Delaware Corporate Law Update

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

Delaware Chancery Orders Defendant Directors Deposed on SLC’s Motion to Terminate Claims

Courts are restrictive in granting a plaintiff discovery in connection with the motion of a special litigation committee (an “SLC”) to terminate claims.  That is particularly true with regard to discovery directed toward defendant directors.  In a recent transcript decision, Judy v. Agar, the Court of Chancery denied motions of two defendant directors for protective orders against their depositions and certain document discovery.  The Court cited the lengthy past litigation history of the company (characterizing it as having a “black halo”), but also discussed the kinds of allegations that in its view justified such depositions.  This decision is useful because there is little caselaw discussing the scope of discovery in this context other than from an SLC.

In this case, plaintiffs sought and received discovery from the SLC.  The key question on defendants’ motions was what discovery plaintiffs would be permitted from certain defendant directors who benefited from the SLC’s motion to dismiss certain claims.

The Court denied the motions and began with the observation that this was not “a typical case”.  Rather, it continued, the case was one “that I’ve had for however many years now where people hide things, they lie, they engage in fraud.”  “No phase of this company’s multi-phase history has ever involved actions that are inspiring of confidence,” said the Court.  But for that background, the Court said it would have been “highly likely” to “limit the scope” of discovery.

The Court also observed that other circumstances “were probably sufficient to warrant a deposition regardless”.  One director had engaged in communications with the (single-member) SLC concerning its functioning such as whether an in-person meeting with plaintiffs’ counsel was appropriate, fees the SLC should pay, and changes in SLC composition upon the election of new directors.  The Court held that those communications “are probably sufficient to warrant a deposition regardless.”  Similarly, it held that another director’s relationships with certain parties, particularly the SLC, were sufficient to warrant his deposition.

Separately, the Court noted that no live testimony would be permitted in the hearing on the SLC’s motion to terminate certain claims (a “Zapata” hearing), reasoning that the applicable standard was akin to a summary judgment motion.

The Court did not lay down a new rule or standard for discovery from defendant directors as to an SLC’s motion to terminate litigation.  It is a given that such discovery may be difficult to obtain and may require a particularized showing from plaintiff.  The Court, however, may be influenced by extensive past bad conduct on the part of the company or those associated with it.   It may also grant discovery into (1) communications between the SLC and the defendant director about the functioning of the SLC; and (2) specific relationships between the defendant director and others, particularly the SLC, that could have a bearing on the SLC’s motion.

The Williford Firm LLC serves as counsel for plaintiffs in this action.

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Filed under: Court of Chancery, Derivative Actions, Zapata

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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.