Delaware Corporate and Commercial Litigation Blog

Chancery Awards Fees to Prevailing Party Based on Agreement; Examines Reasonableness of Amount

Francis G.X. Pileggi — Sat, 06 Feb 2010 19:46:54 -0500

In Concord Steel, Inc. v. Wilmington Steel Processing, Co., Inc., et al., No 3369-VCP (Del. Ch. February 5, 2010), read decision here, the Delaware Court of Chancery awarded attorneys' fees based on a provision in an asset purchase agreement that afforded reasonable attorneys' fees to the prevailing party. Our blog summary of the post-trial decision in this case, granting damages and affirming a prior injunction on a covenant not to compete, can be found here.

Issues Addressed

Was the amount of fees sought reasonable based on Rule 1.5?
Did the statutory limit of 20% collected on a debt instrument, based on Section 3912 of Title 10 of the Delaware Code, apply to the fee request pursuant to the provision of an asset purchase agreement?

Analysis

1. The Court applied the factors in Delaware Lawyers' Rule of Professional Conduct 1.5 to assess the reasonableness of fees. The factors in the rule include the following:

the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal services properly;
the fee customarily charged in the locality for similar legal services;
the amount involved and the results obtained;
the experience, reputation, and ability of the lawyer or lawyers performing the services; and
whether the fee is fixed or contingent.

Several relatively recent Chancery decisions were referred to by the Court in connection with a review of issues such as the percentage of time spent by senior partners, whether the number of attorneys working on the matter amounted to overstaffing, and the hours spent in comparison to the complexity or simplicity of the litigation. See., e.g., footnotes 15, 17, 21 and 23.

Notable was the Court's observation that no Delaware case has found "block-billing" to be objectionable per se. The Court also concluded that it was not unreasonable to bill for two attorneys conferring with each other, or for an attorney who did not examine witnesses to bill for time spent at trial. Nor did the Court find it unreasonable to use two attorneys from outside counsel and two attorneys from local counsel for most of the work on the case over about two years. However, the Court found that there was an overuse of senior partners based on the percentage of hours charged by senior partners being 98 percent of total hours billed. The assumption, one might infer, is that the Court expects associates to do most of the work, perhaps, at least in terms of the percentage of total hours charged.

2. Section 3912 of Title 10 of the Delaware Code governs the total amount of attorneys' fees that can be collected in suits brought to enforce notes, mortgages, invoices or "other instrument of writing." This last catch-all phrase was interpreted to refer to evidence of a debt. The Court reasonsed that the asset purchase agreement in this case was not an instrument of debt, but rather the suit in this case was initiated to enforce a covenant not to compete. The Court distinguished other cases that involved collection on an invoice or a suit for collection of an amount certain, which was dissimilar to the facts in this matter.

Article on Most Important Recent E-Discovery Decision

Francis G.X. Pileggi — Fri, 05 Feb 2010 11:52:49 -0500

The Pension Committee of the University of Montreal Pension Plan et al., v. Banc of America Securities, LLC, et al., 2010 WL 184312 (S.D.N.Y.). This decision, by the author of the Zubulake decision, which established several e-discovery standards, is subtitled "Zubulake Revisited: Six Years Later". This is the most important recent decision on e-discovery. We did a short highlight on the case, with a link to the actual opinion, here.

Kevin Brady, a nationally recognized expert on e-discovery, has written a detailed article about the case for the current issue of BNA's "Digital Discovery & E-Evidence", which is available here.

Corporate Governance and Socialism

Francis G.X. Pileggi — Fri, 05 Feb 2010 03:51:27 -0500

Corporate governance is an area of study that operates, at least in the U.S., within a capitalist system (for the time being). Professor Stephen Bainbridge, a corporate law expert, refers here to a scary recent survey about socialism, with a link that explains its failure as an empirical matter.

Chancery Adheres to Opinion Despite Remand After Precluding Testimony

Francis G.X. Pileggi — Wed, 03 Feb 2010 18:32:39 -0500

In Sloan v. Segal, No. 2319-VCS (Del. Ch., Jan. 27, 2010), read letter decision here, the Court of Chancery adhered to its prior opinion after the Supreme Court remanded for clarification. The prior trial court opinions in this case were highlighted on this blog here.

The primary and short reason I include this ruling on the blog is for its discussion of the difference between how a witness was actually used and offered at trial, compared to the description of how the role of that witness was described in the pre-trial stipulation (which were not the same).

Overview
This letter ruling is based on the remand from the Supreme Court which held that it was improper for the trial court to “exclude certain deposition testimony.” That testimony was in the form of a deposition by the expert for the Petitioner. The deposition was not offered into evidence during the Petitioners’ case-in-chief. In the pretrial stipulation, as the Supreme Court noted, Respondent Louis Segal agreed that the deposition of that expert could be admitted despite the fact that the deposition had not been conducted as a trial deposition.

Issue upon Remand
The issue upon remand was whether the inclusion of the deposition testimony of the Petitioner’s expert, Dr. Ayden Bill, would have changed the trial court’s decision.

Analysis
The Petitioners indicated at the pre-trial conference that they would only use Dr. Bill as a rebuttal witness and that the pretrial stipulation said that Dr. Bill’s testimony could come in either live or by deposition. However, the Court and counsel for the Respondent were given the impression that because he was a rebuttal witness it was expected that the rebuttal witness would appear live to address the case presented by the other party.

The Supreme Court reasoned that the original pre-trial stipulation regarding the introduction of Dr. Bill’s deposition had never been altered.

In its decision after remand, the Court of Chancery explained that it read the entire deposition testimony of Dr. Bill and concluded that: “Nothing in it persuades me that the measured conclusions I previously reached were erroneous. At best, Dr. Bill speculates that Mrs. Sloan might have had some unexpressed change of heart and desired to leave wealth to the Petitioners Frank and Jack Sloan, despite: (1) A total absence on the effort on their part to resume contact with her; and (2) The total lack of any effort by Frank and Jack to foster a relationship between their children and their grandmother, Mrs. Sloan. Indeed, Dr. Bill admits he is speculating in this regard.”
Moreover, the Court adds in support of its conclusion to “adhere to [its] previous decision,” that: “all in all, Dr. Bill provides no rational basis to conclude Mrs. Sloan had any intention to leave her wealth to the two sons who abandoned her and whose sole reaction to her aging and change of residence to Florida involved maneuvering to try to secure wealth at her disposal.”

Conclusion
The Court also referred to the testimony of three other doctors that did support a finding that the Codicil was a product of the true wishes of Mrs. Sloan. The finding was also supported by medical records and the concession by the Petitioners that Mrs. Sloan had no reason to reward them. This all supports the view that she was competent when she expressed the clear intent to leave them nothing.

Judge Scheindlin Issues 85-page Opinion on E-Discovery entitled "Zubulake Revisited: Six Years Later"

Francis G.X. Pileggi — Sun, 31 Jan 2010 21:02:16 -0500

The Pension Committee of the University of Montreal Pension Plan et al., v. Banc of America Securities, LLC, et al., 2010 WL 184312 (S.D.N.Y.), read amended opinion here.

Kevin Brady, a nationally-recognized expert in electronic discovery, prepared this short overview.

For those who follow the case law dealing with electronic discovery, there is a new a “must-read” decision that was just issued. On January 15, 2010, Judge Shira Scheindlin, author of the landmark series of e-discovery opinions in Zubulake v. UBS Warburg, issued an 85-page amended opinion in the case of The Pension Committee of the University of Montreal Pension Plan et al., v. Banc of America Securities, LLC, et al., 2010 WL 184312 (S.D.N.Y.) (“Pension Committee”) (the original opinion was issued on January 11, 2010 and is available at 2010 WL 93124.). Judge Scheindlin titled her 85-page opinion “Zubulake Revisited: Six Years Later.”

The case looks at preservation and spoliation from the perspective of the plaintiff and the issue had to do with information that should have been preserved by the plaintiffs after the lawsuit was filed but was not. Judge Scheindlin addresses in great detail, ways to define the levels of culpability -- negligence, gross negligence, and willfulness in the electronic discovery context, identifying the following “failures” and levels of culpability as examples:

• the failure to issue a written litigation hold (gross negligence);
• the failure to collect information from key players (gross negligence or willfulness);
• the destruction of email or backup tapes after the duty to preserve has attached (gross negligence or willfulness);
• the failure to obtain records from all employees (some of whom may have had only a passing encounter with the issues in the litigation), as opposed to key players (negligence);
• the failure to take all appropriate measures to preserve ESI (negligence).
• the failure to collect information from the files of former employees that remain in a party's possession, custody, or control after the duty to preserve has attached (gross negligence); and
• the failure to assess the accuracy and validity of selected search terms (negligence).

Judge Scheindlin also discusses who should bear the burden of establishing the relevance of evidence that is lost and who should be required to prove that the absence of the missing material has caused prejudice to the innocent party. Judge Scheindlin also suggests a novel burden-shifting test in dealing with burden of proof and severity of the sanction requested. Finally, Judge Scheindlin provides guidance on the important issue of preservation of backup tapes.

Court of Chancery Approves a Cox Communications Settlement of Two Actions; Reduces Attorneys' Fee Award to $10 million

Francis G.X. Pileggi — Sun, 31 Jan 2010 16:37:44 -0500

Brinckerhoff v. Texas Eastern Products Pipeline Co., LLC, C.A. Nos. 2427-VCL, 4548-VCL (Del. Ch. Jan. 15, 2010), read opinion here.

Kevin Brady and Ryan Newell of the Connolly Bove firm prepared this synopsis.

In a consolidated matter, the Court of Chancery approved a settlement and reduced the request from plaintiffs’ counsel for fees and expenses from $19.5 million to $10 million for two actions related to a transaction and subsequent merger, which had as its primary goal extinguishing the plaintiffs’ standing to bring a derivative action. Brinckerhoff v. Texas Eastern Products Pipeline Co., LLC, C.A. Nos. 2427-VCL, 4548-VCL (Del. Ch. Jan. 15, 2010). The Court analyzed the settlement with “significant scrutiny” involving two hearings because the parties asked the Court to approve a Cox Communications settlement (referring to In re Cox Communications, Inc., 879 A.2d 604 (Del. Ch. 2005)) that would resolve not only the litigation related to the merger but also the derivative action.

The Court spent a great deal of time identifying the parties and key players in the challenged transactions. For brevity purposes, the parties are described and defined at the end of this summary.

First Settlement Hearing Unsuccessful

At the first hearing, the Court determined that the record was inadequate so the parties successfully supplemented the record for the second settlement hearing. In discussing the situation created by the two actions, Vice Chancellor Laster used the phrase pas de trois quoting Vice Chancellor Strine’s reference from In re Cox Communications. Vice Chancellor Laster then identified his concerns:

[T]he record established that the special committee focused repeatedly on the Derivative Action, embraced the premise that the claims had significant value, but then approved a deal in reliance on a fairness analysis that afforded no value whatsoever to those very same claims. These and other factors left me to wonder about the good faith of the special committee and brought to mind Chancellor Allen’s admonition, offered in a different context, that “due regard for the protective nature of the stockholders’ class action [and to which I would add derivative actions as well], requires the court, in these cases, to be suspicious, to exercise such powers as it may possess to look imaginatively beneath the surface of events, which, in most instances, will itself be well-crafted and unobjectionable.” It did not require much suspicion or imagination to think that extrinsic factors might have colored the judgment of the special committee and plaintiffs’ counsel when agreeing to a Cox Communications settlement. The lure of a premium transaction, the self-evident benefits of settlement to the controller and other defendants, and the prospect of an easy end to the litigation – coupled with a large fee – create powerful pressures. No one need cross the line of collusion or conscious shirking for these forces to have an effect. “[H]uman nature may incline even one acting in subjective good faith to rationalize as right that which is merely personally beneficial.” (citations omitted).

The Challenged 2006 Transactions: The Sale and the Joint Venture

In 2006, Enterprise LP (1) acquired the Pioneer Plant and all of Teppco Partner’s gas processing rights for $38 million, and (2) along with Teppco, agreed to form a joint venture (the “JV”) to own Jonah Gas Gathering Company (“Jonah”). While Merrill Lynch, which was hired by the Teppco Audit Committee to provide a fairness opinion on the Pioneer Sale, opined that the $38 million purchase price was fair, Merrill Lynch did not consider Teppco’s rights under the processing contract after the Jonah acquisition. Simmons & Co., which was hired by Enterprise to provide a fairness opinion, valued the deal at $780 million by taking into consideration Teppco’s plans to expand Jonah’s gathering and processing systems. On March 31, 2006, the Pioneer sale closed with Enterprise paying only $38 million.

At the same time as the Pioneer sale, the JV proceeded with EPCO employees who were under the control of Daniel Duncan (who controlled both Teppco and Enterprise) negotiating the terms of the JV. In addition to Teppco contributing Jonah to the JV, both Teppco and Enterprise committed to provide half of the funding. In an important deal point, Jonah’s value was “based on Teppco’s historic cost of investment, not Jonah’s value as a going concern.” Using that valuation, Teppco was credited with a capital contribution of approximately $800 million for the purchase price of Jonah, $250 million in prior investments, and an additional amount for Teppco’s portion of the future financing. In the aggregate, this amounted to Teppco owning 80% of the JV. Enterprise was credited with $208 million, or roughly 20% of the financing. Had Jonah been valued as a going concern, plaintiffs alleged that the post-expansion JV was worth about $2.2 billion. For Enterprise to remain a 20% owner, it would have had to more than double its $208 million capital contribution. The plaintiffs did not discount the value for lack of control because Teppco and Enterprise agreed that Enterprise would manage the daily operations.

Teppco expected Goldman Sachs, which had been hired by Teppco to explore financing alternatives, to render a fairness opinion for this transaction but Goldman Sachs declined. After Duncan convinced that directors of Teppco and Enterprise that his motives were not biased and that a fairness opinion was unnecessary, the Teppco Audit Committee approved the deal. Simmons, however, did provide a fairness opinion for Enterprise.

The Derivative Action

Plaintiffs brought the Derivative Action alleging: (1) breach of fiduciary duty against Teppco directors related to the JV and Pioneer Sale; (2) aiding and abetting of breaches of fiduciary against Enterprise; and (3) disclosure violations related to Teppco’s LP and an exchange transaction.

From late 2006 to early 2009, the parties engaged in motion practice (with count three being dismissed), extensive discovery, and mediation. Just before agreeing to mediate, Duncan and members of Enterprise management decided to pursue a merger with Teppco. Enterprise made its initial offer in March of 2009 wherein each Teppco LP unit would be converted into 1.043 Enterprise LP units plus $1 for total consideration at Enterprise’s then-current market value of $21.89 per LP unit. This offer was rejected by the Teppco Audit Committee as “unacceptably low because, among other things, it inadequately valued Teppco’s business and did not take into account the potential value of the [Derivative Action].”

The Merger and Resulting Litigation

In April 2009, defendants’ counsel informed plaintiffs’ counsel of the potential merger. The parties agreed to adjourn the mediation for sixty days and allow the parties to negotiate a deal. On April 29, 2009, Teppco announced publicly that Enterprise had made a merger proposal, plaintiffs filed the Merger Action. Instead of taking any action to expedite or enjoin the action, plaintiffs entered into what Vice Chancellor Laster described as “the Cox Communications minuet,” by which he was referring to a situation:

in which real litigation activity ceases and a special committee engages in coordinated two-track negotiations, one with the controller over the deal and the second with plaintiffs’ counsel over the litigation. If the special committee and the controller close in on a transaction, then the plaintiffs’ counsel gets a heads up so that the three sides can agree simultaneously on terms. The plaintiffs’ claimed causal role in generating the transactional benefits – which the defendants concede to ensure consideration for a global release – in turn supports a fee award for plaintiffs’ counsel.

Negotiations quickly brought the parties to a deal on an exchange ratio of 1:24. Thereafter, counsel for the defendants and the plaintiffs entered into a memorandum of understanding to settle all pending litigation in consideration for the closing of the merger. Importantly, the converse was not true – the closing of the merger was not contingent upon the settlement of the litigation.

Credit Suisse opined that value was fair to the unaffiliated Teppco unitholders – but this analysis did not consider the value of the Derivative Action. The Teppco Special Committee, Teppco Audit Committee, and Teppco GP board all approved and ultimately recommended it to the Teppco LP unitholders. On August 6, 2009, the parties submitted a formal settlement stipulation.

Resolution of the Actions

As an initial matter, the Court discussed the direct and derivative nature of the actions noting that “as a result of the Merger, the distinctions between a derivative action on behalf of Teppco for the indirect benefit of its LP unitholders and a class action on behalf of those same Teppco LP unitholders have blurred. Regardless, “Delaware law recognizes an exception to the continuous ownership requirement when ‘a principal purpose of the merger was the termination of the then pending derivative claims.’” Despite the Court recognizing that after the merger the Derivative Litigation could have continued “as a de facto class action on behalf of holders of Teppco LP units as of the effective time,” the Court recognized that “eliminating the Derivative Action was a principal purpose for the Merger” and that settlement was a practical decision.

Fairness of the Settlement

In considering the fairness of the settlement, the Court noted that “[a] transactional settlement that follows the Cox Communications paradigm requires particular scrutiny because of the nigh-on formulaic nature of the process . . . .” In such a situation, the litigation brought by plaintiffs’ counsel will likely drive the deal price upward and plaintiffs’ counsel is incentivized to agree to the escalated deal price. Defendants’ counsel are also encouraged to reach an agreement as they generally obtain a broad release. As a result, counsel for both parties tend to have their interests align very early and accordingly both recognize the need to develop a “favorable record of settlement negotiations.” The real issue then becomes: how much did the plaintiffs’ lawyers add to transactional negotiations and how much should they get in return for their claims?

The problems of aligned interests are exacerbated where the transactional settlement will resolve both the transaction and a litigation. The Court noted that this case represented an example of that scenario:

The defendants knew they faced a real claim that had survived a motion to dismiss. They were in the midst of discovery and looking towards a trial and potentially adverse result. They thus had even greater incentives to use a transaction to resolve the litigation. Meanwhile, absent an exception to the traditional doctrine of claim extinction by merger, the closing of a transaction could leave the plaintiffs’ lawyers high and dry. The plaintiffs here did not raise a peep about continuing the Derivative Action but rather accepted the ready-made settlement opportunity. Everyone had ample reason to “settle” otherwise viable claims in exchange for the “benefits” provided by the proposed deal.

Accordingly, Vice Chancellor Laster stated that “the Court must give significant scrutiny to Cox Communications settlements, and particularly those that simultaneously resolve pending derivative claims.”

Plaintiffs’ Claims

The record developed in the Derivate Action led the Court to believe that the claims were very strong. As for the Merger Action, the claims were not as strong as they were controlled by terms in the LP agreement that were very favorable to defendants. A term of the LP agreement essentially allowed the defendants to rebuke any challenge to the merger so long as it was approved by a majority of the Teppco Audit Committee members. Nonetheless, even though the Court found that the claims in the Merger Action were not as strong as the claims in the Derivative Action, they still represented a “meaningful litigation threat.”

Plaintiffs alleged damages as high as $2 billion. After review of a detailed record, the Court concluded that the Derivative Action could be worth approximately $100 million. In analyzing the consideration provided in the merger, the Court was troubled that the financial advisors failed to address whether the merger price was fair in light of the Derivative Action. The Court said: “[a]lthough I am persuaded that the Merger benefited the Teppco LP unitholders, it is not possible to determine the degree to which the terms of the Merger compensated them for the Derivative Action. Put bluntly, the Merger could well have been the deal that the Special Committee would have negotiated anyway.” Despite some misgivings, the Court considered the fact that the special committee was comprised of “independent, outside directors with no ties to the controller [who] appear to have acted in good faith to negotiate the terms of a premium transaction.” In addition, prior to the Cox Communications mode, the plaintiffs had pursued the Derivative Action with vigor, thereby creating a valuable litigation asset that may have prompted the merger.

Taking into consideration all of these facts, the Court concluded that, in a close call, “the Teppco Special Committee used the Derivative Action as an effective negotiation tool to increase the Merger consideration and obtain a fair result.” Accordingly, the Court approved the settlement.

Attorneys’ Fees

Even though the defendants agreed not to oppose plaintiffs’ counsel’s request for $19.5 million in fees and $1.5 million in expenses, the Court was required to make its own independent analysis. In analyzing the Sugarland factors and in particular the level of contingency risk the plaintiffs took, the Court noted that in pursuing the Derivative Action the plaintiffs’ counsel undertook real contingency risk, engaged in significant discovery including document review and depositions. However, the Court stated that when the parties shifted into Cox Communications mode, the plaintiffs’ risk was substantially mitigated. In the end, the Court found the $19.5 million figure to be excessive.

The Court awarded plaintiffs’ counsel $10 million – which represents 10% of the benefits conferred by the Derivative Action, stating that ten percent “reflects the plaintiffs’ substantial litigation effort while recognizing that the bulk of the litigation remained. . . . Like Vice Chancellor Strine, I believe that higher percentages are warranted when cases progress further or go to the distance to a post-trial adjudication.”

The Parties

• Teppco Partners L.P. (“Teppco”) – The nominal defendant in the Derivative Action, Teppco is a master limited partnership in the oil and gas industry. On October 26, 2009, Teppco became a wholly owned subsidiary of Enterprise Products Partners, L.P. (“Enterprise”).
• Enterprise – A defendant in both actions, Enterprise is also a master limited partnership in the oil and gas industry.
• Texas Eastern Products Pipeline Company, LLC (“Teppco GP”) – Defendant Teppco GP was Teppco’s sole general partner.
• Enterprise Products GP, LLC (“Enterprise GP”) – Defendant Enterprise GP is Enterprise’s general partner.
• Daniel L. Duncan (“Duncan”) – A self-made billionaire oil and gas entrepreneur, Duncan controlled both Teppco and Enterprise. In February 2005, Duncan acquired 100% of Teppco GP, which he then transferred to Enterprise GP Holdings, L.P. (“Enterprise Holdings”) in May 2007. Duncan serves as the Chairman of Enterprise GP. He also controls EPE Holdings GP, Enterprise Holdings (through EPE Holdings GP), Teppco GP (through Enterprise Holdings), Enterprise Holdings GP (through Enterprise Holdings), and EPCO, Inc. Duncan is a defendant in both actions.
• EPCO, Inc. (“EPCO”) – A defendant in both actions, EPCO, Inc. was largely (if not wholly) owned by Duncan and his family. Controlled by Duncan, EPCO staffed Enterprises GP and Teppco GP with all of their employees, including Teppco GP’s executives.
• Teppco GP Directors – Named as individual defendants in the Derivative Action were the directors of Teppco GP at the time of filing. These individuals “had obvious connections to Duncan or Enterprise, and a majority had conflicts that were facially compromising for purposes of any transaction between Teppco and Enterprise.” Similarly, named as individual defendants in the Merger Action were the Teppco GP directors at the time of filing.
• Teppco Audit Committee – Initially comprised of inside directors – including two who were named defendants in the Derivative Action – Delaware counsel was able to add two independent outside directors when the merger was being considered.

Chancery Orders Dissolution of LP Based on "Not Reasonably Practicable" Standard in Section 17-802

Francis G.X. Pileggi — Sun, 31 Jan 2010 15:31:22 -0500

Harris v. RHH Partners, LP, et al., No. 1198-VCN, (Del. Ch., January 27, 2010), read letter decision here. A prior decision in this case by the Delaware Court of Chancery was highlighted here.

Why This Short Ruling is Noteworthy

This decision in noteworthy because it applies a statute that, comparatively speaking, does not enjoy a copious body of case law interpreting it. The statute in question is the dissolution statute for LPs, Section 17-802 of Title 6 of the Delaware Code. Decisions interpreting this dissolution statute have also been applied by analogy to the counterpart statute in the Delaware LLC Act, Section 18-802. These statutes allow for one to petition to dissolve an LP or an LLC when: "it is not reasonably practicable to carry on the business in conformity with the partnership [or LLC] agreement."

Background

This case involved two parties who owned an LP, called RHH Partners, that in turn owned the personal residence of the sole limited partner who owned 99% of the LP. The remaining 1% was owned by a former friend who was also the general partner. Harris, the 99% owner and general partner, was a New York lawyer by training and appeared in this case pro se, as did the general partner.

Court's Reasoning

Despite a general purpose clause authorizing the LP to operate "for all lawful purposes", the Court found after hearing testimony that the purpose of the LP "was not entirely clear" though it likely evolved over time. The Court concluded that: "its purpose, however ill-defined, ceased to exist", and therefore, based on Section 17-802, the court held that "it is not reasonably practicable for RHH to carry on the business in conformity with the partnership agreement."

Moreover, the Court reasoned that: (i) leaving the two partners "in any kind of business relationship would serve no useful purpose"; and (ii) there is no apparent purpose for the LP; and (iii) using the LP as a vehicle to own Harris' residence "has no cognizable relationship to any business purpose for which RHH might exist."

Winding-up

Ordering dissolution did not end the discussion. For the winding-up aspect of the case, the Court divided ownership of the sole asset of the LP, the personal residence of Harris, in the same proportion as the two men owned the LP. Thus, Harris received a "99 % fee simple interest " in the real estate, and the other partner received a "1% undivided fee simple interest". The Court noted that before distribution of the assets could be made, Section 17-804 required that creditors be paid.

Postscript

Notwithstanding the unusual procedural aspect of both parties appearing pro se, thus resulting in a less developed factual record and fewer formal legal arguments presented, the issue the Court addressed is sufficiently important, and the case law on the dissolution statute sufficiently meager--by comparison to many corporate statutes for example, that this ruling merited a quick overview.

Delaware Court of Chancery Applies New York Law to Dismiss Counterclaims and Affirmative Defenses

Francis G.X. Pileggi — Sun, 31 Jan 2010 14:44:30 -0500

Mitsubishi Power Systems Americas, Inc. v. Babcock & Brown Infrastructure Group US, LLC, No. 4499-VCL (Del. Ch., Jan. 22, 2010), read opinion here. The Court of Chancery's prior decision granting a TRO was summarized here.

Because this decision applies New York substantive law and is based solely on New York law, we will only provide a cursory review of this matter.

Procedurally, the Court ruled on a Motion for Judgment on the Pleadings pursuant to Rule 12(c) regarding counterclaims and some affirmative defenses of Babcock & Brown. This 36-page opinion contains many detailed factual background matters that would only be worth summarizing if we were discussing the entire opinion. A simplistic statement of the underlying facts is that it deals with a dispute over the terms of two agreements to buy wind turbines involving large amounts of money and problems with the quality and delivery dates of the products.

The claims and defenses that were dismissed based on New York law include the following:

Breach of contract
Breach of Implied Duty of Good Faith and Fair Dealing
Fraud
Negligent misrepresentation
Equitable estoppel

Vice Chancellor Laster Rejects Standard Phrase in Confidentiality Stipulations Dealing with Restrictions on Use of Confidential Information

Francis G.X. Pileggi — Sun, 31 Jan 2010 10:17:04 -0500

NewRadio Group LLC v. NRG Media LLC, et al., C.A. No. 4951-VCL (Del. Ch., January 27, 2010), read letter decision here.

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

In this Court of Chancery decision, Vice Chancellor Laster struck language from a proposed confidentiality stipulation because he found the language to be “overbroad” and an “invalid prior restraint.” This is an issue that he has raised in a number of cases literally since the day after he took the bench in October 2009.

The offending language in the NewRadio case was as follows: “the confidentiality restrictions contemplated by the Stipulation would continue to be binding throughout and after the conclusion of the Litigation, including without limitation, any appeals therefrom.” In other confidentiality stipulations, Vice Chancellor Laster has struck the following language: “[i]n the event that any discovery material is used in any court proceeding in this litigation or any appeal therefrom, said discovery material shall not lose its status as confidential through such use.”

Vice Chancellor Laster noted that the provision in NewRadio “makes no exception for information that becomes part of the public record. By its terms, the Stipulation purports to have me trump the common law right of access by ordering that all materials designated by the parties as ‘Confidential’ would remain under seal, regardless of how they were used. I take no comfort in my ability or the ability of another court to hold the Stipulation inapplicable to particular documents or to release them from seal. Absent such a ruling, public materials will ostensibly remain protected and sealed, and parties will risk contempt if they treat the public record as public.”

Chancery Bars Proportionate Fault Claim in Confirmation of Arbitration Award

Francis G.X. Pileggi — Sun, 31 Jan 2010 05:29:28 -0500

Global Link Logistics, Inc. v. Olympus Growth Fund III, L.P., No. 4444-VCP (Del. Ch. Jan. 29, 2010), read opinion here.

David Felice, of Ballard Spahr, represented one of the parties in this matter, and prepared this synopsis.

In a summary proceeding to confirm an arbitration award, the Court of Chancery dismissed with prejudice a cross-claim for adjudication of proportionate fault among co-defendants to an arbitration proceeding, holding that the moving co-defendants should have first raised the issue at arbitration and, by failing to have done so, were barred from seeking to hold their co-defendant disproportionately liable for a $7 million fraud award. In addition, the Court dismissed without prejudice defendants’ cross-claims for pro rata contribution and to pierce the corporate veil as not ripe. This decision is noteworthy for litigators who agree to resolve disputes through binding arbitration because the issue of proportionate fault as between and among co-defendants must be resolved in the arbitration proceeding or the parties risk exposure to a potentially disproportionate share of the damages award.

Background

The dispute presented itself in the form of a complaint to confirm an arbitration award and how payment of the arbitration panel’s $7 million damage award for fraud should be allocated among the three defendants who were found to be jointly and severally liable for fraud. Through a Stock Purchase Agreement (“SPA”) executed in 2006, Plaintiffs acquired Global Link Logistics, Inc. (“Global Link”) from Olympus Growth Fund III, L.P., Olympus Executive Fund, L.P. (collectively, “Olympus”) and CJR World Enterprises, Inc. (“CJR”). Global Link, based in Atlanta, Georgia, “engages in the international shipping business as a non-vessel operating common carrier under licenses from the Federal Maritime Commission.” Plaintiffs claimed that sometime after the SPA closed, they received notice that Global Link was engaged in split-routing – a practice where Global Link requested that trucking companies deliver cargo to a location different from the information provided to the ocean carrier. Plaintiffs also claimed that this practice was a violation of the Shipping Act. Alleging ignorance of the practice of split-routing, Plaintiffs initiated an arbitration proceeding to recoup the entire purchase price, more than $128 million, claiming: (i) that defendants breached the representations contained in the SPA and (ii) fraud through the intentional concealment of the split-routing practice. Defendants argued that the practice had been disclosed during due diligence and, in any event, is not a violation of the Shipping Act.
Following arbitration, the panel awarded Plaintiffs approximately $6 million for breach of the representations contained in the SPA – with each of the sellers being held responsible for paying an amount proportionate to their share in Global Link at the time of the sale. On the fraud claim, the panel found Olympus and CJR jointly and severally liable and awarded Plaintiffs approximately $7 million (the “Fraud Award”). The panel was not asked to nor did it render a finding of proportionate fault for the Fraud Award.

Plaintiffs filed a complaint to confirm the award in accordance with the Delaware Uniform Arbitration Act. Through an Amended Answer, Olympus asserted cross-claims against CJR: (i) for contribution toward the Fraud Award for the full amount based on CJR’s proportionate fault in accordance with 10 Del. C. § 6302(d); (ii) for contribution of CJR’s pro rata share of the Fraud Award; and (iii) to pierce CJR’s corporate veil and to hold its sole stockholder liable for any amount CJR may owe. CJR and its sole stockholder filed separate motions to dismiss the cross-claims, arguing that 10 Del. C. § 6306(d) barred Olympus from pursing a claim for contribution for any amount greater than CJR’s pro rata share of the Fraud Award and that any claims for pro rata contribution and to pierce the corporate veil were not ripe.

Analysis

The Court held that an arbitration award constitutes a judgment under the Delaware Uniform Contribution Among Tort-Feasors Law (“DUCATL”) and that Olympus’ failure to raise the issue of proportionate fault by way of a cross-claim in the arbitration precluded Olympus from attempting to litigate the issue in court. Through its cross-claim, Olympus attempted to hold CJR liable for more than its proportionate share of the Fraud Award under 10 Del. C. § 6302(d), which states: “[w]hen there is such a disproportion of fault among joint tort-feasors as to render inequitable an equal distribution among them of the common liability by contribution, the relative degrees of fault of the joint tort-feasors shall be considered in determining their pro rata shares.” CJR moved to dismiss the cross-claim as being barred by the requirements of 10 Del. C. § 6306(d). Section 6306(d) states: “[a]s among joint tort-feasors against whom a judgment has been entered in a single action, subsection (d) of § 6302 of this title applies only if the issue of proportionate fault is litigated between them by cross-complaint in that action.”

Noting that there was no Delaware case law addressing the interplay between the Delaware Uniform Arbitration Act and the DUCATL, the Court concluded that “an arbitration award should be deemed a judgment for purposes of the DUCATL at least in the circumstances of this case.” (Op. at 10). The Court reasoned that the very limited grounds upon which an arbitration award could be modified or vacated “suggest that such awards have sufficient finality to warrant affording them the status of a judgment.” Id. In addition, the Court noted “perhaps most importantly, if I were to accept the Olympus Parties’ argument, it would open the door to duplicative litigation and seriously undermine the judicial efficiency and cost and time savings afforded by arbitration.” Id. Based on this rationale, the Court concluded that the cross-claim “clearly exemplifies the type of duplicative litigation and inefficient use of judicial resources that § 6306(d) was designed to prevent.” Id. at 11. However, the Court did limit its holding as being applicable “only to the situation before me, namely, that in which the cross-claim defendant (here, CJR) in a later-filed proportionate fault cross-claim under 10 Del. C. § 6302(d) was a party to the arbitration and could have been named in a cross-claim by the cross-claim plaintiff in the arbitration proceeding.” Id. at 13-14.
Based on the fact that neither Olympus nor CJR had paid any portion of the Fraud Award, the Court concluded that the cross-claim for pro rata contribution from CJR was not ripe. Similarly, because the contribution claim was not ripe, the Court found that the veil-piercing cross-claim would not be ripe, if ever, until CJR failed to pay its apportioned pro rata share of the Fraud Award. Accordingly, the two remaining cross-claims were dismissed without prejudice.

Chancery Determines that Erroneous Fact Finding Would Not Change Holding

Francis G.X. Pileggi — Sat, 30 Jan 2010 15:28:11 -0500

CA, Inc. v. Ingres Corp., No. 4300-VCS (Del. Ch. Jan. 26, 2010), read letter decision here. The Court of Chancery's120-page prior decision in this matter was highlighted here.

This letter decision was initially designed to resolve issues presented by competing proposed orders to implement the December 2009 decision of the Court linked above. In the process of presenting two competing orders, the parties both agreed that the Court had made an erroneous finding of fact in its prior opinion. This letter ruling concludes that the decision of the Court would not have been different regardless of the erroneous fact finding even though the Court candidly admits that it overlooked statements at oral argument and deposition testimony on the particular fact involved.

Professor Bainbridge on Corporate Governance and the U.S. Senate's Membership

Francis G.X. Pileggi — Tue, 26 Jan 2010 09:51:07 -0500

Corporate Law Professor Stephen Bainbridge discusses the impact on the law of corporate governance that could change based on the particular membership of the U.S. Senate, in a post here, especially focusing on the potential consequences to Delaware due to Congressional efforts to federalize corporate governance, and how the delegation from Delaware impacts that analysis.

Court of Chancery Analyzes Details of Claim for Breach of Implied Covenant of Good Faith and Fair Dealing for Limited Deadline Extension--and Denies Claim

Francis G.X. Pileggi — Thu, 21 Jan 2010 14:30:25 -0500

Amirsaleh v. Board of Trade of the City of New York, No. 2822-CC (Del. Ch., January 19, 2009), read opinion here. Read summaries on this blog of the several prior opinions of the Court of Chancery in this case here. In this latest opinion, the Court presumed the reader's familiarity with the background facts recited in the Court's November 2009 opinion.

Overview

This 24-page Court of Chancery decision provides a descriptive post-trial analysis of the application of the implied covenant of good faith and fair dealing that Delaware imposes on all contracts--without exception. The claim for breach of the covenant was ultimately rejected in the context of allegations that a deadline was "selectively extended" to assist "connected" people.

Background

This dispute arose out of the merger, on January 12, 2007, of the New York Board of Trade ("NYBOT") with and into CFC Acquisition Company, a wholly owned subsidiary of IntercontinentalExchange, Inc. ("ICE"). In connection with the merger, NYBOT owners (known as members) were effectively given the option of being cashed out or receiving a combination of ICE common stock and cash in exchange for their membership interests. NYBOT members expressed their merger consideration preference by completing and timely submitting an election form to a third-party. The combination of ICE common stock and cash was worth more than the option of only straight cash, so most members naturally did not prefer to be cashed out.

The initial deadline for the election was January 5, 2007. Many members missed the deadline. Thus, the deadline was extended until January 18, 2007. However, some members still missed the extended deadline.

Plaintiff submitted his form late and it was rejected as untimely, thus he was cashed out instead of receiving the combination of common stock. He then sued claiming a breach of the implied covenant of good faith and fair dealing.

The Court's November 2009 opinion, cited as 2009 WL 3756700 (Del. Ch. Nov. 9, 2009), explained in great detail the contours of the good faith and fair dealing covenant. The current opinion decided whether the evidence presented at trial satisfied the prerequisites for breach of that obligation. It did not.

Highlights

Although the demarcations of the applicable law were set forth in the November 2009 decision, the latest opinion is helpful for its highlighting of the factual situations that are illustrative of "what one should do" when there are financial repercussions for failing to meet deadlines and under what circumstances allowing only "selective" extensions of that deadline may be considered bad faith and a violation of the covenant of good faith and fair dealing.

Prerequisites to Finding Bad Faith Based on Facts of This Case

The Plaintiff failed to present at trial sufficient evidence to satisfy his burden of proof that the acceptance of less than all of the late elections amounted to bad faith. In order to establish bad faith the Court determined that the Plaintiff was required to show (but did not), the following:

(i) that the decision to allow a limited extension of the deadline was motivated by bad faith; and (ii) that it was the result of a culpable mental state. See. 2009 WL 3756700 at *5-6.

The Court explained that the Plaintiff could have demonstrated the foregoing by showing that the decision to open a late acceptance window was: (i) solely based on the fact that certain "connected members" failed to get their forms in on time; or (ii) that certain "connected members" received special treatment in submitting late elections, including holding open the window until all "connected members" had submitted their elections.

Four Examples Not Demonstrating Bad Faith

The Court explained that bad faith (the absence of good faith) would not be found if it appeared that the decision to accept late submissions fell within the following categories: (i) it was driven by considerations of customer satisfaction balanced against leaving enough time to calculate and distribute the merger distribution by the January 29, 2007 distribution deadline required by the merger agreement; or (ii) if it appeared that defendants made reasonable efforts to give all members making late elections the same or substantially similar assistance turning in their late forms. See n. 11. Nor would bad faith be found if: (iii) defendants had failed to accept any late election form; or (iv) if defendants accommodated all late filers (as this would have exceeded the implied covenant's requirements.) See n. 18

Court's Reasoning and Holding

The Court found that opening a late election acceptance window was not motivated by a desire to help "connected members" but rather was intended to accommodate all members who missed the deadline. Moreover, the people whom the Plaintiff claimed were "connected' and the object of the defendants' alleged favoritism, were not "connected" at all, as the Court explained after careful analysis of the relationships involved, spanning many pages of this opinion.

Professor Bainbridge on "Efficient Breach" Theory of Contract and Related Moral Issues

Francis G.X. Pileggi — Wed, 20 Jan 2010 09:11:51 -0500

Professor Bainbridge discusses the "efficient breach" theory of contract law, and related moral issues that it may raise, in a post here.

The Delaware Court of Chancery, in its recent Nacco decision, summarized here, observed at page 61 of the slip opinion that Delaware recognizes that theory. In the Nacco case, the Court mentioned the theory in the context of discussion noting that contract provisions will prevail to bar tort liability as provided in the terms of an agreement.

Delaware Court of Chancery Explains Procedural Prerequisites to Rebut Business Judgment Rule Protection for Board of Directors; Defines "Interested" Director and Lack of Director "Independence"

Francis G.X. Pileggi — Tue, 19 Jan 2010 01:42:17 -0500

Robotti & Co. LLC v. Liddell, No. 3128-VCN (Del. Ch., Jan. 14, 2010), read opinion here. See summary of Court of Chancery's prior Section 220 decision involving these parties here.

This 43-page Delaware Court of Chancery decision could serve as a “mini-law review article” that explains the current Delaware law on a wide range of issues important to those involved in corporate derivative litigation, and directors who want to understand the standards by which their conduct will be reviewed by the courts.

Background

The factual and procedural background of this matter is that it is a class and derivative action challenging a stockholder rights offering ("Offering"). The shareholder plaintiff alleges that the directors of the company set the Offering at a deliberately and inadequately low price that would trigger anti-dilution provisions in the agreements governing the stock options and warrants of the controlling shareholder. The shareholder plaintiffs argued that the triggering of the anti-dilution provisions resulted in a benefit being enjoyed by the directors that was not shared by the other shareholders and therefore, was a self-dealing transaction. The Court found, however, that the complaint failed to state a claim because the anti-dilution provisions did not change or challenge the pre-existing contractual rights of the directors which left them in substantially the same position they were in before the rights Offering. Thus, the shareholder did not sufficiently allege disloyal conduct by, for example, showing that the directors acquiesced to the wishes of the controlling shareholder.

This cursory review will simply highlight key aspects of the Court’s opinion so that the interested reader can decide to review the full text of the decision on their own at the above link.

Court’s Summary of Issues in Case and Its Four-Part Holding

The Court described this case as one that “ultimately boils down to an alleged breach of the duty of loyalty and whether or not the defendants obtained a personal benefit through the Offering.” The Court’s reasoning and analysis can be summarized in four parts: (1) The Court cannot draw a reasonable inference from the facts that the Offering’s trigger of the anti-dilution provisions and their effect upon the options worked a material personal gain to the directors at the expense of the public stockholders. Nor did the plaintiff plead sufficient facts to support a claim that the directors acted in bad faith by consciously disregarding their fiduciary duties. (2) Because the court cannot reasonably infer from the facts that the directors received a personal gain by way of the collateral consequences of the Offering or consciously disregarded their duties, their decision to consummate the Offering is protected by the business judgment rule. (3) Of equal importance, the plaintiff has not duly alleged that the controlling shareholder dominated the board as it approved the Offering. (4) The derivative claims were barred because the plaintiff failed to plead that the board of directors were either interested or under the control or domination of an interested party as of the time it asserted the derivative claims.

Court Declines to Convert Motion to Dismiss into Motion for Summary Judgment

Robotti requested that the Court treat the motion to dismiss by the defendants as one for summary judgment because the defendants relied upon documents that were neither integral to, nor incorporated within, the complaint. The Court declined the invitation to treat the motion as one under Rule 56 as opposed to Rule 12(b)(6), which would have given the parties a reasonable opportunity to present all material relevant to a summary judgment motion. The Court observed that matters beyond the complaint may generally not be considered in a ruling on a motion to dismiss except in the following instances: “(1) When such documents are integral to, and incorporated within, the plaintiff’s complaint; or (2) When the documents are not being relied upon for the truth of their contents.” See footnote 49.

Direct v. Derivative Claims

The opinion contains a thorough discussion and analysis of the differences between a direct as compared to a derivative claim. Referring to recent Delaware Supreme Court opinions on the topic, the Court explained that an initial inquiry in determining between a direct and derivative claim requires the following two questions to be addressed: “(1) Who suffered the alleged harm - - the corporation or the shareholders individually; and (2) Who would receive the benefit of the recovery or other remedy?” See footnotes 55 and 56.

The Court discussed the recent cases that have analyzed whether a dilution in the value of corporate stock and overpayment by fiduciaries is direct or derivative. The recent decision in Gentile v. Rossette, 906 A.2d 91 (Del. 2006) was described as involving a controlling shareholder who caused the company to issue the controlling shareholder’s stock in return for debt forgiveness. The Supreme Court in Gentile held that both the corporation and the shareholders were harmed by the overpayment and due to the dual nature of the harm, the claims in that class were both derivative and direct.

Analysis of Bad Faith and Breach of Duty of Loyalty Claims

The Court described a methodology for analyzing allegations of bad faith within the context of a duty of loyalty claim as being recently clarified by the Delaware Supreme Court in Lyondell Chemical Co. v. Ryan, 970 A.2d 235 (Del. 2009). The Court of Chancery explained as follows:

“Mere gross negligence, which includes the failure to inform oneself of available material facts, cannot constitute bad faith. Bad faith, and thus a breach of the duty of loyalty, can arise only when a fiduciary consciously disregards his or her responsibilities. The Court in Lyondell imposed a high standard on any plaintiff advancing such a claim, and recognized a “vast difference between an inadequate or flawed effort to carry our fiduciary duties and a conscious disregard of those duties.” It concluded that fiduciaries in this context breached their duty of loyalty only if they “knowingly and completely fail to undertake their responsibilities.”

In this case, the Court found that Robotti never claimed that the defendants “knowingly and completely” failed to undertake their responsibilities, nor may any such inference be drawn from the complaint.

Business Judgment Rule Applies

This opinion provides a robust discussion of the business judgment rule, its applicability, and the pleading requirements under Rule 23.1.

Notably, this is the first Delaware decision that cites to the current version of the highly regarded four volume treatise on the business judgment rule recently published by Stephen A Radin and which is cited at footnote 89 by the Court as follows: 1 Stephen A. Radin, et al., The Business Judgment Rule: Fiduciary Duties for Corporate Directors 110 (6th ed. 2009).

Referring to the Radin treatise, the Court defines the business judgment rule as follows:

“The business judgment rule, as a general matter, protects directors from liability for their decisions so long as there exists a ‘business decision, disinterestedness and independence, due care, good faith and no abuse of discretion and a challenged decision does not constitute fraud, illegality, ultra vires conduct or waste.’ There is a presumption that directors have acted in accordance with each of these elements, and this presumption cannot be overcome unless the complaint pleads specific facts demonstrating otherwise. Put another way, under the business judgment rule, the Court will not invalidate a board’s decision or question its reasonableness, so long as its decision can be attributed to a rational business purpose.” See footnote 91.

The Court found that Robotti had been unable to allege that defendants were interested in the transaction and it also failed to allege bad faith or conscious disregard of fiduciary duty. Moreover, although Robotti may have plead a failure to act with due care and on an informed basis regarding the transaction, such a conclusion would be unhelpful in light of the provision in the charter pursuant to Section 102(b)(7) which would preclude a claim for damages on that ground.

Demand Excusal

The Court also conducted an analysis under Rule 23.1 and found that the derivative claims did not satisfy that rule. Footnote 95 and 96 made it clear that the applicable time period to determine whether the pre-suit demand requirement was futile was when the first derivative claim was presented--which was in the second amended complaint. The composition of the Board at that time when the first derivative claim was filed made the Rales v. Blasband case applicable. See 634 A.2d 927, 933-34 (Del. 1993). Under Rales, the Court explained that the relevant inquiry is only whether the board can exercise its independent and disinterested judgment in responding to a demand, where, as here, the majority of the directors responsible for that decision have since been replaced.

Definitions to Determine "Interested" or "Independent" Directors

The Court provides a helpful discussion and definition of the term “interested” for purposes of pre-suit demand upon the board. Likewise for pre-suit demand purposes, the Court provides a useful definition to determine whether a director is "independent" for purposes of a pre-suit demand analysis. See footnote 98: “The mere fact that a director receives some benefit that was not shared generally by all shareholders is insufficient; the benefit must be material.”

For purposes of demand excusal analysis, rather, the plaintiff must show that the alleged benefit was “significant enough in the context of the director’s economic circumstances, as to have made it improbable that the director could perform her fiduciary duties to the . . . shareholders without being influenced by her overriding personal interest.” See footnote 99.

Regarding the independence of a director, the Court emphasized the contextual aspect of the inquiry, which requires a Court to ask “whether the directors are so ‘beholden’ to an interested director or interested controlling shareholder, that ‘their discretion would be sterilized.’ Motivations such as friendship may influence the inquiry, but in order for friendship alone to neutralize the independence of a director, the ‘relationship must be of a bias-producing nature.’” See footnote 101.

The Delaware Supreme Court has required that a complaint identify a relationship between a disinterested director and the interested director or controlling shareholder “that is so close that one could infer that the ‘non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director.’” See footnote 103.

The Court analyzed the factual situation as it related to each board member at the time the derivative claim was made in the second amended complaint, and found that the complaint did not adequately justify excusal of a pre-suit demand.

Conclusion

Thus, because the Court found that a majority of the board at the time of the derivative claim was both independent and disinterested, Robotti did not sufficiently plead demand futility and to that extent his derivative claims were dismissed. In addition, the claim for self-dealing by interested fiduciaries failed as a matter of law and the facts did not support an inference that the directors consciously disregarded their fiduciary duties or entirely advocated their responsibilities. Therefore, the complaint was dismissed.

Delaware Supreme Court Affirms Chancery's Ruling on Fees for "Corporate Benefit" in Class Action; Notes Distinction in Delaware v. Federal Law on Presumptions

Francis G.X. Pileggi — Mon, 18 Jan 2010 11:43:14 -0500

Alaska Electrical Pension Fund v. Brown, No. 240, 2009 (Del. Supr., Jan. 14, 2010), read opinion here. See blog summaries of prior Delaware decisions in this case here.

This Delaware Supreme Court decision is the second time Delaware’s High Court has reviewed a decision by the Delaware Court of Chancery in this case regarding a request for attorneys’ fees in a class action settlement. The prior case summaries at the above link provide a more detailed factual background. A simplified statement of the case is that attorneys who pursued related litigation in California argued that they caused a higher price to be obtained in a merger, and then sought to intervene in the related case in Delaware to share in the attorneys' fees awarded.

Issues on Appeal
The key issues on appeal before the Supreme Court related to whether there was a causation between the increase in the tender offer as a result of the efforts of the attorneys for the intervenor, Alaska Electrical Pension Fund. Specifically, Alaska argued that the defendants failed to rebut the presumption to which it was entitled, and that the Court of Chancery abused its discretion when it held that the defendants established that Alaska did not in any way contribute to the higher price.

Standard of Review
The Supreme Court applied the abuse of discretion standard when reviewing a denial of an application for attorneys’ fees. In addition, the Supreme Court reviewed de novo legal principles applied in reaching that decision. See footnote 10.

The Corporate Benefit Doctrine as an Exception to the American Rule
An exception to the American Rule under which litigants pay their own attorneys’ fees regardless of the outcome of the lawsuit, is the "corporate benefit doctrine” which has been long recognized in Delaware to provide for the reimbursement of attorneys’ fees and expenses in corporate litigation. In order to be entitled to an award of fees under the corporate benefit doctrine, an applicant must show three things: (1) that the suit was meritorious when filed; (2) the action producing benefit to the corporation was taken by the defendants before judicial resolution was achieved; and (3) the resulting corporate benefit was causally related to the lawsuit. See footnote 13.

The policy reason behind the common corporate benefit doctrine is that the rule insures that, “even without a favorable adjudication, counsel will be compensated for the beneficial results they produce.”

Presumption Applicable for Causal Connection
Delaware law imposes on the defendant the burden to show that there was no causal connection that existed between the initiation of a lawsuit and any later benefit to the shareholders, when, as here, a defendant takes action subsequent to the complaint that renders the claims asserted moot. This presumption exists because it is the “defendant, and not the plaintiff, who is in a position to know the reasons, events and decisions leading up to the defendant’s action.” See footnote 16.

Under Delaware law, there are two types of presumptions. First, “conclusive presumptions” mandate that the trier of fact: “find the presumed fact from the proven fact.” See footnote 17.

Second, a “rebuttable presumption” is applied to impose on the party against whom it is directed the “burden of proving that the non-existence of the presumed fact is more probable than its existence.” See D.R.E. 301(a). The presumption of causation is rebuttable, but to overcome the presumption, the defendants “must demonstrate that the lawsuit did not in any way cause their action.”

See footnote 19, which notes that Delaware law differs from the Federal Rules of Evidence which require only that the opposing party produce some evidence to rebut the presumption.

Standard of Review of Factual Findings
The Supreme Court emphasized that the findings of fact of the trial court are entitled to deference and that “so long as the Court of Chancery has committed no legal error, its factual findings will not be set aside on appeal unless they are clearly wrong and the doing of justice requires their overturn." See footnote 26. The Supreme Court reasoned that because the presumption of causation was rebutted by factual findings supported by the record, the Court of Chancery did not abuse its discretion in denying the application of Alaska for attorneys’ fees and costs.

Standard of Review for Discovery Rulings
The Supreme Court applied the standard of review of “abuse of discretion” for its review of a discovery issue in connection with a motion to compel e-mails that Alaska argued should be subject to the “at issue” exception to the attorney/client privilege.

The Supreme Court explained that the "at issue" exception to the attorney/client privilege may apply in two situations: “(1) A party injects the privileged communications themselves into the litigation, or (2) A party injects an issue into the litigation, the truthful resolution of which requires an examination of confidential communications.” See footnotes 28 through 30. However, in the end, based on Supreme Court Rule 8, the Court declined to rule on this last issue after determining that it was not fairly presented to the trial court for review prior to the appeal.

New Rules Allow for "Lightening Fast" Adjudication of New Cases Filed in Delaware Court of Chancery

Francis G.X. Pileggi — Sun, 17 Jan 2010 21:40:05 -0500

A new voluntary arbitration procedure for new cases is coming to the Delaware Court of Chancery. It will provide a new streamlined, "lightening fast" litigation timetable for the adjudication of certain types of business disputes that fit within the parameters of the new rules. Highlights of the new arbitration rules were presented last month by Chancellor Chandler to the Delaware Bar and are available here. This new procedure is voluntary and gives new meaning to the term "alacrity". It is designed to provide another option to litigants seeking expedited or summary proceedings for certain business disputes that fit the new "streamlined" process provided for in the new rules that will become effective on February 1, 2010. The actual new rules are available here. Key points about the new procedure and rules include the following:

As a prerequisite for cases seeking money damages, the amount in controversy must exceed one million dollars.
The arbitrator will be a permanent sitting member of the Court.
A preliminary conference will be scheduled within 10 days of the commencement of the case to address procedural and substantive aspects of the case.
The statutory authority for the parties to consent to this procedure is 10 Del. C. Section 349.
The arbitration hearing will generally "occur no later than 90 days following receipt of the petition". See Del. Ch. Ct. R. 97(c).
The arbitration proceedings will be confidential.
Discovery and motion practice are expected to be limited.
Appeals will be directly to the Delaware Supreme Court
Filing and hearing fees are as follows: $12,000 for filing the petition, and $6,000 for each day of arbitration (to be shared by the parties). See Order of Jan. 4, 2010 establishing fee schedule here.

This new "rocket docket" allows for an exciting and creative method to obtain an adjudication from a member of the Court at "lightening speed" for the right type of case.

UPDATE: Professor Larry Ribstein comments on the new rules here.

Class Action Settlement Approved in Norfolk Case

Francis G.X. Pileggi — Sun, 17 Jan 2010 13:58:49 -0500

For anyone interested in what an Order from the Delaware Court of Chancery approving a class action settlement looks like, a recent one in the case of Norfolk County Retirement System v. First American Corporation, is available here.

Delaware Court of Chancery Dismisses Dow Shareholders' Derivative Claims Regarding Rohm and Haas Acquisition for Failure to Plead Demand Futility

Francis G.X. Pileggi — Sun, 17 Jan 2010 11:45:49 -0500

In Re The Dow Chemical Company Derivative Litigation, Cons. No. 4339, (Del. Ch., Jan. 11, 2010), read opinion here.

Kevin Brady and Ryan Newell of the Connolly Bove firm prepared this synopsis.

On January 11, 2010, a year after a major corporate battle between the Dow Chemical Company (“Dow”) and Rohm & Haas Company (“ROH”) regarding a $19 billion merger, Chancellor Chandler dismissed derivative claims including Caremark-type allegations against Dow’s current directors and officers for failure to adequately plead demand futility under Court of Chancery Rule 23.1.

Anatomy of the Deal -- “Ticking” Fee but No “Financing Out” or MAE Clause

In December 2007, Dow entered into a memorandum of understanding with Kuwait’s Petrochemicals Industries Company (“PIC”) for a joint venture referred to as “K-Dow.” Dow was to receive $9 billion in cash following the transfer of 50% interest in five Dow commodities chemical businesses. In July 2008, Dow entered into an $18.8 billion merger agreement wherein it would acquire all of ROH at $78 per share. The closing was scheduled to occur within 2 business days of receiving regulatory approval. Because Dow recognized that “uncertainty” regarding any aspect of the deal would be a death knell for the deal, Dow did not condition the closing on a financing or any other traditional “outs.” Dow assumed the risk of a material adverse effect in the chemical industry and financial markets. The merger agreement, however, did contain traditional penalties for delay or failure to close including specific performance and substantial “ticking” fees (interest on the cash portion of the deal which was estimated to be approximately $3.3 million per day).

As for financing, Dow had $9 billion from PIC, $4 billion from Berkshire Hathaway Inc. and the Kuwait Investment Authority, and a $13 billion bridge loan (available to be drawn upon if the ROH merger closed before K-Dow closed even though Dow’s position publicly was that the ROH merger was not contingent upon the closing of K-Dow).

Tightening of Credit Markets -- Dow’s Picture Worsens

In July 2008, Dow’s earnings were strong, however, by 2009 Dow’s outlook and the economy in general took a downward turn. Dow’s credit ratings nearly fell to junk bond levels, which possibly meant that either Dow did not have the necessary cash reserves for the ROH deal or, if it closed, Dow would be insolvent following several credit defaults. Dow nonetheless proceeded with pre-closing plans for both K-Dow and ROH.

In late November 2008, Dow received approval for K-Dow from Kuwait’s Supreme Petroleum Council (the “SPC”) to close, which was slated for January 2, 2009. That approval was later rescinded by the SPC (without giving any reason) in late December 2008 – which prompted Dow to quickly issue a press release stating that the ROH closing was not contingent upon K-Dow. (Allegedly, behind the SPC’s rescission were inferences of “external interference,” “politicizing” of the oil industry, and other suspicions that suggested bribery on Dow’s behalf.)

Dow Tries to Extend the Closing

As of January 9, 2009, the only remaining regulatory approval needed was that of the FTC. According to the Plaintiffs, Dow lobbied the FTC to delay approval and also asked ROH to extend the closing deadline. Neither request succeeded. The FTC granted final antitrust clearance for the transaction on January 23, 2009, which triggered a closing no later than January 27, 2009. Two days before closing, Dow refused to close citing two reasons: (i) a change in the economic climate; and (ii) the likelihood that the combined Dow-ROH entity would fail. ROH sued Dow on January 26, 2009 for specific performance. That litigation settled before as trial was about to start and the merger closed on April 1, 2009 “on substantially altered financial terms.”

Derivative Claims

Plaintiffs brought a litany of claims including breaches of fiduciary duties by the Directors for: “(a) approving the [ROH] Transaction, (b) misrepresenting the relationship between the [ROH] and K-Dow transactions, (c) failing to detect and prevent alleged bribery in connection with the K-Dow transaction, (d) failing to detect and prevent the alleged misrepresentations, (e) failing to detect and prevent insider trading, and (f) failing to prevent the payment of allegedly excessive and wasteful compensation.”

Demand Excusal

Plaintiffs, in bringing a derivative action, must satisfy Court of Chancery Rule 23.1 by either making a pre-suit demand or alleging demand futility. The Court stated that the purpose of the demand requirement “is not to insulate [directors] from liability; rather … to preserve the primacy of board decisionmaking regarding legal claims belonging to the corporation.” Demand is futile and therefore excused “only if a majority of the directors have such a personal stake in the matter at issue or the proposed litigation that they would not be able to make a proper business judgment in response to a demand.”

The Court also noted that while the procedural posture was a motion to dismiss, the more liberal standard of Rule 12(b)(6) did not apply. Because the claims were derivative, the motion must be considered under Rule 23.1: “demand futility under Rule 23.1 is ‘logically the first issue [for all derivative claims] and if plaintiffs cannot succeed under the heightened pleading requirements of Rule 23.1 . . . there is no need to proceed to an analysis of the merits of the claim’ under Rule 12(b)(6).” Moreover, two different demand standards applied to Plaintiffs’ claims. For the claims regarding a board action -- the Directors’ approval of the ROH merger -- the Court applied the Aronson test. For claims regarding board inaction (Caremark claims), the Court applied the Rales test.

Approval of the ROH Merger

Under Aronson, Plaintiffs were required to “plead particularized facts that raise a reasonable doubt either (i) that a majority of the directors who approved the transaction in question were disinterested and independent, or (ii) that the transaction was the product of the board’s good faith, informed business judgment.”

First Prong of Aronson

Plaintiffs allege that demand was excused as futile because half of the board failed the test of being disinterested or independent because of their relationships with director Liveris – yet they did not allege that Liveris was interested in the transaction. Plaintiffs pointed to Liveris’ role as a director at Citigroup – which was the named bank among many that were to provide the bridge loan if needed. Under this theory, the Court noted that Liveris potentially had a conflict of interest if ROH had forced Dow to draw upon the bridge loan to close and had Dow consequently gone into bankruptcy. However, this was merely a potential conflict and does not reasonably lead to the conclusion that a conflict existed. With no conflict of interest, there was no interested director and “without an interested director, the Court stated that the independence of the remaining directors need not be examined. Plainly put, the beholdenness or dominance of any director is irrelevant because there is no fear that the dominating director, without a personal or adverse interest, will do anything contrary to the best interest of the company and its stockholders.” With Plaintiffs failing to meet the burden under Rule 23.1, the Court held that the majority of the Directors were disinterested and independent.

Second Prong of Aronson

The Court held that the complaint failed to indicate that the Directors were not adequately informed. To survive the second prong of Aronson, the “‘plaintiffs must plead particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision.’”

The Court found that “[n]othing in the complaint indicates the Dow board was not adequately informed about the transaction with [ROH].” Taking into consideration the economic times, the Court noted that “[e]ven accepting all the well-pled allegations as true, plaintiffs do not rebut or address the accepted facts that the board was negotiating in a seller’s market and [ROH] demanded certain deal protections.” The Directors made a decision to enter the merger agreement without a financing contingency because they did not want ROH to seek another partner. The Plaintiffs focused on the “substantive content of the directors’ decision” as opposed to the process. As Chancellor Chandler stated in Citigroup, “substantive second-guessing of the merits of a business decision . . . is precisely the kind of inquiry that the business judgment rule prohibits.”

The Court stated:

“To show that a disinterested and independent board acted outside the bounds of business judgment, plaintiffs must show that directors acted in bad faith. Recently, the Supreme Court clarified the concept of bad faith in Lyondell Chemical Co. v. Ryan, noting that ‘[i]n the transactional context, [an] extreme set of facts [is] required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties.’ Plaintiffs must show that defendants completely and ‘utterly failed’ to even attempt to meet their duties.”

While the Plaintiffs claimed that the directors misrepresented the connection between ROH and the K-Dow deals, the Court found no misrepresentation of the relationship. Thus, having failed to show reasonable doubt that the Directors did not exercise valid business judgment, the Court held that Plaintiffs failed to satisfy the second prong of Aronson. Coupled with the failure to prove either interestedness or lack of independence, the Court dismissed with prejudice the claim for breach of fiduciary duties regarding the ROH merger.

Caremark Failure to Supervise

Demand futility for the Caremark monitoring claims was governed by Rales wherein:

[D]efendant directors who face a “substantial likelihood of personal liability” are deemed interested in the transaction and thus cannot make an impartial decision. But “[d]emand is not excused solely because the directors would be deciding to sue themselves.” Rather, “demand will be excused based on a possibility of personal director
liability only in the rare case when a plaintiff is able to show director conduct that is ‘so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists.’”

The core of Plaintiffs’ Caremark claims was that the failure to monitor subjected Dow to be exposed to liability for 1) bribery allegations in K-Dow; 2) misrepresentations regarding the need for K-Dow to close to provide financing for ROH; and 3) insider trading and waste allegations.

To prevail on their claim for oversight liability, Plaintiffs

must show that the directors knew they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities such as by failing to act in the face of a known duty to act.” Furthermore, the test is “rooted in concepts of bad faith; indeed, a showing of bad faith is a necessary condition to director oversight liability.” Only an “utter failure” will satisfy a showing of bad faith. Moreover, because Dow has adopted a Section 102(b)(7) provision in its charter, plaintiffs must plead particularized facts showing bad faith in order to establish a substantial likelihood of personal directorial liability.

K-Dow Bribery Allegations

Plaintiffs claimed that the Directors failed to detect and prevent bribery related to K-Dow was “supported” by an unsubstantiated charge made by a Kuwaiti Parliament member. Nonetheless, at the motion to dismiss stage the complaint contained facts that allowed the Court to infer that bribery may have occurred. However, Plaintiffs failed to plead the “red flags” that would give the Directors a basis for suspicion. Plaintiffs argued that because members of Dow’s management may have been involved with bribery issues in the past (Dow paid a fine to the SEC in January 2008), the Board should have suspected similar behavior here. However, the Court rejected that argument because it was found that the prior infractions involved different members of management, a different country, and a different transaction.

Lacking both the knowledge of and reason to suspect bribery, the Directors could not have consciously disregarded their duty to supervise. Nor did Plaintiffs plead facts to suggest an “utter failure” to supervise insiders or that any director acted with anything but good faith. Accordingly, Plaintiffs failed to “allege facts that establish a substantial likelihood of director liability due to oversight liability under Citigroup . . . .” The bribery claim was dismissed with prejudice.

Interestingly, in footnote 85, the Court noted that Dow had set up policies to prevent improper dealings with third parties in its Code of Ethics which expressly prohibited unethical payments to third parties. Plaintiffs also made allegations that defendants permitted their corporate governance policies to be compromised. The Court said in essence that you can’t have it both ways – “Plaintiffs cannot simultaneously argue that the Dow board ‘utterly failed’ to meet its oversight duties yet had “corporate governance procedures” in place without alleging that the board deliberately failed to monitor its ethics policy or its internal procedures.”

Director(s) Domination or Control of Board

Finally, Plaintiffs argued that nonetheless Liveris faced a substantial likelihood for failing to supervise and that he dominated and controlled a majority of the Directors. Without reiterating its reasons, the Court held that Plaintiffs had not pled facts sufficient to show that Liveris, like the other directors, was subject to a substantial liability of interest. Having no conflict, it was irrelevant whether he dominated and controlled a majority of the Directors.

In conclusion, having failed to establish that even one director faced a substantial likelihood of liability, Plaintiffs were unable to show that the board was dominated, controlled, and improperly influenced. Thus, under Rales, Plaintiffs failed to establish that demand was excused so the claims were dismissed.

In an Appraisal Action Arising out of a 1997 Merger, the Court Rejects a Fairness Opinion Based on One Week's Analysis; Awards $841,000 in Expert Fees But Rejects Request to Shift Attorneys' Fees

Francis G.X. Pileggi — Sun, 17 Jan 2010 10:12:26 -0500

In Re Sunbelt Beverage Corp. Shareholder Litigation, Consol. C.A. No. 16089-CC (Del. Ch., Jan. 5, 2009), read opinion here.

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

The Court of Chancery in this opinion addressed a consolidated breach of fiduciary duty and appraisal proceeding arising out of a 12-year old cash-out merger of SBC with and into Sunbelt Beverage Corporation. Plaintiff Goldring alleged that Sunbelt’s board of directors violated their fiduciary duties in cashing her out at an unfair price, for which she sought rescissory relief or in the alternative, an appraisal of her shares of Sunbelt stock, plus interest, costs, expert fees and attorneys’ fees.

In 1997, Goldring held approximately 14.9% of the shares of Sunbelt stock. Sunbelt formerly was a division of McKesson Corporation that in 1988 began to divest its wine and spirits operations. McKesson approached Ray Herrmann, the former Vice-Chairman of McKesson Wine & Spirits, to see if he would be interested in purchasing McKesson Wine & Spirits. Herrmann organized a group of investors, including investment funds from the private investment firm of Weiss, Peck, and Greer (“WPG”), to purchase McKesson Wine and Spirits.

In 1997, McKesson and WPG sold their last remaining shares of Sunbelt stock. Sunbelt’s board convened a week later, on August 6, 1997, to discuss a proposed business alliance with Young’s Market. Before the conclusion of the meeting, the board authorized Sunbelt to obtain a fairness opinion for a $45.83 per-share offer for Goldring’s stock. After a week’s work on the project, Hempstead & Co. had completed its valuation of Sunbelt and prepared a fairness opinion for a proposed Sunbelt stock transaction at $45.83 per share. On December 12, 1997, Goldring filed her appraisal action in Delaware but the action was stayed while an arbitration proceeding went forward in New York. Following the conclusion of the arbitration, the stay was lifted and Goldring’s appraisal action and her common law breach of fiduciary duty action proceeded in Delaware.

At trial in April 2009, Goldring’s expert valuations were: (i) a discounted cash flow analysis ($114.04 per share); and (ii) a comparable transactions analysis ($104.16 per share). Defendants’ expert’s valuations were: (i) a discounted cash flow analysis ($36.30 per share); (ii) an analysis of earlier transactions involving Sunbelt stock ($45.83 per share); and (iii) an asset based approach ($42.12 per share).

The Court found that the defendants failed to show any semblance of a fair process with respect to the merger. The Court found that the defendants failed in meeting their burden of demonstrating that the merger was entirely fair, as they did not use “any of the procedural devices that could temper … the application of the entire fairness standard, such as a special negotiating committee of disinterested and independent directors or a majority-of-the-minority stockholder vote provision.” Moreover, the merger included “no procedural protections designed to ensure arm’s-length bargaining or to approximate a fair valuation procedure. There was no special committee, no opportunity for genuine negotiations regarding the merger consideration, and no dissemination of material information that would level the playing field and prevent Goldring from becoming a drastically disadvantaged minority shareholder.” However, the Court found that rescissory damages were not appropriate because of “significant issues related to complexity and implementation…” The company’s portfolio was “too complex to unscramble and, ultimately, rescission is an equitable remedy that a court of equity will only grant, as an exercise of discretion, when that remedy is clearly warranted.”

Turning to the appraisal action, the Court focused on the fact that the defendants obtained a “highly suspect” fairness opinion for the proposed merger consideration of $45.83 because the opinion was produced in approximately one week (during which time, the lead appraiser for Hempsted was working on at least one other matter that precluded him from working extensively and meaningfully with Sunbelt representatives). As a result, the Court followed Goldring’s expert and awarded $114.04 per share in money damages as an adequate substitute remedy.

With respect to Goldring’s request for fees and costs, the Court determined that the equitable result would be for defendants to pay Goldring’s court costs and expert witness fees which amounted to over $840,000. The Court rejected her request for attorneys’ fees because in order to shift fees, the Court had to find bad faith on the part of defendants which the Court could not find here. The Court also awarded interest at the legal rate (5% greater than the Federal Reserve discount rate as measured during that period of time), compounded quarterly.