The Delaware Supreme Court recently clarified the extent and scope of charging liens that can be asserted by Delaware attorneys against clients who fail to pay their legal bills.  In the decision of Katten Muchin Rosenman LLP v. Sutherland, No. 151, 2015 (Del. Jan. 6, 2017), the High Court overturned the Court of Chancery and held that a charging lien may be asserted against an award, when an attorney bills on an hourly rate, regardless of whether the services rendered were necessary to obtaining such award.  In so doing, the Supreme Court held that the Court of Chancery’s requirement that a charging lien can only be obtained for unpaid services that directly relate to a client‘s recovery was an improper prerequisite to impose on a law firm’s equitable right to a charging lien.  In this case, the amount of unpaid attorneys’ fees exceeded the award, and therefore the plaintiff law firm was entitled to a charging lien on the entirety of the award.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

As set forth in the Delaware Supreme Court decision of Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del., 2015), a board’s decision to approve a merger transaction is subject to business judgment rule presumption when the merger was approved by a disinterested majority of the company’s stockholders in a fully-informed and uncoerced vote.

This rationale was applied in the recent decision of In re Solera Holdings, Inc. S’holder Litig., Cons. C.A. No. 11524-CB (Del. Ch. Jan. 5, 2017).  There, a former stockholder of Solera Holdings, Inc. (“Solera” or the “Company”) challenged a private equity firm’s acquisition of the Company for $55.85 per share (a total of approximately $3.7 billion) in a merger that closed in March 2016, at which time Solera merged with an affiliate of Vista Equity Partners (“Vista”) in the transaction that is the subject of this action (the “Merger”)

The complaint alleged a single claim for breach of fiduciary duty against the eight members of Solera’s board who approved the transaction (of which seven were outside directors).  Specifically, the complaint alleged that the defendants improperly favored the interests of Company’s management, failed to establish an effective special committee or to extract the highest price possible for the Company, implemented preclusive deal protection devices, and failed to disclose material information about the value of the Company’s stock.

Plaintiff did not contend that the transaction is subject to entire fairness review, given that the transaction did not involve a controlling stockholder and the disinterestedness of the outside directors was not challenged.  However, plaintiff asserted that the enhanced scrutiny standard under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. Supr., 1985) and its progeny should be applied.

Chancellor Bouchard noted that, as explained Supreme Court explained in Corwin:

Revlon was ‘primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M&A decisions in real time, before closing,’ and was not a tool ‘designed with post-closing money damages claims in mind.’

In the post-closing context, the Supreme Court held in Corwin that ‘when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.’ This rule flows from our ‘long-standing policy . . . to avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves.’

The Court found there was no question that a majority of Solera’s stockholders approved the transaction in an uncoerced vote after receiving a definitive proxy statement dated Oct. 30, 2015.  Moreover, the complaint did not allege that the act of approving the merger was an act of waste.  Thus, the claim could only survive the motion to dismiss if it was demonstrated that the Solera stockholders who approved the transaction were not fully informed.

The Court further found that the Solera stockholders’ approval of the transaction was fully informed.  In making this analysis, the Court stated as follows:

Under Delaware law, when directors solicit stockholder action, they must “disclose fully and fairly all material information within the board’s control.” The essential inquiry is whether the alleged omission or misrepresentation is material. Delaware has adopted the standard of materiality used under federal securities laws. Under that standard, information is “not material simply because [it] might be helpful.” Rather, it is material only “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” In other words, information is material if, from the perspective of a reasonable stockholder, there is a substantial likelihood that it “significantly alter[s] the ‘total mix’ of information made available.”

The Court disagreed with plaintiff’s insinuation that defendants were obligated to disclose “all troubling facts regarding director behavior” irrespective of their materiality.  Rather, the Corwin Court made clear that “troubling facts regarding director behavior . . . that would have been material to a voting stockholder” must be disclosed when seeking stockholder approval of a transaction.

For these reasons, the Court of Chancery granted defendant’s motion to dismiss, and dismissed plaintiff’s complaint with prejudice.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the first Chancery opinion of 2017, Vice Chancellor Montgomery-Reeves granted dismissal of a class action complaint which alleged breach of the duty of disclosure in connection with a short-form merger, in the decision of In re United Capital Corp. S’holders Litig., Cons. Case Nos. 11619-VCMR (Del. Ch. Jan. 4, 2017).

Lead Plaintiff Louis B. Geser (“Plaintiff”) owned shares of common stock in United Capital Corporation (“United Capital”).  Defendant A.F. Petrocelli owned approximately 94% of the outstanding shares of United Capital before the transaction at issue. On September 30, 2015, Petrocelli through his controlled entities merged with United Capital at $32 a share, thus becoming the sole shareholder of United Capital.

Plaintiff’s complaint alleged the notice of merger failed to disclose the following information:

  • The controller’s reasoning behind the merger price,
  • Special committee’s process,
  • Financial projections used to determine the value of the company,
  • Information regarding the working capital and future use of cash of the company,
  • The lack of independence of two members of the special committee, and
  • The identities of two directors and a director’s spouse who participated in a multi-million dollar note with the company.

The Court granted defendants’ motion to dismiss on the grounds that all material information was disclosed in the notice and, in the realm of a short-form merger, any omitted information is not material to the decision of whether the minority stockholders should accept the merger consideration or seek appraisal.

In granting the motion, the Court found that plaintiff did not allege adequately that the omitted information was material to the decision to seek appraisal and the duty of disclosure was not violated.  The Court found that Plaintiff’s sole remedy was one of appraisal.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of In re OM Group, Inc. Stockholders Litigation, Cons. C.A. No. 11216-VCS (Del. Ch. Dec. 16, 2016), Vice Chancellor Slights considered a motion for reargument by the Plaintiffs challenging his prior decision dismissing the complaint.  Click here for prior decision by the Court granting motion to dismiss on Oct. 12, 2016.

The Complaint alleged that in the face of a threat of shareholder activism, the OM Board rushed to sell OM on the cheap in order to avoid the embarrassment and aggravation of a prolonged proxy fight and, in doing so, acted in a manner not consistent with maximizing present share value in violation of their fiduciary duties under Revlon.

The Court reiterated the familiar standards that govern a motion for reargument under Rule 59, namely that the Court “will deny a motion for reargument ‘unless the Court has overlooked a decision or principle of law that would have a controlling effect or the Court has misapprehended the law or the facts so that the outcome of the decision would be affected.'”

Plaintiffs asserted that the Court misapprehended a pleaded fact that: “The disclosure issue in question for purposes of this motion concerns ‘the evolution of Deutsche Bank’s engagement.’”  The Complaint had alleged that Deutsche Bank was retained as a second financial advisor to members of the OM Board in connection with the transaction, and raised issues with respect to such retention.

The Court noted that the October 12th opinion acknowledged that Plaintiffs were alleging that the Proxy “omitted information regarding the evolution of Deutsche Bank’s engagement” and that the “Proxy failed to disclose that the OM Board initially contemplated hiring Deutsche Bank on a flat fee basis but then inexplicably converted the engagement to a contingency fee arrangement.”  The Court then rejected Plaintiffs’ assertion that the Court did not fully understand the nuance of its disclosure theory with respect to Deutsche Bank fees because the Complaint did not plead, and the Proxy did not disclose, that the Board actually agreed to the contingency fee arrangement.

The Court rejected Plaintiffs’ reasoning.  The Court found that Plaintiffs’ citations to RBC Capital Markets, LLC v. Jervis, No. 140, 2015 (Del. Supr. Nov. 30, 2015) and In re El Paso Corp. S’holder Litig., 41 A.3d 432 (Del. Ch. 2012) for the proposition that “the retention of second bank on a contingent basis can be conflict-reinforcing, not cleansing” was not helpful.   Neither decision addressed in a disclosure context whether stockholders had been adequately apprised of the circumstances pursuant to which the later-retained bankers were engaged or would be compensated, and neither involved the cleansing effect of a fully-informed stockholder vote under Corwin.

The Court concluded that the Proxy adequately disclosed the circumstances surrounding the engagement of Deutsche Bank and that the omissions identified in the Complaint were not material.  Having found that the majority of disinterested stockholders had approved the merger, the Court found that the business judgment rule applied, which necessitated dismissal of the action.  Accordingly, Plaintiffs’ motion for reargument was denied.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent appraisal decision of Merion Capital L.P. v. Lender Processing Services Inc., C.A. No. 9320-VCL (Del. Ch. Dec. 16, 2016), the Delaware Court of Chancery determined the fair value of petitioners’ shares of stock in Lender Processing Services, Inc. (the “Company”). In January 2014, Fidelity National Financial, Inc. completed the merger by which it acquired the Company. The Court found that the fair value of the Company’s common stock at the effective time of the merger is $37.14

Each party’s expert used the discounted cash flow analysis in determine fair value of the shares, but came to different numbers.  Petitioners’ expert determined that shares were worth $50.46/share, whereas the Company’s expert came to a value of $37.14/share.  As cited by Vice Chancellor Laster: “[T]he DCF . . . methodology has featured prominently in this Court because it is the approach that merits the greatest confidence within the financial community.” Owen v. Cannon, 2015 WL 3819204, at *16 (Del. Ch. June 17, 2015) (quotation marks omitted).”

The Court provided a thorough and helpful analysis in terms of determining fair value, including discussions of the risk-free rate, the supply-side equity risk premium, beta, and size premium.  The Court also considered a string of Delaware Chancery decisions which demonstrated how much weight the Court can give to the merger or deal price as evidence of fair value, stating as follows:

In a series of decisions since Golden Telecom II, this court has considered how much weight to give the deal price relative to other indications of fair value. In five decisions since Golden Telecom II, the Court of Chancery has given exclusive weight to the deal price, particularly where other evidence of fair value was unreliable or weak. In five other decisions since Golden Telecom II, the court has declined to give exclusive weight to the deal price in situations where the respondent failed to overcome the petitioner’s attacks on the sale process and thus did not prove that it was a reliable indicator of fair value.

The Court likened the case to AutoInfo and BMC, and gave full weight to the sale price.  Here, Vice Chancellor Laster found that the Company ran a sale process that generated reliable evidence of fair value, and created a reliable set of projections that support a meaningful DCF analysis. Accordingly, the Court agreed with the Company’s expert appraiser and found that the fair value per share was $37.14.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of In the Matter of Dissolution of Artic Ease LLCC.A. No. 8932-VCMR (Del. Ch. Dec. 9, 2016), the Court of Chancery analyzed whether an LLC member and certain affiliated entities were subject to the jurisdiction of Delaware under 6 Del. C. § 18-109, and ultimately dismissed third-party claims for lack of personal jurisdiction.

Section 18-109 of the Delaware LLC Act allows Delaware courts to exercise personal jurisdiction over parties who manage Delaware limited liability companies in actions “involving or relating to the business” of the company. Section 18-109(a) describes two types of “manager[s]” for personal jurisdiction purposes: (1) managers as defined in the operative limited liability company agreement and (2) parties who “participate[] materially in the management” of a Delaware limited liability company.

The Court also cited to an opinion of the U.S. District Court for the District of Delaware, which held that alleged managers in charge of financial and commercial functions for a limited liability company who act subject to the board’s authority do not “participate[] materially in the management” absent a “control or decision-making role” in the company. Wakely Ltd. v. Ensotran, LLC, 2014 WL 1116968, at *5 (D. Del. Mar. 18, 2014).

The Court found that the third-party defendants were not managers and thus not subject to the Court’s jurisdiction under Section 18-109.  Specifically, the Court rejected third-party plaintiffs’ argument that third-party defendant William Cohen was a manager of Summetria, LLC under Section 18-109(a)(i) because he was an original member of the Summetria board of directors, and as such, he possessed voting power.  The Court disagreed, finding that Cohen is not a manager of Summetria under Section 18-109(a)(i) because the Summetria LLC Agreement makes clear that another individual, Carol Forden is the sole manager of Summetria.  The Court also found that Cohen did not materially participate in the management of the LLC in that he had no control or decision-making role.

In sum, merely acting as an officer, without more, will not suffice when that person is subject to the control of others.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

A question that is often posed to Delaware corporate practitioners is whether a non-Delaware court can dissolve a Delaware entity.  Certain jurisdictions, such as Texas, will generally decline to dissolve a foreign entity, while others will do so if the entity’s principle place of business is in that state.

The recent transcript decision of Zebala v. Aminopterin LLC, C.A. No. 12186-VCS (Del. Ch. Sept. 28, 2016) involved this issue.  Prior to the filing of the Chancery action, litigation in California had been pending and that court had already issued an injunction restricting the LLC’s assets. The LLC agreement contained a California forum selection clause as well.  A motion was filed to dismiss the case in favor of the prior filed action.

Relying upon the McWane doctrine, Vice Chancellor Slights dismissed the dissolution proceeding in favor of the California action.  Notably, the Court of Chancery declined to decide whether a Delaware court has the sole and exclusive power to dissolve a Delaware entity.  The opinion can be construed to imply that the Delaware courts will allow sister courts to determine whether they have jurisdiction to dissolve a Delaware entity.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

The recent letter order issued in the case of Kandell, et al. v. Niv, et al., C.A. No. 11812-VCG (Del. Ch. Oct. 14, 2016) illustrates the Court’s disfavor when parties stipulate to expand the word count of a brief on the eve of a briefing deadline.  In order to avoid jeopardizing the briefing schedule, the Court granted the request, but with these words of caution:

Please be aware, however, that a motion to extend the word limit should be brought to the presiding judge’s attention in sufficient time for him to consider the request, accompanied by a statement of good cause.

Accordingly, parties seeking to expand the current word count limitation of 14,000 words for opening and answering briefs, or 8,000 words for replies, should make such request sufficiently in advance with a statement of good cause.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the Dell Inc. appraisal action, the Court previously held that the fair value of Dell common stock at the effective time of the merger was $3.87 per share more than the merger price.  For a link to a prior post discussing the decision, click here.  The appraisal statute authorizes a party that has incurred expenses litigating an appraisal to have its expenses, including reasonable attorneys’ fees, allocated pro rata among the shares comprising the appraisal class.

The recent decision of In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. Oct. 17, 2016) provides a useful discussion of the Court of Chancery’s calculation of a fee award in an appraisal case based on the aforementioned benefit conferred to the dissenting stockholders.

The decision discusses when expenses should be deducted from the benefit conferred before calculating the fees, and other issues of import. This opinion will undoubtedly serve as a roadmap for future fee awards granted in appraisal cases.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of Jay Frechter v. Cryo-Cell International, Inc., Civil Action No. 11915-VCG (Del. Ch. Oct. 7, 2016), the Court of Chancery granted a mootness fee in connection with a lawsuit brought by a stockholder challenging a bylaw provision.  The bylaw provision at issue indicated that directors could be removed “for cause” at a “special meeting” of stockholders.  The plaintiff asserted that under Section 141(k) of the Delaware General Corporation Law, stockholders have the right to remove directors without cause, and thus the provision was unlawful.

After the Plaintiff moved for summary judgment, the Company amended its bylaw to remove the language complained of, mooting the action.  The Court found that the provision at issue was “misleading to stockholders and could have a chilling effect on the exercise of their franchise under Section 141, because providing a procedure to remove directors for cause (and remaining silent as to removal without cause) could indicate to a reasonable stockholder that cause was a requisite for removal.”

The Court considered the Sugarland factors and found that a mootness fee of $50,000 for plaintiff’s counsel was warranted.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.