Updates

The Delaware Counsel Group LLP publishes legal updates regarding critical areas of Delaware Corporate and Alternative Business Entity Law on a bi-weekly basis. If you would like to sign up to receive our updates via email or post, please click here to subscribe.

Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : June 21st, 2011

Chancery Court says no advisory opinion absent a litigable controversy

In In re Native American Energy Group, Inc., C.A. No. 6358-VCL (Del. Ch. May 19, 2011), the Court of Chancery denied a petition from Native American Energy Group, Inc. for a declaration to cure a flaw in its capital structure, stating that the court lacked jurisdiction because there was no litigable controversy. Pursuant to Section 225(b) of the General Corporation Law of the State of Delaware (the “GCL”), the company sought a declaration that it had cured the flaw through the written consent of a majority of stockholders. Though Section 225(b) of the GCL was amended in 2008 to authorize a corporation to file petitions in the court to determine the result of certain stockholder votes, the court found that this amendment was limited in scope and not intended to enable parties to manufacture grounds for an advisory opinion.

Potential derivative claims of stockholders plaintiffs do not in and of themselves produce grounds for enjoining a merger

In In re Massey Energy Company Derivative and Class Action Litigation, C.A. No. 5430-VCS (Del. Ch. May 31, 2011), shareholder plaintiffs sought to enjoin the merger of Massey Energy Company (“Massey”) and Alpha Natural Resources Inc. (“Alpha’), contending that the merger consideration failed to adequately compensate plaintiffs for derivative claims against Massey stemming from management’s failure to make a good faith attempt to comply with mining regulations and damages from an explosion that killed 29 miners. The Court held that the record did not support the issuance of a preliminary injunction because there was no indication that the derivative claims “are material in comparison to the overall value of Massey as an entity.” The Court found the merger procedurally sound, that the Massey board “exerted reasonable effort to get the highest price it could from Alpha,” and that the board was not improperly motivated by a desire to avoid liability.

Vice chancellor rules that Revlon duties attach to 50/50 cash and stock merger deal

 In In re Smurfit-Stone Container Corp. S’Holder Litig., C.A. No. 6164-VCP (Del. Ch. May 20, 2011, revised May 24, 2011), the Court of Chancery held that the Revlon standard applies when a merger consideration is split evenly between cash and stock, but nonetheless declined to enjoin a merger between Smurfit Stone Container Corp. (“Smurfit”) and Rock-Tenn Co. Stockholders of Smurfit had contended that the price, the equivalent of roughly $35 per share, was unreasonable and that the Smurfit board had violated its Revlon duty to maximize shareholder value by failing to adequately value or shop the company, and by agreeing to preclusive deal protection measures, such as a $120 million termination fee. The Court refused to grant the preliminary injunction, holding that (1) there was not a “strong showing” of likelihood of success on the merits because the Board’s decision to sell the company was not unreasonable, (2) plaintiffs failed to establish irreparable harm, and (3) the balance of equities favored the defendants.

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Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : June 7th, 2011

Fair price plus fair process still the law in Delaware mergers

In re Orchid Cellmark Inc. S’holder Litig., C.A. No. 6373-VCN (Del.Ch. May 12, 2011).  The Court of Chancery declined to preliminarily enjoin a merger transaction that plaintiffs claimed was “the result of a flawed and inadequate process” and involved “materially misleading and incomplete” securities filings.  The Court, applying the Revlon doctrine, concluded that the Board and the Special Committee thereof did not act unreasonably in their determination to engage in a merger which, despite several deal protection mechanisms, yielded the shareholders of the target an approximate 40% premium over the trading price of the shares. Further, it determined that the plaintiffs failed to demonstrate a reasonable probability of success on the merits of their disclosure claims, and concluded that there was not a significant likelihood of irreparable harm to the plaintiffs if the merger were to be consummated.

 

Chancery Court holds that you need to tell the other side that documents exist, but you don’t have to sort your opponent’s documents

DFG Wine Company, LLC v. Eight Estates Wine Holdings, LLC, C.A. No. 6110-VCN (Del. Ch. Apr. 18, 2011).  In a letter opinion, the Court of Chancery addressed an LLC books and records action by a member of a Delaware LLC.  The Court granted plaintiff’s demand that defendant provide information as to whether certain records of its wholly-owned subsidiary exist, and if so, where they are located holding that, without resolving the substantive merits of the dispute, requiring the defendant to provide such information would “facilitate trial.”  The Court, however, denied plaintiff’s request that defendant be required to identify certain documents (originally produced by plaintiff) produced by defendant in discovery by the specific discovery request to which they pertain, holding that “[e]fficiency must – or perhaps, should – be the measure of discovery in summary proceeding,” and that, while typically “responding to discovery requests with a blanket reference to a substantial set of documents is insufficient,” the fact that the documents were originally produced by plaintiff would result in an “unwarranted burden” on defendant.

 

If you want access to corporate records, you’d better be a shareholder (and it doesn’t hurt to know applicable statutes of limitations and the status of any related legal settlements)!

 

Graulich v. Dell Inc., C.A. No. 5846-CC (Del.Ch. May 16, 2011).  The Court of Chancery entered a judgment on the pleadings in favor of defendant Dell Inc., after determining that the plaintiff had failed to state a proper purpose for a books and records action under Section 220 of the General Corporation Law of the State of Delaware.  The Court held that the plaintiff lacked standing because (i) he was not a stockholder of defendant until 2 years after the time period for which he sought records, and (ii) even if he had standing to pursue either a derivative or direct action, it would have been time-barred by the applicable statute of limitations, or precluded by a settlement release in a derivative action relating to the products.

 

Chancery Court holds that split off was not a violation of the Company’s Indenture

Liberty Media Corp. v. The Bank of N.Y. Mellon, C. A. No. 5702-VCL (Del. Ch. Apr. 6, 2011).  Plaintiff, Liberty Media Corp (“Liberty”), sought a declaratory judgment that the distribution of two divisions of its company to its stockholders, in order to split off new publicly traded company, did not violate the terms of an indenture pursuant to which Liberty issued certain bonds.  Bondholder defendants sought to aggregate the split-off at issue with several other distributions that Liberty made to stockholders, claiming that, taken together, they amounted to a violation of a provision of the indenture prohibiting Liberty from selling, transferring or disposing of substantially all of its assets.  The Court, after trial, granted the declaration, holding that the distribution itself was not a violation of the indenture and that the distributions could not be aggregated.

 

Chancery Court reduces attorney’s fees granted to plaintiff in derivative action based on the quality of the disclosures.

 

In re Saur-Danfoss Inc. S’holders Litig., C.A. No. 5162-VCL (Del. Ch. May 3, 2011).  Minority stockholders sought $750,000 in attorney’s fees where their negotiation and subsequent litigation caused a controlling stockholder to make certain disclosures and eventually withdraw its tender offer. The Court, evaluating the qualitative importance of the disclosures obtained, awarded $75,000 in fees, refusing to award fees related to pre-litigation disclosures and substantially reducing the fees awarded based on the quality of the disclosures.

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Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : April 21st, 2011

Pharm. Prod. Dev., Inc. v. TVM Life Sci. Ventures VI, L.P. et al, C.A. No. 5688 VCS (Del. Ch. Feb. 16, 2011).  The plaintiff, a purchaser of a biotech company, sought damages from the target’s officers and stockholders, who were jointly liable for contractual damages under the merger agreement. On a motion to dismiss for failure to state a claim, the Court allowed the breach of contract claims to proceed against the defendants, and refused to rule on whether post-acquisition expenditures were barred by the merger agreement’s indemnification clause, which excluded special damages.

 

William Penn P’ship v. Saliba, C.A. No. 111 (Del. Feb. 9, 2011).  The Delaware Supreme Court affirmed the Chancery Court’s decision that defendants, managing members of a Delaware LLC, had breached their fiduciary duties in a self-interested transaction involving the sale of an asset of the LLC, and affirmed the award of attorneys’ fees to plaintiff members of the LLC where there were no money damages based on the value of the asset sold.

 

In re Del Monte Foods Co. S’holders Litig., Cons. C.A. No. 6027-VCL (Del.  Ch. Feb. 14, 2011).  The Court preliminarily enjoined the consummation of a merger for twenty days to allow time for a topping bid before the stockholder vote.  The Court held that breach of fiduciary duty claims against directors and aiding and abetting claims against a private equity firm that was purchasing the company had a sufficient likelihood of success to where investment bankers secretly advised both the buy-side and the sell-side of the transaction.

 

King v. Verifone Holdings, Inc., C.A. No 5047 (Del. Jan. 28, 2011).  The Supreme Court of the State of Delaware reversed a Court of Chancery decision denying an 8 Del. C. § 220 information request because the stockholder had previously initiated derivative litigation, holding that a bright line rule that such an information request must be made prior to other litigation was inconsistent with prior case law and public policy.

 

KFC National Council and Advertising Cooperative, Inc. v. KFC Corp., C.A. No. 5191-VCS (Del. Ch. Jan. 31, 2011).  Franchisees and the corporate franchisor were organized as a non-stock corporation with a Committee that had a right to vote on the national advertising campaign of the brand.  The Court of Chancery granted the plaintiff franchisees’ motion for a declaratory judgment stating that franchisees had a right to amend the advertising plan proposed by the franchisor where the certificate of incorporation of the non-stock corporation did not clearly vest the franchisor with a veto over the plan.

 

Chartis Warrantyguard, Inc. v. National Electronics Warranty, LLC, C.A. No. 5764-VCP (Del. Ch. Jan. 28, 2011).  The Court preliminarily enjoined defendants from using data that was collected in a joint venture to compete against the venture until the dispute can be resolved in arbitration.

 

Air Products and Chem., Inc. v. Airgas, Inc. et al., C.A. No. 5256-CC, (Del. Ch. Feb. 15, 2011).  The Court of Chancery dismissed all claims against director defendants for keeping a poison pill in place where the board acted in good faith and with the honest belief that the price offered in an all shares, all cash offer was inadequate.  The Court, reviewing the facts under the enhanced scrutiny test set forth in Unocal v. Mesa Petroleum Co., found that the directors acted in good faith, responded to a legally cognizable threat and that the takeover defense was proportional to the threat.

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Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : February 24th, 2011

Charles R. King v. Verifone Holdings, Inc., C.A. No. 5047 (Del. Jan. 28, 2011).  Appellant is a stockholder plaintiff who first brought a derivative action in federal court in California, alleging, inter alia, breach by directors and officers of the subject corporation of their fiduciary duties to the corporation.  The stockholder did not initially pursue an action under Section 220 of the General Corporation Law of the State of Delaware to inspect the books and records of the corporation.  The Supreme Court ruled that such a stockholder plaintiff is not barred from later bringing such a books and records action, and reversed the judgment below of the Court of Chancery.

Direct Capital Corp. v. Ultrafine Technologies, Inc., et al., C.A. No. 6139-CC (Del. Ch. Jan. 21, 2011).  In a letter opinion, the Court of Chancery, in considering the legal claims of a plaintiff pursuant to a lease agreement, reaffirmed that where the claims of a plaintiff are contractual in nature, involve a “purely legal question” and “can be remedied by money damages available in the Superior Court,” the Court of Chancery does not have jurisdiction to consider plaintiff’s claims.

Reis v. Hazelett Strip-Casting Corp., et al., C.A. No. 3552-VCL (Del. Ch. Jan. 21, 2011).  The Court found defendants, a corporation and its controlling stockholders, liable to minority stockholders who were frozen out in a reverse stock split.  The Court held that defendants failed to meet their burden under the entire fairness standard, where there were no procedural protections and no one bargained on behalf of the minority stockholders in the decision to consummate the reverse split, and where the price set as compensation for the fractional shares held by the minority stockholders was less than the pro-rata value of the shares determined at trial.

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Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : February 9th, 2011

In Re John Q. Hammons Hotels, Inc. S’holders Litig., C. A. No 758-CC (Del. Ch. Jan. 14, 2011).  The Court granted summary judgment for the defendant corporation holding that under the entire fairness standard, the 2005 sale of John Q. Hammons Hotels, Inc. was “entirely fair” to minority stockholders.  The process and price were found to be fair where the special committee that approved the transaction was independent and disinterested, highly qualified, and exercised its authority to reject offers that were insufficient to the minority stockholders.  The Court rejected claims that the mere existence of a majority stockholder that could reject the transaction was enough to taint the foregoing process. 

Great-West Investors LP v. Thomas Lee Partners L.P. et al., C. A. No. 5508-VCN (Del. Ch. Jan. 14, 2011).  Plaintiff investors sought reformation of a limited partnership agreement where defendant managers were entitled to a fee that increased by a factor of “1.05 multiplied by” the prior year’s fee.  Defendants claimed that the language of the limited partnership agreement unambiguously called for an annual increase of 105% in management fees to be paid to defendant managers, notwithstanding the alleged representation of defendants’ counsel in 2007 that this language was intended to “effect a 5% increase”.  The Court granted defendants’ motion to dismiss for failure to state a claim with regard to: a claim for reformation based on ambiguity of the contract language; breach of fiduciary duty claims; and claims based on breach of the implied covenant of good faith and fair dealing.  The Court allowed the following claims to survive:  a request for declaratory relief requiring defendant to engage in faith negotiation as specified in the limited partnership agreement before the fee escalation clause became effective; breach of contract claims; reformation based upon mutual mistake; reformation based on unilateral mistake; and reformation for fraud.

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