qualified-derivative-plaintiff

In PARFI HOLDING AB v. MIRROR IMAGE INTERNET, INC., 2008 WL 4110698 (Del. Ch., Sept. 4, 2008), the Delaware Chancery Court provides a magnum opus on the "importance of being earnest".  Many wags might suggest that such truisms need not be explained in an opinion, but we all know of  lawyers who have made less than true representations to the court with impunity. Well, this opinion  "draws a line in the sand" and dismisses a case due to the misrepresentations that were made to the court intentionally in an attempt to have the court make a ruling based on those false facts.

This opinion is 28-pages long in the Westlaw format which amounts to roughly 90 pages in the original slip opinion format. Though not unusually long for a Chancery Court opinion, I want to thank the famous Wilmington trial lawyer Rick DiLiberto  for taking me to a Phillies baseball game this afternoon, which gave me the chance to read this recent opinion today (between pitches) so  I could post this tonight.

No less than four (4) prior reported decisions have been published in this case–two each by the Delaware Chancery Court and the Delaware Supreme Court. The extensive and excruciatingly detailed factual background described in this opinion is encyclopedic, but if one wants even more background facts, the prior opinions in this case can be found at the following citations:

Parfi Holding AB v. Mirror Image Internet, Inc., 794 A.2d 1211 (Del. Ch.2001) (called “Parfi I”), rev’d, 817 A.2d 149 (Del.2002)(“Parfi II”); Parfi Holding AB v. Mirror Image Internet, Inc., 842 A.2d 1245 (Del.Ch.2004)(“Parfi III ” or the “Stay Order”); aff’d in part, rev’d. in part, 926 A.2d 1071 (Del.2007)(“Parfi IV ”).

Two of those cases were briefly highlighted on this blog here and here. The latest opinion issued a few days ago is another Chancery Court example of  a "law review article that also serves as the court’s decision."  So, how does one summarize a law review article in the abbreviated format of a blog post? I will try to highlight key passages and liberally "cut and paste" what many bloggers refer to as the "money quotes".

The  first quote is from the court’s own introductory overview of its opinion:

In essence, the plaintiff sought to have a motion for reargument granted, but not by
way of proper argument, but instead on the basis of a misleading recitation of the facts. In this opinion, I conclude that an order of dismissal is the only fitting remedy for this misconduct. When a party knowingly misleads a court of equity in order to secure an unfair tactical advantage, it should forfeit its right to equity’s aid.  Otherwise, sharp practice will be rewarded, and the tradition of civility and candor that has characterized litigation in this court will be threatened.

Second, I conclude that, in any event, the plaintiffs do not have derivative standing. One of the plaintiffs did not own stock at the time of two of the transactions it challenges and thus lacks standing as to those claims. And, as to its other claims, that plaintiff lacks standing because it sold off any economic interest in the company on whose behalf it is putatively suing during the course of this litigation, leaving itself an empty holder without any economic interest in the corporation. Given that reality, the public policy purpose behind the continuous ownership rule requires a finding that this plaintiff lacks standing.

In addition to misrepresentations to the court, one reading of the voluminous facts in this case can lead one to the conclusion that the plaintiffs were playing games with the court and trifling with its jurisdiction. The gamesmanship of the plaintiffs (as opposed to its lawyers) involved parallel  arbitration proceedings in Sweden.

The Chancery Court had issued a Stay of the Chancery proceedings based on the understanding that the arbitration  in Sweden would proceed apace. At a subsequent routine status conference in the Chancery case, the court inquired about the pendency of the arbitration. What eventually became apparent was that the primary plaintiff entity (and the man who controlled that plaintiff entity) were trying to game the system. The plaintiffs (and the primary controlling person in particular) did not like the Stay Order and did not want to proceed to arbitration so he lied to  the court about his "inability" to proceed with the Swedish arbitration in an attempt to seek a modification of the Stay Order.

But the court smelled something rotten in Denmark and allowed discovery into whether the plaintiffs engaged in sanctionable delay or made misrepresentations to the court. The results of discovery confirmed evidence of both.Continue Reading Chancery Court Dismisses Case Due to Misrepresentations to Court; Finds Derivative Plaintiff Unqualified, and Awards Fees