended to officers in 2004.  The court described the constitutional due process issues that the consent statute raises as causing “Delaware courts some amount of headache.”  See footnote 79 and accompanying text.

Because the only substantive claim against the officers in their individual capacities in this case was for tortious interference, the claim did not arise out of their duties owed to the company for which they served as officers, but instead from torts allegedly committed against another entity.  Therefore, the court explained that in order to impose jurisdiction based on the consent statute, the officers must be “necessary or proper parties,” to the lawsuit against the company for whom they serve as officers.

Necessary or Proper Party:

The court provides a definition of what it means to be a “necessary party” in this context: “If her rights must be ascertained and settled before the rights of the parties to the lawsuit can be determined.”  See Slip op. at 21.  The court instructed that a “party is proper if she has a tangible legal interest in the matter separate from the corporation’s, and if the claims against her arise out of the same facts and occurrences as the claims against the corporation.”  Id.

Minimum Contacts:

Although the court found that the individual officers were proper parties for purposes of the consent statute, the court also reasoned that the necessary minimum contacts to satisfy due process were not present.  The court described the contract at issue in this case as a “guardian-variety commercial contract, rather than one necessarily implicating Delaware interests.”  The court cited Turf Nation v. UBU Sports, Inc., 2017 WL 4535970 (Del. Super. Oct. 11, 2017), as involving a similar fact pattern and applicable analysis.  As in the Turf case, the court explained that the simple commercial contract at issue does not involve Delaware corporate law nor does it involve a contract to be performed in Delaware.  Rather, the court emphasized that Delaware has “no real interest in this case other than the exercise of personal jurisdiction over officers and directors, which is, in my view, insufficient in light of the constitutional due process rights owed . . ..”  Slip op. at 25.  The court added that the actions allegedly giving rise to liability were not taken as officers of the company that they serve nor were the harms alleged to have been committed breaches of fiduciary duties.

Lastly, the court noted that the simple fact that Delaware law governs the contract and Delaware was selected as a forum for settling disputes, is not sufficient alone to satisfy constitutional due process without more—because, in part, the officers in this case are not signatories to  those agreements that called for Delaware as a forum.

The current issue of the Delaware Business Court Insider includes an article on the titular topic by yours truly and my colleague Cheneise Wright. Courtesy of the good folks at the Delaware Business Court Insider, and with their permission, it appears below.

Chancery Declines to Follow First-Filed Rule in Advancement Case

By: Francis G.X. Pileggi*
and
Cheneise V. Wright**

A recent Delaware Court of Chancery opinion applied an exception to the general rule that Delaware courts will often exercise their discretion to dismiss or stay a Delaware action in favor of a first-filed action between the parties that is pending in another jurisdiction. In Lay v. Ram Telecom International, Inc., C.A. No. 2021-0631-SG (Del. Ch. Oct. 4, 2021), the court analyzed the nuances of the first-filed rule regarding an advancement case under Section 145 of the Delaware General Corporation Law.

The first-filed rule, often referred to as the McWane doctrine, based on the Delaware Supreme Court decision in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281, 283 (Del. 1970), provides that a Delaware court’s “discretion should be exercised freely in favor of the stay when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.”

The background of the Lay case involves a demand letter sent in early June of 2021 seeking indemnification and advancement of fees and expenses incurred in defending an action the defendant had filed against the plaintiffs in the Superior Court of California. Instead of responding, five days after that letter was sent, the defendant amended their complaint in California to add a claim for declaratory relief, asking the California court to make a ruling on the indemnification and advancement issues. About a month later, the plaintiffs filed the Delaware suit seeking advancement for fees and costs incurred in the California Action.

In early August, the defendant filed a motion seeking a stay or dismissal of the Delaware advancement case in light of the California Action. Briefing was completed on the motion to stay or dismiss by Sept. 27, 2021. The court distinguished prior Delaware decisions that stayed advancement actions in favor of a first-filed action in which the same indemnitee had already asserted advancement rights. See Johnston v. Caremark RX, Inc., 2000 WL 354381, at * 2-5 (Del. Ch. Mar. 28, 2000). In contrast, the court cited to its decision in Fuisz v. Biovail Technologies, Ltd., 2000 WL 1277369, at * 4 (Del. Ch. Sept. 6, 2000), in which the court denied a stay of an advancement action where the prior action was not filed by the indemnitee.

The Court of Chancery also applied the reasoning in the Fuisz case in which the plaintiffs sought advancement under Section 145(k) for a Virginia action in which they had already asserted their advancement rights as an affirmative defense, but notably did nothing to obtain any relief from the Virginia court on the basis of that defense. The court explained in Fuisz that “unless the person having such an entitlement first actively invokes the jurisdiction of a foreign tribunal and seeks an adjudication of that issue from it . . . this court will not regard the foreign action as ‘first-filed’ for purposes of McWane’s comity-based analysis.” Id. at * 1.

The court in the instant case supported its decision not to apply McWane by noting that the plaintiffs in this case did not select California as the forum and they made no effort to obtain an adjudication from the California court of any of the issues presented in this action. Rather, “it was the defendant in this action who sought a declaratory judgment in the California action concerning the plaintiff’s advancement and indemnification rights.”

The court emphasized the importance to its holding of the fact that the defendant amended the California Action to add a declaratory relief claim after the plaintiffs sent a demand for advancement and indemnification. The court underscored that it would be inequitable to allow any plaintiff that receives an advancement demand from a defendant to circumvent the right to a summary advancement proceeding in Delaware under Section 145(k) by simply amending its complaint in the other forum to add a declaratory relief claim on the advancement issue upon receiving a demand. Instead, the court ruled: “that is not our law.”

The court explained that the first-filed rule under the McWane doctrine does not apply because in this instance the California Action should not be considered a first-filed action.

The court also distinguished a very recent Chancery decision which stayed an advancement action in favor of a federal action even though the plaintiff in the federal action had not claimed advancement. See Harmon 1999 Descendants’ Trust v. CGH Investment Management, LLC, 2021 WL 4270220 at * 3 & n.12 (Del. Ch. Sept. 21, 2021). The court explained why the Harmon case was inapplicable. In Harmon, the court reasoned that the federal action was “in its penultimate phase” and an issue before the federal court was whether the person seeking advancement was a limited partner. That issue was a “material, factually rife, and disputed issue” in the advancement action. Therefore, the Court of Chancery held in that case that because the federal court was likely to resolve the factual issue before the Court of Chancery could, efficiencies would be gained by staying the Delaware suit in favor of the federal action.

In contrast, the pending motion to stay or dismiss did not identify any “material, factually rife and disputed issue” that had to be decided in the California Action before the question of advancement could be resolved in the Court of Chancery, nor does the motion to dismiss in Delaware argue that the California Action is in its “penultimate phase.”

In sum, the Court of Chancery held that the motion to stay or dismiss did “not present exceptional circumstances warranting a departure from the rule that claims under Section 145(k) for advancement of expenses should not be stayed or dismissed in favor of the prior pending foreign litigation that gave rise to them.” Thus, the Court of Chancery declined to stay the Delaware Action in favor of the California Action.

In a concluding footnote the court regaled readers with the entertaining linguistic observation that in addition to not being in its penultimate phase, the California Action did not appear to be in an antepenultimate or even a pre-antepenultimate phase.

____________________________________________________________________________
*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

**Chenesie V. Wright is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP

In a seminal decision that has already been the subject of extensive scholarly commentary within the few days since its issuance, the Delaware Supreme Court overruled its 2006 decision in the Gentile case. That decision held that some stockholder claims can be both direct and derivative. New Delaware law on this topic was announced in Brookfield Asset Management, Inc. v. Rosson [TerraForm],  No. 406, 2020 (Del. Sept. 20, 2021).

The Harvard Law School Forum on Corporate Governance, on which I have published several articles, has a helpful overview of the case.

I typically favor on these pages those Delaware corporate and commercial decisions that are not already the subject of extensive commentary elsewhere, with some exceptions. So many other qualified academics and practitioners have already written about this case, that I’ll defer further comment and direct readers to the abundant analysis already available elsewhere.

 

 

 

The Delaware Court of Chancery recently explained the public policy involved, and the applicable criteria used by the court, to determine if “claims-splitting” should require the stay or dismissal of one lawsuit when the same parties are pursuing another lawsuit in another forum based on the same operative facts. In Goureau v. Lemonis, C.A. No. 2020-0486-MTZ (Del. Ch. March 30, 2021), the court addressed the many nuances of the various factors that will be applied to determine whether claims-splitting has taken place and whether or not it warrants the stay or dismissal of a lawsuit involving the same parties pursing claims based on the same operative facts in different fora. There are many factually determinative issues that are required to be addressed in the analysis of such an issue and this 34-page decision provides careful treatment of the topic.

Notably, the court acknowledged an exception to the rule against claim-splitting when “a plaintiff could not for jurisdictional reasons present his claim in its entirety in a single action.” See Slip-op at 32.

The court recognized that the Court of Chancery has exclusive jurisdiction over dissolution of a Delaware company but cited to cases where that jurisdiction can be stayed until after claims have been resolved in another court, after which time issues regarding dissolution can be addressed in Chancery. See footnotes 122-124 and accompanying text.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Supreme Court recently made landmark rulings on choice-of-law and fraud-exclusion issues in affirming a decision that required the last of nine D&O insurers to pay its share of settlements with investors who claimed Dole Foods Co. Inc.’s CEO cheated them in a 2013 going-private buyout in RUSI Indemnity Co. Inc. v. Murdock, et al., No. 154, 2020, opinion (Del. March 3, 2021).

The high court’s March 3 en banc opinion rejected all four key arguments RUSI Indemnity Co. made in its appeal of the Superior Court’s dismissal of the insurer’s claim that it did not owe coverage for $200 million in settlements of investor breach of fiduciary duty, securities fraud and appraisal actions.  

The opinion, and several other recent Delaware director and officer insurance decisions that some insurers view as policyholder-friendly, will be closely examined by business insurers and their defense firms nationwide, possibly resulting in the inclusion of forum selection clauses and other changes in policy wording and litigation strategy. 

Background

Since two thirds of the nation’s Fortune 500 companies are chartered in Delaware, the high court’s unanimous opinion is significant in that it endorsed rulings that:

•  Delaware law applied despite Dole’s incorporation being its only connection to the First State, while the policy was negotiated and issued in California, where the fruit giant was based and the officers and directors lived.

•  Under Delaware law, a policy provision that excludes coverage for fraudulent action by an insured does not defeat coverage

•  What RUSI calls the “Fraud/Profit Exclusion”— did not defeat coverage for the settlement of the stockholder actions

•  The “larger settlement rule,” was not improperly applied contrary to the policy’s provision governing the allocation of losses to the extent they were covered.

Justice Gary Traynor, writing for the full court, said Delaware insurance statutes specifically allow corporations “to purchase D&O insurance for liabilities arising from bad-faith conduct,” but “concluding certain conduct, including a director’s breach of loyalty sounding in fraud, is not uninsurable on public-policy grounds is notably different than placing a stamp of approval on that conduct.”

The underlying litigation

The underlying litigation stemmed from Murdock and President, COO and General Counsel C. Michael Carter’s alleged deception and fraud that enabled them to acquire the 60 percent of Dole stock they didn’t already own at an artificially low price in a going-private transaction.  In a consolidated action in the Chancery Court, a group of investors alleged fraud and breach of duty and that was combined with an appraisal action.  In a memorandum opinion after trial, Vice Chancellor Travis Laster ruled that Murdock and Carter had engaged in fraud and bad faith in orchestrating the unfair, self-interested transaction for an undeserved extra profit of nearly 17 percent and found the two jointly and severally liable for $148,190,590.18—or $2.74 per share—in damages.  In re Dole Food Co., Inc. Stockholder Litigation, 2015 WL 5052214, at *26 (Del. Ch. Aug. 27, 2015).

The other underlying action

Meanwhile, before the Chancery Court action was settled, another group of Dole stockholders who had sold their stock between January and October 2013, and were therefore not parties to the Stockholder Action, filed a securities class action in the U.S. District Court for the District of Delaware alleging fraud and violations of the Securities Act.  They cited references in the Chancery opinion regarding Murdock and Carter having “engaged in fraud”. San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-1140-SLR (D. Del. 2015).  The high court said without consent or confirmation of coverage from the insurers, Dole negotiated a settlement of the San Antonio action, under which the plaintiffs released the claims against the insureds and Dole agreed to pay or cause to be paid $74,000,000 plus interest.

The coverage actions

Eventually, after filing an unsuccessful declaratory judgment action in Superior Court, Dole’s excess insurers other than RUSI, paid the limits of their $10 million policies or settled with the insureds but RSUI pressed on with the suit and the Superior Court ordered RSUI to pay $10 million plus more than $2 million in prejudgment interest after rejecting four key arguments, and RSUI appealed.

Choice of law

The justices agreed that Delaware’s legislature intended that companies incorporated in Delaware should be governed by that state’s corporate law even if their charter was their only connection to the First State.  “The state of incorporation is the center of gravity of the typical D&O policy, including the policy under consideration here,” Justice Traynor wrote. The insureds’ legal ties to Delaware “are more significant – and therefore should be afforded greater weight — than their physical location in California.”

Public policy re: Insurability 

The high court asked itself the question ““does our State have a public policy against the insurability of losses occasioned by fraud as to vitiate parties’ freedom of contract?” and answered in the negative, noting that Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance “against any liability,” whether or not the corporation has the power to indemnify against such liability.  

The policy’s fraud exclusion

Although the Chancery Court found that the Dole officers “engaged in fraud” there was no final adjudication of that finding, especially in the District Court action.  However, the fraud finding on which the insurer relied was not in the Securities Lawsuit; it was in the Chancery Court lawsuit, Justice Traynor held.  The fact that the findings in the Chancery Court lawsuit “might have been implicated” in the resolution of the Securities Lawsuit had it not been settled “is irrelevant to a determination of whether there has been an adjudication” in the Securities Lawsuit.  A blanket prohibition, on public-policy grounds, against insuring for losses arising from a director’s or officer’s misstatements, misleading statements, or breaches of the duty of loyalty (when based on fraud) would leave many injured parties without a means of recovery.  A prohibition on insurability,  also “would leave many injured parties without a means of recovery,” which would conflict with “the public policy that favors the compensation of innocent victims,” the high court said.

The Allocation Issue

The Supreme Court said RUSI had pleaded no facts to suggest that the settlement of the Securities Lawsuit “represented an admixture of covered and non-covered losses.” Nor, it said, did the Insurer provide “an explanation of how the application of their ‘relative exposures’ allocation theory would lead to a reduction in the coverage available to the Insureds.”

Takeaways

“It is generally true that on balance policyholders will want to have their D&O insurance coverage disputes resolved in Delaware courts. Insurers? Not so much,” said Kevin M. LaCroix, an insurance law specialist who hosts the D&O Diary blog where he posted a comprehensive analysis and commentary on the RUSI opinion. https://www.dandodiary.com/2021/03/articles/d-o-insurance/del-sup-ct-rules-for-insureds-in-long-running-dole-foods-do-insurance-coverage-dispute/

He said in the crucial area of choice-of-law, the Supreme Court here gave little weight to the contract-related principles typically found to govern the “most significant relationship test”–such as where the contract was formed or where it was delivered–and instead gives outcome-determinative weight to the fact that the company involved was incorporated in Delaware.

The insurers undoubtedly will be taking up the question of whether they need to add a forum selection provision to their policies, LaCroix said.  Hopefully, the question of when and how a forum selection clause may be legally enforced will not become yet another facet of D&O litigation.

 

 

A recent Delaware Court of Chancery decision recited the standards applied in Delaware to determine when to stay a case or allow it to proceed when similar litigation between the same parties is proceeding in another state. In AG Resources Holdings, LLC v. Terral, C.A. No. 2020-0850-JRS (Del. Ch. Feb. 10, 2021), the court addressed the titular topic in a 24-page decision that  provided a careful chronology of the litigation between the parties in Louisiana as well as detailed background facts.

But for purposes of this short blog post, I will provide highlights of what I regard, quite subjectively, as the most noteworthy takeaways from this ruling that would have the broadest application to corporate and commercial litigators in Delaware:

This decision provides guidance for what standards will be applied when a motion to stay or dismiss under Rule 12(b)(3) is filed–depending on which of the following circumstances are in play:

  • If the Delaware case was clearly the first-filed case, compared to the related case pending in another forum. See Slip op. at 8 and n. 19. (apply Cryo-Maid factors giving due deference to the plaintiff’s choice of forum.)
  • If, however, the Delaware action follows the filing of a similar action elsewhere, “the court applies the discretionary McWane standard that allows the court to defer more readily to the court in which related litigation was first filed”. Id. and n. 20.
  • If the pending cases both outside and in Delaware are filed at about the same time, the court applies the “forum non conveniens analysis by applying the factors set forth in Cryo-Maid.” Slip op. at 9 and n. 21 That is, less emphasis in such a situation is placed on the priority of filing.

Two nuanced variations on the above three situations require more careful analysis. For example:

  • When litigation is contemplated and one party files a DJ action in an attempt to preempt the filing by the opposing party in a different forum, the court’s analysis “requires a closer look”. Slip op. at 10 and n. 25.
  • Also, when the issue involves the internal affairs of a Delaware entity or issues arising under a Delaware entity’s constitutive documents, Delaware courts may have a greater interest in retaining the matter. Slip op. at 20 and n. 45.

All of the foregoing assumes that there is not a controlling, mandatory forum selection clause (as compared, for example, to a merely permissive forum selection clause). In such a situation, reference should be made to the many cases highlighted on these pages analyzing the enforceability of mandatory forum selection clauses. (Just make sure there is no delay in the enforcement of such a clause.)