Search rule 1.9

Prior blog posts over the last 19-plus years on these pages have addressed the difficulty of succeeding on a motion to disqualify counsel. The recent Delaware Court of Chancery decision in Brex Inc. v. Su, C.A. No. 2022-0758-MTZ (Del. Ch. May 22, 2024), is no exception.

This ruling explains why disqualification of counsel was denied based on an alleged violation of Rule of Professional Conduct 3.7(a), which provides the general prohibition of an attorney acting as a necessary witness and an advocate in the same trial. See prior blogs posts on these pages with highlights of court decisions addressing this rule.

Rule of Professional Conduct 1.9 may bar current representation of a client that is adverse to a prior representation of a former client. But in this case, delay in seeking disqualification on this basis, was the reason why the court determined that the argument was waived. See prior blog posts on these pages with highlights of court decisions addressing this rule.

For the last 15 years, I have published a list of key corporate and commercial decisions by the Delaware Supreme Court and Court of Chancery on these pages. On a few occasions, I have published a Mid-Year Review of those cases. This year, veteran reporter and court watcher Jeff Montgomery of Law360 published such a review this month, and quoted your truly about the import of a few of those decisions. The link is here and the article is copied below.

Top Delaware Cases Of 2020: A Midyear Report
By Jeff Montgomery

Law360 is providing free access to its coronavirus coverage to make sure all members of the legal community have accurate information in this time of uncertainty and change.

Law360 (July 2, 2020, 4:11 PM EDT) — Despite the pandemic, the first half of 2020 saw epic judicial gear-shifting but no real slowdown in Delaware’s key business courts, with new Chancery Court complaints actually picking up and important corporate and commercial law decisions regularly emerging from remotely conducted proceedings.

Movement was a little slower in the state Supreme Court and U.S. District Court, where new complaints slowed or held steady and arguments were generally handled differently, but both venues released rulings that were felt far beyond the 2,000 square miles of the First State.

COVID-19 Plan: Keep Socially Distant and Carry On

Delaware Chief Justice Collins J. Seitz declared a COVID-19 judicial emergency on March 13, closing courthouses to the public days later and limiting court activities to essential matters. Workarounds soon followed that limited physical public interaction at all levels of the state’s court system by turning to teleconference, videoconference and internet conference technologies that were already in use or being explored.

By May 29, a four-phase court reopening plan developed by a systemwide court committee emerged, with  limited public access to courthouses resuming on June 15 during Phase 2. Although the use of courtrooms was permitted to resume, initial Phase 2 rules included tight restrictions on the number of individuals allowed inside, with remote proceedings still the norm and jury trials remaining on hold until the start of the next phase, which has yet to be announced.

“The Court of Chancery and the Supreme Court seem to have adjusted pretty well to the constraints,” said Lawrence A. Hamermesh, professor emeritus at Widener University Delaware Law School. “Of course, being able to process cases without a jury is a big advantage under the circumstances.”

As the eventful first half of 2020 came to a close, many looked back on:

Matthew B. Salzburg et al. v. Matthew Sciabacucchi

In March, Justice Karen L. Valihura and a unanimous state Supreme Court broadened the scope of Delaware chartered company affairs that can be handled in federal court, reversing Vice Chancellor J. Travis Laster’s ruling that state corporation law prohibits companies from adopting federal forum selection provisions for Securities Act litigation.

Instead, the justices found a category of “intra-corporate” matters, including those involving Section 11 of the Securities Act of 1933, that also can be kept out of state courts if companies choose.

It was a case noteworthy in part for the characterization of opposing positions as “nonsense on stilts” by former Chancellor William B. Chandler III, now of Wilson Sonsini Goodrich & Rosati PC, during winning arguments before the justices. Chandler’s firm represented Blue Apron, Roku and StitchFix, the companies challenging the forum ruling.

Francis G.X. Pileggi of Lewis Brisbois LLP, author of Delaware Corporate & Commercial Litigation Blog, said it was the first Supreme Court finding that a Delaware company’s bylaws can require some claims to be filed in federal court.

“The ramifications of that have not yet been fully felt, because there are certain variations on that decision that are not quite predictable in terms of how the court will rule,” Pileggi said. “Whether that same reasoning would apply to arbitration provisions is an open question in some circles.”

Hamermesh tagged the Blue Apron decision as a major ruling, noting that its reach could extend beyond venue choices to arbitration and limits on class actions, shifting of fees or rights under federal law. Interpretation of the decision in federal districts across the country remains unsettled, however.

“I’ve now seen a couple federal cases elsewhere that have tossed shareholder complaints asserting federal securities claims (even ones that can’t be brought in state court) based on Blue Apron and a forum selection bylaw,” Hamermesh said in an email. “The interesting question to me is how aggressive companies will be in adopting this sort of bylaw, and in regard to what range of federal claims.”

The case is Matthew B. Salzburg et al. v. Matthew Sciabacucchi, case number 346,2019, in the Supreme Court of the State of Delaware.

Dell Technologies Inc. Class V Stockholders Litigation

A court finding of “several recognized forms of coercion” tripped up Dell Technologies’ hopes of escaping a stockholder suit in June, with Vice Chancellor Laster refusing to dismiss a class complaint that stockholders came up at least $6 billion short when the tech company lined up a $24 billion stock swap deal. Any of the coercive acts, the court noted, were enough to deny business judgment deference in the suit. The remaining defendants are Dell, controlling shareholder Silver Lake Group LLC and four Dell directors.

In his 94-page opinion, the vice chancellor laid out a sort of Field Guide to Corporate Breaches, detailing a range of coercive conduct and ways in which it could circumvent or undermine requirements for independent special committee approvals and and majority of the minority shareholder votes.

Afterward, the vice chancellor’s opinion zeroed in on the company’s conduct, pointing to a brute-force species of coercion in the tech company’s plan to eliminate a costly class of stock that was supposed to track the value of cloud computing company VMWare, but in practice consistently came up short.

According to the stockholders, Dell and the directors threatened to pursue a forced conversion of their VMWare stock to Dell “Class C” common stock by a straight board vote, without negotiation or purportedly independent evaluation and with Dell founder Michael Dell having the independent power to trigger the move. The forced conversion, however, would have shrugged off customary corporate attempts to “cleanse” a troubled deal by relying on an independent committee of company directors to assess conflicts under precedents set in the Delaware Supreme Court’s 2014 Kahn v. M & F Worldwide Corp. decision, often referred to as MFW, and cases that followed.

While Dell did go with a special board committee, the vice chancellor found in his June decision that both directors on the panel were themselves “hopelessly conflicted” to begin with. They recommended approval of the deal in an hour after the company advised that it had bypassed the committee and lined up backing from a sizable block of stockholders in advance of a required approval by a majority of unconflicted “minority” investors.

Ex-Chancellor Chandler, who did not have a role in the Dell case, said that the vice chancellor’s decision affirmed that an “MFW special committee cannot be passive but has to be engaged throughout the process” while “stockholders play a separate and distinct role” in strategies to cleanse potentially conflicted deals.

Chandler said the Dell opinion also may figure prominently in a case now before Chancellor Andre G. Bouchard over the breakup of WeWork’s $3 billion acquisition by Japan’s SoftBank Group Corp.

The case is In re: Dell Technologies Inc. Class V Stockholders Litigation, case number 2018-0816, in the Court of Chancery of the State of Delaware.

Consumer Financial Protection Bureau v. The National Collegiate Master Student Trust

On May 31, a long-stalled, 2017 settlement of claims against a $15 billion student loan management and investment enterprise got tipped into a ditch, with Delaware federal Judge Maryellen Noreika finding that attorneys for the National Collegiate Master Student Trust lacked authority to sign a $22 million consent decree with the Consumer Financial Protection Bureau.

Among other determinations, Judge Noreika concluded that National Collegiate counsel McCarter & English LLP had no clearance to sign the deal with the CFPB. Only Wilmington Trust, the “owner trustee” for the National Collegiate funds, had the authority, with the deal also needing the support of note insurer Ambac Assurance Corp.

The decision threw the case into a round of briefings on motions to dismiss filed by investors in notes collateralized by the student loans acquired by National Collegiate. Businesses that service the loans also opposed the consent agreement.

Representatives of the administrators, insurers, trustees and servicers for the 15 National Collegiate Student Loan trusts involved have argued that the owners, controlled by affiliates of Donald Uderitz’s Vantage Capital Group, accepted the consent decree in an effort to regain control of assets, litigation rights and retention agreements. Opponents say those rights and powers belong to the noteholders, indenture trustee and affiliates until the notes are paid back.

In limbo, meanwhile, are student borrowers, some of whom have argued and sued for years over claims of improper and inadequately documented efforts to collect on unsupported default claims.

Separate litigation is pending in Chancery Court on related disputes.

The case is Consumer Financial Protection Bureau v. the National Collegiate Master Student Loan Trust et al., case number 1:17-cv-01323, in the U.S. District Court for the District of Delaware.

AmerisourceBergen v. Lebanon County Employees’ Retirement Fund et al.

In April, Delaware’s Supreme Court upheld a finding that drug wholesaler AmerisourceBergen Corp. had to turn over to stockholders books and records that it had previously released to investors in a federal stockholder action despite holding back against the state parties.

The decision came in an appeal of a Chancery Court conclusion that withholding of the same documents in the state case smacked of “plaintiff shopping” — giving an advantage to a potentially weaker plaintiff while holding back the stronger or more experienced ones.

The investors’ demand for books and records in Chancery Court and the derivative suit in Delaware federal court both focused on AmerisourceBergen’s allegedly costly and deadly failures in the distribution, control and oversight of opioids.

Pileggi, who has written extensively on disputes and decisions involving the Delaware General Corporation Law’s “Section 220” provisions for investor access to books and records, said the AmerisourceBergen action was among the most important on the topic in recent years.

The decision, Pileggi said, appeared to politely signal that “there are a lot of Section 220 decisions that have strayed” from the language of the law.

The case is AmerisourceBergen v. Lebanon County Employees’ Retirement Fund et al., case number 60 of 2020, in the Supreme Court of the State of Delaware.

In re: Tesla Motors Inc. Stockholder Litigation

In February, Vice Chancellor Joseph R. Slights III released a decision that put a stockholder challenge to Elon Musk’s $2.6 billion merger of Tesla Inc. and SolarCity Corp. on track for one of the first major in-court Chancery Court trials since the COVID-19 crisis barred in-person arguments.

The vice chancellor rejected a partial summary judgment motion filed by investors and a dismissal motion sought by Musk for all but a valuation claim. Musk, who founded Tesla and co-founded SolarCity, was accused of orchestrating a deeply conflicted deal to bail out the rooftop solar company.

The suit, slimmed down since six Tesla directors agreed to an insurer-paid $60 million settlement, is now scheduled to be argued starting July 27, with one week in court and a second week of arguments via videoconference.

The case is In re: Tesla Motors Inc. Stockholder Litigation, case number 12711, in the Court of Chancery of the State of Delaware.

Forescout Technologies Inc. v. Ferrari Group Holdings LP

One week before the Tesla trial begins, Vice Chancellor Sam Glasscock III is scheduled to convene an expedited trial, to be streamed live via YouTube, in a pandemic-related merger breach case filed by cybersecurity firm Forescout Technologies Inc. on May 19.

In the suit, Forescout accused Ferrari Group Holdings LP, a deal affiliate of private equity firm Advent International, of attempting to walk away from its agreed-to $1.9 million acquisition of Forescout.

Although Forescout argued that Advent’s refusal to close was one of the latest examples of COVID-19 cold feet, and an unsupportable reason for breaching the deal, Advent said in counterclaims that Forescout’s business had fallen “off a cliff” since the merger pact was signed, creating a material adverse effect allowing Advent’s exit.

The case is Forescout Technologies Inc. v. Ferrari Group Holdings LP and Ferrari Merger Sub Inc., case number 2020-0385, in the Court of Chancery for the state of Delaware.

–Editing by Jill Coffey.

The Delaware Court of Chancery in a recent opinion allocates the precise amount of fees payable, as a result of a prior indemnification ruling, in light of the total amount of fees incurred by various parties and proceedings that were not all subject to indemnification obligations. The decision in Meyers v Quiz-Dia LLC, et al., C.A. No 9878-VCL (Del. Ch., Mar. 16, 2018), needs to be read by anyone who wants to know how, according to Delaware law, the exact of amount of fees will be allocated when indemnification is owed to less than all the parties, and for fewer than all of the underlying lawsuits, for which fees have been incurred and that may not be easily separated for purposes of determining what amounts are covered by an indemnification obligation. Several of the many prior Chancery decisions in this case have been highlighted on these pages and should be referred to for detailed background facts and procedural history.

After 13 years of highlighting Delaware decisions on indemnification and advancement rights of officers and directors, and publishing an annual book chapter on those cases for several years, this is the most helpful decision that I recall for its analysis of how to determine the allocation and exact amount of fees incurred and payable among multiple parties and different lawsuits, when not all the parties and not all the underlying litigations are covered by indemnification.

Noteworthy Aspects of Indemnification Law from This Decision

  • The court addresses the rare issue of a subrogation right to indemnification pursued by one of the companies involved that paid the fees for the officers and directors based on secondary liability for indemnification. [The company with the primary indemnification obligation initially refused to pay.] This opinion explains the prerequisites that need to be satisfied for one seeking reimbursement via subrogation of fees paid pursuant to a secondary obligation to indemnify. One of the requirements for subrogation in this context is that the payor not be a “volunteer” though that term in this context is not strictly defined and may be satisfied by the desire of a company to support its management.
  • Chancery Rule 88 was the procedural mechanism that the parties resorted to, in connection with the motion to quantify the exact amount of fees, because the prior opinion in June 2017 establishing the right to indemnification, highlighted on these pages, did not determine the amount of fees due–and the parties could not agree on the amount or allocation. A total of about $552,000 (out of a total of about $785,000) was sought for the underlying litigations, and about $820,000 for “fees on fees” out of a total of about $1.9 million was sought in this latest ruling. [Yes, the “fees on fees” amount exceeded the total of fees incurred, and now sought, for the underlying lawsuits.]
  • Allocation of fees payable for the two indemnitees in this matter was  determined by the court to be controlled by a prior agreement among the parties to share the fees for the underlying litigations. See footnotes 56 to 59. The court reasoned that the two persons entitled to indemnification pursuant to the prior ruling of the court, Smythe and MacDonald, had previously agreed that they would be allocated 20% of the fees in the underlying lawsuits. The company seeking subrogation on their behalf in this instant decision, therefore, was not entitled to seek reimbursement for more than the 20% that Smythe and MacDonald had previously agreed to be apportioned to them in a separate allocation agreement. The net amount awarded in this decision was about $145, 00o, therefore, instead of the more than $700,000 sought.
  • The allocation of “fees on fees” was based on a slightly different analysis. Citing to prior decisions that applied the principle of “reasonably proportionate to the level of success” to an award of “fees on fees”, and in light of the request in this matter for about $820,000 out of the $1.9 million in “fees on fees” incurred for both covered and uncovered parties, or 39% of the total, the court explained that based on the total number of initial claims and the amount of work on the successful claims, 50% success was the appropriate starting point for allocation of fees on fees in this case. The court then used the 20% allocation explained above for the underlying litigation and: “Multiplying the two percentages results in a fees-on-fees percentage of 10%.” Applying that percentage to the “base amount”, results in a fee award of $125,000.
  • The court compared that award with what the court described as “its experience” that briefing on summary judgment in this case “likely would have cost between $100,000 and $200,000”, and because the success achieved in this case could have been achieved via summary judgment motion, the court determined that the amount awarded was reasonable.
  • Pre-judgment interest was also awarded and the discussion about the date when that interest starts is worth reading verbatim. See footnotes 67 to 70 and accompanying text.

Activision Blizzard Inc. v. Hayes et al., No. 497-2013, order issued (Del. Oct. 10, 2013). In a rare ruling from the bench, after oral argument, the Delaware Supreme Court reversed an injunction granted by the Court of Chancery in  Hayes v. Activision Blizzard Inc., No. 8885, 2013 WL 5293536 (Del. Ch. Sept. 18, 2013).  The formal written Supreme Court opinion was issued on Nov. 15, 2013.

The issue addressed was whether the structure of the deal qualified as the type of business combination that required a vote by public shareholders. In a unanimous ruling, Delaware’s high court ruled that no vote was required. A formal opinion followed.

Overview

In 2007, Vivendi had purchased a majority interest in Activision and the right to designate approximately half of Activision’s board in connection with a stock purchase agreement. Fast forward to 2013. Both Vivendi and Activision want to unwind their business combination and go their separate ways.

Activision offered to pay $5.8 billion for the majority of Vivendi’s ownership in Activision, which Vivendi would place in a non-operating shell company for Activision to acquire. Those shares re-acquired by Activision would be treasury shares, and would thereby reduce the number of Activision’s outstanding shares. Additionally, Vivendi would sell a portion of its Activision interest to a limited partnership owned by the two Activision-designated board members (who also served as Activision’s President/CEO and Chairman of the Board).

These proposed transactions would leave Vivendi with 11.9% of Activision, the limited partnership with 24.7%, and the public stockholders with 63.4%.

Despite the outcome, which would ultimately benefit the public stockholders, the public stockholders sought to temporarily restrain the transaction and put the transaction to a stockholder vote. According to the stockholders, Section 9.1(b) of Activision’s charter, which provides for a shareholder vote on a “merger, business combination or similar transaction,” mandated that Activision put the transaction to a vote. The Court of Chancery converted the motion for TRO into a motion for preliminary injunction, and enjoined the proposed transaction between Activision and Vivendi, because generally, the transaction looked like a business combination and smelled like a business combination. Therefore, the Court of Chancery ruled, the transaction is subject to a stockholder vote under the charter.

Activision appealed the injunctive order, arguing that (i) the Court of Chancery improperly converted the motion for TRO into a motion for a preliminary injunction; (ii) laches should bar the stockholders from trying to enjoin a transaction at the last minute given their prior knowledge of the deal; and (iii) no stockholder vote is required pursuant to Section 9.1(b) because the transaction is not a merger, business combination, or similar transaction.

The Delaware Supreme Court tackled the merits argument and agreed with Activision that “[t]his transaction does not involve any combination or intermingling of Vivendi’s and Activision’s businesses. Indeed, it is the opposite of a business combination. Two companies will be separating their business connection….” Further, the Court noted that calling Activision’s acquisition of a holding company formed exclusively for the purpose of consummating this transaction a “merger or business combination” would be an inappropriate glorification of form over substance. Importantly, the Court acknowledged that Activision’s charter would have provided for additional protection at the stockholder level if the transaction increased (as opposed to decreased) Vivendi’s interest in Activision.

In a unanimous ruling issued just hours after oral argument on October 10, 2013, Delaware’s high court ruled that no vote was required for the transaction to disentwine the businesses of Activision and Vivendi. A formal opinion followed on November 15, 2013. This is an example of how quickly the Delaware courts can decide cases. This final appellate ruling came about a mere month after the complaint was filed in the trial court.

Frank Reynolds of ThomsonReuters, who edits Westlaw’s Delaware Corporate Journal, provides a helpful overview of the case.

We have written frequently on these pages about decisions that have addressed potential conflicts of interest in the litigation context, both real and imagined, in the state and federal courts. See, e.g., cases and articles on these pages here. The U.S. District Court for the District of Delaware recently disqualified counsel based on a finding of a conflict of interest, in connection with a client representation that ended over 15 years earlier. The motion was filed by plaintiff’s counsel a year after the case had commenced. See Eon Corp. IP Holdings LLC v. Flo TV Inc. Compare: recent prior U.S. District Court decision in Delaware that found a conflict of interest based on Rule 1.7 but still denied a motion to disqualify counsel.

The court’s analysis, and the recitation of applicable cases and rules, is “must reading” for anyone who needs to know the latest Delaware law on conflicts of interest in litigation.

Importantly, the U.S. District Court for the District of Delaware has adopted the Model Rules of Professional Conduct, pursuant to Local Rule 83.6(d)(2), which differ in some respects from the version of the ABA model rules adopted by the Delaware Supreme Court and applicable to Delaware lawyers in state courts in Delaware.

Air Products and Chemicals, Inc. v. Airgas, Inc., No. 5249 (Del. Ch., March 5, 2010), transcript of ruling from the bench available here. For anyone who wants to know the latest iteration of law from the Delaware Court of Chancery on motions seeking to disqualify litigation counsel based on alleged conflicts of interest, this short ruling is required reading. In Delaware, such rulings from the bench can still be cited in briefs, by reference to the transcript.

We previously wrote about this high-stakes litigation concerning an unwelcomed takeover attempt and the ability of the target to "just say no". A sideshow of sorts has developed regarding the effort of the target to disqualify the distinguished counsel of the suitor, who is using the Cravath firm.

 Yesterday, Chancellor Chandler ruled from the bench that he would not disqualify the Cravath firm from serving as counsel for Air Products despite allegations by Airgas that Cravath had represented Airgas in related matters just before, allegedly, Cravath dropped Airgas in order to represent Air Products. Students of Delaware law in this area know that efforts to disqualify counsel in Delaware have not had a high success rate in the recent past. See, e.g., here (involving battle between Rohm and Haas v. Dow), here , here, here (despite possible violation of rule, no impact on the integrity of the legal proceeding), and here, for recent Delaware decisions in which the court has denied motions to disqualify counsel. For comparison purposes, see here  for a decision by a federal court in California based on different facts.

The denials of these motions should not be viewed as indicating that the Delaware courts do not take the rules of professional responsibility seriously. Rather, it should be seen as a manifestation of the concern that the courts have that litigators may try to use the Rules of Professional Conduct as a litigation tool. The argument is that transgressions of the ethics rules applicable to lawyers generally should be handled by the arm of the Supreme Court, which in Delaware is called Disciplinary Counsel, which is primarily responsible for the enforcement of those rules when alleged violations of those rules do not meet the high threshold of interfering with the administration of justice in a particular lawsuit.

Despite four separate ethics experts opining in this case, on behalf of each of the parties, on the requirements of Rules 1.7 and 1.9 of the Rules of Professional Conduct, the Court did not need to decide that issue.

Though the ruling from the bench is in the form of a transcript, which in Delaware can still be cited in briefs, it reads as if it is a carefully reasoned opinion (which it is). One should read the whole thing to appreciate it fully at the above link, but a few money quotes follow:

Before this Court may enter the Draconian order of disqualification, a moving party seeking that drastic relief must come forward with clear and convincing evidence establishing a violation of the Delaware Rules of Professional Conduct so extreme that it calls into question the fairness or the efficiency of the administration of justice. That is the holding of our Supreme Court in a case styled In Re: Dunlap.

…

Like Dow Chemical and the Rohm & Haas case, Airgas here has not demonstrated even simply persuasively, let alone clearly and convincingly, that it would be disadvantaged by the presence of its former counsel as advocate for its opponent, Air Products.

The Court found that Cravath did not have access to confidential information that it could use against Airgas in this case. Moreover, the Court observed that ethical walls had been established within the Cravath firm to separate those lawyers that had worked on the prior corporate matters from the lawyers working on the litigation. The Chancellor reasoned further that:

Given the absence of any credible threat of prejudice to Airgas from Cravath’s continued participation in this lawsuit, I think the threat of harm to Air Products from disqualification far outweighs the threat of harm to Airgas from a failure to disqualify.

Postscript. The New York Times’ DealBook blog wrote about yesterday’s decision here.

For my regular ethics column in the current issue of The Bencher, the national publication of the American Inns of Court, I summarized a Florida appellate court decision that discussed the issues of legal ethics involved in the same lawyer representing a majority shareholder and the corporation. In allowing the same lawyer to represent the shareholder but not the corporation, the court discussed the principles involved under Rules 1.7, 1.9 and 1.13. Also included are cites to a few other cases that discuss related issues. For a copy of the article download file.