Delaware Corporate Law Update

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

Enforcing The Court of Chancery – Bench Warrants

“Court of Chancery” and “bench warrants” are two phrases you don’t often see together.  Perhaps that is a testament to how often they are usually obeyed.  But as a recent case, Deutsch v ZST Digital Networks, Inc., demonstrates, the Court does have the power to issue them in appropriate cases.

Plaintiff brought a books and records case against a Delaware corporation that, through holding companies, did business in China.  The company defaulted, and the Court entered judgment against it.

Directors and senior officers of the corporation, Chinese nationals Bo Zhong and his son Lin Zhong, had a long history of defying and frustrating the Court’s orders.  Plaintiff sought to enforce the default judgment, and the company did not comply.  The Court appointed a receiver who spent years and significant resources attempting to cause the company to comply but was continually frustrated.

Finally, the receiver moved to issue bench warrants to arrest the Zhongs.  They appeared before the Court and raised objections, resulting in this opinion.

The Court first rejected the argument that the Zhongs as non-parties could not be held in contempt.  It noted that an order binds not only the named parties but also those “identified with them in interest, in ‘privity’ with them, represented by them or subject to their control.”  Thus, the order extended to “directors, officers, and employees” of the company, such as the Zhongs.

The Court noted that personal jurisdiction was satisfied under 10 Del. C. § 3114, providing personal jurisdiction over directors of a Delaware corporation.

The Zhongs then made due process arguments against the bench warrants.  The Court ruled that the contempt ruling sought would be civil and not criminal, since the requested arrest would only last until the contemptuous conduct ceased, which meant less process was due.  Even with the lesser requirements for civil contempt, the Court did in part accept the Zhongs’ due process arguments, noting that the receiver sought to hold the Zhongs in contempt of orders which did not identify the Zhongs by name and imposed broad mandates (such as giving the receiver authority over books and records and requiring cooperation) rather than specific demands.

Thus, the Court decided to enter a more specific order directing the Zhongs to take actions that the receiver had identified as being necessary to comply with the Court’s orders.  This would give the Zhongs a final opportunity to comply with the Court’s order and another hearing should noncompliance cause the receiver to move again for the issuance of a bench warrant.

Key Takeaways:

  • The Court of Chancery does have the power to enforce its rulings through bench warrants;
  • The Court can issue warrants as to persons not a party to the lawsuit, even persons not named specifically in the Court order allegedly disobeyed; but
  • Such circumstances may provide fertile grounds for arguments from arrestees including personal jurisdiction and due process.
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Filed under: Uncategorized

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

Chancery Has Jurisdiction Over Claims for Escrow Money

The Court of Chancery recently confirmed, in East Balt LLC v. East Balt US, LLC  (available here), that it has subject matter jurisdiction over a breach of contract claim for damages to be paid from a contractually-established escrow.

Plaintiff sold assets to defendants for $250 million, $7.9M to be escrowed to indemnify defendants against losses from later claims.  In the event of claims the escrow would continue unless otherwise agreed until a final non-appealable order resolved the dispute.  Defendants asserted claims totaling more than $7.9M.  Plaintiffs sued in Chancery to release the escrow; defendants argued that only Superior Court could hear the case.

The Court ruled for plaintiff, relying on a 2013 Chancery bench ruling, and a 1977 Chancery decision, to the same effect.  The Court rejected defendants’ argument that Superior Court was adequate because (i) all the escrow agreement required was a final ruling; and (ii) its contempt powers could enforce declaratory relief.

East Balt confirms that parties with a contractual damages claim from an escrow may sue in the Court of Chancery.

Filed under: Uncategorized

2015 DGCL Amendments

On May 12, the Delaware Senate passed amendments to the Delaware General Corporation Law, and on June 3, the amendments made their way through the House Judiciary Committee.  They will be considered next by the House and, if passed, will be presented to the Governor (amendments available here).  Two are particularly noteworthy:

Forum selection amendment – One amendment responds to several Court of Chancery decisions on whether a Delaware corporation’s bylaws may contain a provision that selects a forum for disputes.  One permitted a provision selecting Delaware, another a provision selecting North Carolina.  The amendments would allow forum selection provisions in charters or bylaws as to “internal corporate claims,” including derivative actions.  It prohibits any provision that selects a non-Delaware forum as the exclusive forum, but there is no prohibition as to a provision that selects Delaware plus some other jurisdiction(s).  So, for instance, a bylaw would be valid if it provided for exclusive jurisdiction of Delaware and North Carolina, but not if just North Carolina was selected.

Fee-shifting amendment – Another group of amendments responds to a Delaware Supreme Court decision allowing a fee-shifting bylaw for a non-stock corporation.  The amendments prohibit such provisions, but only as to stock corporations.  In other words, a Delaware stock corporation’s charter and bylaws cannot contain any provision requiring a stockholder to pay attorneys’ fees or costs in connection with an “internal corporate claim.”

As you may have heard, the proposed amendments also made certain changes as to appraisal actions.  The Delaware House and Senate have been considering different versions of such changes, however, and there is some uncertainty if any such changes will be included in the final bill or if so in what form.

Filed under: Uncategorized

Strine And Glasscock Nominated

The word is out — current Court of Chancery Vice Chancellor Leo E. Strine, Jr. and Master Sam Glasscock have been nominated by the Governor to be Chancellor and Vice Chancellor, respectively. Since the Delaware Senate’s term ends on June 30, votes on their confirmation will likely occur before then.

Filed under: Uncategorized

Update on Selecting New Chancellor

As discussed in an earlier post, a vacancy for the position of Chancellor of the Delaware Court of Chancery has opened up with the retirement of Chancellor William B. Chandler III.

It has been reported that the following candidates (in no particularly order) have confirmed that they have applied:

1.  Bruce Silverstein (Young Conaway Stargatt & Taylor)
2.  The Honorable Mary Johnson (currently a Delaware Superior Court judge)
3.  Richard Forsten (Saul Ewing)
4.  Joel Friedlander (Bouchard, Margules and Friedlander)
5.  Kevin F. Brady (Connolly Bove Lodge & Hutz)
6.  Richard E. Berl, Jr. (Smith Feinberg McCartney & Berl)
7.  The Honorable Sam Glasscock (currently a Master in Chancery)

It has not been said whether that is the exclusive list of candidates or whether there may be others.  Friedlander and Judge Johnson were two of the three finalists for the last Court of Chancery vacancy, ultimately filled by current Vice Chancellor J. Travis Laster.

The Judicial Nominating Committee will select three of the candidates before it and forward their names to the Governor.  This is anticipated to take place soon, within weeks.

While there is no geographic requirement in the Delaware Constitution for the position, previously each of Delaware’s three counties (New Castle, Kent, and Sussex) has had a Chancellor or Vice Chancellor associated with and sitting in that county.  Retiring Chancellor Chandler is the only judicial officer from the Court of Chancery sitting in Sussex County.  The majority of the state’s lawyers, and the majority of candidates on the above list, practice law in Wilmington, in New Castle County.  But two of the candidates do have connections to Sussex County:  Judge Johnson has a beach house in Bethany Beach and Master Glasscock sits in Georgetown.

Filed under: Uncategorized

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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.