Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

Why Delaware?

You may have noticed that many large U.S. and international businesses are incorporated in the U.S. state of Delaware.  (For that matter, the authors are Delaware lawyers.)  Why is that?  After all, Delaware is a small state and very few large businesses are headquartered there.

The United States of America has a federal system of government:  national law governs some subjects while state law governs others.  Business formation and governance (the way the business is structured and controlled) is one subject typically governed by state law.  Thus, each state has its own laws governing businesses formed in that state.

Delaware has a long history of laws allowing businesses to form the entities most appropriate for their needs.  Those laws are designed, and amended typically every year, to allow a flexible response to any business conditions that might be encountered while also protecting the rights of investors.

Delaware also has a separate court, the Court of Chancery, which over the years has evolved into a court that specializes in resolving many business disputes.  Cases involving Delaware entities, particularly regarding their formation and governance, will often be brought or transferred to that court.  Its five judges specialize in resolving those cases fairly and predictably under Delaware laws and the court’s past decisions interpreting those laws.  Therefore, a business has some assurance that if it forms in Delaware a lawsuit brought in that state of formation will proceed predictably.

For these reasons and more, businesses that are large or seek investment will often form in, or move to, Delaware.  Small U.S. businesses, particularly those that anticipate doing business only in one state, might consider forming in that state instead.

Filed under: Basic Law of Corporations, Uncategorized

Supreme Court Reverses Denial of Contractual Fee-Shifting

In Washington v. Preferred Communication Systems, Inc., (opinion available here), decided February 27, the Delaware Supreme Court reversed the Court of Chancery and awarded attorneys’ fees pursuant to a promissory note fee-shifting provision.

In 2006, appellants bought promissory notes issued by appellee Preferred Communication Systems, Inc. (“PCSI”). When the notes came due in 2007, PCSI was unable to pay. PCSI agreed in an offer letter to provide noteholders with stock warrants as compensation for delay until it could pay.

In 2013, after PCSI received a significant cash payment, noteholders sued PCSI in Texas. The parties ultimately settled the noteholders’ claims for outstanding principal and interest but agreed to litigate their claims for warrants in Delaware. The Court of Chancery granted summary judgment in favor of the noteholders, holding, “The contract at issue consists of the Notes as modified by the Offer Letter” and that PCSI had breached the contract by not issuing the warrants.

The successful noteholders then sought attorneys’ fees pursuant to a fee-shifting provision in the promissory notes. The provision shifted fees if “any indebtedness” evidenced by the notes was collected in a court proceeding; or if the notes were “placed in the hands of attorneys for collection after default”. The Court of Chancery denied the motion, holding that “fee-shifting rights extend only to collection efforts.”

On appeal, the noteholders argued that “indebtedness” was a broad term that included warrants as well as principal and interest; and that PCSI had defaulted by not issuing the warrants. The Supreme Court agreed with the noteholders that the plain language of the notes shifted fees, emphasizing the Court of Chancery’s summary judgment ruling that the offer letter had modified the notes (which contained the fee-shifting provision) to promise warrants. The Supreme Court also held that even if the promissory notes had been ambiguous, they would have been construed against drafter PCSI under the contra proferentem doctrine. Thus, the Court reversed and remanded to the Court of Chancery to award attorneys’ fees.

The Williford Firm LLC served as Delaware counsel for appellants-noteholders in this action.

Filed under: Attorneys' Fees, Delaware Supreme Court

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Disclaimer

Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.