In the recent decision of In re Oxbow Carbon LLC Unitholder Litig., Consol. C.A. No 12447-VCL (Del. Ch. March 13, 2017), Vice Chancellor Laster provides a comprehensive review of pretrial discovery rules before the Delaware Court of Chancery.  This opinion is an excellent roadmap for conducting discovery in Delaware, and contains a treasure-trove of citations, authorities and maxims that would aid any Chancery practitioner.

Several quotes of import from this decision are as follows:

  • “The scope of discovery pursuant to Court of Chancery Rule 26(b) is broad and farreaching . . . .”
  • Relevance “must be viewed liberally,” and discovery into relevant matters should be permitted if there is “any possibility that the discovery will lead to relevant evidence.”
  • When a party objects to providing discovery, “[t]he burden is on the objecting party to show why and in what way the information requested is privileged or otherwise improperly requested.”
  • Generic and formulaic objections “are insufficient.”
  • In short, “[o]bjections should be plain enough and specific enough so that the Court can understand in what way the discovery is] claimed to be objectionable.”
  • Objection to requests as “excessive, overbroad, and unduly burdensome” is insufficient. “The objecting party must show specifically how each discovery request is burdensome or oppressive by submitting affidavits or offering evidence revealing the nature of the burden.”

Consistent with the recent amendments to the Federal Rules of Civil Procedure governing discovery, this decision reinforces the notion that vague, generic and boiler-plate objections to discovery requests will simply not be tolerated by the Court of Chancery.

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.

Under Section 220 of the Delaware General Corporation Law (“DGCL”), only stockholders or directors have standing to make a demand to inspect a Delaware corporation’s books and records.  What happens if, after a books and records demand is made upon the corporation, but before an action is commenced before the Court of Chancery, the stock of the demanding stockholder is extinguished through a merger?  This precise issue was addressed in the recent decision of Weingarten v. Monster Worldwide, Inc., C.A. No. 1293-VCG (Del. Ch. Feb. 27, 2017).

In Weingarten, the plaintiff stockholder’s demand was made before a merger closed, but the petition was not filed until after the merger closed.  The merger extinguished the stockholder status of the plaintiff.

In a matter of first impression, Vice Chancellor Glasscock ruled that the “unambiguous language of Section 220(c) compels a finding that a former stockholder squeezed out in a merger thereafter lacks standing to bring an action under [Section 220]”.  The Court made clear that a plaintiff must be a stockholder at the time the petition is filed with the Court of Chancery, distinguishing decisions in which a stockholder lost standing after filing a complaint, through a merger.

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 selecting lead counsel for a stockholder derivative litigation, the Court of Chancery applies the factors set forth under Hirt v. U.S. Timberland Service Co., 2002 WL 1558342 (Del. Ch. July 3, 2002).  These factors are as follows:

  • the “quality of the pleading that appears best able to represent the interests of the shareholder class and derivative plaintiffs;”
  • the relative economic stakes of the competing litigants in the outcome of the lawsuit (to be accorded “great weight”);
  • the willingness and ability of all the contestants to litigate vigorously on behalf of an entire class of shareholders;
  • the absence of any conflict between larger, often institutional, stockholders and smaller stockholders;
  • the enthusiasm or vigor with which the various contestants have prosecuted the lawsuit; and
  • [the] competence of counsel and their access to the resources necessary to prosecute the claims at issue.

In making the selection, it is noteworthy that the Court of Chancery recently took into account which counsel initiated a books and records demand to support the allegations of its complaint, rather than relying upon publicly known information. This was an important factor in the decision of In re CytRx Corp. S’holder Deriv. Lit. II, C.A. No. 11800-VCMR (Feb. 22, 2017).

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 Kleinberg v. Aharon, C.A. No. 12719-VCL (Del. Ch. Feb. 3, 2017), the Court of Chancery appointed a custodian over a Delaware corporation under Section 226 of the Delaware General Corporation Law (“DGCL”) to break deadlock.  A voting agreement allowed for 6 board seats, 3 of which were controlled by Defendant Refeal Aharon, the founder and CEO of Applied Cleantech, Inc. (“Applied Cleantech” or the “Company”).  Aharon had traditionally appointed only 2 directors, but fearing that a 3-2 majority had formed against him, he appointed a 3rd director, which caused a 3-3 split on various issues at a meeting.

Under Section 226(a)(2), the court may appoint a custodian when:

The business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division[.]

Notably, the custodian was appointed with limited powers.  In this regard, the Court cited to case law stating that the appointment of a custodian is not mandatory.  Accordingly, the Court appointed a custodian “with the power to vote as a seventh director and the authority to take additional steps to resolve the deadlock.”

For a prior post on a demand for the appointment of a custodian of a Delaware corporation, click here.

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.

Delaware follows the “American Rule”, which mandates that each party bear their own attorneys’ fees regardless of the outcome of the litigation.  However, as an exception to this rule, the court may order fee shifting if there is sufficient bad faith or litigation misconduct by a party.  The Delaware Supreme Court, in its recent decision of Shawe v. Elting, No. 487, 2016 (Del. Feb. 13, 2017), affirmed the Delaware Court of Chancery’s ruling granting such a fee award in light of the bad faith exception to the American Rule.

After an evidentiary hearing, the Court of Chancery found that plaintiff/appellant Shawe deleted substantial documents from his computer, recklessly failed to safeguard his cell phone, improperly gained access to Elting’s e-mails, and lied multiple times under oath. The court also found that Shawe’s improper conduct impeded the administration of justice, unduly complicated the proceedings, and caused the court to make false factual findings.  The lower court ordered that Shawe pay one-third of defendant/appellee’s Elting’s legal fees to defend the case on the merits, and 100% of Eltings’s fees to prosecute the award of sanctions. To review a blog summary of the Court of Chancery’s decision, click here.  The Court of Chancery’s decision can be found here.

The Delaware Supreme Court found that Shawe’s conduct was “ususually deplorable”, and affirmed the lower court’s findings. The High Court also noted that the Court of Chancery has broad discretion in fixing the amount of attorneys’ fees to be awarded, and absent a clear abuse of discretion, the Supreme Court will not reverse the award.

Key Takeaway: This is a textbook case of what actions a party should avoid during the course of litigation.  If the Court of Chancery finds that a party consistently lies under oath, has deleted evidence under a litigation hold notice, and other egregious misconduct, then such party will be susceptible to fee shifting and sanctions.

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 post-trial memorandum opinion of Dore v. Sweports, Ltd., C.A. No. 10513-VCL (Del. Ch. Jan. 31, 2017), Vice Chancellor Laster addressed indemnification for fees incurred in pursuing affirmative claims brought by an indemnified individual.  The underlying lawsuits giving rise to this indemnification action were substantially premised on the attempts of a law firm to collect legal fees.  A partner of the firm was also a director of the company, and had to defend himself when the company filed counterclaims against the plaintiffs that were unsuccessful.   This Delaware indemnification action was commenced after the lawyers substantially succeeded in collecting their fees, and in defending counterclaims brought by the company in the underlying litigation.

Of significance, the Delaware Court of Chancery addressed situations in which an affirmative claim is indemnifiable, in comparison to claims for indemnification for fees incurred to defend a claim brought against an individual “by reason of the fact” that they are a director or officer.

Vice Chancellor Laster explained:

[I]t is conceivable that indemnification might be warranted for preemptive litigation involving personal claims that sought to negate a threatened breach of fiduciary duty claim . . . . indemnification might be available if disposition of the personal claims would determine definitively whether the plaintiffs had breached their fiduciary duties.

Here, because the plaintiffs asserted breach of contract claims not related to their conduct as fiduciaries of the company, the Court declined to indemnify such claims.  The Court found that the contract claims were personal to the plaintiffs in their capacity as lenders, creditors and guarantors, claims which did not have a sufficient nexus to plaintiffs’ corporate duties.

However, the Court permitted indemnification of a portion of the fees incurred to defend against counterclaims that were successfully defended.  Finally, because the plaintiffs did not substantially prevail in their claims seeking indemnification, the court granted a small percentage of the “fees for fees” incurred in connection with this indemnification action.

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 a very recent Delaware Supreme Court decision, Dieckman v. Regency GP LLC, et al., No. 208, 2016 (Del. Jan. 20, 2017), the High Court reversed the Court of Chancery and upheld claims based upon breach of the implied covenant of good faith and fair dealing.  The decision is noteworthy because the limited partnership agreement disclaimed fiduciary duties, and provided for conflict resolution safe harbors which defendants asserted were met.  However, the manner in which such safe harbors were obtained doomed defendants’ reliance upon the same.

Background

The plaintiff is a limited partner/unitholder in the publicly-traded master limited partnership (“MLP”). The general partner proposed that the partnership be acquired through merger with another limited partnership in the MLP family. The seller and buyer were indirectly owned by the same entity, creating a conflict of interest.

The general partner sought refuge in two safe harbor conflict resolution provisions contained in the limited partnership agreement: “Special Approval” of the transaction by an independent Conflicts Committee, and “Unaffiliated Unitholder Approval.” The former requires approval by a special committee independent of the sponsor and its affiliates review and make a recommendation to the board whether to approve the transaction.  The latter requires approval by a majority of unitholder unaffiliated with the general partner and its affiliates.  Under the Limited Partnership Agreement (“LPA”), if either safe harbor is satisfied, then the transaction is not a breach of the agreement.

Plaintiff brought a petition before the Court of Chancery challenging the propriety of the transaction.  Plaintiff alleged that the Conflicts Committee itself was conflicted.  Plaintiff also alleged that the unitholder approval was not satisfied because the general partner made false and misleading statements in a 165 proxy statement to secure such approval.  According to plaintiff, the proxy statement failed to disclose that the Conflicts Committee was not disinterested.

Defendants moved to dismiss the Chancery action, taking the position that the general partner need only satisfy what the partnership agreement expressly required—to obtain the safe harbor approvals and follow the minimal disclosure requirements. Defendants asserted that, whether the information contained in the proxy statement was misleading, or who served on the special conflicts committee, was immaterial based upon the literal reading of the LPA.

The Court of Chancery granted Defendants’ motion to dismiss, which prompted the appeal. Chancellor Bouchard found that fiduciary duties could not be used to impose disclosure obligations on the general partner beyond those in the LPA, because the LPA disclaimed fiduciary duties.  The Court of Chancery also found that the only express requirement contained in the LPA in the event of a merger was that the general partner provide notice of the merger agreement, and there was no requirement to provide notice of a conflict among the Conflicts Committee.

Analysis

The Supreme Court noted that the partnership agreement does not address how the general partner must conduct itself when seeking safe harbors contained in the partnership agreement. However, the Court found that where the express terms of the partnership agreement naturally imply certain corresponding conditions, unitholders are entitled to have those terms enforced according to the reasonable expectations of the parties to the agreement.

Specifically, the High Court stated:

The implied covenant is well-suited to imply contractual terms that are so obvious—like a requirement that the general partner not engage in misleading or deceptive conduct to obtain safe harbor approvals—that the drafter would not have needed to include the conditions as express terms in the agreement.

In other words, the general partner could not rely upon the safe harbor approvals, when it engaged in misleading or deceptive conduct to obtain such approvals, regardless of whether the LPA disclaimed fiduciary duties.

Key Takeaway

Although alternative entities may choose to waive fiduciary duties, the one duty that parties cannot waive in a Delaware alternative entity agreement is the duty to act consistently with the implied contractual covenant of good faith and fair dealing.  Moreover, once parties go beyond the minimal requirements set forth in safe harbor provisions, their actions and disclosures are likewise bound by the covenant.

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.

It goes without saying that a corporation’s bylaws must comply with the applicable provisions of the Delaware General Corporation Law (“DGCL”).  The recent decision rendered by Vice Chancellor Glasscock, Fretchter v. Zier, et al., C.A. No. 12038-VCG (Del. Ch. Jan. 24, 2017) considered whether a corporate bylaw, requiring a two-thirds stockholder vote to remove a director, complied with the DGCL.

Among other things, plaintiff brought a declaratory judgment action that the removal provision of the bylaws violates Section 141(k) of the DGCL, and moved for summary judgment on the count.  Defendants responded with a motion to dismiss the complaint.

The Court granted plaintiff’s motion for summary judgment, finding that the bylaw ran afoul of 8 Del. C. § 141(k), under which directors may be removed by a majority vote of corporate shares.  Notably, the decision explained that the matter solely analyzed the bylaws, with no consideration of the corporation’s certificate of incorporation.

The Court noted that Section 141(k) of the DGCL provides that “[a]ny director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors” subject to two exceptions not pertinent here.  Vice Chancellor Glasscock also rejected defendants’ assertion that Section 216 of the DGCL authorized the bylaw, and disagreed with their assertion that Section 141(k) is permissive.

Accordingly, the Court held that “Section 141(k) unambiguously confers on a majority the power to remove directors, and the contrary provision in the Company bylaws is unlawful.”

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 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.