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The Delaware Quarterly
January – March 2015
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
James P. Smith III
jpsmith@winston.com
+1 (212) 294-4633
John E. Schreiber
jschreiber@winston.com
+1 (212) 294-6850
Matthew L. DiRisio
mdirisio@winston.com
+1 (212) 294-4686
Fiduciary Duties.............................................15
Jurisdiction......................................................16
Motions to Expedite......................................16
Motions For Reargument............................. 17
Motions To Strike........................................... 17
Practice And Procedure...............................18
Settlements.....................................................19
Jonathan W. Miller
jwmiller@winston.com
+1 (212) 294-4626
© 2015 Winston & Strawn LLP
Volume 4, Number 1
Statute Of Limitations..................................20
This Quarter’s Authors .........................................21
The Delaware Quarterly Advisory Board .......21
Delaware Quarterly
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
© 2015 Winston & Strawn LLP
major win for plaintiffs and their counsel, who otherwise
face considerable financial risk in commencing litigation
against the growing number of companies adopting feeshifting 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
2
2013 WL 5878807 (Del. Ch. Nov. 1, 2013), aff’d, No. 348, 2014 (Del. Feb. 12, 2015).
C.A. No. 8173-VCG, 2015 WL 399726 (Del. Ch. Jan. 30, 2015).
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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 case 3 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
3
4
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)
C.A. No. 8173-VCG, 2015 WL 66825 (Del. Ch. Jan. 5, 2015).
C.A. No. 8900-VCG, 2015 WL 67586 (Del. Ch. Jan. 5, 2015).
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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
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
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
6
7
8
Huff, 2013 WL 5878807, at *9 (quoting In re U.S. Cellular Operating Co., C.A. No. 18696NC, 2005 WL 43994, at *10 (Del. Ch. Jan. 6, 2005).
11 A.3d 214 (Del. 2010).
Huff, 2013 WL 5878807, at *12-13.
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,
© 2015 Winston & Strawn LLP
9
10 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 purchase 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.
C.A. No. 6844-VCG, 2014 WL 545958, at *1 (Del. Ch. Feb. 12, 2014).
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).
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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
11 12 13 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)).
Id. at *2.
Id. at *4.
© 2015 Winston & Strawn LLP
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 stockbased 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.
14 15 Id. at *7.
C.A. No. 8173-VCG, 2015 WL 399726 (Del. Ch. Jan. 30, 2015).
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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
© 2015 Winston & Strawn LLP
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 widelyaccepted 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
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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.
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.
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.
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
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 feeshifting 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
Background
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 18 19 20 21 22 16 C.A. No. 9770-CB, 2015 WL 1189610 (Del. Ch. Mar. 16, 2015).
© 2015 Winston & Strawn LLP
91 A.3d 554, 555 (Del. 2014).
Id. at 557-58.
Id. at 558 (quotation omitted).
Id.
See Boardroom Direct, PricewaterhouseCoopers LLP (Nov. 2014), http://www.pwc.com/
us/en/corporate-governance/publications/boardroom-direct-newsletter/november-2014issues-in-brief.jhtml.
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.
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Delaware Quarterly
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:
i. 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
ii. 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
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
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 wellequipped 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
23 24 25 26 27 28 29 Fee-Shifting FAQs, http://www.delawarelitigation.com/files/2015/03/COUNCIL-SECONDPROPOSAL-FAQS-3-6-15-U0124511.docx (last visited Mar. 31, 2015).
[Proposed] Act To Amend Title 8 Of The Delaware Code Relating To The General Corporation Law, http://www.delawarelitigation.com/files/2015/03/COUNCIL-SECOND-PROPOSAL-U01245103.doc (last visited Mar. 31, 2015).
Id.
Id.
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).
Id.
Id.
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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
30 31 32 33 34 35 Fee-Shifting FAQs, http://www.delawarelitigation.com/files/2015/03/COUNCIL-SECONDPROPOSAL-FAQS-3-6-15-U0124511.docx (last visited Mar. 31, 2015).
Id.
Michael Greene, Proposal Would Nullify Fee-Shifting Bylaws In Delaware Stock Corp.
Bylaws, Charters, Bloomberg BNA (Mar. 13, 2015), http://www.bna.com/proposal-nullify-feeshifting-n17179924019.
Id.
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-bigticket-deal-makers-report.
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-concernedabout-some-fee-shifting-bylaws.
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Delaware Quarterly
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 feeshifting 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
that, as a practical matter, applying the bylaw would
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
36 37 38 39 40 41 42 C.A. No. 9770-CB, 2015 WL 1189610, at *1 (Del. Ch. Mar. 16, 2015).
Id.
Id.
Id.
Id.
Id. at *4.
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.
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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
the non-stock corporation in question. 48 Although the ATP
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
43 44 45 46 47 48 49 Id. at *4.
Id. at *4 & n.21.
Id. at *5.
Id. at *7.
Id. at *8-10.
Id. at *9-10.
Id. at *9.
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Delaware Quarterly
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
50 Id. at *4 n.20 (quoting ATP, 91 A.3d at 558).
© 2015 Winston & Strawn LLP
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
51 52 53 C.A. No. 9575-VCN, 2015 WL 894928 (Del. Ch. Feb. 26, 2015).
See James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 80 (Del. 2006).
C.A. No. 9934-VCP, 2015 WL 557995 (Del. Ch. Feb. 10, 2015).
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Delaware Quarterly
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 “dragalong” 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
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.
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
54 55 C.A. No. 9796-VCG, 2015 WL 854724 (Del. Ch. Feb. 26, 2015).
C.A. No. 9671-VCP, 2015 WL 401705 (Del. Ch. Jan. 30, 2015).
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56 57 C.A. No. 7387-VCN, 2015 WL 535626 (Del. Ch. Jan. 30, 2015).
C.A. No. 2399-VCN, 2015 WL 894968 (Del. Ch. Feb. 27, 2015).
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Delaware Quarterly
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.
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 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
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 59 60 61 62 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.
C.A. No. 9355-VCL, 2015 WL 1186126 (Del. Ch. Mar. 12, 2015).
Consol. C.A. No. 9602-CB, 2015 WL 226109 (Del. Ch. Jan. 16, 2015).
C.A. No. 9886-VCN, 2015 WL 1036106 (Del. Ch. Mar. 4, 2015).
C.A. No. 7048-VCN, 2014 WL 7451505 (Del. Ch. Dec. 31, 2014).
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C.A. No. 9542-ML, 2015 WL 915486 (Del. Ch. Feb. 26, 2015).
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Delaware Quarterly
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
63 64 65 C.A. No. 9886-CB, 2015 WL 691449 (Del. Ch. Feb. 18, 2015).
No. 204, 2014, 2015 WL 307770 (Del. 2015).
C.A. No. 2627-VCP, 2015 WL 98091 (Del. Ch. Jan. 7, 2015).
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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-ofsuccess 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
66 C.A. No. 9552-CB, 2015 WL 401371 (Del. Ch. Jan. 30, 2015).
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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]
67 68 No. 441, 2014, 2015 WL 1317705 (Del. 2015).
C.A. No. 7668-VCN, 2015 WL 394011 (Del. Ch. Jan. 29, 2015).
© 2015 Winston & Strawn LLP
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.
69 C.A. No. 9163-VCN, 2015 WL 402265 (Del. Ch. Jan 30, 2015).
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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 takeprivate 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
70 71 C.A. No. 9637-VCG, 2015 WL 757610 (Del. Ch. Feb. 23, 2015).
C.A. No. 8703-CVL, 2015 WL 832501 (Del. Ch. Feb. 27, 2015).
© 2015 Winston & Strawn LLP
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.”
72 C.A. No. 9306-VCP, 2015 WL 1396382 (Del. Ch. Mar. 26, 2015).
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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
73 74 75 C.A. No. 9488-VCP, 2015 WL 399582 (Del. Ch. Jan. 30, 2015).
McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281, 283 (Del.
1970).
C.A. No. 10004-VCG, 2015 WL 1306754 (Del. Ch. Mar. 18, 2015).
© 2015 Winston & Strawn LLP
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
76 77 78 General Foods Corp. v. Cryo-Maid, Inc., 198 A.2d 681, 684 (Del. 1964).
C.A. No. 10495-VCN, 2015 WL 535866 (Del. Ch. Jan. 30, 2015).
C.A. No. 10370-VCG, 2015 WL 139760 (Del. Ch. Jan 12, 2015).
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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
79 80 81 C.A. No. 10543-VCL, 2015 WL 292314 (Del. Ch. Jan. 22, 2015).
C.A. No. 7701-VCL, 2015 WL 139731 (Del. Ch. Jan. 12, 2015).
Central Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings, LLC, C.A. No. 5140-CS, 2012
WL 3201139 (Del. Ch. Aug. 7, 2012).
© 2015 Winston & Strawn LLP
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
82 83 84 Saudi Basic Indus. Corp. v. Mobil Yanbu Petrochemical Co., 866 A.2d 1 (Del. 2005).
C.A. No. 8094-VCP (Del. Ch. Mar. 11, 2015).
C.A. No. 9897-VCG, 2015 WL 356002 (Del. Ch. Jan. 28, 2015).
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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 “wellestablished 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
87 88 89 90
85 86 C.A. No. 8374-VCP, 2015 WL 295373 (Del. Ch. Jan. 22, 2015).
C.A. No. 9950-VCN, 2015 WL 757665 (Del. Ch. Feb. 18, 2015).
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91 Consol. C.A. No. 9985-CB, 2015 WL 56050 (Del. Ch. Jan. 2, 2015).
In re Family Dollar Stores, Inc. S’holder Litig., Consol. C.A. No. 9985-CB, 2014 WL 7246436
(Del. Ch. Dec. 19, 2014).
Revlon, Inc. v. MacAndrew & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
Koehler v. NetSpend Holdings Inc., C.A. No. 8373-VCG, 2013 WL 2181518 (Del. Ch. May 21,
2013).
C.A. No. 7841-VCP, 2015 WL 778846 (Del. Ch. Feb. 24, 2015).
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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 eleventhhour amendment was “unreasonable and inexcusable” and
that plaintiffs’ failure to timely supplement their discovery
responses would greatly prejudice defendants in preparing
for trial.
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 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
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 93 94 Pre-trial Stipulation
C.A. No. 8773-VCP, 2015 WL 357675 (Del. Ch. Jan. 28, 2015).
C.A. No. 7720-VCL, 2015 WL 186837 (Del. Ch. Jan. 15, 2015).
© 2015 Winston & Strawn LLP
C.A. No. 8059-CB, 2015 WL 151618 (Del. Ch. Jan. 13, 2015).
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Delaware Quarterly
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).
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20
Delaware Quarterly
This Quarter’s Authors
Jonathan W. Miller, John E. Schreiber and Matthew L. DiRisio are partners, and Jill K. Freedman, Ian C. Eisner, Andrew S.
Jick, Joseph A. Litman, Stephanie M. Leonard, Marissa C. Nardi and Frank S. Restagno are associates, in the Litigation
Department of Winston & Strawn LLP resident in the Firm’s New York and Los Angeles offices.
The Delaware Quarterly Advisory Board
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