Delaware Corporate and Commercial Litigation Blog

Court of Chancery Questions Special Litigation Committee's Independence and Investigation; Denies Motion to Dismiss Litigation

Francis G.X. Pileggi — Wed, 17 Mar 2010 15:28:12 -0500

In London v. Tyrrell et al., C.A. No. 3321-CC (March 11, 2010), read opinion here, the Court of Chancery denied a special litigation committee’s (“SLC”) motion to dismiss a shareholder’s lawsuit under Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981) because there were material questions of fact regarding: (1) the SLC’s independence, (2) the good faith of its investigation, and (3) the reasonableness of the grounds upon which the SLC recommended dismissal of the lawsuit. A prior Chancery ruling in this case was highlighted on this blog here.

Kevin Brady, a highly regarded Delaware litigator, prepared this synopsis.

Background

In 1996, plaintiffs Craig London and James Hunt and defendants Patrick Neven and Walter Hupalo, and others founded iGov, a government contracting firm. In 2005, after changing its focus, iGov won a 5-year $300 million contract with the United States Special Operations Command (the “TACLAN” contract). Because of the expenses it incurred in reinventing itself, iGov’s CEO, Neven, hired Michael Tyrrell as a consultant (he later replaced London as CFO of iGov) to help iGov find a lender to supply it with an operating line of credit. Textron Financial surfaced as a possible candidate. Around the same time, defendants decided that it would be advisable to implement an equity incentive plan (the “2007 Plan”) for the benefit of key members of management. Chessiecap Securities, Inc. was retained to value iGov stock for purposes of setting the exercise price of options for the 2007 Plan.

The Valuation Rollercoaster

Throughout 2006, Tyrrell distributed a number of 2007 forecasts which reflected ever-changing EBITDA. On May 4, 2006, Tyrrell sent Textron a fiscal year 2007 forecast reflecting an EBITDA of approximately $3.5 million (the “First Textron Forecast”). On August 15, 2006, Tyrrell sent Textron an updated 2007 forecast showing an EBITDA of roughly $3 million (the “Second Textron Forecast”). On August 23, 2006 Tyrrell sent Chessiecap a 2007 forecast that showed an EBITDA which also had a value of approximately $3 million (the “Original Chessiecap Forecast”). On October 2, 2006, Chessiecap valued iGov equity at $5.5 million, however, Tyrrell told Chessiecap that in his view $5.5 million was “probably on the high side.” On October 18, 2006, Tyrrell sent Chessiecap a revised forecast that eliminated certain revenues and expenses and showed an EBITDA of $1.8 million (the “Revised Chessiecap Forecast”). On October 31, 2006, Chessiecap certified its Final Valuation of the equity of iGov at $4.7 million. Finally, on December 8, 2006, Tyrrell sent Textron another updated 2007 forecast that showed an EBITDA of approximately $3.1 million (the “Third Textron Forecast”).

London and Hunt are Removed as Directors

In January, a split in the board developed over the correct valuation to use. On January 7, 2007, Tyrrell sent an email to iGov management regarding a proposal to purchase London’s shares for $4 per share, but he wanted an updated valuation since he felt that iGov’s “valuation will likely be higher than $4.7 million [the Final Valuation]. . . .” On January 16, 2007, London objected to iGov relying on Chessiecap’s Final Valuation for purposes of the 2007 Plan because he felt the information upon which the Final Valuation was based was stale and inaccurate. On January 17, 2007, Hunt, who also believed the Final Valuation was unreliable, made an offer to buy all of Neven’s stock at $28 per share. Defendants Neven and Hupalo, who owned 42.5% of iGov’s voting stock, teamed up with iGov officer and shareholder Jack Pooley (collectively they owned 50.1% of iGov’s voting stock), and executed written stockholder consents removing London and Hunt from the board and electing Tyrrell to the board.

The 2007 Plan is Adopted

Defendants then engaged Chessiecap to prepare an addendum to its Final Valuation in which, among other things, Chessiecap concluded for the first time that the fair market value per share as of July 31, 2006 was $4.92. Defendants then held a special meeting of the iGov board on January 30, 2007 to consider the 2007 Plan under which the defendants were given 60% of the options granted and the plaintiffs were given no options or shares. The 2007 Plan also provided that the exercise price of the options could not be less than 100% of the fair market value of iGov common stock on the date the options were granted. Defendants unanimously voted as directors to approve the 2007 Plan and simultaneously adopted $4.92 per share as the fair market value of iGov shares on January 30, 2007 based on Chessiecap’s Final Valuation, dated July 31, 2006, and the associated addendum.

Former Directors File Suit

After the 2007 Plan was approved, plaintiffs filed a books and records action under 8 Del. C. § 220. Plaintiffs engaged the McLean Group, a valuation firm, to conduct separate valuations of iGov’s equity as of October 31, 2006 and December 31, 2006 (the “McLean Valuations”). In performing the McLean Valuations, McLean used the Second Textron Forecast rather than the Revised Chessiecap Forecast. The McLean Valuations placed the per share value of iGov equity at $13.32 on October 31, 2006 and $15.45 on December 31, 2006. Around this same time, iGov expanded the size of its board from three members to five, adding Vincent Salvatori and John Vinter. On October 31, 2007, after attempts to resolve the dispute failed, plaintiffs filed their complaint. In February 2008, the complaint was amended in response to defendants’ motion to dismiss. The plaintiffs claimed that the defendants breached their fiduciary duties of care and loyalty in that the defendants materially misrepresented iGov’s business prospects to Chessiecap in order to get a lower valuation for them to acquire iGov stock. The plaintiffs sought, among other things, rescission of the options granted to defendants under the 2007 Plan.

SLC Formed

On November 21, 2008, the iGov board formed a two-member SLC comprised of the two new board members (Salvatori and Vinter) to consider whether it was in iGov’s best interest to pursue the derivative claims in plaintiffs’ complaint. The SLC hired legal and financial advisors and conducted an investigation from April 2009 to July 2009. During the investigation, the SLC’s financial advisor (“SRR”) performed valuations of iGov as of October 31, 2006 and January 30, 2007 without reviewing the work done by Chessiecap and McLean. The SLC concluded that October 31, 2006 was an appropriate valuation date because it believed that Chessiecap’s Final Valuation was essentially current as of October 31, 2006, despite being dated July 31, 2006. The SLC determined that January 30, 2007 was an appropriate date because it was the date the challenged 2007 Plan was adopted. SRR also concluded that since iGov was worth $3.90 - $4.15 per share as of October 31, 2006 and $5.24 - $5.39 per share as of January 30, 2007, the $4.92 per share price was “within the range of fair market value” based on the SRR valuations.

SLC Recommends That the Lawsuit Be Dismissed

On August 5, 2009, the SLC filed a Report concluding that the suit was not in the best interests of the Company and recommending that it be dismissed. The SLC concluded that the defendants acted properly in adopting the 2007 Plan and did not breach their duties of care or loyalty. With regards to the duty of care, the SLC found that the 8 Del. C. § 102(b)(7) provision in iGov’s certificate of incorporation exculpates directors from personal liability not involving intentional misconduct or knowing violations of the law. The SLC concluded that a duty of care claim should not be pursued because any breach of care conduct, if it occurred, would be covered by the § 102(b)(7) provision. As to the duty of loyalty, the SLC concluded that defendants’ approval of the 2007 Plan and actions leading to that approval would satisfy the entire fairness standard because the process employed was fair and the $4.92 price was fair. The SLC also determined that no rescission of the options granted under the 2007 Plan was necessary because $4.92 was in the range of fair market value.

Two-Step Analysis under Zapata

Under the Delaware Supreme Court’s decision in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981) there is a two-step analysis that must be applied to the SLC’s motion to dismiss. First, the Court must review the independence of SLC members and whether the SLC conducted a good faith investigation of reasonable scope that yielded reasonable bases supporting its conclusions. In the second step, the Court applies its own business judgment to the facts to determine whether the corporation’s best interests would be served by dismissing the suit.

Independence Questioned – “Caesar’s Wife” or “My Cousin Vinter”

The Court noted that an SLC member is not independent if he or she is incapable, for any substantial reason, of making a decision with only the best interests of the corporation in mind. Quoting the Supreme Court’s decision of Beam v. Stewart, 845 A. 2d 1040, 1055 (Del. 2004):

Unlike the demand-excusal context, where the board is presumed to be independent, the SLC has the burden of establishing its own independence by a yardstick that must be “like Caesar's wife”-“above reproach.” Moreover, unlike the presuit demand context, the SLC analysis contemplates not only a shift in the burden of persuasion but also the availability of discovery into various issues, including independence.

In this instance, it was undisputed that neither Salvatori nor Vinter had a personal stake in the challenged transactions and neither faced any risk of personal liability in this action. However, the Court was troubled by the fact that Vinter was related to Tyrell (Vinter’s wife was Tyrell’s cousin) and Salvatori used to work for Tyrell.

While the Court admitted that it was not possible, at this stage of the proceedings, to say unequivocally that either Vinter’s or Salvatori’s independence was impaired, the burden was on them to show no material question existed about their independence.

The Court determined that they had failed to meet that burden. Moreover, the Court noted that there was evidence to suggest that Vinter and Salvatori may not have conducted their investigation objectively after having considered plaintiffs’ claims. In concluding that the SLC failed to satisfy the independence prong of Zapata, the Court stated that members of an SLC “should be selected with the utmost care to ensure that they can, in both fact and appearance, carry out the extraordinary responsibility placed on them to determine the merits of the suit and the best interests of the corporation, acting as proxy for a disabled board.”

“Scope” of Investigation and “Bases” for Conclusion Questioned

To conduct a good faith investigation of reasonable scope, the Court stated that the SLC had to investigate all theories of recovery asserted in the plaintiffs’ complaint and explore all relevant facts and sources of information that bear on the central allegations in the complaint. If the SLC failed to do that, the result would raise a material question about the reasonableness and good faith of the SLC’s investigation.

Here the SLC concluded that § 102(b)(7) provisions such as iGov’s are routinely upheld by Delaware courts and that such a provision protects defendants from personal liability, in the form of money damages, for gross negligence. However, the Court rejected the SLC’s conclusion stating “I find this to be an unreasonable conclusion because the SLC failed to consider that the requested relief in plaintiffs’ complaint is not limited to money damages; it specifically requests that the 2007 Plan be rescinded. Under Delaware law, exculpatory provisions do not bar duty of care claims ‘in remedial contexts . . ., such as in injunction or rescission cases.’

The SLC also concluded that plaintiffs’ duty of loyalty claims should be dismissed because it believed that the 2007 Plan was entirely fair to iGov -- (1) the process defendants’ employed to secure approval of the 2007 Plan, particularly the process employed to develop the exercise price, was entirely fair, and (2) $4.92 was a fair exercise price. The Court disagreed finding that it was not acceptable for Tyrell to provide Chessiecap with the Revised Chessiecap Forecast showing an EBITDA of $1.8 million while simultaneously providing Textron with multiple iterations of EBITDA forecasts. The Court stated that this type of behavior in the current economic environment was particularly troubling:

As is evident from the SLC Report, the SLC concluded that the process of adopting the 2007 Plan was fair primarily because the SLC believes it was perfectly normal for Tyrrell to provide “optimistic” and “art of the possible” forecasts to Textron and use those forecasts internally, while at the same time providing a forecast to its valuation expert that was “substantially lower” but something the Company could “actually achieve,” rather than being “wishful.” To put it mildly, this is an interesting conclusion, especially in light of the current credit environment. One would suspect that lenders would prefer a forecast projecting what management believes is actually achievable as opposed to wishful.

The Court also identified a number of questions which were not adequately investigated by the SLC, including: (i) why did Tyrrell provide Chessiecap with the Original Chessiecap Forecast (showing an EBITDA of roughly $3 million) if he did not believe that the projections in that forecast were actually achievable? and (ii) why did Tyrrell provide Textron with the Third Textron Forecast (showing an EBITDA of 3.1 million) after he provided Chessiecap with the Revised Chessiecap Forecast (showing an EBITDA of $1.8 million)?

As to “Fair Price,” the Court questioned how the SLC could determine that both the Chessiecap Final Valuation and McLean Valuations were “tainted” and as a result, the SLC did not rely on either valuation (or any other valuation) in concluding that $4.92 was a fair price. Since the SLC had no professional valuation upon which to rely, the Court found that a material question of fact existed about whether the SLC had a reasonable basis to conclude that $4.92 was a fair price. Finally, with respect to the second prong of Zapata, since the Court found that the SLC failed the first prong of Zapata, the Court noted that it was unnecessary to continue the analysis because the result would not change.

Chancery Changes Co-Lead Counsel in Revlon Class Action

Francis G.X. Pileggi — Tue, 16 Mar 2010 15:53:03 -0500

In Re Revlon, Inc., Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. March 16, 2010), read opinion here. This is a Court of Chancery opinion that is certain to generate copious commentary. The Court removed the original Co-Lead Counsel and appointed new Co-Lead Counsel for the class.

This is the type of major decision that warrants a short blurb to make readers aware of it, and allow them to read the whole 44-pages until we have time to provide a more complete review of this important opinion.

We will attempt to supplement this abbreviated post soon, but in the meantime a cursory review makes it clear that this opinion is destined to be cited often for several reasons. For example, it describes the practice and some history of firms who file class actions in the Court of Chancery very soon after a public announcement of a transaction and the ensuing battle for lead counsel among firms filing competing complaints involving the same contested transaction. Footnotes refer to law review articles and prior Chancery decisions that chronicle the issues that arise in this context, often involving the same firms that the Court refers to as "frequent filers" in this Court. The Court also refers to this phenomenon as the "opening steps in the Cox Communications Kabuki dance." (Slip op. at 8.)

The opinion includes scholarly analysis regarding the criteria employed by the Court in its selection of lead counsel in class actions, noting that the size of plaintiff's holding is not always determinative. Without any intent to "name names" and having no interest in identifying firms on this blog that suffered in this case, it must be noted that the Court concluded that original counsel did not "provide adequate representation."

The Court cites to many academic sources that discuss the policy issues that arise in these types of cases, as well as the "pros and cons" of what the Court refers to as "entrepreneurial litigators" who have a portfolio of class action cases. There is much more to commend this decision as must-reading for any lawyer or plaintiff who files a representative action in the Delaware Court of Chancery. A fuller synopsis will follow soon.

Agreement Terminable at Will Not Subject to Statute of Frauds

Francis G.X. Pileggi — Sun, 14 Mar 2010 15:20:31 -0500

Dweck v. Nasser, C.A. No. 1353-VCL (Del. Ch. March 10, 2010), read letter decision here.

Prior decisions of the Court of Chancery involving this matter have been highlighted on this blog here.

This short three-page letter decision refused to apply the Statute of Frauds to an oral agreement that was terminable by either party at any time "upon performance of an act which is within the control of one of the parties." The Court reasoned that because the "performance of the agreement could be completed within one year without breach by either party", the Statute of Frauds did not bar its enforcement.

In a previous decision in this matter, the Court of Chancery ruled that the oral agreement still being disputed in the instant ruling, (which is based in part on an unsigned draft shareholders' agreement), could not serve the purpose of a "voting agreement" due to the requirement of DGCL Section 218(a) that voting agreements or voting trusts be in writing. Nonetheless, the Court observed, nothing prevents the application of another state's contract law, such as New York in this case, to issues such as contract formation at the same time that the DGCL governs the validity of the corporate governance implications of the contract.

Supreme Court Decides Claim Not Covered by Arbitration Clause

Francis G.X. Pileggi — Sat, 13 Mar 2010 16:07:23 -0500

Kuhn Constr. Co. v. Diamond State Port Corp., No. 124, 2009 (Del. Supr. Mar. 8, 2010), read opinion here. In this rare reversal of the Court of Chancery, the Delaware Supreme Court determined that the claims at issue were not subject to arbitration based on the wording of the arbitration provision in the agreement involved.

The Diamond State Port Corp. (DSPC) and Kuhn had disputes about a construction project. DSPC sent Kuhn a notice of intent to arbitrate and a demand for arbitration. Kuhn replied by filing a complaint for injunctive relief pursuant to Section 5703(b) of Title 10 of the Delaware Code (Delaware Uniform Arbitration Act). DSPC filed a motion to dismiss pursuant to Rule 12(b)(6). Chancery granted the motion to dismiss.

The Delaware Supreme Court reversed and began its analysis with the public policy of Delaware that supports arbitration but the predicate of that policy is that the parties have clearly and expressly agreed to arbitrate. Delaware's highest court emphasized that it would not enforce a contract that "unclearly or ambiguously reflects the intention to arbitrate." The Court then discussed basic contract interpretation principles and the standard for determining if a contract is ambiguous.

There were three primary reasons for the Court's decision. First, the applicable clause in the parties' agreement did not clearly and unambiguously indicate the intention to arbitrate the claims at issue. Second, despite isolated terms that may support the view of DSPC, the contract as a whole favored Kuhn's argument that the arbitration clause was not intended to cover all claims. Third, the trial court relied on the 1968 Delaware Supreme Court case in Ruckman that it found controlling, however, Delaware's High Court determined that Ruckman neither controls nor guides the resolution of the instant dispute.

This relatively short opinion is helpful for addressing the frequent litigation that arises in connection with the "coverage" of arbitration provisions.

Citizens United and Corporate Governance

Francis G.X. Pileggi — Sat, 13 Mar 2010 13:23:43 -0500

Professor J.W. Verret writes about the confluence of corporate governance and the recent SCOTUS decision in Citizens United, here, in connection with proposed federal legislation. An excerpt follows:

In short, this bill sought to hijack the securities laws to regulate campaign finance. Even worse, it sought to give Union and State Pension Funds a veto over corporate political spending. As such, my thesis today was simple: trying to achieve labor and campaign policy goals through the securities laws leaves ordinary investors, who hold shares through their 401(k)s, holding the tab for this politically motivated activity

Chancery Upholds State Law Claim for Insider Trading

Francis G.X. Pileggi — Thu, 11 Mar 2010 18:10:32 -0500

Pfeiffer v. Toll, C.A. No. 4140-VCL (Del. Ch. March 3, 2010), read opinion here. This scholarly decision upheld state law claims against directors for insider trading. The Court of Chancery rejected the argument that federal law preempted state law for such claims. For anyone who wants to know the latest Delaware law on insider trading claims, and the Brophy line of cases, this is must reading. The Court cited in its decision to nationally prominent corporate law professor Stephen Bainbridge. See Slip op. at 35, 36, and 41 (citing Stephen M. Bainbridge, Securities Law: Insider Trading 15-16 (2d ed. 2007)). Of course, regular readers of this blog know that the Delaware Court of Chancery and the Delaware Supreme Court have cited to Professor Bainbridge's scholarship many times in prior opinions.

The good professor has already penned thoughtful commentary on this opinion with extensive insight and analysis.We are fortunate to have this nationally recognized expert's review of this case. (It makes my job easier). Thus, I commend to you Professor Bainbridge's discussion of this case, especially regarding the interface between state and federal law in connection with insider trading, available on his blog here and here.

P.S. Professor Larry Ribstein, another prolific, nationally recognized expert whose scholarship is often cited by the Delaware Courts, has just provided his scholarly insights on this case here.

Chancery Decides Winner in Race Car Dispute

Francis G.X. Pileggi — Tue, 09 Mar 2010 18:02:24 -0500

Jarvis v. Elliott, C.A. No. 4753-CC (Del. Ch. March 5, 2010), read opinion here. This 18-page decision is as fun as it gets when it comes to reading judicial decisions.

Although the amounts involved in this case are more fitting for a small claims court, and the primary legal issues are replevin and conversion, the main reason I include this decision on this blog--which seeks to cover all the key decisions on corporate and commercial law from Delaware's Chancery Court and Supreme Court, is due to the memorable manner in which the opinion is written. It includes a combination of serious adjudication mixed with multiple references to famous race car drivers, movies about race cars and other indications that the author of this opinion is quite familiar with the industry from which the parties in this case arrive at the Court. This decision also highlights the reality that not all business disputes in Chancery are billion dollar disputes among Fortune 100 companies. The Court in this case awarded a total of $1,260.67--though the opinion is just as thoughtfully written as if it were one of the many major disputes the Court handles.

The opening line to the ruling deserves to be quoted: "Success on the track does not guarantee success off the track. With regret that a winning team fell apart, I must now sort through the wreckage of a failed relationship...."

The Court explained that replevin was typically not within its jurisdiction but that it retained it in this case under the "whole case or controversy" doctrine based on initial partnership claims. Before defining the elements of a replevin action, the Court began its analysis thusly: "My analysis will be swifter than Richard Petty's race-clinching pit stop at the 1981 Daytona 500. The chassis of this case is a replevin action".

The Court also referred in footnotes to famous movies featuring racing. See footnotes 50, 51 and 52. Demonstrating a firm grip on the details of the racing industry, the Court acknowledged towards the end of its decision the importance of backup engines and backup cars by the following reference: "Just ask Jimmie Johnson, who recently won one of the 2010 Daytona 500 qualifiers in a backup car."

Chancery Denies Motion to Disqualify Cravath Firm in Airgas/Air Products Battle

Francis G.X. Pileggi — Sat, 06 Mar 2010 13:58:15 -0500

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.

Delaware Supreme Court Asks New York Court of Appeals to Address Issue of New York Law; Re: Liability of PricewaterhouseCoopers

Francis G.X. Pileggi — Fri, 05 Mar 2010 12:24:07 -0500

Teachers' Retirement System of Louisiana v. PricewaterhouseCoopers LLP, No. 454, 2009 (Del. March 4, 2010), read opinion here.

In this short ruling, the Delaware Supreme Court used an procedure provided for under the New York Rules of Court to certify a question of law to New York's highest court, the New York Court of Appeals. This approach was based on the following finding of Delaware's highest court: "We have concluded that a resolution of this appeal depends on significant and unsettled questions of New York law that are properly answered, in the first instance, by the New York Court of Appeals."

This matter involves an appeal from the Delaware Court of Chancery regarding the oft-cited AIG case which denied a motion to dismiss claims against the top officials of AIG for breach of fiduciary duty based on Delaware law. However, the claims against the auditor, PwC, were dismissed based on New York law. Highlights of that AIG decision (of more than 100 pages), were provided on this blog here. See American Int’l Group, Inc. v. Greenberg, 965 A.2d 763, 817-22, 826-27 (Del. Ch. 2009).

The Delaware Supreme Court certified the following question to the New York Court of Appeals:

Would the doctrine of in pari delicto bar a derivative claim under New York law where a corporation sues its outside auditor for professional malpractice or negligence based on the auditor’s failure to detect fraud committed by the corporation; and, the outside auditor did not knowingly participate in the
corporation’s fraud, but instead, failed to satisfy professional standards in its audits of the corporation’s financial statements?

Court of Chancery Validates Adoption of Unique Poison Pill to Protect NOLs

Francis G.X. Pileggi — Fri, 05 Mar 2010 10:37:03 -0500

On March 1, 2010, Vice Chancellor Noble issued a long-awaited post-trial decision on the validity of the implementation of a net operating loss carry forward (“NOLs”) rights plan. Selectica, Inc. v. Versata Enterprises, Inc., et al., C.A. No. 4241-VCN, read opinion here

Kevin Brady, a highly regarded Delaware litigator, prepared this synosis.

In his 71-page opinion, Vice Chancellor Noble validated Selectica’s adoption of the NOL pill as a valid exercise of the Board’s business judgment under Unocal Corp. v. Mesa Petroleum Co., 493 A. 2d 946 (1985).

Background

Selectica provides enterprise software solutions for contract management and sales configuration systems. Trilogy, Inc. also specializes in enterprise software solutions. Versata Enterprises, Inc. a subsidiary of Trilogy, provides technology powered business services. All three are Delaware corporations. Selectica became a public company in 2003 and since that time it has failed to turn a profit. What it did generate, however, was an estimated $160 million of NOLs.

In 2008, Trilogy made three proposals to acquire Selectica; all were rejected. In October 2008, Trilogy began making open-market purchases of Selectica stock and on November 10, 2008 Trilogy informed Selectica that it had purchased more than 5% of Selectica’s outstanding stock. Within a week, Trilogy had increased it’s ownership to over 6%. On November 16, 2008, the Selectica Board met to discuss the Trilogy situation and to consider amending Selectica’s 2003 poison pill. The Board unanimously passed a resolution amending the poison pill decreasing the beneficial ownership from 15% to 4.99% “while grandfathering in existing 5% shareholders and permitting them to acquire up to an additional 0.5% (subject to the original 15% cap) without triggering the NOL pill.”

Trilogy continued making open-market purchases “buying through the NOL Pill” bringing its total ownership to 6.7%. Trilogy then proposed that Selectica agree to, among other things, buy Trilogy’s shares back, accelerate payment of its debt and pay Trilogy $5 million for settlement of outstanding issues. While the Selectica Board was considering Trilogy’s settlement offer, the Board asked Trilogy to agree to a standstill as to any additional open-market purchases by Trilogy while the Board used the ten-day clock under the NOL Pill to determine whether to consider Trilogy’s purchases as “exempt” under the rights plan, or else how Selectica would go about implementing the pill.” The NOL Pill permitted the Board to declare Trilogy an “Exempt Person” if the Board determined that Trilogy would not “jeopardize or endanger the availability to the Company of the NOLs . . . .” Another option for the Board included exchanging the rights (other than those held by Trilogy) for shares of common stock. If the Board took no action, then at the end of the ten day period, “the rights would ‘flip in’ automatically, becoming exercisable for $36 worth of newly-issued common stock at a price of $18 per right.”

Trilogy refused to enter into a standstill agreement and Selectica’s Board rejected Trilogy’s settlement offer. On December 31, 2008, the Board concluded that the NOL Pill should go into effect. On January 2, 2009, the Board delegated authority to the Independent Director Evaluation Committee (the “Committee”) “to effect an exchange of the rights under the NOL Pill and to declare a new dividend of rights under an amended rights plan (the “Reloaded NOL Pill”).”

Thereafter, the Committee determined that Trilogy should not be deemed an “Exempt Person”, and that its purchase of additional shares should not be deemed an “Exempt Transaction”, that the exchange of rights for common stock (the “Exchange”) should occur and that a new rights dividend on substantially similar terms ought to be adopted. The Committee passed resolutions adopting the Reloaded NOL Pill and instituting the Exchange, which doubled the number of shares of Selectica common stock owned by each shareholder of record, other than Trilogy and Versata. This reduced Trilogy and Versata’s beneficial holdings from 6.7% to 3.3%.

Selectica Seeks a Declaratory Judgment in the Court of Chancery

Selectica filed an action in the Court of Chancery seeking a declaratory judgment that the actions of the Board and the Committee in adopting the NOL Pill, authorizing the Exchange, adopting the Reloaded NOL Pill and issuing a new rights dividend were valid under Delaware law and were appropriate exercises of their fiduciary responsibilities under Unocal. In particular, Selectica argued that the Board acted reasonably “in concluding that the NOLs constituted a potentially valuable asset that was threatened by Trilogy’s actions, and that the adoption of the NOL Pill, implementation of the Exchange, and adoption of the Reloaded NOL Pill and declaration of a new rights dividend were not preclusive but were reasonable and proportionate responses to the identified threat.”

Trilogy counterclaimed seeking a declaratory judgment that the NOL Pill and Reloaded NOL Pill were invalid, void and unenforceable “either because (1) they are both anti-takeover devices that, either per se or on the facts of this case, preclude an effective proxy contest; or (2) they were not a reasonable and proportionate response to a reasonably perceived threat because the Board failed to establish that the NOLs had a value worth protecting and that this value was threatened by Trilogy’s purchases.” Trilogy challenged Selectica’s argument that the Unocal standard had been met by arguing that the Selectica directors “established neither that the NOLs had a value worth protecting, nor that this value was threatened by Trilogy’s purchases.” Trilogy also sought an order enjoining or rescinding the Exchange and requiring Selectica to redeem permanently the new rights dividends issued under the Reloaded NOL Pill as well as money damages for breaches of fiduciary duty.

Poison Pills and the Unocal Test

The issue before the Court was the reasonableness of the Board’s decision to adopt “a low-threshold poison pill in order to protect assets of speculative and questionable value absent an explicit plan for how such value might be realized.” The Court stated that under the Unocal test:

[t]here is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred. Such enhanced scrutiny operates to ‘ensure that a defensive measure to thwart or impede a takeover is indeed motivated by a good faith concern for the welfare of the corporation and its stockholders’ and that the board did not act ‘solely or primarily out of a desire to perpetuate themselves in office.’

Under the Unocal test, in order to be afforded the protection of the business judgment rule in this situation, the directors had to show that: (i) that they had reasonable grounds for believing (through good faith and reasonable investigation) that a danger to corporate policy and effectiveness existed; and (ii) the defensive measure was reasonable in relation to the threat posed and not coercive or preclusive.

First Prong of Unocal -- Preservation of NOLs as a Valid Corporate Objective

Under the first prong of Unocal, the Board had to show that it had reasonable grounds for concluding that a threat to a corporate objective existed. However, the Court first had to determine whether the preservation of NOLs was a valid corporate objective. The Court was quick to point out that an NOL Pill was not your typical poison pill designed to prevent hostile takeovers because the principal function of an NOL Pill was to prevent the inadvertent forfeiture of potentially valuable assets. Moreover, determining whether NOLs were valuable assets cannot be done in isolation because NOLs derive their value from future taxable income.

Thus, the Court stated that “[g]ranting judicial sanction to low-threshold poison pills employed for the purpose of protecting NOLs guarantees the somewhat unpalatable outcome of acquiescing to the expansion of the universe of reasonable takeover defenses in order to protect assets of questionable, even dubious, value.”

However, the Court went on to note that “as NOL value is inherently unknowable ex ante, a board may properly conclude that the company’s NOLs are worth protecting where it does so reasonable and in reliance on expert advice.” The Court found that there was ample evidence to suggest that the Board placed considerable reliance on advice of outside experts in making a determination as to the value of the NOLs and there was no evidence that the Board’s reliance on the expert advice was unreasonable. As a result, the Court concluded that “the protection of company NOLs may be an appropriate corporate policy meriting a defensive response when threatened. Indeed, the protection of corporate assets against an outside threat is arguably a more important concern of the Board than restricting who the owners of the Company might be.”

Trilogy argued that Selectica failed to satisfy the first prong because there was no expert advice as to the precise value of the NOLs to Selectica. The Court rejected that argument concluding that such evidence was not necessary because:

[i]n order to conclude that a serious threat existed, the Board needed only reasonably conclude that the NOLs were a legitimate asset worth protecting. The Board recognized that the NOLs were material relative to the then-market value of the Company, and that the NOLs, if preserved, had a long window during which they would be available for use. If perhaps somewhat optimistic, they had rational expectations for the Company’s near-term profitability.

In looking at the expert advice Selectica received, the Court concluded that “the Board was reasonable in concluding that Selectica’s NOLs were worth preserving and that Trilogy’s actions presented a serious threat to their impairment.”

Second Prong of Unocal – Reasonable Response to Perceived Threat

Under the second prong of Unocal, the Court was required to evaluate whether the board’s defensive response to the threat was preclusive or coercive and, if not, whether it was “reasonable in relation to the threat” identified. This requires an evaluation of: “(i) the importance of the corporate objective threatened; (ii) alternative methods for protecting that objective; and (iii) impacts of the ‘defensive’ action and other relevant factors.”

The Court stated that “[a] defensive measure is ‘coercive’” where it is “aimed at ‘cramming down’ on its shareholders a management-sponsored alternative” and a defensive measure is preclusive where it “operate[s] to unreasonably preclude a takeover” or “preclude[s] effective stockholder action” — specifically, where the measure “makes a bidder’s ability to wage a successful proxy contest and gain control either ‘mathematically impossible’ or ‘realistically unattainable.’”

Trilogy argued that not only is the NOL Pill more preclusive that prior pills evaluated by Delaware courts, a pill with such a low threshold in conjunction with a staggered board “renders the possibility of an effective proxy contest realistically unattainable.” In rejecting Trilogy’s argument, the Court stated that: “[t]o find a measure preclusive (and avoid the reasonableness inquiry altogether), the measure must render a successful proxy contest a near impossibility or else utterly moot, given the specific facts at hand.” The Court found that based upon the record, the NOL Pill and Reloaded NOL Pill were neither coercive or preclusive and thus do not meet that standard.

Having found that the defensive measure was neither coercive or preclusive, the Court turned to the proportionality test which “requires the focus of enhanced judicial scrutiny to shift to ‘the range of reasonableness.’” Trilogy argued that the Board failed to meet the standard because there was an inadequate assessment of the impact of the adoption of the NOL Pill and the Board failed to consider whether there were alternative more narrowly-tailored methods for protecting the NOLs. The Court, however, rejected Trilogy’s argument, finding the there was sufficient evidence that the Board met its obligations to evaluate the reasonableness of its response relative to the threat, stating that, “Unocal and its progeny require that the defensive response employed be a proportionate response, not the most narrowly or precisely tailored one.”

Postscript: The Harvard Law School Corporate Governance Forum provides commentary on the case here. Professor Steven Davidoff, writing as The Deal Professor, provides his insights and analysis about the case here. Professor Bainbridge provides insightful case analysis here.

Chancery Addresses Claims Arising From Failed Business Venture

Francis G.X. Pileggi — Thu, 04 Mar 2010 18:06:53 -0500

Cline v. Grelock, C.A. No. 4046-VCN (Del. Ch. March 2, 2010), read letter decision here. This relatively short ruling from the Court of Chancery involves comparatively small amounts in dispute but is noteworthy for general principles that are applicable to larger fights. This case is also an indication of the smaller business lawsuits handled by Chancery and the challenge confronted by counsel and the Court to limit the hugely expensive cost of litigation and trial, based on the minimum work that needs to be done in any case, in proportion to the amount at stake in the case.

The most efficient manner to approach this short decision is to highlight in bullet points a few key legal concepts addressed and refer those interested to the whole ruling at the above link.

Two former co-owners (and former life-long friends) dispute their respective ownership interests in a failed business that one of the co-owners dissolved without authorization of the plaintiff, and started a new business that did not include the plaintiff.
Despite being listed on the company's tax returns as a 50% owner, the Court did not credit plaintiff with that interest because plaintiff failed to make his capital contribution in that (or any) amount. The form of entity was an LLC.
Generally, a partner is accountable for profits earned using partnership assets to start a new business which excluded a former partner. However, if no capital contribution was made to the former partnership, there is no claim to the new business.
In this case, the amount of capital the former partner would have contributed, far exceeded the value of any purported interest he may have had in the new business. Thus, no damages could be proven on that claim.
The improper dissolution by one partner was a breach of fiduciary duty that prevented him from seeking damages against his former partner who failed to make a capital contribution (presumably based on unclean hands.)
Damages do not need to be proven with precision and the difficulty of proof does not equate with no relief.
The former partner was still a guarantor on assets he no longer had an interest in, thus the Court required that the parties work in good faith with the bank to have him removed as a guarantor, but failing that, the Court required the party using the asset to indemnify the former partner, including the provision for attorneys' fees and costs in the event it became necessary to enforce the indemnity.
Costs were assessed against the partner who dissolved the former business without authority, which the Court determined was a breach of fiduciary duty

Chancery Clarifies Definition of "Contract Under Seal"

Francis G.X. Pileggi — Thu, 04 Mar 2010 17:18:31 -0500

In Sunrise Ventures, LLC v. Rehoboth Canal Ventures, LLC, No. 4119 (Del. Ch. March 4, 2010), read letter decision here, the Court of Chancery clarified the definition of a "contract under seal", which the Delaware Supreme Court recently addressed in the Whittington case summarized here, as a special type of contract that will enjoy a statute of limitations lasting 20 years.

The key "take away" legal nuggets that make this relatively short decision noteworthy can be highlighted in the following brief bullet points:

In order to enjoy the long statute of limitations available to "contracts under seal", the word "SEAL" must be affixed next to the signature lines of the contract's signatories.
In this case, the Court rejected the argument that such special status can be enjoyed by those contracts that have the mere inclusion of the word only in the "testimonium clause". (i.e., the introductory phrase at the top of some signature lines which provides: "In Witness Whereof, the parties have set their Hand and Seal, this ___ day of...")
Though not directly ruling on this issue, the Court was skeptical of the argument that the requirements of a "contract under seal" could be satisfied if less than all the signature lines included the word "seal" next to them.

The procedural context of this case was the denial of a motion for reargument. The opinion itself which the losing party sought to reargue, was either not remarkable enough or did not cover a topic within the usual scope of this blog, so we did not provide a summary. Yes, the decision on the motion for reargument was more noteworthy than the main opinion for purposes of this blog's coverage. The main opinion sought to be reargued can be found at 2010 WL 363845 (Del. Ch. Jan. 27, 2010).

Chancery Applies Res Judicata and Judicial Estoppel to Bar Claims

Francis G.X. Pileggi — Thu, 04 Mar 2010 15:21:33 -0500

Banet v. Fonds de Regulation et de Controle Cafe Cacao, C.A. No. 3742-CC (Del. Ch. March 12, 2010), read letter decision here. Prior Chancery decisions involving this matter have been highlighted on this blog here. The parties have also been engaged in extensive litigation in the New York courts.

The latest iteration of this matter involves a declaratory judgment action, pursuant to Chapter 65 of Tiitle 10 of the Delaware Code, seeking a ruling that Banet is not a stockholder of New York Chocolate and Confections Company ("NYC3"), and that Lion Capital Management, LLC ("LCM") is not a creditor of NYC3. Due to the application of res judicata and judicial estoppel, the Court does not directly address the substance of those claims. The background facts involve the parties' participation in a chocolate factory in New York.

Chocolate lovers everywhere can appreciate the opening sentence of the Court's letter decision: "The parties in this long-running dispute are locked in a fight over the status of their legal relationship, and, unfortunately, there is no amount of chocolate that can ease the pain."

This concise letter decision provides a helpful analysis and application of the elements of three important legal principles:

res judicata (n.28)
judicial estoppel (n.35)
declaratory judgment actions (n.20)

The prodecural posture of this case was presented to the Court as cross-motions for summary judgment and the lengthy and tortuous prior litigation history between the parties, and the many prior court decisions both in Delaware and in New York were reviewed in the context of this Court's application of the above principles.

One noteworthy aspect of the res judicata discussion was the Court's observation that the named parties in the prior suit need not be identical. Rather it suffices for there to be privity with a party in the prior adjudication. Privity in this context is defined as one having a "close or signficant relationship" with another. (n. 31). Moreover, as noted in other recent Delaware decisions, res judicata also bars claims that "could have been asserted" in the prior action. (n. 32).

Judicial estoppel barred Banet from claiming stock ownership because in a prior ruling this Court relied on Banet's argument that LCM was the owner of shares. Thus, Banet cannot now argue that he is the owner of the same shares. The Court explains in detail why prior adjudications and prior contrary positions taken by the plaintiff required that summary judgment be granted in favor of defendants.

Court of Chancery Clarifies Scope of Arbitration Clause

Francis G.X. Pileggi — Wed, 03 Mar 2010 08:57:56 -0500

In Aveta v. Bengoa, No. 3598-VCL (Del. Ch. March 1, 2010), read letter decision here, the Court of Chancery clarified its prior decision, summarized here, regarding the scope of an arbitration clause. This 3-page letter ruling supplements a prior 43-page opinion from the Court linked above(which is pending appeal before the Delaware Supreme Court.)

The very limited thrust of this decision is to confirm that based on the arbitration clause at issue, the Court had the authority to determine the scope and validity of the arbitration provision because that power was not delegated in the agreement to the arbitrator. The Court cited for this position both the decision in James and Jackson, LLC v. Willie Gary LLC , 906 A.2d 76, 78-79 (Del. 2006), and 10 Del. C. Section 5703.

The Court also determined that the agreement did not allow the parties to expand the issues to be litigated before the arbitrator beyond those initially presented by the deadline provided in the agreement, and as for the substantial delay caused by one party, the Court provided a remedy for that delay in its prior opinion. In closing, the Court explained that the arbitrator can determine what information it will--or will not--consider in deciding the issues and the Court declined to "intrude on the arbitral process by ruling on this question."

Delaware Court of Chancery Imposes Personal Jurisdiction on Singapore Resident Serving as LLC "Manager" per Section 18-109 of LLC Act

Francis G.X. Pileggi — Sat, 27 Feb 2010 14:53:21 -0500

PT China LLC v. PT Korea LLC, No. 4456-VCN (Del. Ch., Feb. 26, 2010), read letter decision here. Many thanks to Peter Ladig, one of the Delaware counsel of record in this case, for forwarding this decision to me the same day it was issued. (The photo below is of the Kent County Courthouse, where the Court of Chancery hears cases in Dover, although a new Courthouse is under construction.) This 29-page decision should be included in the tool box of every Delaware litigator who needs to know about obtaining jurisdiction over a "manager" of a Delaware LLC who may not have any other contacts with Delaware.

Threshold Issue: Whether personal jurisdiction can be imposed on a Singapore resident based on Section 18-109 of the Delaware LLC Act, and if so, if the exercise of such jurisdiction comports with due process prerequisites?

Consent Statute for LLC Managers

Analogous to the consent statute for directors of corporations at 10 Del. C. Section 3114, managers of Delaware LLCs are deemed to consent to the personal jurisdiction of Delaware courts pursuant to Section 18-109 when they agree to serve as a manager of an LLC, and when the suit is "involving or related to the business of the limited liability company or a violation by the manager...of a duty to the limited liability company, or any member...." Even so, due process must still be satisfied.

"Manager" is defined broadly in Section 18-101(10) to include a person who "participates materially in the management of the limited liability company." Obviously this covers a rather broad class of people, including one who may not be formally bestowed with the appellation of manager as that term is often used in a colloquial sense.

Is Due Process Satisfied if Section 18-109 Imposes Jurisdiction for Claims "Relating to Business and Affairs of the LLC" as compared to Fiduciary Duty Claims Against a Manager?

Delaware Courts have previously determined that if claims against a manager of an LLC relate to his or her fiduciary duty obligations, then due process considerations are satisfied when Section 18-109 is used to imposed jurisdiction. See footnote 22 and cases cited. The more nuanced issue in this case is whether the same conclusion can be reached when the claims are not necessarily based on fiduciary duty violations. Prior cases suggest a consideration of three factors to address this issue: (i) do the allegations focus on the rights, duties and obligations of the manager; (ii) is the matter "inextricably bound up in Delaware law"; and (iii) Delaware has a strong interest in providing a forum for disputes relations to actions of managers of a limited liability company formed under its law in discharging their managerial functions.

Sub-Issue: Do Contractual Claims Bar Fiduciary Duty Claims Based on the Same Conduct due to the "Primacy of Contract Law in Delaware" over Fiduciary Claims Involving Matters Based in Contract Rights and Duties.

Prior decisions of this Court have recognized that "a contractual claim will preclude a fiduciary duty claim, so long as 'the duty sought to be enforced arises from the parties' contractual relationship'", due to the primacy of contract law. See fns. 32 to 34 for cases cited. The appropriate question to ask in order to analyze this issue is "whether there exists an independent basis for the fiduciary duty claims apart from the contractual claims, even if both are related to the same or similar conduct." See fn. 34.

The Court explained that it was not necessary to find that the claims against the manager were based on fiduciary duties in order to apply Section 18-109 to impose jurisdiction. Rather, so long as the action "involves the manager's rights, duties, and obligations to the company", due process will be satisfied under the consent statute. See fn. 35. There was no issue in this case about whether the operative agreement limited fiduciary obligations and related liability. Compare generally, Kelly v. Blum decision by Chancery highlighted earlier this week here.

The Court reasoned that the instant dispute is "intertwined with the defendant's [manager's] managerial position", and coupled with "... the potential usefulness of his involvement in this suit, and Delaware's interest in adjudicating disputes involving the management of its limited liability companies...", the Court found justification for exercising jurisdiction in this matter consistent with "constitutional standards of fairness and substantial justice." See fns. 43-44. See generally, In Re USACafes, L.P. Litigation, 600 A.2d 43, 52-53 (Del. Ch. 1991). The Court noted parenthetically, however, that it was not passing judgment on whether the contract-based claims would prevail at a later stage of the proceedings in terms of being plead sufficiently.

Delaware Court of Chancery Awards Fees Based on Prevailing Party Provision

Francis G.X. Pileggi — Fri, 26 Feb 2010 15:10:12 -0500

In Global Link Logistics, Inc. v. Olympics Growth Fund, III, L.P., C.A. No. 4444-VCP (Del. Ch., Feb. 24, 2010), read letter decision here, the Court granted plaintiffs’ entire fee request based on a fee-shifting provision.

Danielle Blount, an associate in our firm, prepared this case summary.

The Court found no support for the argument that the plaintiffs’ filings and the brevity of the documents demonstrated the unreasonableness of plaintiffs’ attorneys’ fee request. The Court dismissed defendants’ contentions and relied upon the following facts: (1) that the plaintiffs were opposed by multiple sets of defendants; (2) the arbitration was highly contentious; and (3) a balance of $9 million remained unpaid when plaintiffs commenced the action. The Court concluded that plaintiffs were justified in relying on expensive counsel to obtain confirmation of the arbitration award. The Court did not find as a justifiable basis to dispute a fee request, the disparity of the amounts expended by each side, or an argument premised upon not needing “such an expensive partner to bill so many hours.”

Delaware courts evaluate the reasonableness of fee requests pursuant to eight factors articulated in Rule 1.5(a) of the Delaware Lawyers’ Rules of Professional Conduct. The factors to be considered in determining the reasonableness of a fee include the following:

1. the time and labor required, the novelty and difficulty of the questions involved and the skill requisite to perform the legal service properly;

2. the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

3. the fee customarily charged in the locality for similar legal services;

4. the amount involved and the results obtained;

5. the time limitations imposed by the client or by the circumstances;

6. the nature and length of the professional relationship with the client;

7. the experience reputation, and ability of the lawyer or lawyers performing the services; and

8. whether the fee is fixed or contingent.

Delaware Lawyer’s Rules of Professional Conduct, Rule 1.5(a).

Although the confirmation of the arbitration award was unopposed, the Court found that the plaintiffs had good reason “to take every procedural step, submit every pleading, and file every motion, brief, and affidavit to obtain confirmation.” Upon determining that plaintiffs’ lawyers and law firms were “commensurate with the amount at issue” and the expertise of [d]efendants’ counsel”, the Court held that the relatively high hourly rates charged were appropriate. The Court stated that the amount charged for obtaining confirmation of the arbitration award was relatively high, however it was not unreasonable in view of the size of the judgment at stake, the legal resources defendants used against plaintiffs and defendants’ efforts to delay confirmation.

In its holding, the Court relied upon the reasoning in EDIX v. Mahani to support the award of the full amount of fees requested. 2007 WL 417208 (Del. Ch., Jan. 25, 2007). In EDIX, upon reviewing the reasonableness inquiry of a request for attorneys’ fees under a contractual fee shifting provision, the Court remarked that the acts of defendants elongated the litigation. In the present case, Vice Chancellor Parsons determined that the defendants could have minimized plaintiffs’ attorneys’ fees by promptly consenting to the confirmation of the arbitration award. Instead, as in EDIX the defendants chose to draw out the conflict by raising defenses and seeking to delay entry of the judgment. Ultimately, the court determined that the “defendants’ actions and the amount at issue created a situation in which plaintiffs could not take anything for granted in their prosecution of the matter.”

For another recent decision addressing the reasonableness of fees based on a fee-shifting provision in an agreement, see Concord Steel summarized here.

Chancery Analyzes Fiduciary Duties of LLC Members and Managers in Merger Context

Francis G.X. Pileggi — Wed, 24 Feb 2010 15:11:19 -0500

Kelly v. Blum, No. 4516-VCP (Del. Ch., Feb. 24, 2010), read opinion here. This 49-page opinion of the Delaware Court of Chancery deserves more extensive treatment--that I hope to provide soon, but for the time being, I will highlight a few bullet points regarding issues of law addressed by the Court that warrant closer reading for most lawyers who make their living in the fields of business litigation.

Confirmation of prior Delaware decisions that in the absence of an LLC Agreement provision to the contrary, both members and managers of an LLC owe traditional fiduciary duties of loyalty and care to each other and the entity. See footnote 69.
The Court found "substantial compliance" with a notice provision in the agreement to be sufficient. See pages 22 and 23.
The two exceptions to the requirement of being a member or shareholder before pursuing a derivative action.
Analysis of whether a claim is direct or derivative.
Elements of a defamation claim.

UPDATE: Professory Larry Ribstein provides an insightful analysis of the case here (which may obviate the need for me to provide a fuller synopsis myself this weekend.)

Arbitration and the Market for Corporate Law

Francis G.X. Pileggi — Wed, 24 Feb 2010 09:08:39 -0500

Professor Larry Ribstein provides a thoughtful discussion here about a recent merger agreement highlighted by Professor Steven Davidoff and the inclusion in that document of an arbitration clause as well as a choice of law clause applying Delaware law--which led to separate analysis of the recently implemented arbitration rules adopted by the Delaware Court of Chancery. Here is my recent post describing those new rules. Both professors discuss the recently enacted Delaware arbitration rules in the context of the perception that Delaware is attempting to maintain its "market" for corporate litigation as a corollary to its efforts to keep its preeminence in corporate law.

The Flexibility of Delaware Corporate Law

Francis G.X. Pileggi — Mon, 22 Feb 2010 15:28:08 -0500

Professor Steven Davidoff, writing as The Deal Professor, for The New York Times DealBook blog, writes about what he refers to as the "flexibility" of Delaware law in connection with mergers and acquisitions, depending on the structure of the deal and the form of consideration. Here is his commentary.

Chancery Imposes Penalties for Misappropriation of Trade Secrets

Francis G.X. Pileggi — Mon, 22 Feb 2010 11:10:17 -0500

Agilent Technologies, Inc, v. Kirkland, No. 3512-VCS (Del. Ch. Feb. 18, 2010), read 93-page opinion here.This magnum opus by the Delaware Court of Chancery was initially issued under seal but is now available for your reading pleasure.

A longer overview of this case will be provided soon, but in the meantime, I wanted to make this opinion available for downloading. For anyone interested in the latest iteration of Delaware law on misappropriation of trade secrets and the remedies available for breach of the Delaware Uniform Trade Secrets Act, this decision is must reading.

As a side note, students of Delaware law will observe that although not granted by the Court in this case, the trade secrets statute is one of the only bases on which the Court of Chancery is vested with authority to grant punitive damages.