Noteworthy 2012 Corporate and Commercial
Decisions from Delaware's Supreme Court and Court of Chancery.
By: Francis G.X. Pileggi and Kevin F. Brady.
This is the eighth year that we are providing an annual
review of key Delaware corporate and commercial decisions. During 2012, we
reviewed and summarized over 200 decisions from Delaware's Supreme Court and
Court of Chancery on corporate and commercial issues. (We also provided partial
lists of key cases throughout 2012.) Among the decisions with the most
far-reaching application and importance during 2012 include those that we are
highlighting in this short overview. We are providing links below to the more
complete blog summaries, and the actual court rulings, for each of the cases
that we highlight below. Prior annual summaries are linked in the right margin
of this blog. We welcome comments if readers think we missed a decision that
should be included.
Decisions of 2012
We begin with our selection of the Top Five Cases from
2012. In no particular order, we chose the following decisions as especially
Properties LLC v. Auriga Capital Corp., No. 148, 2012 (Del. Supr. Nov.
7, 2012) (Per Curiam). Issue Addressed: Delaware's High Court held that the
manager of an LLC violated a contracted-for fiduciary duty that adopted the
equitable standard of entire fairness in a conflict of interest transaction
between the LLC and its manager. The Supreme Court also declared as dicta,
any statements by the trial court that Delaware law imposed default
fiduciary duties in the LLC context. Summary
Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012), in a
110-page opinion, the Delaware Supreme Court upheld the Court of Chancery's
100-plus page decision awarding over $2 billion in damages based on a breach of
fiduciary duty claim in connection with the sale of a company. Delaware's High
Court also upheld an award of attorneys' fees in the amount of $300 million. Highlights
available here. The trial court decision, styled as In re Southern Peru
Copper Corporation Shareholder Derivative Litigation, C.A. No. 961-CS (Del.
Ch. Oct. 14, 2011), was highlighted on these pages here
v. Baker, C.A. No. 7294-VCL (Del. Ch. Sept. 25, 2012). Issues Addressed:
This decision is a candidate for inclusion in the pantheon of iconic Delaware
Court of Chancery opinions addressing the following issues: (1) When derivative
plaintiffs and their counsel will be presumptively found to provide inadequate
representation resulting in the complaint's dismissal with prejudice; (2) When
dismissal of one derivative suit will not bar another derivative suit involving
the same corporation; (3) When a Caremark claim will be dismissed with
prejudice if Section 220 is not used beforehand; and (4) How to successfully
allege pre-suit demand futility in connection with making a Caremark
Re: Encore Energy Partners LP Unitholder Litigation, Cons.,
C.A. No. 6347-VCP (Del. Ch. Aug. 31, 2012). Issue Presented: Whether the terms
of an LP Agreement protected the general partner from claims regarding what
would otherwise be a self-interested transaction, without breaching any duty
owed to its limited partners? Short Answer: Yes. Summary
Corp. v. Soteria Mezzanine Corp., C.A. No. 6158-VCN (Del. Ch. Oct. 31,
2012). Why This Case is Noteworthy: This decision addresses for the first time
in Delaware the applicable standard to determine when the threat of a lawsuit
can be tortious interference with prospective business relationships. This
opinion also features the rare instance when attorneys' fees are assessed based
on an exception to the American Rule (as compared with Rule 37 for motions to
goes to the new Practice Guidelines, discussed below, which the Court of
Chancery adopted and which provide comprehensive tips and instructions for both
procedural matters and substantive discovery obligations that practitioners
must follow if they hope to avoid the wrath of the bench.
We also selected the following additional cases from 2012
that deserve special attention:
Supreme Court Decisions
On December 27, 2012, the Delaware Supreme Court
overruled in part and remanded a decision of the Court of Chancery which denied
a large investor, BVF Partners L.P. ("BVF"), the right to opt-out of a
shareholder class action settlement. In the case of In Re
Celera Corp. Shareholder Litigation, No. 212, 2012 (Dec. 27, 2012), the
Delaware Supreme Court, en banc, addressed the issue raised on appeal by
objector-appellant BVF of the Court of Chancery's certification of
plaintiff/appellee New Orleans Employees' Retirement System ("NOERS") as class
representative in an action challenging the acquisition of Celera Corporation
("Celera") by Quest Diagnostics, Inc. ("Quest"). BVF also appealed from the
Court of Chancery's approval of a class action settlement without an opt out
right for BVF. This decision is likely to have a significant impact on efforts
to bring closure to class action settlements of litigation that involve
objectors with substantial holdings. Summary
Marietta Materials, Inc. v. Vulcan Materials Co., No. 254, 2012 (Del.
Supr., July 12, 2012). Our blurb about the Supreme Court's Order of May 31,
2012 in this case is available here.
Highlights of the 138-page Court of Chancery opinion on these pages is
Issue Presented: Whether a violation of a confidentiality agreement can be a
basis to preclude a hostile tender offer. Short Answer: Yes. The Delaware
Supreme Court affirmed the decision of the Delaware Court of Chancery in this
Worldwide, Inc. v. Kurz, No. 512, 2011 (Del. Supr., April 17, 2012).
Issue Addressed: Whether the Court of Chancery properly granted an interim fee
award in a shareholders' suit which did not produce an immediate monetary
benefit. Short Answer: Yes. Summary
Ltd. v. Trilantic Capital Partners, No. 363, 2011 (Del. Supr., Jan. 20,
2012.) This Order of the Delaware Supreme Court applied the recent decision of
Delaware's High Court in the Central Mortgage case in which it clarified
that Delaware has not adopted the federal standard for motions to dismiss under
Rule of Civil Procedure 12(b)(6) as described in the U.S. Supreme Court's Twombly
and Iqbal decisions, despite the truism that the Delaware Rules of Civil
Procedure are generally based on the Federal Rules of Civil Procedure. Highlights
available here. A fuller overview is available here.
The recent Delaware Supreme Court decision in Central Mortgage taking
this position was highlighted here.
Court of Chancery Rulings
v. Fuqi Int'l, Inc., C.A. No. 5653-VCG (Del. Ch. Nov. 5, 2012). Why
this opinion is noteworthy: The Delaware Court of Chancery in this summary
proceeding reaffirms in this pithy opinion that the Delaware General
Corporation Law's requirement in Section 211 that a shareholders' meeting must
be held annually, will not be suspended due to arguably conflicting provisions
of the federal securities laws. That seems counterintuitive in light of the
supremacy clause, but the court explains in a scholarly manner why a
corporation will not be relieved of its obligation under DGCL Section 211
simply because of federal securities laws or regulations that may also impose
certain prerequisites to holding an annual meeting. Summary
In a transcript ruling in Dent v.
Ramtron Int'l Corp., C.A. No. 7950-VCP (Del. Ch., November 19, 2012),
the Court denied the plaintiff's motion for a preliminary injunction to enjoin
a shareholder vote on a merger between Ramtron and Cypress Semiconductor Corp.
Issue Addressed: Whether the Court should preliminarily enjoin a shareholder
vote on a merger on allegations that the company's proxy statement is false and
misleading in that the company failed to provide disclosures of financial
projections thereby prohibiting the company's stockholders from making an
informed decision on whether to vote in favor of the merger or seek appraisal.
(Transcript rulings are often cited in Delaware briefs as persuasive
Municipal Police Employees' Retirement System v. Lennar Corp., C.A. No.
7314-VCG (Del. Ch. Oct. 5, 2012). Issue Presented: In this summary proceeding,
the Court considered whether newspaper articles announcing a federal
investigation of the company, together with prior lawsuits that were settled
without an admission of fault, satisfy the requisite threshold of "some
evidence" to establish a credible basis of wrongdoing needed to allow a books
and records demand under DGCL Section 220 to proceed. Short Answer: Not under
the facts of this case. Summary
re Synthes, Inc. S'holder Litig., C.A. No. 6452-CS (Del. Ch.
Aug. 17, 2012). Issue Addressed: Whether the controlling stockholder breached
its fiduciary duty by refusing to consider an acquisition offer that would have
cashed-out all the minority stockholders of Synthes, Inc., but required the
controlling stockholder to remain as an investor in Synthes. Short Answer: No. Summary
Carpenters Pension Fund v. infoGroup, Inc.,
C.A. No. 5334-VCN (Del. Ch. Aug. 16, 2012). Issue: Can Plaintiff compel the
expert report prepared by the company's counsel for the board in anticipation
of litigation? Short Answer: No, based on the facts of this case. Importantly,
the Court of Chancery ruled that Rule 26(b)(3) is the standard that applies to
determine if a report for the board must be produced as an exception to the
work product doctrine-and not the less strenuous standard for board reports in
the context of fiduciary litigation when the attorney-client privilege is at
issue, in which case the standard used is often traced to Garner v.
Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). See also, Ryan v. Gifford,
2007 WL 4259557, at *3 n.4 (Del. Ch. Nov. 30, 2007). The Court did not follow
the Garner test even though in dictum from a 1993 case the Delaware
Supreme Court suggested that the Garner standard would govern the
discovery of work product materials. See footnote 17. Summary
Curtis, C.A. No. 7109-VCN (Del. Ch. July 31, 2012). Issues Presented:
(i) In this summary proceeding, the Court considered whether plaintiffs are
entitled to a declaration, pursuant to 8 Del. C. § 225, that they
comprise the board of directors of Ark Financial Services, Inc.; (ii) whether
one of the signatories to the 2011 Written Consent actually owned the shares he
purported to hold; (iii) whether a December 13, 2011 written consent purporting
to elect the plaintiffs to the Board was valid; and (iv) whether a December
2010 issuance of Ark super-voting stock to Ark's then sole Board member was
invalid. Short Answers: Yes to (i) though (iv). Summary
L.O.M. Med. Int'l, Inc., C.A. No. 7600-VCG (Del. Ch. Aug. 17, 2012).
Issue: Whether non-unanimous written consents of shareholders were sufficient
to thwart a challenge to the election of directors at an annual meeting? Short
answer: No. Summary
Re: Appraisal of Orchard Enterprises, Inc.,
C.A. No. 5713-CS (Del. Ch. July 18, 2012). Issue Addressed: In this post-trial
decision in an appraisal action arising out of a merger, the Court determined
the fair value of the shares, relying on the discounted cash flow method of
Technologies, Inc. v. Michael, C. A. No. 7164-VCN (Del. Ch.
April 10, 2012). Issue Addressed: Whether the Court of Chancery has the
inherent authority to remove a director for breach of fiduciary duty, other
than via DGCL Section 225? Short answer: The issue was not directly decided,
but based on the facts of this case, the Court was not inclined to exercise
such an inherent power, if such a power exists, prior to the expedited trial. Summary
Delphi Financial Group Shareholder Litigation, Cons. C.A. No. 7144 -VCG
(Del. Ch. Mar. 6, 2012). This is the third Delaware Court of Chancery decision
in as many weeks that denied injunctive relief, in an expedited opinion, in
response to a challenged transaction-despite criticism in two of the cases, of
the process and the players, but ultimately leaving it up to the shareholders
to decide whether to accept offers of a substantial premium to sell their
available here. See In
Re El Paso, summarized here, and In
Re Micromet, summarized here.
Re El Paso Corporation Shareholder Litigation,
Consol. C. A. No. 6949-CS (Del. Ch. Feb. 29, 2012). Chancellor Strine denied
the stockholder plaintiffs request for a preliminary injunction to enjoin a
merger between El Paso Corporation and Kinder Morgan, Inc. While the Court in a
33-page opinion, severely criticized the actions of a number of the players, in
the end the Chancellor decided to give the shareholders of El Paso the
opportunity to decide for themselves if they liked the price being offered to
available here. The Court's opinion in this matter marks the second time in
the span of only a few months that the Delaware Court of Chancery has strongly
criticized Goldman Sachs for conflict of interest issues in multi-billion
dollar transactions. The most recent high-profile criticism was in the Court of
Chancery's 100-plus page decision in the Southern
Peru Copper case highlighted on these pages here. Our
LexisNexis videocast on this opinion is available here.
Nasser, C. A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), found that Dweck,
the former CEO, a director and 30% stockholder in Kids International
Corporation ("Kids"), and Kevin Taxin, Kids' President, breached their
fiduciary duties of loyalty to Kids by establishing competing companies that
usurped Kids' corporate opportunities and converted Kids' resources. The Court
also imposed liability on an officer of the company for approving the
reimbursement with company funds of the personal expenses of his superior.
Summary available here.
v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6,
2012). Issue Addressed: This opinion addressed the issue of whether
representative plaintiffs in a putative class action should be in sanctioned
for trading on the basis of confidential information obtained in the
litigation. The motion was granted. Summary
China MediaExpress Holding, Inc., C.A. No. 6570-VCP (Del. Ch. Jan. 5, 2012).
Issues Addressed: (1) Whether a Section 220 case should be stayed pending the
outcome of a related federal securities suit; and (2) Whether the shareholder
in this case established a proper purpose to inspect books and records under
DGCL Section 220. Short Answer: (1) Based on a three-part test as applied to
the facts of this case, the Court refused to stay this action in favor of a
pending related federal securities suit, even though a motion to stay was also
pending in the federal court. (2) In this post-trial opinion, the Court
determined that the shareholder established a proper purpose and was entitled
to the documents necessary to investigate that proper purpose. Summary
LLC and Other Alternative Entity Litigation
v. NHAOCG, LLC , C.A. No. 7304-VCL (Del. Ch. Nov. 28, 2012)("Feeley
IV"), the Delaware Court of Chancery addressed-for the first time since the
recent Delaware Supreme Court decision in Gatz
Properties v. Auriga Capital, highlighted on these pages here, the
issue of default fiduciary duties in the LLC context. (This is the fourth
Chancery ruling that we have posted about in the Feeley case.) Highlights
Media Holding Co., LLC v. Brown, C.A. No. 7516-CS (Del. Ch.
Nov. 14, 2012). Issue addressed: Does Delaware have jurisdiction over the
manager of a limited liability partnership (LLP) accused of breach of fiduciary
duty claims, based on acts taken in the course of his work for the LLP, absent
acts taken in Delaware in furtherance of the alleged wrongdoing? Short answer:
v. NHAOCG, LLC, ("Feeley
II"), C.A. No. 7304-VCL (Del. Ch. Oct. 12, 2012). This is the second of
four Chancery rulings in this case that we highlighted on these pages in 2012.
What this case is about: This Delaware Court of Chancery opinion addresses a
dispute regarding management and control of an LLC based on an interpretation
of the LLC agreement, and deserves extra attention because it is the first
opinion to apply DGCL Section 144 to the LLC context. Summary
Annuity and Benefit Fund of Chicago v. DV Realty Advisors LLC, C.A.
No. 7204-VCN (Del. Ch. Aug. 16, 2012). Issue Addressed: How to define "good
faith" for purposes of a limited partnership agreement that required a good
faith determination for removal of a general partner. Short Answer: The Court
compared the common law definitions of good faith in the fiduciary context as
compared to contract law, and also referred to the definition in the Uniform
Commercial Code. See Slip op. at 33 and 34, and footnote 101.
Summary available here.
Re K-Sea Transportation Partners LP Unitholders Litigation, C.A.
No. 6301-VCP (Del. Ch. April 4, 2012). The
prior Chancery decision in this case was highlighted on these pages here.
Issues Addressed: The issues addressed by the Court of Chancery in this matter
were whether the fiduciary duty claims and the contractual claims were barred
by the provisions in the limited partnership agreement, including whether a
provision in the agreement that established a presumption of good faith barred
claims for breach of the implied covenant of good faith and fair dealing. Summary
Laudamiel, C.A. No. 5957-VCN (Del. Ch. Feb. 21, 2012).
Apparently no prior Delaware law directly addressed the issue of whether the
dissolution and cancellation of an LLC transformed derivative claims into
direct claims held proportionately by the members of the LLC. The Court
concluded that, after the filing of the certificate of cancellation, such
claims must be brought in the name of the LLC by a trustee or a receiver
appointed under 6 Del. C. Section 18-805, or directly by the LLC, or
derivatively by its members after reviving the LLC by obtaining a revocation of
its certificate of cancellation. Summary
v. Enterprise Products Holdings, LLC, et al.,
C.A. No. 5989-VCN (Del. Ch., Jan. 6, 2012). Issue Addressed: This decision
speaks to the limitations imposed by 6 Del. C. § 17-1101 on Delaware
courts to address sanctionable conduct by partners and members of alternate
entities that have contracted away their fiduciary duties. Summary
Rulings Regarding Practice, Procedure and
Jurisdictional Issues (including attorneys' fees as exception to the American
v. Innovative Discovery LLC, C.A. No. 7599-VCP (Del. Ch.
Dec. 7, 2012).
Issues Addressed: The Court of Chancery addressed the
following issues in this opinion: (1) Whether a forum selection clause
providing for "sole" jurisdiction in California courts should be honored when a
conflicting forum selection clause in a related agreement provided for
jurisdiction in Delaware courts; (2) Whether 6 Del. C. § 18-111 provided
a basis for equitable jurisdiction when the agreement that gave the Court of
Chancery jurisdiction only provided for money damages; (3) Whether reformation
as a remedy will be allowed when the complaint did not specifically request
reformation but provided notice of the elements of that form of relief.
of Chancery Announces Rule Changes, New Discovery Guidelines
On December 4, 2012, the Court of Chancery announced (here)
that it is updating Rules 26, 30, 34 and 45 regarding discovery effective
January 1, 2013, "to account for modern discovery demands" regarding
electronically stored information ("ESI") and to "bring the Court's rules in line
with current practice." The Court also announced that it is expanding its
Guidelines for Practitioners, originally released in January 2012, to include
guidelines regarding discovery and in particular, ESI (the "Discovery
Practice Guidelines published by the Court of Chancery are entitled:
"Guidelines to Help Lawyers Practicing in the Court of Chancery". They are
a quite formidable 28 pages (after a 3-page index.) Kevin Brady, a member of
the Court's Rules Committee, provided a helpful overview
of the 28-page Guidelines on these pages here.
v. Vermillion, Inc., C.A. No. 7572-VCN (Del. Ch. Nov. 16, 2012). Issues
Addressed: (1) Whether a notarized signature signed in the absence of a notary
results in an invalid verification; and (2) Whether knowingly presenting an
improperly notarized verification is a basis to dismiss the complaint under
Delaware Court of Chancery Rule 41(b). Short Answers: (1) Yes; and (2) Under the
circumstances, dismissal of the complaint is appropriate. Summary
In another Delaware "first in the nation," Vice
Chancellor Laster of the Court of Chancery on October 15, 2012, in EORHB,
Inc. v. HOA Holdings LLC (C.A. No. 7409-VCL) ordered the parties to "show
cause" why computer assisted review should not be used for discovery of
electronically stored information ("ESI") in that matter. After a hearing on a
motion for partial summary judgment and a motion to dismiss a counterclaim,
Vice Chancellor Laster, sua sponte, raised the issue of computer
assisted review in discovery for the balance of the case, saying: "[t]his seems
to me to be an ideal non-expedited case in which the parties would benefit from
using predictive coding. I would like you all, if you do not want to use
predictive coding, to show cause why this is not a case where predictive coding
is the way to go." Transcript at 66.
v. South Canaan Cellular Investments LLC, C.A. No. 7202-VCL (Del. Ch.
July 6, 2012). Issue Addressed: Whether bad faith exception to American Rule
applied to impose attorneys' fees for litigation tactics. Short Answer: Yes. Summary
v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an
important decision of the Delaware Court of Chancery on legal ethics as applied
to non-Delaware attorneys who appear before the Court pro hac vice. Issues
Addressed: Whether lack of complete candor to the Court in a Motion for
Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or
(ii) revoke the admission pro hac vice. The Court also addressed standards
(articulated in this context for the first time), of candor and full
disclosure, regarding potential conflicts, that those seeking admission pro hac
vice must now follow. Summary
and Indemnification Claims
v. NHAOCG, LLC, ("Feeley III"), is a transcript ruling in a
pending Chancery case involving issues that relate to a contest for control,
and which has thus far generated two opinions, highlighted on these pages here
of an oral argument in this case has recently been made available, regarding a
claim in the case that, as of the date of this transcript, had not yet been the
subject of an opinion by the court, but the transcript at pages 66 to 79,
reveals "practice tips" about the mechanics of submitting bills in connection
with a claim for advancement of legal fees for applicable officers or managers.
( We have often explained on these pages that transcripts of rulings in the
Delaware Court of Chancery are often cited in briefs as valid authority).
v. Fitracks, C.A. No. 6454-VCL (Del. Ch. Mar. 5, 2012), addressed
important issues of advancement and indemnification and established a protocol
for resolving the amount of fees payable pursuant to the grant of advancement
v. K-V Pharmaceutical Company, C.A. No. 6936-VCG (Del. Ch., Feb. 7,
2012). Issues Addressed: The Court of Chancery addressed an issue of first
impression in Delaware regarding: "what evidence is relevant to an inquiry into
whether an indemnitee acted in good faith for the purposes of permissive
indemnification" under DGCL §§145(a) and (b). The Court also addressed: (1)
Whether the former CEO is entitled to mandatory indemnification as a matter of
law; (2) Whether additional discovery is required to determine whether the
former CEO acted in good faith (in which case he would be entitled to
statutorily permissive indemnification pursuant to his rights under an
indemnification agreement.) Summary
Request for Appointment of Receiver
v. Metropolitan Hospice Inc., C.A. No. 6192-VCP (March 12, 2012),
involves a post-trial decision on an action under 8 Del. C. § 291 for
the appointment of a receiver for an insolvent, closely held corporation,
Metropolitan Hospice, Inc. ("MHI") which owed, among other things,
approximately $2 million to the IRS for back taxes, penalties, and interest. Summary
Guide with Practice Tips for non-Delaware Lawyers using "local counsel" in
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business litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Eckert Seamans.
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