The Delaware quarterly January - March 2014

Each calendar quarter, the Delaware Quarterly analyzes and summarizes key decisions of the Delaware courts on corporate and commercial issues, as Delaware’s Supreme Court and Court of Chancery are generally regarded as the country’s premier

business courts, and their decisions carry significant influence over matters of corporate law across the nation.

This Quarter’s Highlights

Dominating headlines in Delaware this quarter were a panoply of cases and proposed legislative amendments to the Delaware General Corporation Law (“DGCL”) bearing on the scope of appraisal rights under 8 Del. C. § 262 (and, more pointedly, the

now familiar practice of “appraisal arbitrage”) and the propriety of fee-shifting and forum selection provisions in corporate charters and bylaws. As to the former, the Delaware courts confirmed

that in certain situations, the negotiated merger price can be the best indicator of fair value for appraisal purposes; and rendered important guidance on (i) standing to seek appraisal and (ii) statutory interest accrual on appraisal awards.

In Huff Fund Investment Partnership v. CKx, Inc., the Delaware Supreme Court affirmed Vice Chancellor Glasscock’s earlier rulings in the appraisal of CKx, Inc. that: (i) the merger price was the most reliable indicator of fair value where traditional valuation analyses were unreliable and the merger was a third-party transaction negotiated at arm’s-length and subject to a robust auction process; and (ii) the court lacks discretion to toll the statutory interest that accrues on appraisal awards from the effective date of the merger through the satisfaction of judgment. Notably, the Huff affirmance came on the heels of another appraisal decision – In re Appraisal  of Ancestry.com, Inc. – where Vice Chancellor Glasscock, applying a similar analysis, likewise deemed the merger price the most

Editors

Contents

This Quarter's Highlights............................................. 1

Key Developments In Delaware

Appraisal Law.................................................... 2

Fee-Shifting And Forum Selection Bylaws: Legislative And Judicial Developments             7

Additional Developments In Delaware Business And Securities Law      10

Alternative Entities........................................... 10

Appraisal Proceedings...................................... 11

Arbitration....................................................... 11

Attorney’s Fees............................................... 11

Books And Records Actions.............................. 12

Contract Claims.............................................. 13

Corporate Governance...................................... 14

Discovery....................................................... 15

Fiduciary Duties.............................................. 15

Jurisdiction..................................................... 16

Motions to Expedite......................................... 16

Motions For Reargument.................................. 17

Motions To Strike............................................. 17

Practice And Procedure.................................... 18

Settlements.................................................... 19

Statute Of Limitations............................. 20

Jonathan W. Miller [email protected]

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Matthew L. DiRisio [email protected]

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This Quarter’s Authors.............................................. 21

The Delaware Quarterly Advisory Board.... 21

probative indicator of fair value. While potentially confined to their facts, these cases nevertheless signal a retreat from the courts’ historical reluctance to allow the merger price to serve as a proxy for fair value.

In two other appraisal decisions – an earlier ruling in Ancestry and Merion Capital LP v. BMC Software, Inc. – Vice Chancellor Glasscock addressed controversial issues regarding the standing of appraisal arbitrageurs under §

262. Taken together, the rulings make clear that investors who acquire their shares in a target company (i) after

the record date for determining eligibility to vote on the merger, and (ii) for the sole purpose of exercising appraisal rights, may perfect appraisal rights under § 262 without having to demonstrate that the specific shares for which they seek appraisal were not voted in favor of the merger.

In the wake of these decisions, the Delaware Corporation Law Council (the “Law Council”), comprised of Delaware attorneys charged with recommending annual revisions to the DGCL, promulgated proposed amendments designed to address the surge in appraisal proceedings stemming from the appraisal arbitrage movement. If adopted, the amendments would: (i) prohibit appraisal actions where the shares seeking appraisal represent less than 1 percent of the target’s outstanding stock or comprise less than $1 million in merger consideration; and (ii) in contrast to the Huff decision, allow target companies to toll the accrual

of statutory interest on a portion of the ultimate appraisal award by making an upfront payment to petitioners before the conclusion of the appraisal proceeding. While they could reduce the volume of appraisal claims at the margins, there is a sense among market participants and practitioners that by declining to either impose the type of “share-tracing” requirement rejected by the Chancery Court or reducing the statutory interest rate itself, the amendments may not meaningfully deter appraisal arbitrage.

Also among the Law Council’s recommendations are proposed amendments regarding the use of corporate fee-shifting and exclusive forum charter and/or bylaw provisions, which have continued to occupy courts and generate considerable debate. (The latest pronouncement on the fee-shifting dispute came this quarter in Strougo

v. Hollander, where the Chancery Court held that former stockholders are not bound by fee-shifting bylaws adopted after they ceased to hold stock.) If adopted, the proposed legislation would limit the ability of Delaware corporations to include fee-shifting provisions in their charters or bylaws, but allow them to adopt provisions requiring that all so-called intra-corporate claims be resolved in Delaware courts. The amendment would be a

major win for plaintiffs and their counsel, who otherwise face considerable financial risk in commencing litigation against the growing number of companies adopting fee- shifting bylaws. A determination is expected by the end of June, and all of the proposed amendments would become effective as of August 1, 2015.

Each of these developments is discussed in greater detail below, followed by synopses of other recent decisions issued by the Delaware courts across a broad range

of corporate governance topics, including: alternative entities; appraisal proceedings; arbitration; attorney’s fees; books and records actions; contract claims; corporate governance; discovery; fiduciary duties; jurisdiction; motions to expedite; motions for reargument; motions to strike; settlements; statutes of limitations; and various other issues of Delaware practice and procedure.

Key Developments In Delaware Appraisal Law

This quarter saw several important developments, both judicial and legislative, that bear directly on Delaware appraisal law and, more broadly, on the now-familiar practice of “appraisal arbitrage,” in which investors (typically hedge funds) purchase stock in a target company after the announcement of a merger – and after the record date for determining eligibility to vote on the merger – solely in order to exercise appraisal rights with respect to their holdings. At the forefront was the Delaware Supreme Court’s February 12, 2015 decision in Huff Fund Investment Partnership v. CKx, Inc.,1  affirming, without further written opinion, the Court of Chancery’s decision in an appraisal that: (i) the merger price was the most reliable indicator

of fair value for the target company’s stock; and (ii) the court does not have discretion to toll the statutory interest that accrues on a petitioner’s ultimate appraisal award between a merger’s effective date and the satisfaction of judgment, even as to a portion of merger consideration unconditionally offered by the target company to petitioners during the pendency of the appraisal. The Huff ruling tacitly endorsed another appraisal decision by the Chancery Court this quarter in In re Appraisal of Ancestry. com, Inc.,2 which likewise found the merger price to be

the most probative indicator of fair value. These decisions present a marked departure from recent Delaware jurisprudence declining to afford the merger price any meaningful weight in determining fair value in the appraisal context.

1      2013 WL 5878807 (Del. Ch. Nov. 1, 2013), aff’d, No. 348, 2014 (Del. Feb. 12, 2015).

2      C.A. No. 8173-VCG, 2015 WL 399726 (Del. Ch. Jan. 30, 2015).

In the same time frame, the Court of Chancery also issued two decisions addressing important issues of standing under 8 Del. C. § 262, Delaware’s appraisal statute. In an earlier decision in the Ancestry case3 and Merion Capital LP v. BMC Software, Inc.4 – both issued on January 5,  2015 and both authored by Vice Chancellor Glasscock – the Chancery Court collectively held that both beneficial and record holders who purchase their shares in a target company after the record date for determining voting eligibility, and for the sole purpose of exercising appraisal rights, can perfect appraisal rights under 8 Del. C. § 262 without having to demonstrate that the specific shares for

which they seek appraisal were in fact not voted in favor of the merger by any prior owner of the shares. In doing so, the court effectively sanctioned the standing of appraisal arbitrageurs, whose shares are (i) acquired post-record date and (ii) held in fungible bulk by a nominee record holder (Cede & Co.), such that they are often unable to precisely “trace” their specific shares to “no” votes on the merger at issue.

Finally, in the wake of the Supreme Court’s decision in Huff, the Corporation Law Section of the Delaware State Bar Association promulgated proposed amendments

to the DGCL, designed to curb the recent surge in appraisal proceedings attributable, in large part, to the appraisal arbitrage movement. If enacted by the Delaware legislature, the amendments would: (a) disallow appraisal actions if the shares seeking appraisal represent less than 1 percent of the target company’s total shares outstanding or are worth less than $1 million in merger consideration; and (b) permit target companies to toll the accrual of statutory interest on a portion of the ultimate appraisal award by making an upfront payment to petitioners –

in an amount of the company’s choosing – before the conclusion of the appraisal proceeding.

Huff Fund Investment Partnership v. CKx, Inc.

Background

In 2013, CKx, Inc. (“CKx” or the “Company”) – whose primary assets were the rights to the television programs “American Idol” and “So You Think You Can Dance?”; Elvis Presley Enterprises, which controls the rights to Presley’s name, image, and likeness, along with certain music; and Muhammad Ali Enterprises, which controls the rights to Ali’s name, image, and likeness – entered into a merger agreement pursuant to which private equity firm Apollo

Global Management and affiliates (“Apollo”) agreed to purchase all of CKx’s outstanding common stock for $5.50 per share (the “Merger”).

The Merger followed an extensive sale process in which Gleacher & Co. (“Gleacher”), the Company’s financial advisor, both conducted an auction process and thoroughly solicited additional interest from third parties. Furthermore, following Apollo’s $5.50 per share bid, the board directed Gleacher to solicit bids above the $5.50 share price, and even amended its engagement letter with Gleacher to include monetary incentives to identify such topping bids. After multiple entities expressed interest

in the Company, entered into confidentiality agreements and submitted bids in one form or another, two superior bidders ultimately emerged and engaged in diligence: Apollo, and a second, unidentified bidder, which came  in with a bid ten cents higher at $5.60 per share. The board ultimately accepted Apollo’s slightly lower bid after determining that the second bidder’s financing was

tenuous. Gleacher issued a formal opinion that the Merger was fair, from a financial point of view, to the Company’s stockholders.

CKx shareholders Huff Fund Investment Partnership (“Huff”) and Bryan Bloom (“Bloom,” and, with Huff, “Petitioner”), exercised their appraisal rights under DGCL § 262(h).

During the appraisal proceeding, Huff presented a valuation expert who propounded that fair value for a CKx share was $11.02. Huff’s expert relied upon purportedly comparable companies and transactions, along with a discounted-cash-flow (“DCF”) analysis based on CKx financial projections prepared in connection with the sale process. Respondents’ own valuation expert opined that the fair value was $4.40 per share based on his own DCF analysis that discounted the CKx sales projections.

The Court Of Chancery’s Analysis

Merger Price As Fair Value

As a threshold matter, the court noted that when making a ruling on fair value under § 262(h), the court enjoys discretion to consider whatever data and valuation methods it deems appropriate. Against that backdrop, the court proceeded to reject Petitioner’s comparable company and precedent transactions analyses on the basis that neither involved truly comparable subjects. Indeed, Petitioner’s expert admitted as much at trial, acknowledging that none of the guideline companies (i)

3      C.A. No. 8173-VCG, 2015 WL 66825 (Del. Ch. Jan. 5, 2015).

4      C.A. No. 8900-VCG, 2015 WL 67586 (Del. Ch. Jan. 5, 2015).

were of comparable size, (ii) owned analogous assets,

(iii) competed with CKx or (iv) followed a similar business model.

The court similarly found deficiencies in each side’s DCF analysis. Noting that the utility of DCF analyses rests  upon the “the reliability of the inputs to the model,”5 the court found that CKx’s revenue projections were overly optimistic and, having not been prepared in the ordinary course of business, could not be credited. In particular,  the court found that management’s inclusion of a $20 million uptick in licensing fees for the broadcast rights to American Idol was unreliable; the operative contract was about to expire and the parties had not yet negotiated a new agreement. The court reasoned that conflicting trial testimony about CKx’s long-term prospects demonstrated that management’s projections were designed to secure lower interest rates and a higher price for the Merger. For similar reasons, the court was not inclined to completely exclude the potential increase in revenue resulting from renegotiation of the licensing agreement. In sum, given the inherent uncertainty surrounding the projected future

cash flows, the court found a DCF analysis to be unreliable vis-à-vis CKx.

Given the nature of the sale process conducted by the  CKx board – and the absence of reliable comparables and DCF analyses – the court adopted the merger price as the most reliable indication of CKx’s value. It found that the auction was thorough, effective and free from any specter of self-interest or disloyalty. Addressing the Supreme Court’s ruling in Golden Telecom, Inc. v. Global GT LP,6 which prohibited any presumptive reliance on the merger price by the trial court conducting an appraisal proceeding, the Vice Chancellor found that the Court of Chancery may nonetheless consider the merger price when satisfying

its statutory mandate to consider all factors relevant to fair value, at least where, as here, the underlying merger was a third-party, arm’s length transaction that (i) resulted from a robust sale process that included an auction or market check and (ii) bore no indicia of conflict or disloyalty.7

Tolling Of Statutory Interest Accrual

A month after the court issued its ruling on fair value, Respondents filed a Motion to Stop Accrual of Interest,8  in which they asked the court to (i) order the Petitioner to

5      Huff, 2013 WL 5878807, at *9 (quoting In re U.S. Cellular Operating Co., C.A. No. 18696- NC, 2005 WL 43994, at *10 (Del. Ch. Jan. 6, 2005).

6      11 A.3d 214 (Del. 2010).

7      Huff, 2013 WL 5878807, at *12-13.

8      In a separate interim ruling on May 19, 2014, likewise affirmed by the Supreme Court, the Chancery Court denied the parties’ competing requests for adjustment to the merger price “fair value” for appraisal purposes. C.A. No. 6844-VCG, 2014 WL 2042797 (Del. Ch. May 19,

accept a payment from Respondents of “the undisputed portion of the value of [Petitioner’s] stock”9  and (ii) toll the running of statutory interest on that amount pursuant to  8 Del. C. § 262(h) (five percent over the Federal Reserve discount rate between the effective date of the merger and the satisfaction of the appraisal judgment). The court

denied the motion, concluding that it did not have statutory authority to toll the accrual of interest without “good  cause” showing that awarding interest would be unjust,  and that good cause, in turn, can only be assessed at the conclusion of the proceedings.

The Supreme Court’s Affirmance

On February 12, 2015, the Supreme Court affirmed all

of the Court of Chancery’s rulings below without further written opinion, and based entirely on Vice Chancellor Glasscock’s analyses.10

In re Appraisal of Ancestry.com, Inc.

In December 2012, following an extensive sale process that included a public auction, Ancestry, Inc. (“Ancestry” or the “Company”) was acquired in a take-private transaction by private equity firm Permira Advisors, LLC in a cash transaction that constituted a 40 percent premium to

the unaffected share price (the “Merger”). The Company received written demands for appraisal from three factions of stockholders, including Cede & Co. (“Cede”), as record owner of 1,255,000 shares beneficially owned by Merion Capital, L.P. (“Merion”), on whose behalf Cede had filed the demand. Two verified petitions for appraisal were ultimately filed: one by Merion, seeking appraisal of 1,255,000 shares, and the other by two affiliated hedge funds – Merlin Partners LP and The Ancora Merger Arbitrage Fund, LP (together with Merion, “Petitioners”).

Merion acquired its stake in Ancestry after the record date determining eligibility to vote on the Merger and before the vote, specifically for the purpose of seeking appraisal

2014). It declined to adjust the value downward to reflect post-Merger synergies, because there was no evidence the supposed cost savings factored into the buyer’s calculation of its bid. Conversely, the court declined to adjust the value upward to account for certain assets allegedly not reflected in the merger price, e.g., certain assets CKx was to pur- chase after the Merger, “unexploited revenue opportunities” identified in diligence, voting support agreements from large stockholders and a topping bid. While the court suggested that certain developments post-execution of the merger agreement but pre-closing could be relevant to the fair value calculation in appraisal proceedings, it held that none of  those identified in this instance had such an impact. In principal part, the court reasoned that since potential buyers were aware of the various assets and business opportunities identified, their value was presumably incorporated in the merger price.

9      C.A. No. 6844-VCG, 2014 WL 545958, at *1 (Del. Ch. Feb. 12, 2014).

1. At oral argument, Chief Justice Strine appeared to endorse the view that merger price  can, in  the appropriate circumstances, prove a viable factor in the appraisal context, suggesting that “[t]he best indication of market value is, in fact, a market check.” 2/11/2015 Delaware Supreme Court Oral Arguments, http://new.livestream.com/ DelawareSupremeCourt/events/3801168/videos/76805879 (last visited Mar. 31, 2015).

of the shares. Merion purchased its shares on the open market, and did not know the identity of the sellers. The shares were held by Cede, the nominee of the Depository Trust Company, in an “undifferentiated manner known

as ‘fungible bulk’”11 – a typical practice with respect to publicly-traded stock – which could not trace Merion’s shares to specific votes against the deal.

Standing

In May 2014, shortly before trial, Ancestry filed a motion for summary judgment dismissing Merion’s petition on the

grounds that it could not establish that the shares for which it sought appraisal had not been voted in favor of the Merger, and thus lacked standing under 8 Del. C. § 262. The court disagreed and, on January 5, 2015, denied the motion and found that Merion had properly perfected its appraisal rights and was a proper petitioner for appraisal purposes.

As framed by the court, the pertinent issue was whether a beneficial owner must demonstrate “that the specific

shares for which it seeks appraisal have not been voted in favor of the merger.”12 The court found it does not. As an initial matter, the court noted that beneficial owners who acquire shares after the record date for determining vote eligibility are nonetheless entitled to seek appraisal under the statute, and that, pursuant to a 2007 amendment to § 262, such beneficial owners are expressly permitted to file appraisal petitions in their own name.

Against that backdrop, the court found that under the plain language of Section 262(a), a petitioner seeking to perfect appraisal rights is only required to show that the record holder of the shares for which it seeks appraisal

• here, Cede – has, inter alia, (i) held the shares from the date it made the formal demand for appraisal through the effective date of the merger and (ii) “has neither voted

in favor of the merger … nor consented thereto ….”13 As to the latter requirement, the court rejected the notion that petitioners have to “trace” each specific share for

which they seek appraisal to an abstention or a “no” vote. Instead, consistent with the court’s 2007 decision in In re Appraisal of Transkaryotic Therapies, Inc., where, as here, shares are held in fungible bulk on deposit with Cede, a

petitioner need only show that “Cede had at least as many shares not voted in favor of the merger as the number for which demand [for appraisal] was made.”14

Merger Price As Fair Value

The court issued its fair value opinion on January 30,

2015.15  Echoing the reasoning in the Huff decision discussed above, the Vice Chancellor again concluded – in an opinion that can be viewed as implicitly affirmed by the Supreme Court – that the merger price was the most probative indicator of fair value for Ancestry common stock. As in Huff, the court reasoned that the Merger was  a third-party, arm’s-length transaction resulting from a robust auction process, and did not suffer from any conflict of interest or improper influence, e.g., the presence of a controlling stockholder or conflicted directors. Also as in

Huff, the court found unreliable the DCF analyses provided by both sides based on concerns with various inputs – i.e., projections, terminal values, discount rates and stock- based compensation – and instead conducted its own DCF analysis. The court arrived at a value of $31.79 per share, which further bolstered its reliance on the merger price – $32 per share – as a reliable metric.

Merion Capital LP v. BMC Software, Inc.

On January 5, 2015, the same day it issued its standing decision in Ancestry, the court issued another decision addressing standing in the appraisal context in Merion Capital LP v. BMC Software, Inc. As in Ancestry, Merion had acquired shares in BMC Software Inc. (“BMC” or the “Company”) after the announcement that BMC would be acquired by private equity firms Bain Capital and Golden Gate Capital. Also like Ancestry, shares were purchased  in the open market between the record date for eligibility to vote on the merger and the vote itself, and held on deposit by record owner Cede in fungible bulk. But unlike in Ancestry, where Cede – presumably at the direction of Merion’s brokers – filed the formal demand for appraisal on Merion’s behalf, the brokers through which Merion purchased its BMC shares were unwilling, as a matter of policy, to instruct Cede to demand appraisal. Since only

record holders can technically file the statutory demand for appraisal – as opposed to the ultimate petition – Merion was forced to convert its beneficial ownership into record ownership. It did so, timely filed the appraisal demand with the Company and ultimately filed a petition for appraisal with the court.

1. C.A. No. 8173-VCG, 2015 WL 66825, at *5 (Del. Ch. Jan. 5, 2015) (quoting In re Appraisal of Transkaryotic Therapies, Inc., C.A. No. 1554-CC, 2007 WL 1378345, at *1 (Del. Ch. May 2, 2007)).
2. Id. at *2.
3. Id. at *4.

1. Id. at *7.

15     C.A. No. 8173-VCG, 2015 WL 399726 (Del. Ch. Jan. 30, 2015).

Respondents moved for summary judgment dismissing the petition on the grounds that Merion lacked standing. Similar to the argument in Ancestry, respondents argued that BMC, as a record holder, was required to confirm that none of the specific shares for which it sought appraisal had been voted in favor of the merger – by Merion or

any previous stockholder. Conducting a legal analysis substantially identical to that in Ancestry, the court held that 8 Del. C. § 262 focuses on the record holder’s actions vis-à-vis the merger, and imposes no obligation on a petitioner to show that the specific shares had never been voted in favor of the merger. Here, the court reasoned, there was no dispute that the record holder – Merion –  had not voted the shares it held in favor of the merger and had otherwise satisfied the procedural requirements in the statute. Accordingly, the court denied respondents’ motion for summary judgment.

Proposed Legislative Amendments

In early March, the Corporation Law Section of the Delaware State Bar Association (the “CLS”) promulgated proposed amendments to the DGCL, designed to restrict the availability of appraisal and, more acutely, in an effort to curb the rising tide of appraisal arbitrage. If enacted  by the Delaware legislature, the amendments would:

(a) prohibit appraisal actions where the shares seeking appraisal represent less than 1 percent of the total shares outstanding or comprise less than $1 million in merger consideration; and (b) permit target companies to reduce their exposure to statutory interest on appraisal awards by electing to make an upfront payment to petitioners before the conclusion of the appraisal. If passed, the amendments would apply prospectively to merger agreements entered into on or after August 1, 2015. The amendments would  not, however, impact short-form mergers under the DGCL.

Size Threshold Amendment

The CLS has proposed a de minimus exception to appraisal rights, whereby courts would have to dismiss appraisal petitions where stock is traded on a national exchange and the total number of shares for which appraisal is sought either: (i) represents less than 1 percent of the total outstanding shares entitled to appraisal

rights; or (ii) equates to less than $1 million in total merger consideration, based on the merger price.

Interest Tolling Amendment

This amendment would permit a target company to pay dissenting shareholders an upfront cash amount any time prior to the appraisal judgment, on which the current

statutory interest rate would be tolled. That is, the statutory interest rate imposed by § 262(h) – five percent over the Federal Reserve discount rate between the effective date of the merger and the satisfaction of an appraisal award – would accrue only on the unpaid portion – if any – of the court’s ultimate award.

Takeaways

While the net effect of the recent case law and (if adopted) the proposed legislative amendments on appraisal arbitrage is hard to divine, several general themes emerge.

To begin with, the court’s increased willingness to utilize the merger price as a reliable indicator of fair value could ostensibly disincentivize arbitrageurs from

seeking appraisal in connection with mergers negotiated pursuant to a robust sale process that includes an  auction or effective market check, particularly if the amendment permitting companies to toll the accrual of statutory interest on a significant portion of the ultimate appraisal award is enacted. In those circumstances, petitioners are presumably less likely, in the wake of the Huff and Ancestry rulings, to achieve a meaningful return on the value of their shares, and, under the proposed amendment, would risk being deprived even of the

statutory interest that historically has served as something of an automatic hedge on appraisal bets.

On the other hand, it is not at all certain – or even probable – that merger price will become a more widely- accepted proxy for fair value going forward, or that it will have any meaningful application outside of the similar factual circumstances in Huff and Ancestry, i.e., third-party, arm’s length, premium transactions that are demonstrably free from any taint of conflict or undue influence, involve no controller or interested directors and are subject to thorough market checks. And based on the available empirical data, this is not the merger profile arbitrageurs typically target, because it is less likely that the deal price was skewed by non-market forces and, thus, less likely to yield a material delta between the negotiated price and the intrinsic value of the stock.

The prime appraisal targets are often the transactions more vulnerable to attack from a fiduciary duty standpoint

• controlling stockholder mergers, freeze-out mergers, management-led buyouts and other deals arguably susceptible to conflict or bias – where appraisal awards have routinely exceeded the merger price. In those situations, the proposed amendments, like the recent spate of cases, arguably preserve the incentives of arbitrageurs, since the potential upside could more than

offset the potential (partial) loss of statutory interest under the amendments. In fact, the same upfront payment

a company could make to halt interest accrual could simultaneously serve to reduce the risk to petitioners, who will consequently have less of their own capital at stake and free capital to fund the considerable costs of appraisal proceedings.

In sum, while the recent developments will arguably restrict appraisal in smaller deals or those with extensive market checks, there is a view amongst commentators and certain corporate constituents that the proposed amendments do not go far enough in curbing the perceived abuses of appraisal arbitrage. While they do give companies more flexibility by empowering them to halt the accrual of statutory interest, that practice comes

with its own risks – e.g., the upfront payment is presumably not recoverable in the event it winds up exceeding the amount of the ultimate award and arms petitioners with capital to fund the appraisal litigation. And the limits imposed must be measured against what the amendments declined to do – for example, lower the interest rate

itself or impose on arbitrageurs the type of share-tracing requirement rejected by Ancestry and BMC standing decisions – steps that arguably embrace the practice of appraisal arbitrage.

Fee-Shifting And Forum Selection Bylaws: Legislative And Judicial Developments

The validity of corporate bylaws providing for potential fee-shifting and forum selection in litigation brought by stockholders has remained a hot button issue in Delaware in 2015. Legislation was recently proposed that would  limit the ability of Delaware corporations to include fee- shifting provisions in their charters or bylaws, but would allow them to adopt provisions requiring that all so-called intracorporate claims be resolved in Delaware. The proposed legislation has engendered much controversy, with proponents arguing that the amendments are necessary to protect the ability of stockholders to bring meritorious claims in Delaware courts and detractors contending that fee-shifting bylaws are needed to protect corporations (and, in turn, the vast majority of their

stockholders) from the expense and distraction of frivolous claims brought by a minority of litigious stockholders.

Meanwhile, without deciding the question of whether and under what circumstances fee-shifting bylaws are per se invalid, the Court of Chancery, in Strougo v. Hollander,16

16     C.A. No. 9770-CB, 2015 WL 1189610 (Del. Ch. Mar. 16, 2015).

recently held that such provisions, at a minimum, do not apply to former stockholders whose interest in the

corporation ceased to exist before the bylaw was adopted. These legislative and judicial developments, and their potential impacts, are discussed below.

Background

In 2014, the Delaware Supreme Court held in ATP Tour Inc. v. Deutscher Tennis Bund (“ATP”) that “fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.”17   The court concluded that such provisions are permissible under Delaware law insofar as neither the DGCL nor any other Delaware statute forbids them.18   Because “corporate

bylaws are contracts among a corporation’s shareholders,” the Court explained, a fee-shifting provision contained

in a non-stock corporation’s validly-enacted bylaw is  the functional equivalent of a contractual provision requiring a losing party to pay the winner’s legal fees, which is generally enforceable.19   Of course, the court continued, whether a particular fee-shifting provision will be enforceable “depends on the manner in which it was adopted and the circumstances under which it was invoked. Bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose.”20

In the wake of the ATP decision, more than two dozen Delaware corporations have adopted fee-shifting bylaw  or charter provisions, and several more have publicly signaled their intent to do so.21 Although legislation was proposed in June 2014 that would have prohibited stock corporations from adopting fee-shifting bylaws, the Delaware legislature – given the lateness in its 2014 term and in the face of strong lobbies on both sides – deferred consideration of the issue until 2015. The Legislature expressly invited the Law Council, a committee of the Corporation Law Section of the Delaware State Bar Association, to “continue its ongoing examination of the State’s business entity laws” and submit “any legislative

proposals deemed meritorious” with regard to those laws.22

17     91 A.3d 554, 555 (Del. 2014).

18     Id. at 557-58.

1. Id. at 558 (quotation omitted).
2. Id.
3. See Boardroom Direct, PricewaterhouseCoopers LLP (Nov. 2014), http://www.pwc.com/ us/en/corporate-governance/publications/boardroom-direct-newsletter/november-2014- issues-in-brief.jhtml.
4. S.J. Res. 12, 147th Gen. Assemb., Reg. Sess. (Del. 2014), available at http:// www.corporatedefensedisputes.com/files/2015/03/S.J.-Res.-12.pdf.

The Proposed Legislation

On March 6, 2015, the Law Council, which is comprised of nearly two dozen lawyers from both sides of the

shareholder litigation bar,23   submitted proposed legislation that, if adopted, would amend the DGCL to, among other things:

1. Prohibit the certificate of incorporation or bylaws of any stock corporation from containing “any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party  in connection with an intracorporate claim”;24 and

1. Expressly authorize bylaw or charter provisions that designate Delaware as the exclusive forum for

intracorporate disputes, and prohibit provisions that designate a forum other than Delaware as the exclusive forum for such disputes.25

The proposal exempts non-stock corporations from its prohibition against fee-shifting bylaws.26

In a memorandum explaining its proposal, the Law Council stressed its concern that “fee-shifting provisions will make stockholder litigation, even if meritorious, untenable.”27 The resulting drop-off in stockholder litigation, the Law Council warned, would in turn curtail the development of corporate common law and thereby “eliminate the only extant regulation of substantive corporate law.”28 Acknowledging criticism from corporations and the defense bar that “some, much, or most . . . of stockholder litigation lacks merit,”

the Law Council contended that fee-shifting provisions are not the best way to deal with the problem; rather, the Law Council urged, the task of sorting out frivolous claims from the non-frivolous falls to the courts, which are well- equipped to handle it.29

With respect to the forum selection component of its proposal, the Law Council explained that the proposed amendment was necessary to prevent forum shopping, as well as duplicative litigation in other venues. On this score, the Law Council stated that it “believes that stockholders of Delaware corporations should not be denied access

to the protection of Delaware courts” and that “the value of Delaware as a favored jurisdiction of incorporation is dependent on a consistent development of a balance

of corporate law, and that the Delaware courts are best situated to continue to oversee that development.”30

The Law Council’s proposal has been met with strong reactions on both sides of the debate. While many echo the Law Council’s concerns that widespread fee-shifting could chill even meritorious stockholder claims, others point out that the Law Council’s proposals, read together, appear to serve its own self-interest by ensuring that stockholder litigation in Delaware would, if anything, increase.31  One such critic, Lisa A. Rickard, president of the

U.S. Chamber Institute for Legal Reform, put it this way:

The Delaware Bar Association’s list of recommendations is a huge win for Delaware’s lawsuit business at the expense of shareholders in Delaware companies. Their proposal does precious little to solve the broadly-recognized problem of abusive mergers and acquisitions litigation, while taking away the fee-shifting approach some companies have used to combat it.32

As Ms. Rickard further stated: “The only guaranteed winners will be Delaware lawyers – who’ve effectively strengthened their grip over these M&A lawsuits – at the expense of Delaware’s corporate law franchise.”33

Underscoring Ms. Rickard’s comments, data shows that in 2014, lawsuits were filed challenging roughly 93 percent  of public company transactions, and that 60 percent of all deals valued at more than $100 million led to lawsuits filed in Delaware courts.34

For her part, Mary Jo White, Chair of the U.S. Securities and Exchange Commission, stated that she is “concerned about any provision in the bylaws of a company that could inappropriately stifle shareholders’ ability to seek redress under the federal securities laws” and that the SEC is

“keeping a very close eye on the evolving developments.” 35

1. Fee-Shifting FAQs, http://www.delawarelitigation.com/files/2015/03/COUNCIL-SECOND- PROPOSAL-FAQS-3-6-15-U0124511.docx (last visited Mar. 31, 2015).
2. [Proposed] Act To Amend Title 8 Of The Delaware Code Relating To The General Corpo- ration Law,       http://www.delawarelitigation.com/files/2015/03/COUNCIL-SECOND-PROPOS- AL-U01245103.doc (last visited Mar. 31, 2015).
3. Id.
4. Id.
5. Explanation Of Council Legislative Proposal,

http://www.delawarelitigation.com/files/2015/03/

COUNCIL-SECOND-PROPOSAL-EXPLANATORY-PAPER-3-6-15-U0124513.docx

(last visited Mar. 31, 2015).

1. Id.
2. Id.

1. Fee-Shifting FAQs, http://www.delawarelitigation.com/files/2015/03/COUNCIL-SECOND- PROPOSAL-FAQS-3-6-15-U0124511.docx (last visited Mar. 31, 2015).
2. Id.
3. Michael Greene, Proposal Would Nullify Fee-Shifting Bylaws In Delaware Stock Corp.

Bylaws, Charters, Bloomberg BNA (Mar. 13, 2015), http://www.bna.com/proposal-nulli- fy-feeshifting-n17179924019.

1. Id.
2. Karlee Weinmann, Forum Selection Pays Off For Big-Ticket Deal Makers: Report, Law360 (Feb. 25, 2015), http://www.law360.com/articles/624934/forum-selection-pays-off-for-big- ticket-deal-makers-report.
3. Stephanie Russell-Kraft, SEC’s White ‘Concerned’ About Some Fee-Shifting Bylaws, Law360 (Mar. 19, 2015), http://www.Law360.com/articles/633617/sec-s-white-concerned- about-some-fee-shifting-bylaws.

Strougo v. Hollander

In the midst of the legislative debate concerning the validity of fee-shifting bylaws, on March 16, 2015, Chancellor Bouchard of the Delaware Court of Chancery issued a decision addressing the application of a fee- shifting bylaw to a former stockholder. In Strougo v. Hollander, the court held that a non-reciprocal fee-shifting bylaw could not be enforced against a former stockholder whose interest had been cashed out before the bylaw was adopted.36

In May 2014, First Aviation Services, Inc. (“First Aviation”) completed a 10,000-to-1 reverse stock split at the behest  of its CEO and controlling stockholder. The transaction had the effect of involuntarily cashing out the plaintiff, a former First Aviation stockholder.37  Four days later, the directors of First Aviation adopted a non-reciprocal fee-shifting bylaw, which, similar to the provision at issue in ATP, provided

that any current or prior stockholder who brought a lawsuit against First Aviation and did not obtain a judgment “that substantially achieves, in substance and amount, the full remedy sought” would be obligated to pay First Aviation’s attorney’s fees and expenses.38  Plaintiff sued on behalf

of himself and a putative class of former First Aviation stockholders, claiming that the reverse stock split was unfair, and later amending his complaint to also challenge the fee-shifting bylaw.39   Plaintiff moved for partial judgment on the pleadings that the fee-shifting bylaw does not  apply in his case because it was adopted after the reverse stock split at issue had been consummated.40   Accordingly, whether the bylaw was facially valid under Delaware law was not before the court.

Before determining whether the bylaw was enforceable as against the particular plaintiff, Chancellor Bouchard paused to comment on the “serious policy questions implicated by fee-shifting bylaws.”41   The court observed

type of transaction that should be subject to Delaware’s most exacting standard of review to protect against fiduciary misconduct.”43  Citing ATP’s holding that such provisions, even if facially valid, will not be enforced

if adopted or used for an inequitable purpose, the Chancellor noted that such bylaws would “functionally deprive stockholders” of their “important right” – in fact, one of their “fundamental, substantive rights” – to “sue to vindicate their interests as stockholders.”44

Observing, however, that neither the general policy considerations concerning fee-shifting provisions nor even the facial validity of the specific provision at issue was before the court, Chancellor Bouchard went on to rule on the “narrow” issue before him – whether Delaware law authorizes a bylaw that regulates the rights or powers of former stockholders who were no longer stockholders when the bylaw was adopted.45  The Court held that it does not. As the Chancellor explained:

In determining the bylaw provisions that should apply to a lawsuit initiated by a former stockholder challenging the terms of a cash-out transaction, I hold that the governing bylaws are those in effect when the former stockholder’s interest as a stockholder was eliminated. After that date,  a former stockholder is no longer a party to the corporate contract and thus not subject to any bylaw amendments occurring after his or her interest as a stockholder was eliminated.46

Based on principles of contract law, because First Aviation’s board adopted the bylaw after plaintiff’s interest in the Company had been eliminated in the reverse stock split, the court held that the bylaw does not apply.47

In so doing, the Chancellor distinguished ATP on the ground that, in that case, the fee-shifting provision had been adopted while the plaintiffs were still members of

that, as a practical matter, applying the bylaw would

the non-stock corporation in question.48

Although the ATP

effectively immunize the reverse stock split from judicial review, because “no rational stockholder – and no rational plaintiff’s lawyer42 – would risk having to pay the Defendants’ uncapped attorneys’ fees to vindicate the rights of the Company’s minority stockholders, even

though the Reverse Stock Split appears to be precisely the

bylaw purported to apply to any claim filed against the

corporation by any “current or prior member,” Chancellor Bouchard stated that the ATP decision “cannot responsibly be read to hold that [DGCL] Section 109(b) permits a bylaw that regulates the rights or powers of members who were no longer stockholders when that bylaw was adopted.”49

36     C.A. No. 9770-CB, 2015 WL 1189610, at *1 (Del. Ch. Mar. 16, 2015).

1. Id.
2. Id.
3. Id.
4. Id.
5. Id. at *4.
6. As the court noted, in fact, the provision created fee exposure not only for the plaintiffs, but for anyone acting on their behalf who “offers substantial assistance” or “has a direct financial interest” in their claims, which presumably extends to plaintiff’s counsel. Id. at *3.

1. Id. at *4.

44     Id. at *4 & n.21.

1. Id. at *5.
2. Id. at *7.

47     Id. at *8-10.

48     Id. at *9-10.

1. Id. at *9.

Takeaways

As many see it, the question of the validity of fee-shifting bylaws pits the interest of freedom of contract against that of access to the courts. Exactly where the Delaware

Legislature and courts will land on these issues remains to be seen.

A final determination by the Delaware Legislature concerning the proposed amendments to the DGCL is expected by June 30, 2015. If approved, the amendments would become effective on August 1, 2015. If the Delaware Legislature adopts an amendment to the DGCL that prohibits fee-shifting bylaws, an interesting question will  be what impact, if any, that amendment will have on the numerous companies that have already adopted such bylaws in the wake of the ATP decision. The Law Council’s proposal does not specifically address this issue, and there is, of course, a general prohibition on ex post facto laws.

If the Legislature does not ban fee-shifting bylaws, it will be up to the courts to address what Chancellor Bouchard described as the “serious policy questions implicated by fee-shifting bylaws in general,” including whether and

to what extent they chill meritorious stockholder claims. Indeed, even assuming such bylaws remain facially  valid under the DGCL, the Delaware Supreme Court  has already held that whether any particular fee-shifting provision is enforceable “depends on the manner in

which it was adopted and the circumstances under which  it was invoked.” The Delaware courts will not, under any circumstances, enforce a fee-shifting bylaw that was “used for an inequitable purpose.”50   In the absence of legislation banning fee-shifting bylaws, these issues will play out in the Delaware courts in the years to come.

Moreover, whether or not the Delaware Legislature adopts a prohibition on fee-shifting bylaws, Chancellor Bouchard’s holding in Strougo that former investors are not bound

by bylaws – concerning fee-shifting, forum selection or anything else – that were adopted after they ceased to be stockholders is likely to have continuing ramifications, both in boardrooms and the courts.

Finally, in terms of forum selection, many Delaware corporations, emboldened by recent decisions of the Court of Chancery, have already adopted provisions requiring that any and all intracorporate claims be brought exclusively in the Delaware courts. Such provisions will

likely become an even stronger and more prevalent tool if the Delaware Legislature expressly endorses their inclusion in corporate bylaws and charters.

Additional Developments In Delaware Business And Securities Law

Beyond those topics addressed above, the Delaware courts also issued noteworthy decisions in the following areas of law during the past quarter.

Alternative Entities

Arbitration

In 3850 & 3860 Colonial Blvd., LLC v. Griffin,51 Vice Chancellor Noble, in a letter opinion, denied defendants’ motion to dismiss for lack of subject matter jurisdiction and ordered that the proceedings be stayed pending arbitration to decide the issue of substantive arbitrability, finding that the LLC’s operating agreement dispute resolution provision controlled over the LLC’s successor corporation’s charter provision. The action arose out of the conversion of an LLC into a corporation that resulted in a reduction of plaintiff seed investor’s economic  interest in the company. The LLC’s operating agreement provided for arbitration of the dispute while the successor

corporation’s charter called for litigation in Chancery Court. The court found that the corporation’s charter did not supersede the LLC’s operating agreement with respect

to the resolution of a dispute over the recapitalization of the company because there was no explicit language in the charter to replace the LLC operating agreement and the two agreements maintained independent existence  to the extent that they related to the LLC or corporate governance, respectively. The court further found that the question of arbitrability was for the arbitrator to decide under the court’s Willie Gary52   test, because the parties agreed to arbitrate all disputes and the AAA Commercial

Arbitration Rules permit an arbitrator to rule on jurisdiction.

Fiduciary Duties – Breach Of Fiduciary Duty; Arbitrability

In Lewis v. AimCo Properties, L.P.,53  Vice Chancellor Parsons, in a memorandum opinion: (i) stayed a complaint pending arbitration with respect to the general partner defendants’ (“GP Defendants”) motion to dismiss for lack of subject matter jurisdiction based on arbitration provisions in the relevant operating agreements; and (ii) granted

1. Id. at *4 n.20 (quoting ATP, 91 A.3d at 558).

51     C.A. No. 9575-VCN, 2015 WL 894928 (Del. Ch. Feb. 26, 2015).

52     See James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 80 (Del. 2006).

53     C.A. No. 9934-VCP, 2015 WL 557995 (Del. Ch. Feb. 10, 2015).

the limited partnership defendants’ (“LP Defendants”) motion to dismiss for failure to state a claim upon which relief could be granted, finding that the LP Defendants  did not owe fiduciary duties to plaintiffs. In connection with the GP Defendants’ motion, the court found that the operating agreements’ arbitration clauses, which were broadly written and which required that any arbitration be conducted in accordance with the American Arbitration Association rules, established that the parties agreed

to submit the issue of substantive arbitrability to the arbitrator. In connection with the LP Defendants’ motion to dismiss, the court noted that plaintiffs improperly invoked the corporate law concept that a majority or controlling stockholder owes fiduciary duties to the corporation and its minority stockholders in the limited partnership context and noted that while a limited partner may have a large or majority ownership in the limited partnership, by design, the limited partner does not have the power to manage

or control the business and affairs of the partnership and does not owe fiduciary duties to its fellow limited partners. The court dismissed plaintiffs’ complaint against the LP Defendants, finding that plaintiffs failed to allege that the  LP Defendants acted as general partners under any of the partnership agreements or in a manner “that would subject them to liability as though they were general partners.”

Appraisal Proceedings

In Halpin v. Riverstone National, Inc.,54  Vice Chancellor Glasscock, in a memorandum opinion, held that “drag- along” rights in a stockholder agreement between a corporation and minority stockholders did not preclude minority stockholders from seeking an appraisal following a merger. The stockholder agreement at issue granted  the corporation the power, subject to certain restrictions, to require the minority stockholders to vote in favor of a change-in-control transaction approved by a majority of the corporation’s stockholders (the “drag-along”). While the court suggested that a common stockholder may waive statutory appraisal rights, because the corporation did not strictly comply with the “drag-along” provision of the stockholder agreement, the court determined that the minority stockholders retained their appraisal rights.

Arbitration

In Weiner v. Milliken Design, Inc.,55  Vice Chancellor Parsons, in a memorandum opinion, granted plaintiff’s motion to compel arbitration of a post-closing price adjustment pursuant to a stock purchase agreement. Defendant

had filed a cross motion for summary judgment, arguing that the arbitrator lacked the power to arbitrate claims concerning disputed earnout calculations because those calculations and related earnout payments were rendered “final and binding” after plaintiff had allegedly failed to provide notification of an earnout dispute prior

to expiration of the applicable time period set forth in the arbitration agreement. The court disagreed, holding that defendant’s challenges to the arbitrability of the earnout dispute were questions of “procedural arbitrability” – i.e., concerned whether the parties had complied with the terms of an arbitration provision – and thus should be decided by an arbitrator. The court contrasted questions of “procedural arbitrability” with those of “substantive arbitrability,” which relate to the scope of the arbitration provision and are properly decided by a court.

Attorney’s Fees

Interest

In ReCor Medical, Inc. v. Warnking,56  Vice Chancellor  Noble, in a letter opinion, exercised his “broad discretion” in holding that the interest on plaintiff’s award for attorney’s fees and expenses should be compounded quarterly.

The court, in rejecting defendants’ argument that an award of compound interest would be “unfair,” cited both defendants’ own inequitable conduct, which played an “integral role” in the court’s resolution of the case, and the low level of applicable interest rates.

Intervention; Charging Lien

In Sutherland v. Sutherland,57 Vice Chancellor Noble, in  a letter opinion, granted a law firm’s motion to intervene to petition for a charging lien for unpaid fees incurred in representing plaintiff in earlier stages of the litigation. Plaintiff opposed intervention, citing the “stringent standards” for post-judgment intervention due to “concerns about judicial order and prejudice.” The court,

in granting the motion to intervene, held that the law firm had a right under common law to a charging lien and that plaintiff had reached an agreement with the law firm that had anticipated the filing of such a lien at the end of the litigation. Accordingly, the court found that intervention would not prejudice the court or the parties.

54     C.A. No. 9796-VCG, 2015 WL 854724 (Del. Ch. Feb. 26, 2015).

55     C.A. No. 9671-VCP, 2015 WL 401705 (Del. Ch. Jan. 30, 2015).

56     C.A. No. 7387-VCN, 2015 WL 535626 (Del. Ch. Jan. 30, 2015).

57     C.A. No. 2399-VCN, 2015 WL 894968 (Del. Ch. Feb. 27, 2015).

Mootness Fee

In Swomley v. Schlecht,58 Vice Chancellor Laster, in a letter opinion, outlined the procedure by which the parties  were required to provide notification of an agreed-upon mootness fee in an action arising out of a squeeze-out transaction. According to the court, the parties were

obligated to notify former minority stockholders comprising the putative class of the fee. Notice to a wider range of parties was not required, however, because the party paying the fee was a private entity owned by the individual defendants. The court instructed that the notice must state the nature of the mooted claims and how defendants’ actions rendered the claims moot; identify the entity that

is paying the fee and set forth the fee amount; note that the court has not passed on the amount of the fee; and provide the contact information of both parties’ counsel.

In In re Zalicus, Inc. Stockholders Litigation,59  Chancellor Bouchard, in a letter opinion, denied plaintiffs’ counsel’s request to enter a closing order because the parties had not adequately notified the putative class of their

agreement to pay plaintiffs’ counsel a mootness fee. The court reasoned that such notice is appropriate because it allows an interested party to challenge the use of corporate funds as improper. That the court had not

certified a class was irrelevant to the court’s determination that notification was warranted.

Books And Records Actions

In Fuchs Family Trust v. Parker Drilling Company,60  Vice Chancellor Noble, in a memorandum opinion, rejected plaintiff’s request to inspect Parker Drilling Company’s (“Parker”) books and records. According to the court, plaintiff’s request lacked a “proper purpose” because the issue of alleged “corporate wrongdoing” that formed the basis of the request had already been resolved by virtue of Parker’s settlements with the DOJ and SEC for alleged violations of the Foreign Corrupt Practices Act and by Parker’s termination of its relationships with the individuals and entities “responsible for the corrupt payments.” While plaintiff argued that its inspection demand might lead to a derivative action, the court found that collateral estoppel would have barred any such action by plaintiff.

In The Ravenswood Investment Company, L.P. v. Winmill

& Co. Inc.,61 Vice Chancellor Noble, in a letter opinion, declined to condition plaintiff stockholder’s access to

defendant’s books and records upon an indemnification undertaking but ordered confidential treatment of the documents for a limited period of time. The court had previously granted plaintiff’s request under 8 Del. C. § 220 to inspect defendant’s financial information, and

in the instant decision, addressed the parties’ dispute over: (i) the scope of confidentiality to be afforded to the production; and (ii) whether plaintiff should indemnify defendant against federal and state securities law claims. The court extended the confidentiality agreement over defendant’s financial information for a period of one

year after its production to plaintiff, noting that “financial information does not warrant confidential treatment after three years from the date of the document or information.” However, the court refused to condition plaintiff’s access to defendant’s financial information on indemnification, reasoning that “conditioning a right provided by 8 Del. C.

§ 220 upon an unlimited and unrestricted indemnification obligation unduly impairs a shareholder’s rights as conferred by Delaware law.”

In Southpaw Credit Opportunity Master Fund, LP v. Advanced Battery Technologies, Inc.,62  Master LeGrow, in a post-trial master’s report, found that plaintiff stockholder of Advanced Battery Technologies, Inc. (“ABAT”), a Chinese company which had been delisted from the NASDAQ,

was entitled to ABAT’s records that are necessary to value its stock under 8 Del. C. § 220 but not to certain other requested documents. Plaintiff requested ABAT’s records in order to: (i) determine the financial risk associated

with acquiring a greater position in the company or with maintaining its current position; and (ii) determine the  actual value of the company. Master LeGrow rejected the risk assessment purpose, finding that this was a “veiled effort” to obtain information that would have been reported under SEC rules and that a Section 220 books and records request was not the appropriate vehicle to ensure SEC compliance. However, Master LeGrow found that plaintiff was entitled to inspect records necessary to value its   stock in the company and rejected ABAT’s argument that Chinese law prohibited the production. Master LeGrow  also rejected ABAT’s request that plaintiff be restricted from trading ABAT’s shares following the inspection,  finding that the parties should independently assess

their obligations under federal laws. Accordingly, Master LeGrow recommended that the court order the company to produce certain financial records subject to a standard confidentiality agreement free from unusual restrictions.

58     C.A. No. 9355-VCL, 2015 WL 1186126 (Del. Ch. Mar. 12, 2015).

59     Consol. C.A. No. 9602-CB, 2015 WL 226109 (Del. Ch. Jan. 16, 2015).

60     C.A. No. 9886-VCN, 2015 WL 1036106 (Del. Ch. Mar. 4, 2015).

61     C.A. No. 7048-VCN, 2014 WL 7451505 (Del. Ch. Dec. 31, 2014).

62     C.A. No. 9542-ML, 2015 WL 915486 (Del. Ch. Feb. 26, 2015).

Contract Claims

Breach Of Contract

In Pulieri v. Boardwalk Properties, LLC,63  Chancellor Bouchard, in a memorandum opinion, dismissed plaintiff’s action for breach of contract and unjust enrichment. Plaintiff sought specific performance of an oral contract, pursuant to which: (i) plaintiff would allegedly transfer property to defendant in return for payment; and (ii) defendant would retransfer the property back to plaintiff upon the satisfaction of certain conditions. The court,

in denying plaintiff’s breach of contract claim, held that the conditions to and timing of defendant’s obligation to perform were not sufficiently definite to form a valid contract. The court further held that plaintiff’s breach of contract and unjust enrichment claims were barred by laches because of plaintiff’s “unexcused delay”

in asserting these rights several years after they had accrued.

Contract Interpretation

In Textron, Inc. v. Acument Global Technologies, Inc.,64  the Delaware Supreme Court affirmed a judgment by the Delaware Superior Court holding that plaintiff seller is  not entitled to reimbursement from defendant buyer for paying certain pre-closing contingent liabilities pursuant to a purchase agreement. Plaintiff argued that a “tax benefit offset” provision in the purchase agreement

obligated defendant to reimburse plaintiff for, among other things, “hypothetical tax benefits” related to contingent liabilities. Because the provision was “reasonably and  fairly susceptible to different interpretations,” the Supreme Court ruled that the lower court had properly considered extrinsic evidence, including internal emails, and deposition and trial testimony, in finding that defendant was not obligated to reimburse plaintiff unless plaintiff had received an actual net tax benefit.

Expectation Damages

In PharmAthene, Inc. v. SIGA Technologies, Inc.,65  Vice Chancellor Parsons, in a letter opinion, accepted and rejected in part defendant’s objections to plaintiff’s proposed damages award of $139,814,510 in connection with the court’s previous ruling that SIGA Technologies,

Inc. breached its contractual obligation to negotiate in good faith with PharmAthene, Inc. and was thereby

liable for expectation damages. The court had directed plaintiff’s expert to use the “NERA Model” in calculating

the present value of plaintiff’s lost profits. Defendant argued that plaintiff’s expert failed to do so by: (i) reducing selling, general and administrative (“SG&A”) expenses;

(ii) calculating the present value of the relevant cash flows by using a mid-year convention of discounting; (iii) using an inflation rate of 3.04547 percent instead of a flat rate of 3 percent; and (iv) applying a probability-of- success discount to the years 2006 through 2009. The court agreed with the first two objections, finding that:

(i) plaintiff’s incorporation of SG&A data from only part of 2006 was improper, even assuming a December 20,

2006 date of breach; and (ii) while a mid-year convention may be sound in other circumstances, the NERA Model  did not include one, so its use was improper. The court rejected the remaining objections, finding that the inflation rate of 3 percent was simply a rounded figure derived  from the NERA Model’s 3.04547 percent rate and that applying a probability-of-success discount was consistent with the NERA Model. The court granted the final order and judgment in the case on January 15, 2015, awarding PharmAthene $113,116,985 in expectation damages.

Implied Covenant Of Good Faith And Fair Dealing

In Fortis Advisors LLC v. Dialog Semiconductor PLC,66 Chancellor Bouchard, in a memorandum opinion,  dismissed plaintiff’s claim for breach of the implied covenant of good faith and fair dealing in an earn-out dispute, finding that plaintiff did not allege any “gap” in the merger agreement at issue to be filled through the implied covenant. The court explained that the implied covenant only applies where a contract lacks specific language governing an issue and where the court is asked to advance the purposes reflected in the express language  of the contract to fill the gap. The court noted that plaintiff’s allegations in support of the implied covenant claim were identical to those allegations pled in support of plaintiff’s breach of contract claim. In addition, plaintiff expressly admitted that it did not believe that there were any gaps

in the agreement and that it pled the implied covenant claim in the alternative to its breach of contract claim – “just in case ‘the Court may disagree’ down the road of this litigation.” The court rejected that approach, noting that the right to plead alternative claims does not obviate the need to provide factual support for each theory. The court found that plaintiff’s failure to identify any gap in the

contract warranted dismissal of the implied covenant claim. The court also dismissed plaintiff’s claims for fraudulent

63     C.A. No. 9886-CB, 2015 WL 691449 (Del. Ch. Feb. 18, 2015).

inducement and negligent misrepresentation for, among other reasons, plaintiff’s failure to satisfy the particularity requirement of Court of Chancery Rule 9(b).

In Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC,67 the Delaware Supreme Court reversed the Superior Court’s decision that the implied covenant of good faith and fair dealing applied to the contract

at issue, finding that the lower court erred by implying contractual obligations that were inconsistent with the contract’s express terms. The buyer, who bought a 65 percent interest in an investment advisory firm for $25 million, argued that it would not have done so but for its expectancy to manage the funds for three or more years. However, the contract enabled the seller the right to terminate the buyer’s right to manage the funds if certain conditions were met or for any reason if it was willing to pay a termination fee capped at $3.5 million, which it did. The court first found that the lower court erred in reforming the contract based on a typo. The court explained that fixing a typographical error is tantamount to reforming

the contract when it has material consequences and that reformation requires clear and convincing evidence of mistake – absent under the facts at issue here. The court also found that the lower court erred by applying the implied covenant of good faith and fair dealing, explaining that Delaware courts must not imply a different bargain than that reflected under the express terms of the contract.

Delaware law requires that a contract’s express terms  be honored and “prevents a party who has after-the-fact regrets from using the implied covenant . . . to obtain in court what it could not get at the bargaining table.”

In The Renco Group, Inc. v. MacAndrews AMG Holdings LLC,68  Vice Chancellor Noble, in a memorandum opinion, granted in part and denied in part defendants’ motion to dismiss, declining to dismiss plaintiff’s breach of contract and implied covenant claims but dismissing most of plaintiff’s other claims in connection with a dispute arising out of the parties’ joint venture to produce Humvee  military vehicles. The court declined to dismiss plaintiff’s breach of contract claims, finding that the parties’ differing interpretations of the joint venture agreement reflected an ambiguity in the contract and that plaintiff’s interpretation was not unreasonable as a matter of law. The court also declined to dismiss plaintiff’s alternative implied covenant of good faith and fair dealing claims because the court could not foreclose the possibility that defendants’ alleged misconduct “went to matters so fundamental that [p]

laintiff’s reasonable expectations were frustrated” given  the early stage of the proceedings and the complexity of the business arrangement. However, the court dismissed the breach of fiduciary duty and aiding and abetting claims, finding that plaintiff failed to allege any independent

basis for the claims apart from the contractual claims.   The court also dismissed plaintiff’s tortious interference with contractual relations claims, finding that plaintiff did not allege facts to overcome the affiliate privilege, which requires a showing that defendant: (i) was not pursuing in good faith legitimate profit seeking activities; or (ii) was motivated by a bad faith purpose to injure plaintiff. Finally, the court dismissed plaintiff’s fraudulent transfer claims,

because plaintiff did not sufficiently allege that defendants possessed intent to defraud.

Corporate Governance

In In re Numoda Corporation Shareholders Litigation,69  Vice Chancellor Noble, in a memorandum opinion, applied recently enacted Sections 204 and 205 of the DGCL

in resolving a dispute regarding the capital structures  of Numoda Corp. and Numoda Technologies, Inc. Section 204 provides a safe harbor to remedy acts that would otherwise be void due to failure to comply with

applicable provisions of corporate law or the corporation’s organizational documents. Section 205 grants the court  the power to determine the validity of a corporate act, stock, or rights to acquire stock. The court examined several stock issuances by both corporations that lacked proper documentation and suffered from other procedural deficiencies. The court, applying Sections 204 and 205, ratified certain of these stock issuances but not others.   The court acknowledged that it has wide discretion to fashion equitable remedies under these statutes, but found that there must be a “bona fide effort bearing resemblance to a corporate act but for some defect that made it void

or voidable.” In finding that certain of the stock issuances were valid, the court determined that the parties assumed the relevant capital structure existed, made consistent representations to outsiders, and thus approved those issuances of stock. With respect to certain other grants of contested stock, the court held that Section 205 did not apply because the stockholder at issue could not establish that the board had approved of the issuance.

Discovery

Discovery Stay

In Vaccaro v. APS Healthcare Bethesda, Inc.,70 Vice Chancellor Glasscock, in a letter opinion, denied defendants’ request to stay discovery pending a ruling on plaintiff’s motion to dismiss a related securities fraud action pending in the United States District Court for the District  of Delaware. The court noted that the court must balance the interests of the moving party in avoiding needless litigation costs against the need of the party in opposition to the motion to stay to timely prepare the matter for resolution by the court. The court also noted that it will often grant motions to stay pending a case dispositive motion which will, if successful, end the litigation, thereby avoiding discovery. Here, the court found that while the resolution of the motion to dismiss would likely impact the issues to be addressed in the instant action, the dispute in the instant action will likely go forward regardless of how the motion is determined. In addition, the disposition of

the motion to dismiss was unlikely to obviate the need for discovery. As such, the court found that defendants failed to show that the inefficiencies in proceeding with discovery outweighed the need for reasonably swift preparation

for trial, including preserving witnesses’ recollections of events, and denied defendants’ motion to stay.

Expert Witnesses

In In re Dole Food Co., Inc. Stockholder Litigation,71

Vice Chancellor Laster, in an opinion, held that the corporation that defendants had designated to serve as their expert witness could not serve as such because an expert witness must be a biological person, but noted that defendants could substitute for the corporation

the biological person whom defendants intended to  call to testify on behalf of the corporation. Defendants had identified Stifel, Nicolaus & Company, Incorporated (“Stifel”) as their expert witness to testify on the value of

Dole Food Company, Inc.’s stock at the time of the take- private transaction at issue in this breach of fiduciary duty and appraisal action. While defendants’ expert reports identified Stifel as the author, Stifel’s managing director, Seth Ferguson, and another Stifel employee signed the reports as representatives of Stifel. The court considered various sections of the Delaware Rules of Evidence, including, among others, Rule 602, which requires that a witness be able to testify from personal knowledge, and Rule 603, which requires that a witness be able to take an oath or make an affirmation, and determined that the Rules

of Evidence make clear that a witness must be a biological person. Accordingly, the court held that the corporation could not serve as an expert witness nor could it testify through an agent – as “[n]o one is permitted to testify through an agent.” However, to avoid the prejudice that defendants would suffer if forced to proceed without an expert, the court permitted defendants to substitute Mr.

Ferguson who claimed Stifel’s expert reports as his own at Stifel’s Rule 30(b)(6) deposition, as defendants’ expert witness.

Fiduciary Duties

Breach Of Fiduciary Duty, Aiding And Abetting

In Stewart v. Wilmington Trust SP Services, Inc.,72  Vice Chancellor Parsons, in a memorandum opinion, granted  in part certain defendants’ motions to dismiss an action alleging various claims against the president, directors, auditors, and administrative management company of  four Delaware-domiciled captive insurance companies. Plaintiffs’ claims were prosecuted by the Insurance Commissioner of the State of Delaware as plaintiffs’ receiver in liquidation. The court dismissed plaintiffs’ claims for breach of fiduciary duty against the auditors and the administrative management company, finding  that plaintiffs had failed to adequately allege that these defendants owed fiduciary duties to plaintiffs. The court likewise dismissed plaintiffs’ breach of contract and negligence claims against the auditors and administrative management company, holding that these claims were barred by the in pari delicto doctrine because the plaintiff insurance companies had participated in the alleged misconduct. In so ruling, the court declined to create

an expansive “auditor exception” to the in pari delicto doctrine. The court upheld plaintiffs’ aiding and abetting claims against the administrative management company and one of the defendant auditors, reasoning that plaintiffs had alleged “reasonably conceivable” facts indicating

that these defendants had knowingly participated in  the alleged breaches of fiduciary duty. Finally, the court dismissed plaintiffs’ aiding and abetting claim against another auditor defendant, holding that this defendant

“was not around long enough to have engaged in such a dereliction of [its] responsibilities.”

70     C.A. No. 9637-VCG, 2015 WL 757610 (Del. Ch. Feb. 23, 2015).

71     C.A. No. 8703-CVL, 2015 WL 832501 (Del. Ch. Feb. 27, 2015).

72     C.A. No. 9306-VCP, 2015 WL 1396382 (Del. Ch. Mar. 26, 2015).

Jurisdiction

In McWane, Inc. v. Lanier,73  Vice Chancellor Parsons, in a memorandum opinion, denied defendants’ motion to

dismiss or stay for lack of personal jurisdiction, finding that defendants were equitably estopped from challenging a mandatory forum selection clause in a merger agreement

• an agreement to which they were not signatories – which required all claims “arising out of or relating to” the agreement to be brought in Delaware. Defendants were signatories to a related stockholder agreement, which contained a permissive forum selection clause whereby the parties consented to jurisdiction in Alabama, and the parties were involved in related litigation in Alabama.

As an initial matter, the court found that the merger and stockholder agreements were interrelated and that

the mandatory forum selection provision in the merger agreement controlled. The court then considered whether defendants were equitably estopped from challenging   the merger agreement’s forum selection provision and concluded that they were because: (i) the forum selection clause was presumptively valid and defendants did not

rebut that presumption; (ii) defendants were closely related to the merger agreement because they received a direct benefit under the agreement – more than $5 million from the sale of their stock; and (iii) the claims in the Alabama action arose out of and were related to the merger agreement. As such, defendants were bound by the merger agreement’s mandatory forum selection clause. The court declined to stay the action under the McWane74 first-filed rule, finding that the parties displaced the default rule by contract.

In Wilmington Savings Fund Society, FSB v. Caesars Entertainment Corp.,75  Vice Chancellor Glasscock, in a memorandum opinion, denied defendants’ motion to dismiss or stay a derivative action in favor of a related New York action, finding that the forum selection clause  at issue did not clearly and unambiguously require all claims to be brought exclusively in New York. Defendants argued that plaintiff had contractually agreed to New York as the exclusive forum under the forum selection clause,

or alternatively, that New York was the proper forum under the forum non conveniens doctrine. The court noted

that while the bond indenture that governed the parties’ relationship did not include a forum selection clause, it did indicate that the parties’ rights and obligations were subject to an intercreditor agreement, providing for

jurisdiction in New York. However, the court found that the agreements, taken together, did not indicate “a clear and unambiguous choice . . . to exclusively litigate this

action in New York.” The court then undertook a traditional forum non conveniens analysis and applied the Cryo-Maid factors.76 The court noted that plaintiff brought claims under both states’ laws, but in any event, the court often applies New York law. The court found that while the New York action arose from the same nucleus of facts as the instant action, both courts could provide complete relief. Finally, given the proximity between Wilmington and New York City, the court found that litigating in Delaware “is less manifest hardship than inconvenience.”

Motions to Expedite

In Ellis v. OTLP GP, LLC,77  Vice Chancellor Noble, in a letter opinion, denied plaintiffs’ motion to expedite proceedings to obtain a preliminary injunction to halt the upcoming vote on a merger, finding that plaintiffs failed to set forth

a colorable claim. The limited partnership agreement at issue required that a merger be approved by a majority of the minority unitholders during the subordination period but only by a majority of the unitholders after  the subordination period ended. The acquisition was

announced during the subordination period but the vote was set to occur after the subordination period. Plaintiffs, unitholders of the limited partnership who would be cashed out through the merger, argued that because  the merger was announced during the subordination period, the voting standard applicable during that period

should control, even if the merger vote would occur later. The court disagreed, finding that the limited partnership agreement specified the voting standard during and after the subordination period, and plaintiffs offered no reason as to why the voting standard should not be determined at the time of the vote. The court also rejected plaintiffs’

challenge to the transaction through which the prior owner of the general partner sold its interest to the acquirer, finding that the prior owner, as controller, was free to dispose of its interests as it saw fit.

In Parsons v. Digital River, Inc.,78  Vice Chancellor Glasscock, in a letter opinion, denied plaintiff’s motion to expedite as   it related to plaintiff’s disclosure claims in a class action challenging a proposed merger. The court focused on plaintiff’s management retention disclosure claim as plaintiff’s other principal disclosure claim regarding the

go-shop period was mooted by the filing of the company’s

73     C.A. No. 9488-VCP, 2015 WL 399582 (Del. Ch. Jan. 30, 2015).

74     McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281, 283 (Del.

1970).

75     C.A. No. 10004-VCG, 2015 WL 1306754 (Del. Ch. Mar. 18, 2015).

76     General Foods Corp. v. Cryo-Maid, Inc., 198 A.2d 681, 684 (Del. 1964).

77     C.A. No. 10495-VCN, 2015 WL 535866 (Del. Ch. Jan. 30, 2015).

78     C.A. No. 10370-VCG, 2015 WL 139760 (Del. Ch. Jan 12, 2015).

definitive proxy statement – which was released after oral argument on the motion to expedite. In connection with  the management retention claim, the court found that the company disclosed all material information to stockholders. Plaintiff provided no factual basis for plaintiff’s suggestion that the disclosures were “simply not credible.” As such,  the court found that the disclosure claim was speculative and unlikely to afford plaintiff injunctive relief.

In Sinchareonkul v. Fahnemann,79  Vice Chancellor Laster, in a memorandum opinion, denied plaintiff’s motion

for an expedited hearing on plaintiff’s application for a preliminary injunction, finding that while plaintiff articulated a colorable claim, there was not a sufficient threat of irreparable injury to justify an expedited proceeding. Plaintiff, a director of Sempermed USA, Inc., sought a declaratory judgment invalidating two bylaws which provided disproportionate voting rights to other directors through their ability to elect a chairman with the right

to resolve a board deadlock. The court concluded that plaintiff had articulated a colorable claim, finding that  the bylaws conferring greater voting power on particular

directors were inconsistent with the DGCL which mandates that such provisions appear in a certificate of incorporation, not in bylaws. However, the court found that plaintiff did  not allege a threat of irreparable harm sufficient to warrant an expedited hearing on an application for a preliminary injunction. The court instead ordered a two-day trial on the merits in 90 to 120 days from the date of its opinion.

Motions For Reargument

In Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC,80  Vice Chancellor Laster, in a memorandum opinion, granted plaintiff’s motion for reargument of defendants’ motion to dismiss. Plaintiff, a common law  trust governed by the laws of New York, asserted that defendants made misrepresentations in connection

with the sale of residential mortgage-backed securities to plaintiff. The court had initially dismissed plaintiff’s complaint on timeliness grounds for three principal reasons: First, the court relied on Central Mortgage81 in finding that Delaware’s borrowing statute required the adoption of Delaware’s shorter statute of limitations.

Second, the court, again relying on Central Mortgage, held that, absent tolling, the statute of limitations began to run  at the time the securitization closed. Third, the court held that the parties could not lengthen the statute of limitations

by contract. The court reconsidered its first holding in light of Saudi Basic,82 a controlling Delaware Supreme Court decision specifying that Delaware’s borrowing statute applies only where a party seeks to take advantage of a longer Delaware statute of limitations in order to avoid a shorter statute of limitations in the jurisdiction governing the claim. The court, in reconsidering its second holding, relied on a line of cases distinct from Central Mortgage that held that the accrual provision functioned as a condition precedent that delayed the time by which plaintiff’s claims arose. The court, in reconsidering its third holding, retroactively applied 8 Del. C. § 8106(c), which permits extensions of the applicable statute of limitations of up to 20 years by contract where the amount at issue is at least $100,000.

Motions To Strike

In LongPath Capital, LLC v. Ramtron International Corp.,83 Vice Chancellor Parsons, in a letter opinion, denied petitioner’s motion to strike a PowerPoint slide deck that respondent used during post-trial argument, hard copies of which were left with the court. Petitioner argued that the slides essentially constitute a new brief and that respondent had a greater opportunity to present its case to the court, resulting in unfair litigation advantage. The court noted that there is line where demonstratives go beyond simply summarizing arguments already made

in a party’s brief, and it is at this point that they become improper additional submissions. The court found that respondent’s 98 page slide deck arguably crossed the line based on its length alone. However, the court found upon its cursory review of the slide deck that the information in the deck was already contained in respondent’s previous filings and trial exhibits and, as such, was not an improper submission. The court invited petitioner to identify any new information or arguments in the PowerPoint presentation and to move to exclude those portions of the presentation.

Practice And Procedure

Choice Of Law

In Ascension Insurance Holdings, LLC v. Underwood,84  Vice Chancellor Glasscock, in a memorandum opinion, denied plaintiff’s motion for a preliminary injunction precluding defendant and his current employer from breaching a covenant not to compete. The court, applying California  law – i.e., the law of the state with the strongest contacts

79     C.A. No. 10543-VCL, 2015 WL 292314 (Del. Ch. Jan. 22, 2015).

80     C.A. No. 7701-VCL, 2015 WL 139731 (Del. Ch. Jan. 12, 2015).

1. Central Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings, LLC, C.A. No. 5140-CS, 2012

WL 3201139 (Del. Ch. Aug. 7, 2012).

1. Saudi Basic Indus. Corp. v. Mobil Yanbu Petrochemical Co., 866 A.2d 1 (Del. 2005). 83         C.A. No. 8094-VCP (Del. Ch. Mar. 11, 2015).

84     C.A. No. 9897-VCG, 2015 WL 356002 (Del. Ch. Jan. 28, 2015).

to the agreement at issue – concluded that plaintiff had failed to demonstrate a reasonable likelihood of success on the merits because the agreement violated California public policy. The court rejected plaintiff’s argument that California’s prohibition on agreements not to complete did not apply because the agreement was signed in

connection with the sale of assets by defendant to plaintiff, noting that there was no evidence that a restriction on competition was contemplated as part of the parties’ agreement to sell the assets at issue.

In Trustco Bank v. Mathews,85 Vice Chancellor Parsons, in a memorandum opinion, granted defendants’ motion for partial summary judgment on the issue of whether

plaintiffs’ fraudulent transfer claims were barred by laches.

The court noted that it “look[s] to the analogous statute of limitations to determine whether a plaintiff’s delay was unreasonable.” The parties, which were variously

incorporated in, residents of, and incorporated under the laws of Florida, Delaware and New York, disputed which state’s statute of limitations should apply. The court, applying the “most significant relationship” test, held that Florida’s shorter statute of limitations applied because, among other reasons, the parties’ relationship was centered in Florida and a significant part of the conduct causing the alleged injury occurred in Florida. Accordingly, the court determined that plaintiffs’ fraudulent transfer claims fell outside of Florida’s limitations period.

Filing Under Seal

In Theravectys SA v. Immune Design Corp.,86  Vice Chancellor Noble, in a letter opinion, denied plaintiff’s motion to “reseal” letters mentioning the existence of a settlement between plaintiff and a nonparty, finding that plaintiff failed to file a public redacted version of its letter referencing the settlement within five days of filing the letter under seal as required by Court of Chancery Rule

5.1. Plaintiff argued that it inadvertently failed to file a  public version of the letter but offered no other justification for maintaining the confidentiality of the settlement. In addition, the court noted that the settlement will be a significant topic during future proceedings and preserving its confidentiality would be “difficult, if not impracticable.” The court found that simple inadvertence without further justification for confidential treatment was not enough and denied plaintiff’s motion for resealing.

Interlocutory Appeals

In In re Family Dollar Stores, Inc. Stockholder Litigation,87 Chancellor Bouchard, in a letter opinion, denied plaintiffs’ application for certification of an interlocutory appeal from the court’s memorandum opinion denying plaintiffs’ motion to preliminarily enjoin the stockholder vote on a proposed merger.88 The court rejected plaintiffs’ three arguments in favor of certification pursuant to Supreme Court Rule 42(b) (i)-(v). First, plaintiffs argued that the opinion decided an original question of law: “whether a particularly restrictive interpretation of a fiduciary-out provision excuses a board from their Revlon89 duties, such that the board may reject

a financially superior offer based on antitrust concerns, without fully informing themselves of those antitrust concerns and without negotiating terms that might diminish or eliminate those concerns.” The court disagreed, finding that its opinion merely entailed the application of “well- established legal principles emanating from Revlon to a particular set of facts.” Second, plaintiffs argued that the opinion, which held that directors must be adequately informed when rejecting a financially superior offer from a third party, conflicts with the court’s opinion in NetSpend,90 which held that directors in such a situation must be fully informed. The court rejected this argument as semantic, holding that the NetSpend court did not intend to draw a distinction between being “fully informed” and “adequately informed.” Finally, plaintiffs argued that the opinion  involved special issues and that interlocutory review by the Supreme Court would serve the considerations of justice. The court rejected this argument because the opinion did not “reverse or set aside a prior decision of the court, a jury, or an administrative agency” as required under the applicable statute.

Intervention

In Carlyle Investment Management L.L.C. v. Moonmouth Company S.A.,91  Vice Chancellor Parsons, in a memorandum opinion, granted a third party’s motion

to intervene in litigation involving Carlyle Investment Management and certain related persons and entities. The third party intervenor, comprised of liquidators of Carlyle Capital Corp., sought to intervene to obtain a protective order regarding certain documents that the court had ordered produced concerning the relationship between defendants and the intervenor. The court held that the

85     C.A. No. 8374-VCP, 2015 WL 295373 (Del. Ch. Jan. 22, 2015).

86     C.A. No. 9950-VCN, 2015 WL 757665 (Del. Ch. Feb. 18, 2015).

87     Consol. C.A. No. 9985-CB, 2015 WL 56050 (Del. Ch. Jan. 2, 2015).

1. In re Family Dollar Stores, Inc. S’holder Litig., Consol. C.A. No. 9985-CB, 2014 WL 7246436 (Del. Ch. Dec. 19, 2014).
2. Revlon, Inc. v. MacAndrew & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
3. Koehler v. NetSpend Holdings Inc., C.A. No. 8373-VCG, 2013 WL 2181518 (Del. Ch. May 21, 2013).

91     C.A. No. 7841-VCP, 2015 WL 778846 (Del. Ch. Feb. 24, 2015).

intervenor met the requirements for intervention under Court of Chancery Rule 24(a), which governs intervention as of right. In so ruling, the court rejected defendants’ argument that the intervenor unduly delayed in seeking intervention, reasoning that the case was still in its early stages. The court granted the intervenor’s request for a protective order, finding that, under Delaware law, the documents at issue were prepared in anticipation of litigation and thus entitled to work product protection.

Leave To Amend

In OptimisCorp v. Waite,92  Vice Chancellor Parsons, in a memorandum opinion, denied plaintiffs’ request to amend their complaint and granted in part defendants’ motion

in limine to exclude additional allegations relating to new alleged co-conspirators, finding that plaintiffs failed to timely supplement their discovery responses with the new information in violation of Court of Chancery Rule 26(e). Plaintiffs requested leave to add additional counts for civil conspiracy and aiding and abetting against defendants, including allegations regarding three new co-conspirators, following defendants’ motion for summary judgment

and after the completion of fact discovery. The court noted that Rule 26(e) requires parties “seasonably” to amend or supplement interrogatory responses in certain specified circumstances and interpreted “seasonably” to mean within a reasonable time. Given that the number and identity of the members of the conspiracy would dramatically affect the scope of the case and defendants’ potential liability and given the timing of plaintiffs’ settlement with the new alleged co-conspirators – three months before the close of discovery – the court found that plaintiffs were required to have supplemented their interrogatory responses before the close of discovery to

meet the “seasonably” requirement. Accordingly, the court denied plaintiffs’ leave to amend, finding that the eleventh- hour amendment was “unreasonable and inexcusable” and that plaintiffs’ failure to timely supplement their discovery responses would greatly prejudice defendants in preparing for trial.

Pre-trial Stipulation

In Itron, Inc. v. Consert Inc.,93  Vice Chancellor Laster, in an opinion, granted plaintiff’s request to declare certain facts as admitted, including facts that defendant had admitted in its answer and discovery responses, and found that defendant failed to negotiate the pre-trial stipulation in good faith, resulting in sanctions. The lawsuit, involving

a dispute over a development agreement, was set for  trial after approximately two years of discovery. Plaintiff provided defendant with a proposed pretrial stipulation containing 164 proposed admitted facts, and defendant responded by deleting approximately 90 percent of the facts, including facts that defendant had admitted in its answer and discovery responses. The court noted that Court of Chancery Rule 16 requires counsel to confer in good faith to stipulate to the contents of the pretrial order and that while the court cannot compel the parties to stipulate to facts, the court may determine that particular facts have been admitted based on the discovery record or because they are not legitimately in dispute. As such, the court found that facts to which defendant previously admitted and certain benign and undisputed facts – such as the dates on which documents were exchanged – were admitted facts and that defendant’s objections to them were improper. In addition, the court found that

defendant failed to confer in good faith as required by Rule 16 and ordered defendant to pay the attorney’s fees and expenses incurred by plaintiff in preparing the proposed order and in briefing and arguing the motion before the court. The court also ordered the parties’ senior-most Delaware and non-Delaware attorneys to meet and confer regarding the remaining proposed admitted facts on the record.

Settlements

In In re Jefferies Group, Inc. Shareholders Litigation,94 Chancellor Bouchard, in a letter opinion, resolved a   dispute regarding the definition of the class for purposes   of a proposed class settlement. The action arose out of the acquisition of Jefferies Group, Inc. by Leucadia National Corp. through a stock-for-stock merger. Defendants   argued that the class definition, which included holders

of the acquired company’s common shares, should also include holders of the acquired company’s deferred shares. According to defendants, it would be unfair to exclude the latter because the exchange ratio, which plaintiffs alleged was too low, was applied equally to common and deferred shares. Plaintiffs argued that  holders of deferred shares should not be included in the settlement class definition because they were not included in the operative complaint, the certification order, and

the term sheet. The court, in ruling for plaintiffs, held that no person in the parties’ position could have reasonably believed that the class definition in the term sheet included holders of deferred shares.

92     C.A. No. 8773-VCP, 2015 WL 357675 (Del. Ch. Jan. 28, 2015).

93     C.A. No. 7720-VCL, 2015 WL 186837 (Del. Ch. Jan. 15, 2015).

94     C.A. No. 8059-CB, 2015 WL 151618 (Del. Ch. Jan. 13, 2015).

Statute Of Limitations

In Hartsel v. The Vanguard Group Inc.,95  Judge Robinson of the U.S. District Court for the District of Delaware dismissed as time barred plaintiffs’ derivative claims against certain investment advisors and individual defendants. The court had previously dismissed an action brought by plaintiffs against the same defendants for failure to adequately allege demand futility. Plaintiffs filed the instant action after making a demand on the

defendant board. In finding that plaintiffs’ claims were time barred, the court rejected plaintiffs’ argument that their claims were preserved by Delaware’s Savings Statute, 10 Del. C. § 8118(a), reasoning that the statute provides an exception to Delaware’s statute of limitations only where

a case is dismissed as a “matter of form,” such as for lack of jurisdiction, improper venue, and improper service of process. According to the court, the dismissal of plaintiffs’ prior action for failure to adequately plead demand futility was not a “matter of form” because the “entire question of demand futility is inextricably bound to issues of business judgment.”

95     Civ. No. 13-1128-SLR, 2015 WL 331434 (D. Del. Jan 26, 2015).