Delaware Corporate Law Update

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

Xoom: Chancery Awards Fee For Modest Disclosures Without Release

On August 4, in In re Xoom Corp. Stockholder Litigation, Vice Chancellor Glasscock signaled a limitation on the Court of Chancery’s recent caselaw critical of attorneys’ fee awards for additional merger disclosures.  The Court awarded $50,000 even though it held that the disclosures had only modest value because there was no release; plaintiffs’ claims had therefore been mooted, not settled.

A little background: in September 2015, Vice Chancellor Glasscock approved a merger settlement awarding fees which exchanged supplemental disclosures for a broad release of claims, but he criticized such settlements and warned against future Court approval (Riverbed).  In January 2016, Chancellor Bouchard rejected a disclosure-only settlement that did not address a “plainly material misrepresentation or omission” (Trulia); in August, Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit did the same (Walgreens).

In Xoom, plaintiffs sought fees for supplemental disclosures made in connection with the merger of Xoom Corporation into PayPal Holdings, Inc.  The Court ruled, however, that the mootness context supported a different analysis than recent prior cases.  This case, to the contrary, did not involve a broad release of claims.  Thus, plaintiffs had provided a benefit to the class without giving anything up.  While the disclosures worked only a modest benefit, the Court nonetheless awarded some of the fees requested “to encourage wholesome levels of litigation.”


Filed under: Attorneys' Fees, Court of Chancery

Chancery Court Dismisses Caremark Claim

In Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs (opinion available here), Vice Chancellor Montgomery-Reeves dismissed a fiduciary duty claim for failure of oversight (a so-called “Caremark claim”).  Caremark claims are well-known for being difficult to succeed on, and Melbourne further defines the limited circumstances where one is colorable.

Qualcomm, Inc. has paid more than one billion dollars for antitrust violations, including:  1) a $891M settlement for a 2005 claim by competitor Broadcom; 2) a $208M fine in 2009 by South Korea; 3) a 2010 claim by Japan still pending; and 4) a $975M fine in 2015 by China.  While these cases involved different allegations of wrongdoing, many involved Qualcomm’s market dominance in certain products used in wireless communications coupled with the same alleged failure to license its products on fair, reasonable and non-discriminatory (“FRAND”) terms.  Plaintiff alleged the first three cases were red flags that should have prompted Qualcomm’s board of directors to prevent the fourth.

Plaintiff filed its complaint after succeeding via a books-and-records case at getting some 14,000 pages of documents including board materials.  Plaintiff’s complaint pointed to board materials showing that Qualcomm’s board knew it expected to continue to face regulatory complaints and investigations in the future.   Rather than modifying its policies or prices to reduce or eliminate risk, however, Qualcomm’s board’s strategy on this issue was to educate “industry participants and government officials as to why its practices were legal” and to “pursu[e] appeals.”  Under Delaware law, “a fiduciary may not choose to manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity will result in profits for the entity.”

The Court held that plaintiffs did not state a claim.  In doing so it compared plaintiff’s claims to two cases in which Caremark claims survived.

In Massey Energy Co., a coal mining company had failed to change safety practices that later lead to the company pleading guilty to criminal charges including one count for violating safety standards resulting in death and a $4.5M fine.  The Court noted that in Massey the company’s CEO “publicly stated that the idea that governmental safety regulators knew more about mine safety than he did was silly.”  The Court distinguished Massey on the grounds that the red flags alleged there were far more egregious and indisputable; and that in that case the company had challenged the law itself, whereas in this case Qualcomm had not contested the antitrust laws themselves but taken the position that its conduct did not violate them.

In Pyott, the Board and CEO of a drug company knowingly approved a business plan that violated a ban on marketing drugs for off-label use.  It did so despite general counsel’s advice that the company “likely had engaged in such illegal conduct”.  Pyott criticized the Board’s view of the distinction between off-label selling and marketing “as a source of legal risk to be managed, rather than a boundary to be avoided.”  The Court emphasized that Pyott was based on the board’s alleged decision to cause the company to engage in illegal conduct, whereas here the allegation was that Qualcomm’s board did not put a halt to it.  Moreover, again, Qualcomm’s board had taken the position that its conduct did not violate the relevant rules.

Caremark claims are difficult in part because they strain against the boundaries of a basic principle of Delaware law, the business judgment rule.  As the Court observed in a quotation taken from another case, “In any business decision that turns out poorly there will likely be signs that one could point to and argue are evidence that the decision was wrong. . . . This temptation, however, is one of the reasons for the presumption against an objective review of business decisions by judges, a presumption that is no less applicable when the losses to the Company are large.”

Melbourne reinforces the view that Caremark claims are difficult to prevail on and that even decisions on whether one is colorable may well be fact-specific.  Other lessons of Melbourne are as follows:

  • Board or management statements of their well-informed belief that the activities in question are legal are helpful in defending such a claim.
  • On the other hand, statements that express or imply knowledge that such activities are illegal or show disrespect for regulatory authorities are unhelpful.
  • Legal rules protecting employee or customer well-being or safety, or those that involve or result in criminal prosecution, may be more dangerous to transgress than economic rules such as antitrust.
  • Creating a policy is more vulnerable than failing to discontinue an already-created one.
  • Board documents reaffirming the legality of a particular policy, and addressing and creating a strategy for continuing to support it, may support a later defense of failure to eliminate the policy. That being said, plaintiffs may also point to such documents as proof of red flags.

Filed under: Caremark, Court of Chancery

2016 DGCL Amendments

On August 1, 2016, the latest amendments to the Delaware General Corporation Law became effective (amendments available here).

Two sets of amendments are summarized below.  One set limits the availability and extent of the appraisal remedy, while another expands the Court of Chancery’s jurisdiction over disputes involving certain corporation stock or asset sale agreements.

Appraisal amendments – One amendment prohibits certain appraisals of shares of public corporations.  It has three exceptions:

  • It does not apply to short-form mergers (i.e. the parent owned at least 90% of the subsidiary’s shares before the merger).
  • It does not apply if the shares entitled to appraisal (their holders have perfected their appraisal rights) exceed 1% of those eligible.
  • It does not apply if the merger consideration for the shares entitled to appraisal is greater than $1M.

Another amendment allows corporations to avoid paying interest on appraisal awards if and to the extent they prepay the amount to those entitled to appraisal.  This amendment was adopted due to a concern that some appraisal proceedings were at least partly motivated by the difference between low current interest rates and the high legal interest rate available in appraisal actions.

Chancery jurisdictional amendment – Section 111 has been amended to expand the Court of Chancery’s subject-matter jurisdiction.  The Court may now hear cases involving agreements between a corporation and one or more stockholders in which stockholders sell or offer to sell their stock.  It also has nonexclusive jurisdiction over cases involving agreements by corporations to sell, lease or exchange assets pursuant to stockholder consent.  This amendment expands the Court of Chancery’s jurisdiction to contractual disputes typically involving many of the same issues the Court of Chancery already dealt with in its preexisting jurisdiction.

Sandra Feldman of CT Corporation summarizes other 2016 amendments to Delaware’s various business entity laws here.

Filed under: Appraisal, Court of Chancery, Subject-matter jurisdiction

Chancery Court Denies Law Firm’s Charging Lien

In Sutherland v. Sutherland (opinion available here), Vice Chancellor Noble rejected a petition by law firm Katten Muchin Rosenman LLP (“Katten”) for a charging lien against an attorneys’ fee award where the allegedly unpaid bill solely related to work after the work on which the fee award was based.

The litigation, which began in 2004 and 2006, resulted in certain benefits to the subject company; namely, elimination of salary to certain persons terminated for cause and modification of provisions allowing insiders to compete with the company.  The Court awarded $275,000 in fees for those benefits, all of which were achieved by 2007.

Katten had represented plaintiff in the litigation.  Katten, which had already been paid $2.7 million, claimed it was still owed $766,166.75 for work occurring after 2008.

As the Court noted, the purpose of a charging lien is “to make sure that the client does not avoid paying her lawyer for the benefits she obtained”.  It held that Katten, however, was seeking a charging lien “for work which caused no benefit and has no connection to the recovery, other than having occurred in the same litigation.”  Thus, the Court rejected the petition: “Seeking a charging lien for work which produced no benefit when the law firm has already been paid for the work which produced the benefit (whether the benefit for the family corporation or the corresponding fee award) is inconsistent with the theoretical underpinnings of the attorney’s charging lien.”

N.B.  Since the publishing of this post, on January 3, 2017, the Delaware Supreme Court reversed the Court of Chancery’s opinion.

The Williford Firm LLC served as Delaware counsel for plaintiff in this action.  Results in cases depend on their specific factual and legal circumstances and results in one do not guarantee the same or similar results in another.

Filed under: Court of Chancery, Delaware Supreme Court

Chancery: Stockholder Ratifications Must Be Formal To Be Effective

On October 28, Chancellor Andre G. Bouchard held in Espinoza v. Zuckerberg (available here) that a disinterested controlling stockholder cannot informally ratify a transaction approved by an interested board of directors and thereby shift the standard of review from entire fairness to the business judgment presumption. Thus, stockholder ratification must occur via a stockholder vote or written consent.

The board of directors of Facebook, Inc., a Delaware corporation, awarded itself a compensation package in 2013. Plaintiff sued alleging the package was a self-interested transaction unfair to Facebook. After the filing of the lawsuit, Facebook’s controlling (61%) stockholder, Mark Zuckerberg, expressed his approval of the compensation package in an affidavit and a deposition. Defendants argued that Zuckerberg had thereby “ratified” the compensation package and, therefore, the business judgment presumption should apply and summary judgment should be granted in their favor.

The Court noted that ratification of the compensation packages could have been accomplished by voting at a stockholder meeting or, less intrusively, by a written consent in compliance with 8 Del. C. § 228. It is unclear to the reader (and quite possibly to the Chancellor) why Zuckerberg did not take the latter step. As the court observed, “the burden and expense of this litigation undoubtedly dwarf the burden of Zuckerberg signing an appropriate form of consent in this case.”

The Court stated it was “far from clear” that Zuckerberg intended his deposition statement to be a “definitive ratification of a specific corporate act” – Zuckerberg only testified (relevantly) that “‘the compensation plan that we have is doing its job of attracting and retaining them over the long term’”. The Court noted that even written consent required prompt notice to the other stockholders, while defendants’ informal ratification methods did not involve notice to other stockholders at all.

The Court disagreed with defendants, holding that “stockholder ratification of a self-dealing transaction must be accomplished formally by a vote at a meeting of stockholders or by written consent”. The Court expressed concern that allowing affidavits or deposition testimony to constitute ratification would become a slippery slope to “press releases, conversations with directors, or even ‘Liking’ a Facebook post of a proposed corporate action” being argued to be ratification, where it may not be clear exactly what actions are being ratified.

Filed under: Controlling Stockholder, Court of Chancery, Fiduciary Duties

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

Chancery and Practitioners Give Tips On Practice Before Court

On May 22, the annual Recent Developments in Delaware Corporate and Alternative Entity Law seminar was held.  Panels spoke on corporate law blogs, recent developments, and legal ethics.  One panel of particular note spoke on the Court of Chancery’s Guidelines to Help Lawyers Practicing in the Court of Chancery, which were made public in January of this year and are available here.  The panel included several practitioners — Gregory Williams of Richards Layton, Kevin Brady of Eckert Seamans, and Kevin Shannon of Potter Anderson — as well as Chancery Leo E. Strine, Jr.

The Guidelines are almost 18 pages (single-spaced); full of useful guidelines and tips on various situations that regularly come up before the Court.  Anyone practicing before that Court would do well to read, and re-read, them.

One dilemma is that the Guidelines state they are not to be cited as authority to the Court; but the panel clarified that they may be discussed and shared with opposing counsel.  I myself have seen this happen on a number of occasions given the breadth of the Guidelines.

Chancellor Strine noted that a similar set of guidelines concerning discovery is currently in the works , although there is no word on when that will be out.

The panel clarified that the best practice is to submit compendiums that include only key cases and authorities, whether or not they are “nonpublic” (i.e. only available on Lexis/Westlaw).  While Court of Chancery Rule 171(h) calls for all unreported decisions to be included, the increasing general availability of Lexis/Westlaw has taken away the original reason behind the rule, and the Guidelines hinted that including only key authorities was the better way to go.

Other interesting tidbits from the panel:

  • A practitioner should touch and feel anything that is going to the Court.  It is one thing to intellectually instruct that a filing be put together, it is another to look through it and see whether that has been done correctly and if it has whether it would be confusing or cumbersome for the courts. As an example, in a recent set of courtesy copies to the Court from a reputable Delaware firm every fifth word was garbled.  Even a quick look-through would have immediately identified the problem.
  • Delaware practitioners should be prepared to discuss anything filed with the Court with their name on it, even if they are in a Delaware counsel role to another, more active, out-of-state firm.
  • The senior Delaware attorney on the case should be involved in everything that is submitted to the Court.
  • The senior Delaware attorney need not of course be involved in every aspect of discovery, but should be involved (on both sides) in discovery disputes before they need to be submitted to the Court.  It often happens that the Court gets a laundry list of complaints about responses to discovery, a position that the Court would rather not be in.  One panelist also suggested that based upon recent decisions the Court seemed to be getting more restrictive in applying the attorney-client privilege.
  • Chancellor Strine expressed the view that he often found helpful demonstratives that somehow tied together information from a number of exhibits in a useful form, such as a chronology.
  • And finally, for those considering submitting expedited requests for action around August, keep in mind that the Court’s clerks (who typically serve one-year terms) typically turn over at that time.

Filed under: Court of Chancery

Court of Chancery Rejects Summary Judgment As To Loyalty Claims Against VC Investors

Today the Court of Chancery released a memorandum opinion (available here) rejecting much of defendants’ summary judgment motion in a case brought by a unitholder in a Delaware LLC against two venture capital firms and/or their affiliates that had collectively acquired control of the LLC.  By way of disclosure, this firm represents plaintiffs in the litigation.

Plaintiff is a unitholder and former CEO of Adhezion Biomedical LLC, who challenged a series of issuances of preferred units and other rights to defendants including two venture capital firms/affiliates of those firms, Originate Ventures, LLC and Liberty Advisors, Inc.  Plaintiff claimed that the issuances breached defendants’ duties of care and loyalty and obligation of good faith, and violated provisions in the LLC Agreement requiring a class vote by common unitholders.  The Court granted summary judgment as to the duty of care and obligation of good faith claims, but denied it as to plaintiffs’ claims for breach of the duty of loyalty and based upon the class vote requirement.

Noteworthy sections of the Court’s ruling included the following:

  • The Court found a genuine issue of material fact as to whether the two VC firms and their affiliates should be treated as a group for purposes of imposing controlling stockholder duties upon them.  The two VC firms and their affiliates collectively owned more than 66% of the voting units, controlled two of five directors, and had parallel economic interests, and plaintiff identified multiple communications supporting an inference that they exerted actual control of capital raising activities.
  • The Court rejected defendants’ argument that director approval immunized the transactions based upon a provision in the LLC Agreement similar, but not identical, to Section 144 of the Delaware General Corporation Law.  In addition to noting other material factual disputes, the Court ruled that, as a matter of law, in any event it would not operate as a safe harbor against review of the challenged transactions for breach of the duty of loyalty under the entire fairness standard of review.

Filed under: Controlling Stockholder, Court of Chancery, Derivative Actions, Fiduciary Duties

Court of Chancery Posts Practitioner Guidelines

Last week the Court of Chancery posted a document on its website entitled “Guidelines to Help Lawyers Practicing in the Court of Chancery” (available here).  It is intended as a “practice aid” to “minimize disputes over process”.  The document is 18 pages single-spaced, and is required reading (and re-reading) for anyone who practices before the Court, either regularly or occasionally.  Up front the Guidelines state  that they are a practice guide only and are not intended to be “used as a sword” or even cited before the Court.  The Guidelines were announced by press release which itself has some interesting things to say (available here).  Sample forms available with and referenced by the Guide are available here.

The press release reveals that the Court is proposing a rule to eliminate the requirement that a compendium of unpublished cases be provided with submissions, in favor of an “encouragement” to provide only authorities that are crucial to determining the case.  In this age of Westlaw and LexisNexis, along with the number of unpublished Chancery decisions available on the internet, this previous requirement now seems antiquated and the proposed rule a welcome nod to present realities.

A selection of notable comments in the Guidelines:

  • PDAs, blackberries, and cell phones — These are to be turned off and placed in the vestibules outside each courtroom.  If needed for scheduling purposes they may be retrieved and used should the Court permit.
  • The Guidelines repeat the expectations that the Court has previously voiced many times for Delaware counsel, that while it understands that sometimes the division of labor is weighted heavily in favor of forwarding counsel, ultimately it is the “Delaware lawyer who is taking the positions set forth therein and making the representations to the Court,” and this role “does not alter the Delaware lawyer’s responsibility for the positions taken and the presentation of the case.”  Submitting a letter from co-counsel to the Court with a short cover letter is not permissible.
  • The Guidelines list requirements for transmittal letters accompanying courtesy copies of briefs.
  • Counsel calling chambers to seek  potential dates from the Court should only do so with all other counsel on the line or after obtaining authority from them, .  If  potential dates, counsel should relay all of them to the other parties and ensure that information has been shared fairly, even if that attorney is not available for one or more of the dates provided.
  • Except for motions to expedite, scheduling disputes should be resolved by motion, not letter.
  • The Court does not want a lengthy exchange of letters: after a response and possibly a reply letter it is  “time to schedule a conference.”
  • The Court strongly expressed its preference for limited expert discovery (i.e. materials provided to or relied upon by the expert), and that it “understands the degree of involvement counsel typically has in preparing expert reports”.
  • The Court prefers that defendants who wish to oppose a motion to amend on grounds that the amendment would be futile stipulate to the motion but reserve their right to challenge the pleading via answer or motion to dismiss.
  • A submission of fifteen pages or less should be submitted as a speaking motion; a submission of greater length should be a brief with tables of contents and authorities.
  • Discovery disputes — The Court will “not be inclined” to hear arguments — or even authorities — that had not previously been presented to the other side.  “If the argument or authority had been presented, perhaps the dispute would have been resolved.”

Among the forms listed is a lengthy sample scheduling order for a plenary action (available here). It stipulates that many dates not affecting the Court’s schedule may be amended by agreement of the parties, without Court approval.  As has become common before the Court, simultaneous opening and answering pre-trial briefs are contemplated.

Filed under: Court of Chancery



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.