the delaware quarterly - winston & strawn delaware quarterly is a source of general information...

© 2014 Winston & Strawn LLP

The Delaware Quarterly

April - June 2014 Volume 3, Number 2

EditorsJonathan W. [email protected]+1 (212) 294-4626

James P. Smith [email protected]+1 (212) 294-4633

Matthew L. [email protected]+1 (212) 294-4686

John E. [email protected]+1 (212) 294-6850

The Delaware Supreme Court and Delaware Court of Chancery are generally regarded as the country’s premier business courts, and their decisions carry significant influence over matters of corporate law throughout the country, both because of the courts’ reputation for unsurpassed expertise in the field and because the vast majority of public companies in the United States are incorporated in Delaware and governed by its substantive law. Accordingly, Delaware’s corporate jurisprudence provides critical guidance to corporations, alternative entities and practitioners in evaluating corporate governance issues and related matters.

Each calendar quarter, the Delaware Quarterly analyzes and summarizes key decisions of the Delaware courts on corporate and commercial issues, along with other significant developments in Delaware corporate law.

The Delaware Quarterly is a source of general information for clients and friends of Winston & Strawn LLP and is also contemporaneously published in the Bank and Corporate Governance Law Reporter. It should not be construed as legal advice or the opinion of the Firm. For further information about this edition of the Delaware Quarterly, readers may contact the Editors, the Authors, or any member of the Advisory Board listed at the end of this publication, as well as their regular Winston & Strawn contact.

ContentsIntroduction ............................................................. 2

Chen v. Howard-Anderson .................................. 2

ATP Tour, Inc. v. Deutscher Tennis Bund ...........7

Additional Developments In Delaware Business And Securities Law .............................10

Alternative Entities .........................................10

Appraisal Proceedings .................................. 11

Arbitration ......................................................... 11

Attorney’s Fees ............................................... 12

Books and Records Actions ........................ 13

Class Actions ................................................... 13

Constitutional Law ......................................... 13

Contract Interpretation ................................. 14

Corporate Governance .................................16

Fiduciary Duties .............................................. 17

Indemnification and Insurance ................... 18

Injunctions ........................................................19

Jurisdiction ......................................................20

Motions to Dismiss ........................................20

Practice and Procedure ................................21

Rights of First Refusal ..................................22

Settlements .....................................................22

Status Quo Orders ........................................23

Stay of Proceedings .....................................23

This Quarter’s Authors ........................................24

The Delaware Quarterly Advisory Board .......24

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IntroductionWarranting particular attention this quarter are two decisions: the first, out of the Court of Chancery, is Chen v. Howard-Anderson,1 in which Vice Chancellor Laster provides further guidance on the legal standards governing director and officer liability in connection with a sale process leading to a change-in-control transaction; and the second, from the Delaware Supreme Court, is ATP Tour, Inc. v. Deutscher Tennis Band,2 in which the high court upheld the facial validity of fee-shifting provisions in corporate bylaws.

In Chen, Vice Chancellor Laster, applying the enhanced scrutiny standard of review at the summary judgment stage, held that directors and officers could be held personally liable for a breach of their fiduciary duty of loyalty if, in conducting and overseeing a sale process, they acted unreasonably and with an improper motive – i.e., if they allowed any interest other than the pursuit of the best price reasonably available to stockholders to influence their decision. Although the court concluded that there were triable issues of fact as to whether the defendant-directors in Chen had acted within the range of reasonableness in conducting the sale process, it held that the evidence was insufficient to support an inference that the directors had acted with an improper motive. Accordingly, the court dismissed plaintiffs’ process claims against the director-defendants, who were exculpated from liability for breaches of the duty of care, but allowed such claims to proceed against the officer-defendants, who were not. The Vice Chancellor also allowed plaintiffs’ disclosure claims to proceed against all defendants, finding that there was sufficient evidence to support the inference that the directors and officers were aware of certain facts, at the time they approved the proxy statement, that rendered statements contained therein materially false and misleading.

In ATP – a decision that has been viewed as potentially impacting the very nature of stockholder litigation in Delaware – the Supreme Court upheld the facial validity of a fee-shifting provision in a non-stock membership corporation’s bylaws. The Court unanimously found that a bylaw purporting to shift responsibility for all attorney’s fees in intra-corporate litigation to unsuccessful plaintiffs – i.e., who do not succeed on the merits – is facially valid under Delaware law if adopted for a proper corporate purpose. Although the decision is groundbreaking in the sense that it could theoretically shift the landscape of stockholder fiduciary litigation by altering the traditional risk calculus

1 87 A.3d 648 (Del. Ch. 2014). 2 C.A. No. 534, 2013, 2014 WL 1847446 (Del. May 8, 2014).

involved in commencing such litigation, as discussed below, several factors could serve to mitigate the long-term impact of the decision, including, most prominently, proposed legislation that would prohibit public stock corporations from enacting such fee-shifting provisions.

All of these developments are discussed in greater detail below, followed by synopses of other recent decisions issued by the Delaware courts across a broad range of corporate governance topics, including: alternative entities; appraisal proceedings; arbitrations; attorney’s fees; books and records actions; class actions; constitutional law; contract interpretation; corporate governance; fiduciary duties; indemnification and insurance; injunctions; jurisdiction; motions to dismiss; rights of first refusal; settlements; status quo orders; stay of proceedings; and various issues of Delaware practice and procedure.

Chen v. Howard-Anderson3

The Chen decision, issued on April 8, 2014, addresses important questions relating to the legal standards governing director and officer liability in connection with the process leading to a change in control transaction and the stockholder disclosures made in connection therewith. Most notably, Vice Chancellor Laster held in Chen that, in a case governed by enhanced scrutiny, directors could incur personal liability for breaching their duty of loyalty if it is established that the directors (a) acted unreasonably in conducting and overseeing a sale process and allowed an improper motive – i.e., any interest other than the pursuit of the best price reasonably available – to influence their decisions, and/or (b) were aware of facts that rendered statements contained in the company’s proxy statement materially false or misleading. In so holding, the Vice Chancellor expressly rejected the defendants’ argument that, under the Delaware Supreme Court’s decision in Lyondell Chemical Co. v. Ryan,4 bad faith, for purposes of establishing a breach of the duty of loyalty in this context, could be established only where the plaintiffs demonstrated that the directors “utterly failed to attempt to obtain the best sale price.” Citing the high court’s 2006 decision in In re Walt Disney,5 Vice Chancellor Laster explained that there are other theories of bad faith recognized under Delaware law, including “where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation.”

3 87 A.3d 648 (Del. Ch. 2014). 4 970 A.2d 235 (Del. 2009). 5 906 A.2d 27 (Del. 2006).

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Although the court concluded that the record before it in Chen supported the inference that certain of the directors’ decisions during the sales process fell outside the range of reasonableness by unduly favoring the ultimate acquirer over other bidders, it held that the plaintiffs failed to develop sufficient evidence to support an inference that the directors acted with an improper motive. Accordingly, with respect to the plaintiffs’ process claims, the court granted summary judgment in favor of the independent director-defendants, who were insulated from liability for breaches of the duty of care by the exculpation provision in the company’s charter, but allowed such claims to proceed against the two officer-defendants who could not invoke the exculpation provision. The court, however, allowed plaintiffs’ disclosure claims to proceed against all defendants, holding that the record supported an inference that the directors and officers of the target company, Occam Networks, Inc. (“Occam”), knew about the alleged “disclosure problems” in the company’s proxy statement before approving it. As discussed below, the decision reinforces the importance of promoting a level playing field amongst potential bidders in a sale process and the need for directors to take reasonable steps to ensure that proxy disclosures are not false and misleading.

Background

Occam’s Sale Process

Early in 2009, Occam, a supplier of products to the broadband access market, retained Jefferies and Company, Inc. (“Jefferies”) to advise it on strategic alternatives and, around the same time, contacted Calix, Inc., a potential strategic bidder, about a potential transaction between the two companies. In July 2009, Adtran, Inc. (“Adtran”), another broadband access company, reached out to Occam’s president and CEO, Robert Howard-Anderson, to discuss a potential business combination. Howard-Anderson did not take up Adtran’s offer to visit its headquarters or sign Adtran’s non-disclosure agreement until approximately five months later.6

In late 2009 and early 2010, Occam’s board began contacting other prospective acquisition candidates as well. When, as part of this process, Adtran sought revenue projections from Occam for use in its internal modeling, Occam responded that Adtran should use publicly available projections. Shortly thereafter, Occam prepared a series of internal revenue projections for 2010, 2011 and 2012 that exceeded publicly available projections. By June 2010, Calix and Adtran had both

6 Id. at 654-55, 658.

put forward proposals. Calix’s initial term sheet of May 2010 valued Occam at $7.02 per share, although an internal presentation suggested that it was willing to pay significantly more. By June, Calix had increased the aggregate merger consideration that it was willing to offer in a mixed stock and cash deal to $171.1 million, or $7.72 per share. Meanwhile, also in June, Adtran sent a letter of intent proposing an all-cash offer at a 30-35% premium to Occam’s then trading price, representing a premium of approximately 11% over Calix’s bid.7

At a meeting in June 2010, the Occam board considered the company’s strategic alternatives, principally including the proposed cash-and-stock merger with Calix, an all-cash sale to Adtran, or remaining independent with or without a possible acquisition of a third entity, Keymile International GmbH (“Keymile”). A presentation to the Board by Jefferies at this time used publicly-available revenue forecasts, rather than Occam’s higher internal forecasts.8

The 24-Hour Market Check And Deadline

On June 30, 2010 Occam’s board instructed Howard-Anderson and Jefferies to give Adtran a 24-hour deadline to make a bid. Adtran declined to bid within this timeframe, which Adtran’s CFO described as “a 24-hour gun to our head.” The board also instructed Jefferies to conduct a 24-hour market check. On July 1, 2010 – the Thursday before the July 4 weekend – Jefferies sent emails to seven potential buyers, not mentioning Occam by name. Each email imposed a 24-hour deadline. Despite the ambiguity of the emails, five potential buyers replied expressing interest but stating that the timeframe was too short to make a meaningful bid. Neither Occam nor Jefferies followed up with any of those potentially interested bidders.9

The Occam-Calix Merger

On July 2, 2010, Occam’s board authorized exclusive negotiations with Calix. When the exclusivity agreement expired, Occam extended it without contacting Adtran or any other potential partners, and without seeking to use Occam’s improved performance in the interim to renegotiate the price. Around this time, Occam for the first time provided its internal projections for 2010-2012 to Jefferies, and it provided projections for 2010 and 2011 to Calix. On September 15, 2010, Jefferies prepared a fairness opinion stating that a merger between Occam and Calix was “fair, from a financial point of view,” and that it had reviewed projections for 2010 and 2011 only, “having

7 Id. at 657-60.8 Id. at 660. 9 Id. at 660-61, 675.

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been advised by management of [Occam] that it did not prepare any financial forecasts beyond such period.” As the court later noted, this statement was contrary to the evidence since Occam had prepared, and Jefferies had received, 2012 projections. The merger between Occam and Calix was announced on September 16, 2010 and called for Occam’s stockholders to receive $3.83 in cash and 0.2925 shares of Calix common stock. The aggregate value of the consideration was $7.75 per share, a premium of 60% over Occam’s trading price at the time of approval.10

Prior Proceedings In The Court Of Chancery

On October 6, 2010 the plaintiffs – stockholders holding approximately 19% of Occam’s common stock – filed suit alleging that Occam’s directors and officers breached their fiduciary duties by (i) making decisions during the merger process that fell outside the range of reasonableness, and (ii) issuing a proxy statement that contained materially misleading disclosures and material omissions. The Court of Chancery issued a preliminary injunction blocking a stockholder vote until corrective disclosures were made on January 24, 2011. Occam made the required disclosures and its stockholders approved the merger on February 22, 2011, with approximately 50.5% of non-obligated shares voting in favor. On January 6, 2012, the Court of Chancery certified a non-opt out class comprised of all the unaffiliated shares.11

During fact discovery, the parties took over 20 depositions and exchanged over 60,000 pages of documents. After discovery closed, the Occam defendants moved for summary judgment, arguing that (i) they did not breach their fiduciary duties and, (ii) in any event, the evidence at most supported a breach of the duty of care for which they were shielded from liability by an exculpatory provision in Occam’s certificate of incorporation.12

The Court’s Analysis

In a 78-page decision issued on April 8, 2014, Vice Chancellor Laster held that the directors and officers of Occam acted outside the range of reasonableness in conducting the process that ultimately led to the merger with Calix, but that the company’s outside directors were shielded from liability for breaches of the duty of care by an exculpatory provision in Occam’s certificate of incorporation. The court, however, allowed the process claims to proceed to trial against the two

10 Id. at 662-64. 11 Id. at 664, 652. 12 Id. at 664-65, 653.

officer-defendants, who could not avail themselves of the exculpatory provision, and allowed the plaintiffs’ disclosure claims to proceed against all defendants.

Standard Of Review

As an initial matter, the Vice Chancellor distinguished between the standard of conduct and the standard of review in considering the fiduciary duties of directors. The standard of conduct, Vice Chancellor Laster explained, is what directors are expected to do and is defined by the duties of loyalty and care. The standard of review, by comparison, is the test that a court applies when evaluating whether directors have met the standard of conduct. The court briefly outlined Delaware’s three tiers of review – the business judgment rule, enhanced scrutiny, and entire fairness – and observed that under each test, the standard of review is more forgiving of directors and more onerous for stockholder plaintiffs than the standard of conduct.13

The court held that enhanced scrutiny was the appropriate standard of review for the Occam-Calix merger because it was a mixed cash-and-stock transaction. In so holding, the Vice Chancellor rejected the defendants’ argument that the business judgment rule should apply because the transaction had already closed, explaining that “[t]he specter that potential context-dependent or situationally specific conflicts may have undermined a board’s decision does not dissipate just because a transaction has closed.” The court did, however, suggest that a fully informed, non-coerced stockholder vote could affect the standard of review for a sale process challenge, but noted that this was not an argument that the defendants had raised.14

Vice Chancellor Laster also rejected the plaintiffs’ argument that the standard of review should be escalated to the “entire fairness” standard because, plaintiffs argued, a majority of the directors were interested or not independent. As the court explained, although the four outside directors of Occam held dual or multiple fiduciary duties, the interests of the beneficiaries of those duties were aligned with those of Occam’s stockholders and there was, accordingly, no conflict of interest. Only Occam’s CEO, Howard-Anderson, was interested in the Calix merger because he received financial benefits that were not shared with the stockholders, including cash severance and other benefits from the change of control.15

13 Id. at 666-67. 14 Id. at 667-69.15 Id. at 669-71.

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Application Of Enhanced Scrutiny To The Sale Process

Having determined that enhanced scrutiny was the appropriate standard of review, the court went on to explain that the key inquiry was whether the defendant fiduciaries had “act[ed] reasonably to seek the transaction offering the best value reasonably available to the stockholders, which could be remaining independent and not engaging in any transaction at all.” The key metric under enhanced scrutiny, the Vice Chancellor explained, is reasonableness, but is not to be confused with the rationality standard:

Unlike the bare rationality standard applicable to garden-variety decisions subject to the business judgment rule, the Revlon standard contemplates a judicial examination of the reasonableness of the board’s decision-making process. Although linguistically not obvious, this reasonableness review is more searching than rationality review, and there is less tolerance for slack by the directors.16

To be sure, Vice Chancellor explained, this does not mean that a court may substitute its own business judgment for that of the directors, but only that it should “determine if the directors’ decision was, on balance, within a range of reasonableness.”17 In the mergers and acquisitions context, the court stressed, “[a]ny favoritism [directors] show toward particular bidders must be justified solely by reference to the objective of maximizing the price the stockholders receive for their shares.”18 Applying this standard, the Vice-Chancellor determined that – at least at the summary judgment stage – the record supported an inference that the board’s actions fell outside the range of reasonableness in favoring the sale to Calix over other alternatives that may have generated greater value.19

The court pointed to the contrast in Occam’s dealings with Calix, on the one hand, and Adtran, on the other, as evidencing this favoritism. Occam initiated and maintained contact directly with Calix, quickly signed a non-disclosure agreement with Calix, engaged in minimal negotiations over Calix’s term sheet, and quickly agreed to, and then readily extended, exclusivity. By contrast, Occam did not take up Adtran’s inbound offer to discuss strategic alternatives for approximately five months, did not sign Adtran’s non-disclosure agreement for the same period, and delegated Jefferies to deal with Adtran. Viewing the evidence in the light most favorable to the plaintiffs,

16 Id. at 673 (quoting In re Netsmart Techs., Inc. S’holder Litig., 924 A.2d 171, 192 (Del. Ch. 2007)).17 Id. at 673 (quoting Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 45 (Del.

1994)).18 Id. at 674 (quoting In re Topps Co. S’holder Litig., 926 A.2d 58, 64 (Del. Ch. 2007)).19 Id. at 674-75.

the Vice Chancellor concluded that it supported the inference that Occam and its directors were unreceptive to a transaction with Adtran, despite the fact that Adtran proposed an all-cash offer at a premium of approximately 11% over the Calix offer. The court stressed that the defendants failed to identify a stockholder-motivated reason for this apparent favoritism that would justify their actions at the summary judgment stage.20

The court was also obviously concerned that Occam did not vigorously pursue other logical bidders. Most notably in this respect, the court found that the 24-hour market check – for which the emails went out on the Thursday before July 4th weekend and imposed a 24-hour deadline – fell outside the range of reasonableness. Even though five of the seven recipients expressed some interest, while stating that the timeframe was too short for a meaningful response, Occam and its advisors did not follow up with any of them.21

The Vice Chancellor, of course, cautioned that he was making no final determinations on these issues, but rather, in the context of a summary judgment determination, was required to resolve all conflicts in favor of the non-moving plaintiffs, even though there was competing evidence to support the reasonableness of the board’s decisions.22

Bad Faith, Lyondell, And The Exculpatory Provision

Occam’s certificate of incorporation contained an exculpatory provision shielding its directors from liability for breaches of fiduciary duty. Under Section 102(b)(7) of the Delaware General Corporate Law (“DGCL”), this provision eliminates director liability for duty of care violations but does not exculpate breaches of the duty of loyalty or acts or omissions made not in good faith. To be covered, therefore, the Occam defendants had to establish that the claims against them implicated, at most, a violation of the duty of care. Relying on the standard articulated in Lyondell for bad faith failure to comply with Revlon duties, the directors argued that they were entitled to summary judgment unless the plaintiffs could show that they had “utterly failed” to attempt to obtain the best sale price.23

The Vice Chancellor rejected that argument, holding that Lyondell’s “utterly failed” standard did not apply to the type of bad faith alleged by the plaintiffs in Chen. Lyondell, the court explained, applies only where the type of bad faith alleged is that a director “intentionally fail[ed] to

20 Id. at 674-75.21 Id. at 675. 22 Id. 23 Id. at 676-77; 970 A.2d 235 (Del. 2009).

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act in the face of a known duty to act, demonstrating a conscious disregard for his duties.” In Lyondell, the issue was whether directors had knowingly and completely failed to undertake their Revlon duties and “utterly failed to attempt” to obtain the best sale price. Vice Chancellor Laster explained that there are other ways in which a fiduciary can act in bad faith under Delaware law, and that Lyondell itself acknowledged such possibilities.24

The plaintiffs’ claims in Chen were premised on a different line of Delaware precedent, holding that a fiduciary fails to act in good faith when he intentionally acts with a purpose other than that of advancing the best interests of the corporation. Under this theory, the plaintiffs were required to show that the Occam directors’ decisions fell outside the range of reasonableness based on motivations other than the pursuit of the best value reasonably available. On reviewing the record, the Vice Chancellor concluded that the evidence did not support an inference that the directors, a majority of which he had already determined were independent and disinterested, had acted for an improper motive. Accordingly, even assuming that certain of their actions and decisions fell outside the range of reasonableness, the outside directors would be entitled to exculpation for breaches of the duty of care.25

Howard-Anderson and Occam’s CFO, on the other hand, were not protected from liability by the exculpatory provision, because DGCL § 102(b)(7) does not authorize exculpation for officers.26

Disclosure Claims

In addition to challenging the process that led to the transaction, the plaintiffs in Chen also alleged that the disclosures in Occam’s proxy statement were materially false and misleading. In seeking summary judgment, the Occam defendants sought a determination as a matter of law that the disclosures were accurate and that any omitted information was immaterial. Considering the evidence in the light most favorable to plaintiffs, the court concluded that there were triable issues of fact relating both to whether Occam’s proxy statement contained material misstatements or omissions and, if so, whether such deficiencies would constitute a breach of the duty of care or a breach of the duty of loyalty on the part of the company’s directors. Accordingly, the court declined to grant summary judgment on the plaintiffs’ disclosure claims.27

24 Chen, 87 A.3d at 680-83.25 Id. at 684-86.26 Id. at 686-87. 27 Id. at 687-91.

The plaintiffs’ lead disclosure claim was that Occam’s internal 2012 revenue projections were material and should have been disclosed in the proxy statement. The court noted that reliable management projections are of obvious materiality in a cash-out merger, because “[a]fter all, the key issue for the stockholders is whether accepting the merger price is a good deal in comparison with remaining a shareholder. . .” The plaintiffs also alleged that the proxy statement misleadingly characterized Occam’s 2011 projections as having been prepared on a stand-alone basis without regard to the projected merger with Calix. The court cited evidence that the projections had been reduced in anticipation of the merger and cautioned “[i]n addition to the traditional duty to disclose all facts material to the proffered transaction, directors are under a fiduciary obligation to avoid misleading partial disclosures.” The plaintiffs also alleged that the Jefferies fairness opinion falsely described the information it was given by Occam – stating that it had been told by Occam’s management that the company had not prepared financial forecasts beyond 2011. The court noted that Occam’s CEO and CFO had both reviewed projections for 2012, and that Jefferies had been provided with 2012 projections.28

Finally, the plaintiffs argued that that the proxy statement offered a misleading description of the sale process. The Vice Chancellor noted that plaintiffs had amassed “extensive evidence indicating that the background section more closely resembled a sales document than a fair and balanced factual description,” which he found “particularly troubling because the defendants asked the court to take judicial notice of the contents of the Proxy Statement and rely upon its factual accuracy both for purposes of a motion to dismiss and in connection with the preliminary injunction hearing.”29

Noting that the duty of disclosure “is not an independent duty, but derives from the duties of care and loyalty,” the court also declined to hold that the defendants were protected from liability by the exculpatory provision, because it was not clear at this stage whether the disclosure violations in the proxy statement resulted from a breach of the duty of loyalty or the duty of care. There was evidence that the directors were in a position to review and correct misstatements and omissions in the disclosures. Finally, the court held that damages could be awarded using a quasi-appraisal measure for a breach of the duty of disclosure, notwithstanding the fact that the merger had closed.30

28 Id. 29 Id. at 690.30 Id. at 691-93.

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Takeaways

First, the opinion is notable for its explication – and arguable expansion – of what may be deemed bad faith in relation to a board’s duty of loyalty in a sale transaction subject to enhanced scrutiny. Chen holds that bad faith for these purposes is not limited to Lyondell’s “utter disregard” standard, but rather also exists in situations where a board conducting a sale process was motivated by anything other than the pursuit of the best value reasonably available to stockholders.

Second, and relatedly, the court’s analysis sounds a cautionary note to boards and practitioners about certain pitfalls to avoid in conducting a sale. Most notably, barring some compelling justification geared towards maximizing the value that stockholders will receive, boards should treat potential bidders equitably during the sale process in order to avoid the appearance of favoritism. Any favoritism must be justified solely by reference to the objective of maximizing price for the stockholders. In this regard, boards should take into account the nature and timing of its interactions with bidders and, in conducting a market check, should make sure that potential bidders are given a reasonable time to provide a meaningful response. As Vice Chancellor Laster held in Chen, arbitrary deadlines that require a candidate to bid in an unreasonably short time period are likely to fall outside the range of reasonableness.

Third, the opinion contains a thoughtful and insightful discussion of the standard of review governing merger challenges. The Vice Chancellor rejected the argument that the business judgment standard should be applied simply because the transaction had already closed, noting that the key concern – that improper considerations may have undermined a board’s decision – does not dissipate just because a transaction has closed. Nevertheless, although the court affirmed that enhanced scrutiny is the appropriate standard in a challenged mixed cash and stock sale, it suggested in dicta that a “fully informed, non-coerced stockholder vote” could lower the standard to that of the business judgment rule.31 This perhaps hints at a future direction for the court, and also highlights the importance of full and fair disclosures in the proxy statement – another takeaway from the case noted immediately below.

Finally, the opinion serves as another reminder that directors are under an obligation to review the disclosures in the company’s proxy statement and to correct any material misstatements or omissions. Chen raises the

31 Id. at 669.

possibility that directors may be held liable for breaching their duty of loyalty – even after the transaction has closed – if they were aware of facts that rendered the proxy statement materially misleading or inaccurate, with the damages in such circumstances determined on a quasi-appraisal basis. Directors should, accordingly, review the disclosures in the proxy statement to ensure, to the best of their knowledge, that all material information is disclosed, that the sales process is accurately depicted, and that the disclosures are otherwise complete and accurate.

ATP Tour, Inc. v. Deutscher Tennis Bund32

In a May 8, 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), the Delaware Supreme Court, sitting en banc, unanimously upheld the facial validity of a non-stock corporation’s bylaw that purported to shift responsibility for all attorney’s fees in intra-corporate litigation to unsuccessful plaintiffs (i.e., those who do not prevail on the merits). Responding to certified questions from the Delaware federal district court, the Court found that a fee-shifting provision in a non-stock corporation’s bylaws is facially valid under Delaware law if adopted for a proper (i.e., not inequitable) corporate purpose, and that aiming to deter litigation is not, a fortiori, improper. The Court likewise held that, if otherwise valid, such a bylaw would be enforceable even vis-à-vis members whose affiliations preceded the bylaw provision’s adoption.

On the surface, the ATP ruling has the potential to shift the landscape of stockholder fiduciary duty litigation by fundamentally altering the traditional risk calculus and incentive structure for representative plaintiffs and their counsel, which have long included the prospect of recovering their own attorney’s fees – often irrespective of the ultimate outcome of a dispute. Yet, as discussed below, several factors could serve to mitigate the decision’s long-term impact, from political dynamics to interpretive ambiguities to factual distinctions in future cases, and, for the time being, there remain several unknowns about its practical ramifications.

Background

The underlying litigation arose from the following facts: ATP Tour, Inc. (“ATP”) is a Delaware non-stock membership corporation that operates an international professional men’s tennis tour. Its members include both professional tennis player and entities that own and operate tennis tournaments.

32 C.A. No. 534, 2013, 2014 WL 1847446 (Del. May 8, 2014).

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In 2006, the ATP board of directors amended its bylaws to include a fee-shifting provision stating that:

In the event that (i) any [current or prior member or Owner … (“Claiming Party”)] initiates or asserts any [claim or counterclaim (“Claim”)] … against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party … does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.33

The following year, ATP’s board voted to change the tour schedule and format, thereby downgrading two of its entity members (Deutscher Tennis Bund and Qatar Tennis Federation, together, the “Federations”) from the highest tier of tournaments to the second highest tier. Displeased with the amendments, the Federations filed suit against ATP and certain of its directors in the United States District Court for the District of Delaware, alleging federal antitrust claims and state-law fiduciary duty claims. After trial, the district court granted the director defendants’ motion for judgment as a matter of law on the fiduciary duty claims and the antitrust claims asserted against them, and found in favor of ATP on the balance of the antitrust claims. The Federations lost on all fronts.

ATP then moved to recover its fees under Rule 54 of the Federal Rules of Civil Procedure, relying on the fee-shifting provision in its bylaws. The district court denied the motion on the ground that the bylaw provision was antithetical to the policies underlying the federal antitrust laws and, accordingly, that its enforcement was preempted by federal law in this circumstance.34 On appeal, the Third Circuit vacated the district court’s order, finding that it should have determined, as a threshold matter, whether the fee-shifting bylaw was enforceable as a matter of Delaware law prior to addressing the preemption issue. On remand, the district court determined that the enforceability of a fee-shifting bylaw presented novel issues under Delaware law, and thus certified four questions to the Delaware Supreme Court for consideration:

33 ATP, 2014 WL 1847446, at *1.34 Id. at *2 (citing Deutscher Tennis Bund v. ATP Tour Inc., 480 Fed. App’x. 124, 126 (3d. Cir.

2012)).

΅ whether the board of a Delaware non-stock corporation may lawfully adopt a bylaw that, in the context of intra-corporate litigation, obligates the claimant to pay for all litigation fees and costs in the event the claimant does not substantially prevail on the merits;

΅ whether such a bylaw, even if it might be unenforceable against a partially-successful plaintiff, could nonetheless be lawfully enforced against a plaintiff who is wholly unsuccessful (and obtains no relief) in the litigation;

΅ whether such a bylaw, if otherwise enforceable, would become unenforceable if adopted for the purpose of deterring members from bringing litigation to challenge other corporate actions; and

΅ whether such a bylaw, if otherwise valid, could be enforced against members who joined the corporation before the bylaw was adopted.35

The Court’s Analysis

Fee-Shifting Bylaws Are Generally Enforceable Under Delaware Law, Even As Against Preexisting Members

The Court first recited the bedrock principle that, under Delaware law, a corporation’s bylaws are presumed valid so long as they are consistent with the DGCL and the company’s certificate of incorporation and not otherwise prohibited. Accordingly, courts will construe them “in a manner consistent with the law rather than strike [them] down.”36

Against that backdrop, the Court held that neither the DGCL nor any other Delaware statute forbids the enactment of fee-shifting bylaws. The Court reasoned that a fee-shifting bylaw that allocates risk among parties in intra-corporation litigation would satisfy the DGCL because it “relates to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.”37 The Court also found fee-shifting bylaws permissible under Delaware common law, notwithstanding that Delaware follows the “American Rule,” pursuant to which each litigant is responsible for their own attorney’s fees and costs regardless of the outcome of a dispute. In particular, since bylaws are treated as contracts among a corporation’s stockholders, and it is “settled that

35 Id. at *2-3.36 Id. at *3 (citing Frantz Mfg. v. EAC Indus., 501 A.2d 401, 407 (Del. 1985)).37 Id. (citing 8 Del. C. §109(b)).

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contracting parties may agree to modify the American Rule,”38 directors of Delaware corporations may permissibly shift fees through corporate bylaws.39

In addition, the Court found no analytical distinction, from a contractual perspective, between members who joined the corporation pre- and post-adoption of the fee-shifting bylaw, holding that the bylaw would be equally enforceable against both groups. As to preexisting members, the Court reasoned that the DGCL permits a corporation to confer upon its directors “the power to adopt, amend or repeal bylaws”40 and that “stockholders will be bound by bylaws adopted unilaterally by their boards.”41

Fee-Shifting Bylaws Would Be Unenforceable If Adopted For An Inequitable Purpose (Which Doesn’t Necessarily Include Deterring Litigation)

The Court explained that the determination of whether a specific bylaw is enforceable would be fact-specific and “depend[] on the manner in which it was adopted and the circumstances under which it was invoked.”42 To that end, it made clear that “[b]ylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose,”43 but noted that the intent to deter litigation is “not invariably an improper purpose.”44 The Court reasoned that fee-shifting provisions deter litigation by their very nature and thus an intent to deter litigation would not necessarily render the bylaw unenforceable.

Takeaways

On the heels of last year’s Boilermakers Local 154 Retirement Fund v. Chevron45 decision – in which the Court of Chancery sanctioned the use of so-called “exclusive forum” bylaws mandating that all intra-corporate disputes proceed in the Court of Chancery – the ATP case underscores the growing strategy among corporate boards to use bylaws in an effort manage the proliferation of stockholder litigation, which follows nearly every merger or other change-in-control transaction and often plays out in multiple forums despite nearly identical factual underpinnings.

38 Id. (citing Sternberg v. Nanticoke Mem’l Hosp., Inc., 62 A.3d 1212, 1218 (Del. 2013)). 39 For the same reasons, the Court confirmed, in response to the second certified question, that

an otherwise valid fee-shifting bylaw triggered by a plaintiff’s failure to achieve substantial success could, at a minimum, properly be applied to a plaintiff who received “no relief at all” in a litigation. Id. at *4.

40 Id. at *5 (citing 8 Del. C. §109(a)).41 Id., citing Boilermakers, 73 A.3d at 956. 42 Id. at *4. 43 Id. (citing Schnell v. Chris-Craft Indus., 285 A.2d 437 (Del. 1971)).44 Id. 45 73 A.3d 934 (Del. Ch. 2013).

Like the Chevron case, the ATP ruling has generated significant discourse and controversy among legal practitioners and in the media. But in contrast to Chevron, which, on balance, steers stockholder litigation toward (or limits it to) Delaware, the ATP ruling, if left undisturbed and interpreted broadly, could vastly reduce the incidence of intra-corporate litigation as a whole. For that reason, it was predictably met with swift and forceful resistance. On May 22, 2014, just two weeks after the opinion was issued, the Delaware Corporate Law Section of the Delaware State Bar Association proposed a legislative amendment prohibiting Delaware stock corporations from adopting fee-shifting provisions in their bylaws, and thus effectively limiting the holding of ATP to non-stock corporations. Supporters of the amendment argued, among other things, that requiring a stockholder to bear the costs in a losing lawsuit would chill the filing of meritorious suits and would weaken the limited liability protection granted to stockholders under Delaware corporate law. The amendment – dubbed Senate Bill 236 – was fast-tracked, with the Delaware General Assembly initially slated to vote on it by June 30, 2014 and, if adopted, an effective date of August 1, 2014.

Yet, like the ATP decision itself, Senate Bill 236 prompted considerable opposition. Most notably, the U.S. Chamber Institute for Legal Reform (an affiliate of the U.S. Chamber of Commerce) sent letters to Delaware senators urging them not to adopt Senate Bill 236 on the principal ground that the fee-shifting mechanism blessed in ATP gives corporations a powerful tool to protect stockholders against the extraordinary costs of unnecessary and duplicative strike suits, and thus outweighs the comparatively moderate risk (according to the Institute) of chilling meritorious stockholder actions. In response, Senate Bill 236 was withdrawn on June 18, 2014, and the Delaware Senate adopted a resolution to continue examining the issue of fee-shifting bylaws, postponing consideration of the bill until early 2015. In the meantime, the debate will persist, with advocates touting the need to protect stockholders’ ability to avoid monetary liability and prosecute viable corporate lawsuits and detractors characterizing Senate Bill 236 as a protectionist rejoinder designed, in part, to maintain a central pillar of Delaware jurisprudence and, in turn, to protect the economic interests of Delaware and its bar. Ultimately, the General Assembly will have to balance the potential for abuse in filing meritless and duplicative litigation with the chilling effect of deterring meritorious litigation.

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Meanwhile, even assuming Senate Bill 236 were scrapped in its entirety (which seems unlikely), ATP’s real world impact on stockholder litigation remains unclear for several reasons.

First, the Court was only deciding the facial validity of fee-shifting bylaws under Delaware law – not the actual bylaw challenged in ATP, which it indicated would “turn on the circumstances surrounding its adoption and use.” Indeed, “bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose.”46 Evaluating the propriety of fee-shifting bylaws will thus be a highly fact-dependent inquiry that will hinge on, inter alia, the language of the provision and the timing and purpose of its adoption. While the Court found that deterring litigation is not an improper purpose per se, one can certainly imagine a heavy dose of scrutiny from the Court of Chancery in assessing corporate motives in enacting bylaws that shift fees for the benefit of officers and directors who are the very parties being sued on the basis of their corporate positions.

Second, although nothing in the decision expressly limits its holding to non-stock membership corporations, the fact remains that the unusual corporate structure at issue might provide another vehicle through which ATP’s holding could effectively be confined to its facts. In that regard, applying ATP beyond its borders will generate a number of procedural issues, including how a fee-shifting bylaw like the one at issue would operate in the context of stockholder class actions, where a representative plaintiff purports to act on behalf of thousands of other stockholders – would unnamed class members who never participated in a suit share some responsibility for fees in the event of an unsuccessful action? If so, how would fees be allocated? Relatedly, it remains to be seen whether – and to what extent – a fee-shifting bylaw could properly be applied in derivative actions where the company is only a nominal party. The answers to these questions could materially broaden or restrict ATP’s impact going forward.

Third, the fact that fee-shifting bylaws are generally permissible from a legal perspective hardly ends the inquiry for public company boards of directors. Most notably, fee-shifting bylaw could garner significant backlash among various corporate constituencies, including proxy advisory firms, corporate governance advocates and activist investors, not to mention certain institutional investors. Those criticisms, in turn, could lead to “vote no” campaigns,

46 Id. (citing Schnell, 285 A.2d 437).

stockholder proposals designed to repeal the bylaws, and other activist responses that could adversely affect the corporation and/or its stockholders.

In sum, the propriety of fee-shifting bylaws in the public company sphere remains in flux, and corporate boards (and practitioners) should both closely monitor the legislative developments certain to unfold in the coming months and carefully consider the potential benefits and risks discussed above (including, among other things, the makeup of their stockholder base) in contemplating the wisdom of implementing such a provision.

Additional Developments In Delaware Business And Securities LawBeyond those topics addressed above, the Delaware courts also issued noteworthy decisions in the following areas of law during the past quarter.

Alternative Entities

Contract Interpretation

In Caiola Family Trust v. Dunes Point West Associates,47 Vice Chancellor Parsons, in a memorandum opinion, granted partial summary judgment in favor of defendants in a dispute arising out of the management of a limited liability company created to operate an apartment complex. Plaintiffs, the non-managing members of the company, alleged that the defendant manager of the company improperly refused to comply with plaintiffs’ vote to replace the apartment complex’s property manager. The court, in rejecting plaintiffs’ claim, found that the relevant provision in the operating agreement did not, under its plain meaning, provide plaintiffs with the unilateral authority to compel defendants to replace the property manager. The court also noted that plaintiffs’ interpretation of the relevant provision conflicted with the “general management scheme and division of authority” between plaintiffs and defendants set forth in the operating agreement.

Corporate Expense Reimbursement

In Durham v. Grapetree, LLC,48 Vice Chancellor Glasscock, in a letter opinion, held that plaintiff, a member of a family-owned and operated limited liability company, was entitled to reimbursement for certain expenses he had incurred in managing the company’s properties despite failing to obtain approval from a majority of the company’s managing members pursuant to the company’s operating agreement.

47 C.A. No. 8028-VCP, 2014 WL 1813174 (Del. Ch. Apr. 30, 2014).48 C.A. No. 7325-VCG, 2014 WL 1980335 (Del. Ch. May 16, 2014).

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According to the court, defendant’s refusal to reimburse plaintiff was “incompatible with the course of dealing of the LLC.” Specifically, the court noted that: (i) certain managing members had obtained reimbursement of expenditures without formal approval; and (ii) the managing members had not consistently voted, or required a vote, to approve plaintiff’s prior reimbursement requests.

Dissolution

In In re Interstate General Media Holdings, LLC,49 Vice Chancellor Parsons, in a memorandum opinion, ordered the dissolution of Interstate General Media Holdings, LLC (“Interstate”) through a private auction held among Interstate’s members and a specific labor union eligible to partake in the sale. The parties did not dispute that judicial dissolution was necessary, agreeing that the managers of the LLC were deadlocked and that dissolution under Section 18-802 of the Delaware LLC Act was appropriate. However, the parties disagreed as to how the dissolution should be effectuated in order to maximize value. Petitioner argued that the LLC should be sold in an private auction among the LLC’s members and requested that the auction be structured as an “English-style,” open outcry auction. Respondent argued that the LLC should be sold in a public auction. The court noted that there is “no single blueprint” for maximizing the value of an entity through a sale, which is a fact-intensive inquiry. The court found no evidence that a public auction would maximize value, because there was no reasonable probability that a “serious bidder” would emerge other than the parties that would already participate in a private auction. Moreover, a private auction could be conducted more quickly and would be less expensive than a public auction. For all of these reasons, the court concluded that the value of Interstate would be maximized by a private, “English-style” open ascending auction.

Appraisal Proceedings

In Huff Fund Investment Partnership v. CKx, Inc.,50 Vice Chancellor Glasscock, in a letter opinion addressing “merger synergies” under Delaware appraisal law, declined to adjust the merger price in connection with the acquisition of CKx, Inc. by Apollo Global Management (“Apollo”). The court had previously relied on the merger price to determine fair value in this appraisal action but noted that certain price adjustments might be necessary to reflect the value of the company as a going concern. Here, the court addressed the open questions of whether

49 C.A. No. 9221-VCP, 2014 WL 1697030 (Del. Ch. Apr. 25, 2014).50 C.A. 6844-VCG, 2014 WL 5878807 (Del. Ch. May 19, 2014).

the merger price should be adjusted: (i) downward to exclude synergies Apollo sought to realize in the merger; or (ii) upward to account for the value of certain assets not reflected in the merger price. The court declined to make any adjustments, finding, as to the first question, that the record does not support a showing that Apollo formed its bid based on the belief that merger-specific cost-savings would be realized. In connection with the second question, the court found that the market had the opportunity to value the “unexploited revenue opportunities” at issue and that the record did not support a conclusion that a higher bidder would have emerged. The court reiterated that the sales price was the best indicator of fair value and that neither party had demonstrated otherwise.

Arbitration

Arbitrability

In Riley v. Brocade Communications Systems, Inc.,51 Vice Chancellor Noble – in a letter opinion noteworthy for explaining how to apply the Willie Gary52 test to whether a claim for advancement, and its arbitrability, should be decided by an arbitrator – granted defendant Brocade Communications Systems, Inc.’s (“Brocade”) motion to stay, in favor of arbitration, plaintiff’s action for advancement of attorney’s fees and expenses incurred in defending against criminal allegations of insider trading and misappropriation of defendant’s confidential information. Brocade argued that plaintiff’s action was covered by a release executed by the parties that contained an arbitration provision. The court, applying the Willie Gary test, determined that the parties had “clearly and unmistakably” intended to submit to an arbitrator “any matter” concerning the release, including its arbitrability.

Reviewability of Arbitration Award

In SPX Corp. v. Garda USA, Inc.,53 the Delaware Supreme Court, sitting en banc, reversed the Chancery Court’s decision to vacate an arbitration award, finding that the arbitrator had not manifestly disregarded the law. In connection with a post-closing dispute over an adjustment to a purchase price, the arbitrator decided, without any analysis, that no adjustment was needed. The Chancery Court vacated the award, finding that the arbitrator did not follow the relevant provisions of the parties’ share purchase agreement. The Supreme Court noted that a review of an arbitration award “is one of the narrowest standards of judicial review in all of American

51 C.A. No. 9486-VCN, 2014 WL 1813285 (Del. Ch. May 6, 2014).52 James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78 (Del. 2006).53 No. 332, 2013, 2014 WL 2708631 (Del. Jun. 16, 2014).

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jurisprudence” and that vacatur is only authorized where the arbitrator acts in “manifest disregard” of the law by consciously choosing to ignore a legal principle or contract term that is so clear as to not be subject to reasonable debate. The Court found that while the arbitrator’s interpretation of the share purchase agreement may have been wrong, it was not without basis in the contract. As such, the Court reinstated the award.

Attorney’s Fees

In Crothall v. Zimmerman, et al.,54 the Delaware Supreme Court reversed the Court of Chancery’s order awarding attorney’s fees to plaintiff’s counsel. The appeal arose from a derivative action in which plaintiff, prior to issuance of final judgment, withdrew his claim and sold all of his units in the company. The lower court dismissed the action after plaintiff’s withdrawal but, in what the Supreme Court characterized as an “odd development,” permitted plaintiff’s counsel to intervene in the action to pursue an attorney’s fee award for allegedly achieving a “corporate benefit” during his representation of plaintiff. The lower court ultimately awarded plaintiff’s counsel $300,000 in fees. The Supreme Court, in reversing the fee award, held that because plaintiff mooted his case by abandoning his claims and selling his units, plaintiff rendered “any rulings he had obtained incapable of being turned into an appealable judgment.” According to the Supreme Court, plaintiff thus failed to “obtain an authoritative ruling of the Court of Chancery” that could “create a corporate benefit” and thus serve as the basis for an attorney’s fees award.

In Raul v. Astoria Financial Corp.,55 Vice Chancellor Glasscock, in a memorandum opinion, granted defendant’s motion to dismiss and denied plaintiff’s request for attorney’s fees and expenses in connection with plaintiff’s investigation of and demand on the board of Astoria Financial Corporation (“Astoria”). Plaintiff, a stockholder of Astoria, asserted claims for breach of fiduciary duty based on Astoria’s alleged failure to disclose information required to be disclosed under Dodd-Frank. The court examined whether plaintiff was entitled to attorney’s fees under the corporate benefit doctrine – if plaintiff’s claims would survive a motion to dismiss and “a material corporate benefit resulted, the attorney’s fees incurred by the stockholder may be recovered despite the fact that no suit was ever filed.” However, the court did not find any merit to plaintiff’s breach of fiduciary duty claim and denied plaintiff’s request for fees and expenses.

54 No. 608, 2013, 2014 WL 2580658 (Del. Jun. 9, 2014).55 C.A. No. 9169-VCG, (Del. Ch. June 20, 2014).

In Smith v. Fidelity Mgmt. & Research Co.,56 Vice Chancellor Laster, in a memorandum opinion, provided guidance for how to fairly calculate attorney’s fees in the face of potential joint causes for a favorable settlement. The court granted plaintiffs’ fee request, finding that defendants – significant Revlon, Inc. (“Revlon”) stockholders affiliated with Fidelity financial services group (collectively, “Fidelity”) – had benefitted from plaintiffs’ stockholder class action against Revlon. After plaintiffs began pursuing their action against Revlon but before plaintiffs settled on behalf of the class, Fidelity settled their related claims against Revlon for an amount that included a contingent payment based on any additional amount that plaintiffs obtained for the remainder of the class. In granting plaintiffs’ request for fees, the court concluded, among other things, that plaintiffs’ counsel’s prosecution of the underlying action against Revlon played a “contributory role” in generating increased consideration obtained by Fidelity in its settlement and was the “sole and direct cause” of Fidelity receiving the contingent payment. The court awarded plaintiffs’ counsel nearly four million in fees for the benefit conferred on Fidelity.

In Wayman Fire Protection, Inc. v. Premium Fire & Security, LLC,57 Vice Chancellor Parsons, in a letter opinion that appears to be the first time a Delaware court has applied the fee-shifting provisions of the Delaware Misuse of Computer System Information Act, granted defendants’ request for a reduction in the amount of attorney’s fees it had been ordered to pay. In an earlier post-trial opinion, the court had found defendants jointly and severally liable under that Act for claims relating to a former employee taking data from his former employer’s computer and using it for the benefit of his new competing employer and had awarded plaintiff 35 percent of the attorney’s fees and expenses it reasonably incurred in the litigation. Plaintiff submitted its proposed order for damages and attorney’s fees, and defendants sought a reduction of the fee amount, arguing that the proposed fee award was disproportionate to the actual amount of money at issue. The court agreed, finding that the fee request of over four times the amount of damages was disproportionate to the result plaintiff achieved after trial. Moreover, the court found that plaintiff’s litigation strategy, pursuant to which plaintiff alleged a number of baseless claims, militated against granting plaintiff the large award requested.

56 C.A. No. 8066-VCL, 2014 WL 1599935 (Del. Ch. Apr. 16, 2014).57 C.A. No. 7866-VCP (Del. Ch. Jun. 27, 2014).

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Books and Records Actions

In Hallandale Beach Police Officers and Firefighters’ Personnel Retirement Fund v. Lululemon Athletica Inc.,58 and Laborers’ District Council Construction Industry Pension Fund v. Lululemon Athletica Inc.,59 Vice Chancellor Parsons, in a transcript ruling, rejected plaintiffs’ demand under 8 Del C. § 220 to inspect the records of Lululemon Athletica, Inc. (“Lululemon”) relating to the company’s amended executive bonus plan, finding that plaintiffs failed to articulate a credible basis for inferring potential wrongdoing in connection with the board’s approval of the plan. The court did, however, grant plaintiffs’ request to inspect company records relating to a stock trade made on behalf of Lululemon’s chairman that occurred after the company’s CEO informed the board of her plans to resign but before the resignation was publicly announced. The court reasoned that this stock sale created a credible inference that the chairman or the company might be involved in wrongdoing.

In The Ravenswood Investment Company, LP v. Winmill & Co. Inc., et al.,60 Vice Chancellor Noble, in a letter opinion noteworthy for rejecting a “no trade” condition on inspecting a company’s records, granted plaintiff’s inspection request under 8 Del. C. § 220. The court only considered plaintiff’s narrow request for the company’s financial statements, as plaintiff had received access to most of the other records it requested. Defendant argued that it should only be required to turn over the nonpublic financial records if plaintiff agreed not to trade the company’s stock as a condition to its inspection of the financial statements – reasoning that this condition was required to protect against possible tipper liability. The court rejected this argument, finding no legal support for such a condition on a stockholder’s lawful right to inspect the books and records in connection with its proper purpose to value the company’s stock. The valuation of stock has been found to be a proper purpose for a Section 220 request, and any secondary purpose for the request is irrelevant once a proper purpose has been established. The court declined to order defendant to pay plaintiff’s attorney’s fees, finding that defendants’ alleged sanctionable conduct did not rise to the requisite level of bad faith under the bad faith exception to the American Rule, which requires each party pay their own attorney’s fees.

58 C.A. No. 8522-VCP (Del. Ch. Apr. 2, 2014).59 C.A. No. 9039-VCP (Del. Ch. Apr. 2, 2014).60 C.A. No. 7048-VCN, 2014 WL 2445776 (Del. Ch. May 30, 2014).

Class Actions

Class Certification

In Allen v. El Paso Pipeline GP Company, L.L.C.,61 Vice Chancellor Laster, in a memorandum opinion, granted plaintiffs’ motion for class certification in an action arising out of defendant El Paso Pipeline Partners, L.P.’s (“El Paso”) acquisition of a 25 percent stake in Southern Natural Gas Co. from El Paso Corporation, the parent company of El Paso’s general partner. Plaintiffs challenged the transaction, claiming that defendants violated both their express contractual obligations and the implied covenant of good faith and fair dealing, or alternatively, aided and abetted those wrongful acts. Defendants argued that the class should not be certified because certain of plaintiff’s claims were derivative, and thus failed to satisfy Court of Chancery Rule 23(a). The court disagreed, reasoning that, under the Tooley62 test, plaintiffs’ claims were direct because: (i) plaintiffs alleged that they suffered injury to their own contractual rights; and (ii) any remedy obtained by plaintiffs would not necessarily flow back to the company.

Constitutional Law

Procedural Due Process

In Cohen v. State of Delaware,63 the Delaware Supreme Court affirmed the Court of Chancery’s rejection of appellants’ claims that they had been denied of their due process rights during several Chancery Court delinquency proceedings. The Delaware Insurance Commissioner found that appellant Jeffrey B. Cohen, the former CEO of Indemnity Insurance Corporation (“Indemnity”), committed fraud and petitioned the Chancery Court for a seizure order to prevent further depletion of Indemnity’s assets. Cohen engaged in a series of subsequent disruptive actions, and the Chancery Court issued a series of orders after a number of hearings to restrict Cohen’s behavior and impose sanctions upon him. Cohen alleged that he was deprived of due process during these proceedings, principally based on the fact that he had not received a transcript of an ex parte hearing that contained a reference to criminal contempt which would have allegedly motivated Cohen to attend a subsequent hearing – his absence from which resulted in a disadvantage to him in subsequent proceedings. The Court found that Cohen’s due process rights had not been violated, because Cohen received sufficient notice of the hearings and had a meaningful

61 Allen v. El Paso Pipeline, GP Co., LLC., 90 A.3d 1097 (Del. Ch. 2014).62 Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). 63 C.A. Nos. 545, 2013 and 621, 2013, 2014 WL 1389780 (Del. Apr. 9, 2014).

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opportunity to respond and to present evidence prior to the entry of the orders. The Court also denied co-appellant RBG Entertainment’s claim that its due process rights were violated when it was not provided with an opportunity to brief a renewed motion to intervene as its request for intervention did not deny that the fraud occurred, did not proffer evidence that Indemnity was not in a precarious financial situation and did not offer to provide financing to ensure that no harm would result from the delay if its request was granted.

Contract Interpretation

Breach of Contract

In Howard v. Spanish Broadcasting System, Inc.,64 Vice Chancellor Glasscock, in a memorandum opinion, denied defendant Spanish Broadcasting System, Inc.’s (“SBS”) motion to dismiss plaintiffs’ claim that SBS failed to satisfy its obligations in connection with the repurchase of plaintiffs’ preferred SBS stock. While SBS conceded that, under the applicable stock certificate, it was contractually obligated to determine whether the company had legally available funds to repurchase plaintiffs’ stock, it argued that plaintiffs had failed to adequately allege a breach of this obligation. The court disagreed, finding that because plaintiffs had alleged that SBS “failed to take any actions or explore any options that would have given it legally available funds” to repurchase the stock, plaintiffs had provided SBS with sufficient notice of their breach of contract claim.

Implied Covenant of Good Faith and Fair Dealing

In In re: El Paso Pipeline Partners L.P. Derivatives Litigation,65 Vice Chancellor Laster, in a memorandum opinion, granted defendants’ motion for summary judgment. Plaintiffs brought suit challenging a transaction through which El Paso Corporation sold certain assets to a limited partnership that it controlled. Plaintiffs alleged, among other things, that defendants violated their express contractual obligations and the implied covenant of good faith and fair dealing in connection with sale. The court first considered the breach of contract claim against the General Partner. Because the transaction involved a conflict of interest, the General Partner sought and received approval from the Conflicts Committee, which, under the terms of the partnership agreement, was required to approve the transaction in good faith. The court found that that the Conflicts Committee’s approval was made in subjective good faith and dismissed the breach of contract claim. The court then addressed

64 C.A. No. 9209-VCG (Del Ch. Ct. June 27, 2014).65 C.A. No. 7141-VCL, 2014 WL 2768782 (Del. Ch. Jun. 12, 2014).

plaintiffs’ claim that defendants violated the implied covenant of good faith and fair dealing and explained that the doctrine is one by which Delaware courts imply terms to fill gaps in the express provisions of an agreement. While the implied covenant is a mandatory, non-waivable aspect of every contract governed by Delaware law, where contractual provisions cover a particular issue, there are no gaps to fill and the implied covenant will not apply. Plaintiffs argued that the implied covenant required the General Partner to disclose material information to the Conflicts Committee, but the court disagreed as the partnership agreement expressly limited the General Partner’s fiduciary duty of disclosure. In addition, plaintiffs did not present any evidence to support their claim that the General Partner breached the implied covenant by intentionally misrepresenting facts to the Special Committee.

Interpretation

In Bear Stearns Mortgage Funding Trust 2007-AR2 v. EMC Mortgage, LLC,66 Vice Chancellor Laster issued an order denying the parties’ cross-motions for summary judgment. Plaintiff alleged that defendant breached certain loan representations and warranties in connection with a residential mortgage-backed security transaction. The parties moved for summary judgment as to the meaning of two warranties. In connection with the first warranty, both parties relied on proof of custom and usage to support their respective positions as to its meaning. The court found that rather than interpret the provision in the abstract, “the better course is to hold a trial to inquire into and develop the facts to clarify the relevant legal principles and their application” to the provision. The court found that the second warranty was ambiguous, and given the competing interpretations of the provision, the court would benefit from a full factual record before interpreting it post-trial. As such, the court denied the cross-motions for summary judgment.

In Caspian Alpha Long Credit Fund, L.P. v. G.S. Mezzanine Partners 2006, L.P.,67 the Delaware Supreme Court affirmed the Chancery Court’s order granting defendants’ motion to dismiss plaintiffs’ action arising out of allegedly improper amendments to an indenture. Plaintiffs argued that the indenture permitted them to sue their fellow noteholders for voting to approve amendments to the indenture that were unfavorable to plaintiffs. The Supreme Court, like the lower court, found that plaintiffs’ interpretation of the indenture was unreasonable. The Court reasoned that the provision at issue applied only in

66 C.A. No. 6861-VCL, 2014 WL 2469668 (Del. Ch. Jun. 2, 2014).67 No. 472, 2013, 2014 WL 2186958 (Del. May 22, 2014).

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situations where the noteholders approving the allegedly unfavorable amendments were acting in a representative capacity as fiduciaries for all noteholders. According to the Court, noteholders who simply vote on an amendment to an indenture, as defendants were alleged to have done here, are not exercising any fiduciary authority. The Supreme Court also noted that plaintiffs’ interpretation of the indenture could not be reconciled with several other indenture provisions.

Reformation

In Miller v. National Land Partners, LLC et al.,68 Vice Chancellor Glasscock, in a post-trial memorandum opinion, granted defendants’ request for reformation of two management agreements to include a fee provision that was inadvertently removed from the agreements due to a scrivener’s error. Plaintiff brought this action for declaratory judgment arguing that defendant Wilson, plaintiff’s former husband, made a fraudulent conveyance of approximately $5 million from the real estate development corporation that was jointly owned by plaintiff and Wilson. In plaintiff and Wilson’s divorce proceedings, Wilson was ordered to pay plaintiff $4.9 million. Shortly after the entry of that judgment (which has since been reversed), Wilson caused the corporation to pay approximately $5 million in management fees to its corporate partner. Defendants argued that this payment was required under the parties’ management agreements and that any omission of the fee provision requiring this payment was the result of a scrivener’s error. The court considered the parties’ previous agreements which contained the fee provision and the parties’ course of conduct and found that defendants’ proved by clear and convincing evidence that the fee provision was left out from the agreements due to a scrivener’s error. Therefore, the court dismissed plaintiff’s complaint and reformed the contract accordingly.

Ripeness

In Aviva Life & Annuity Co. v. American General Life Insurance Co.,69 Vice Chancellor Glasscock, in a memorandum opinion, granted defendants’ motion to dismiss, finding that plaintiff’s claim for declaratory judgment was not ripe for adjudication. Plaintiff sought a declaration that the changes made by defendant to plaintiff’s corporate-owned life insurance policy violated certain agreements between the parties. According to plaintiff, these changes would, in the future, have adverse tax implications under certain circumstances. The

68 C.A. No. 7977-VCG, 2014 WL 2601378 (Del. Ch. Jun. 11, 2014).69 C.A. No. 8414-VCG, 2014 WL 1677798 (Del. Ch. Apr. 29, 2014).

court, in concluding that plaintiff’s claim was not ripe for adjudication, reasoned that plaintiff was requesting that the court “wade into murky IRS waters to determine the necessity, or reasonableness” of a provision “which has never, and may never be triggered . . . .”

In XL Specialty Insurance Co. v. WMI Liquidating Trust,70 the Delaware Supreme Court reversed the Superior Court’s denial of a motion to dismiss, finding that a declaratory judgment action brought by a bankruptcy trust was not ripe. Washington Mutual, Inc.’s (“WMI”) Liquidating Trust (the “Trust”) sought a determination of whether D&O insurance policies cover future expenses and liabilities that might arise out of pre-bankruptcy wrongful acts allegedly committed by WMI’s directors and officers. Defendants argued that the Trust lacked standing to prosecute its coverage claims and that the dispute did not present a ripe “actual controversy” susceptible of adjudication. The Court agreed, explaining that Delaware courts only exercise jurisdiction over a case where the underlying controversy is ripe and will not render advisory or hypothetical opinions. Here, the Court found that the controversy was not ripe, because the Trust had not asserted any claims against the directors and officers and instead sought a judicial determination, that, if made, would be based on uncertain and hypothetical facts and that may never become necessary. The Court concluded that the Trust’s “desire to receive advice” is not a cognizable interest that justifies an exercise of jurisdiction. Because dismissal was appropriate on ripeness grounds, the Court did not reach the issue of standing.

Standing; Interpretation

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, et al.,71 Vice Chancellor Parsons, in a post-trial memorandum opinion, focused largely on standing and issues of contract interpretation and dismissed plaintiff’s breach of contract claims, finding that plaintiff was not a party to the agreement at issue and did not otherwise have standing to enforce the agreement. Plaintiff claimed that defendants breached a license agreement and that plaintiff was entitled to enforce the terms of the agreement by consenting to and “joining in” the licenses granted thereunder. The court, applying New York law, found that plaintiff had not “joined in” to the licensing agreement as a whole and only “joined in” to the license. The court noted that an arbitrator had already determined that plaintiff was not a party to the entire agreement. The court went on to analyze certain ambiguous provisions of the agreement,

70 C.A. No. N12C-10-087, 2014 WL 2199889 (Del. May 28, 2014).71 C.A. No. 5589-VCP (Del. Ch. June 25, 2014).

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considering parol and extrinsic evidence adduced at trial, but concluded that the “join in” language was included to limit, not expand, plaintiff’s rights regarding the licenses.

Corporate Governance

Board Composition

In Biolase, Inc. v. Oracle Partners, LP,72 the Delaware Supreme Court, on an expedited appeal, affirmed the Chancery Court’s decision finding that a director’s oral resignation was permissible under 8 Del. C. § 141(b). The expedited proceeding was brought under 8 Del. C. § 225 to determine the composition of Biolase, Inc.’s board of directors after director Alexander Arrow resigned orally at a board meeting and was replaced by director Paul Clark. The company’s CEO had requested and accepted Arrow’s oral resignation, but after replacing him with Clark, the CEO learned that Clark was planning on seeking the CEO’s ouster. The CEO then sought to invalidate Clark’s appointment, arguing that the resignation and appointment had not been valid under 8 Del. C. § 141(b), which states that “any director may resign at any time upon notice given in writing . . . to the corporation.” The Supreme Court agreed with the Chancery Court’s finding that Section 141(b) is permissive and does not require written notification. The Court also found that there was sufficient evidence for the Chancery Court to conclude that Arrow resigned from the board and that Clark was properly appointed to the board. Finally, the Court found that the Chancery Court properly refused to grant Oracle Partners, LP’s request for attorney’s fees, because the claim was not included in the pre-trial or post-trial briefs and the request was waived.

Board Composition; Voting Agreements

In In re Westech Capital Corporation,73 Vice Chancellor Noble, in a memorandum opinion, issued a post-trial 8 Del. C. § 225 opinion resolving a dispute about the meaning of two subsections of a voting agreement that determine how its signatories designate directors to the board of defendant Westech Capital Corp. (“Westech”). Plaintiff John Gorman, Westech’s majority stockholder prior to execution of the disputed voting agreement, argued that the provisions at issue were unambiguous majority-of-stock voting provisions that permitted him to vote his majority stock to designate directors. Defendants argued that the provisions at issue favored a per capita voting scheme. The court concluded that, based on its plain meaning, one of the two voting agreement provisions at

72 No. 270, 2014, 2014 WL 2619404 (Del. Jun. 12, 2014).73 C.A. No. 8845-VCN, 2014 WL 2211612 (Del. Ch. May 29, 2014).

issue was a per capita provision. With respect to the other provision, the court held that because it was “not clearly and unambiguously a per capita voting mechanism,” Delaware’s presumption in favor of majority voting applied.

Director Removal

In Gassis v. Corkery, et al.,74 Vice Chancellor Glasscock, in a memorandum opinion, dismissed plaintiff Bishop Macram Max Gassis’ (“Gassis”) action under 8 Del. C. § 225, finding that defendants had validly removed Gassis from the board of the Sudan Relief Fund, Inc. (the “Fund”). Gassis, relying on a provision in the Fund’s bylaws providing that he “shall be” chairman of the board, argued that the board lacked authority to remove him. The court, disagreed, reasoning that: (i) because Gassis was elected to the board, the bylaws permitted his removal with or without cause; (ii) in any event, the bylaws granted the board the ability, by majority vote, to repeal the provision relied upon by Gassis. The court also rejected Gassis’ argument that, even though his removal was not void, it was voidable because defendants allegedly removed him from the board in retaliation for exercising his rights to examine the Fund’s books and records under 8 Del. C. § 220. According to the court, the evidence demonstrated that Gassis’ removal was “motived by policy and personality conflicts,” not “retaliation.”

Executive Compensation

In Louisiana Municipal Police Employees Retirement System v. Bergstein, et al.75 and Shepherd v. Simon, et al.,76 Vice Chancellor Laster, in a transcript ruling, granted defendants’ motion to dismiss plaintiffs’ derivative claims involving a challenge to a 2011 compensation award to the company’s CEO and related 2011 amendments to the company’s stock incentive plan as moot but denied the motion as to a disclosure claim regarding 2012 amendments to the plan. Plaintiffs alleged that the board breached its fiduciary duties by approving the 2011 amendments to the company’s stock incentive plan, resulting in a $120 million grant to the CEO – which was in violation of the original 1998 stock incentive plan’s annual salary cap – without stockholder approval as required by applicable stock exchange rules. Defendants claimed that the claim had been mooted by the board’s 2013 modification to the compensation award and the 2014 amendments to the plan that reinstated the original salary cap and performance metric requirements. The court agreed finding that the challenge to the 2011 amendments and related award was

74 C.A. No. 8868-VCG, 2014 WL 2200319 (Del. Ch. May 28, 2014).75 C.A. No. 7764-VCL, 2014 WL 1397031 (Del. Ch. Apr. 4, 2014).76 C.A. No. 7764-VCL, 2014 WL 1397032 (Del. Ch. Apr. 4, 2014).

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moot based on the 2013 modification to the award and the 2014 amendments to the stock incentive plan, because the “substance of the dispute has disappeared.” Plaintiffs also claimed that certain 2012 amendments to the plan were invalid based on the company’s improper disclosure that the 2012 amendments, which raised the amount of permissible compensation per calendar year, were “non-substantive.” Defendants argued that the only problem with the plan to which the disclosures could be material had been mooted, but the court disagreed. The court allowed plaintiffs’ challenge to the sufficiency of the 2012 disclosures to go forward, as nothing had transpired to render that claim moot.

Written Consents; Voting Agreements

In Flaa v. Montano, et al.,77 Vice Chancellor Glasscock, in a memorandum opinion noteworthy for its discussion of vote-buying and the disclosures necessary for written consents in lieu of a stockholders meeting, invalidated a consent action based on inadequate disclosures to stockholders. Plaintiff brought suit under 8 Del. C. § 225 to confirm the validity of a written consent action taken by Cardio Vascular BioTherapeutics, Inc.’s (“Cardio”) creditor, Calvin Wallen, to remove Cardio’s founder from the board and to appoint directors amendable to Wallen. Pursuant to a deal with the bankruptcy trustee, Wallen agreed to purchase one million shares from the trustee in exchange for, among other things, a seat on the Cardio board. The court found that the agreement between Wallen and the trustee was not properly disclosed to Cardio stockholders. Specifically, Cardio’s stockholders were not informed of the details of the stock purchase agreement and the granting of the board seat – material information that should have been disclosed in the proxy materials. The court invalidated the consent action and ordered Cardio to hold an annual election to be overseen by a special master.

Fiduciary Duties

In Allen v. El Paso Pipeline GP Company, L.L.C., et al.,78 Vice Chancellor Laster, in a memorandum opinion, granted defendants’ motion for summary judgment as to defendants’ remaining claims that had not been dismissed under the court’s June 12, 2014 opinion. Plaintiffs brought suit challenging a transaction through which El Paso Corporation sold certain assets to a limited partnership that it controlled. Plaintiffs alleged, among other things, that defendants violated their express contractual obligations and the implied covenant of good faith and

77 C.A. No. 9146-VCG, 2014 WL 2212019 (Del. Ch. May 29, 2014). 78 C.A. No. 7520-VCL (Del. Ch. Jun. 20, 2014).

fair dealing in connection with sale. The court dismissed all breach of contract claims against all defendants other than the General Partner, since only the General Partner was a signatory to the agreement at issue. The partnership agreement set out certain procedures for assessing transactions involving a potential conflict of interest, whereby a Conflicts Committee could approve such a transaction if it found the transaction to be in the best interest of the company. The court noted the presumption that the Conflicts Committee acted in good faith and found that plaintiffs failed to adduce any evidence that rebutted that presumption, rejecting plaintiffs’ breach of contract claims. The court also rejected plaintiffs’ breach of the implied covenant of good faith and fair dealing claim, finding that partnership agreement could not be read to include an obligation for the General Partner to obtain a fairness opinion in the context of the transaction. Finally, the court summarily dismissed plaintiffs’ aiding and abetting claim, finding that in the context of a purely contractual relationship, it was inappropriate to expand the reach of liability to those who were not parties to the original contract.

In Cambridge Retirement System v. Bosniak, et al.,79 Chancellor Bouchard, in a memorandum opinion, granted in part defendants’ motion to dismiss. Plaintiff brought derivative claims for breach of fiduciary duty and corporate waste in connection with certain equity awards and cash disbursements paid to the directors of Unilife Corporation (“Unilife”). Defendants moved to dismiss arguing that plaintiff failed to make a pre-suit demand and, as to certain claims, failed to state a claim upon which relief may be granted. The court found that demand was excused under the first prong of Aronson,80 because the claims involved a self-dealing transaction implicating a majority of Unilife’s board at the time the suit was filed. The court dismissed the fiduciary duty claims stemming from equity distributions made to outside directors, finding that plaintiff’s allegations failed to call into question the validity of the stockholder approval of those distributions and also failed to rebut the presumption of the business judgment rule. The court summarily dismissed plaintiff’s waste claim for failure to state a claim, as the compensation payments at issue did not constitute a one-sided transaction with which no reasonable business person would agree.

In Houseman v. Sagerman,81 Vice Chancellor Glasscock, in a memorandum opinion, dismissed in large part plaintiffs’ claims challenging actions taken by the Universata, Inc.

79 C.A. No. 9178-CB (Del. Ch. Jun. 26, 2014).80 Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).81 C.A. No. 8897-VCG, 2014 WL 1478511 (Del. Ch. Apr. 16, 2014).

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(“Universata”) board in connection with Universata’s 2011 merger. Plaintiff stockholders of Universata alleged that defendant directors failed to satisfy their Revlon duties in good faith and breached their fiduciary duties by failing to obtain merger consideration for certain “litigation assets.” Plaintiffs also alleged that Universata’s financial advisor aided and abetted these breaches. The court found that plaintiffs failed to adequately plead a breach of the board’s Revlon duties, because the board did not fail to take actions to maximize stockholder value – despite certain imperfections in the board’s process. The court found that defendants did not breach their fiduciary duties in failing to obtain consideration for the litigation assets under Primedia,82 because the litigation assets – involving claims that the board improperly (i) amended the company’s equity incentive plan, (ii) vested and issued warrants to company directors and (iii) paid change in control payments – only came into existence contemporaneously with the merger’s approval and, as such, could not have been used to negotiate value pre-merger. The court dismissed the aiding and abetting claim against the financial advisor, because plaintiffs failed to adequately plead scienter. Finally, although plaintiffs had not sought liability for a diversion of merger consideration, the court found that plaintiffs had stated a conceivable claim for the diversion of assets under Golaine.83 The court found that the warrants issued by the board arose in the context of self-dealing and that the board’s post-merger action to vest those warrants conferred a benefit on directors that was not shared with stockholders. The court found that such diversion was material and that the claim challenging these actions survived defendants’ motions to dismiss.

In Montgomery v. Erickson Air-Crane, Inc.,84 Vice Chancellor Laster, in a transcript ruling, denied defendants’ motion to dismiss plaintiff’s action alleging that Erickson Air-Crane Inc.’s (“Erickson”) majority stockholder engineered a transaction to purchase Evergreen Helicopters Inc. (“Evergreen”) to the detriment of the company’s minority stockholders. According to the court, plaintiff’s complaint sufficiently alleged that Erickson’s majority stockholder was a substantial creditor of Evergreen and thus “stood on both sides” of the transaction. The court, noting that this is “an entire fairness case,” concluded that there “clearly is a claim here.” The court rejected defendants’ argument that plaintiff failed to make a demand on Erickson’s board, reasoning that a demand would have been futile.

82 In re Primedia, Inc. Shareholders Litig., 67 A.3d 455 (Del. Ch. 2013).83 Golaine v. Edwards, 1999 WL 1271882 (Del. Ch. Dec. 21, 1999).84 C.A. No. 8784-VCL (Del. Ch. Apr. 15, 2014).

Indemnification and Insurance

Advancement of Fees

In Babul v. Relmada Therapeutics, Inc.,85 Vice Chancellor Parsons, in a transcript ruling, granted plaintiff’s motion for summary judgment on his claim for advancement of legal fees and costs to defend against a lawsuit brought by Relmada Therapeutics, Inc. (“Relmada”), a company at which plaintiff formerly served as a director and officer. Relmada argued that plaintiff was not entitled to advancement of fees and costs under the company’s bylaws and applicable indemnification agreement because plaintiff was not being sued in connection with his role as a former director or officer of Relmada. The court disagreed, noting that the sole claim asserted against plaintiff was for “breach of fiduciary duty.” According to the court, it is “difficult to conceive a situation in which a director or officer can breach their fiduciary duties to an entity but the breach is unrelated to their status as an officer or director.” The court also noted that Delaware public policy favors indemnification and advancement.

In Pontone v. Milso Industries Corp.,86 Vice Chancellor Parsons, in a memorandum opinion significant for addressing fee advancement law applicable to counterclaims, found that a special master improperly overruled certain of defendant’s objections to the advancement of attorney’s fees. Pontone, a former officer and director of Milso, brought suit for advancement of legal fees incurred in connection with an ongoing out-of-state litigation between the parties, in which Pontone was the defendant. Milso’s bylaws included indemnification and advancement rights, and the court had previously found Pontone eligible for advancement and appointed a special master to resolve any disputes concerning the amount of fees to be advanced. Milso filed objections to certain of the fee requests, which the special master overruled. In addressing whether fees could be recovered for counterclaims Pontone had raised in the out-of-state action – the general rule being that advancement is appropriate for compulsory counterclaims that may reduce any recovery on a plaintiff’s original claims – the court found that certain counterclaims were not compulsory and that the special master’s decision to advance fees for these claims had applied an overbroad standard in its advancement analysis and was improper.

85 C.A. No. 9366-VCP, hearing (Del. Ch. Apr. 4, 2014).86 C.A. No. 7615-VCP, 2014 WL 2439973 (Del. Ch. May 29, 2014).

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In Rizik v. TractManager, Inc.,87 Master LeGrow, in a Master’s Report, granted plaintiffs’ motion for summary judgment in an action alleging that defendants improperly refused to advance legal fees and costs. Plaintiffs, former officers of defendant TractManager, Inc. (“TractManager”), were sued by the company in separate actions for alleged “material breaches” of their responsibilities to TractManager and its stockholders. Plaintiffs sought advancement pursuant to TractManager’s bylaws, which provided mandatory advancement rights to directors and officers of the company who were made party to an action “by reason of the fact” that they were directors or officers. Defendants argued that plaintiffs were not sued “by reason of the fact” that they were officers of TractManager because a “non-officer employee” could have engaged in the same alleged wrongdoing. The court disagreed, reasoning that TractManager’s proposed rule would place a “narrow reading” on the “by reason of the fact” standard, which Delaware courts “consistently interpret[ ] broadly and in favor of advancement.” The court further held that, even if TractManager’s argument had merit, it would not succeed because the lawsuits at issue alleged that plaintiffs’ “unique positions as officers” allowed them to engage in the alleged misconduct.

Injunctions

Preliminary Injunctions

In mindSHIFT Technologies, Inc. v. Altobello, et al.,88 Vice Chancellor Laster, in a post-hearing order, granted in part plaintiff’s motion for preliminary injunction in an action arising out of defendants’ alleged breach of non-compete, non-solicitation, and confidentiality agreements with plaintiff. In granting plaintiff’s motion in part, the court concluded that: (i) plaintiff had alleged colorable claims that defendants breached the confidentiality agreements; and (ii) plaintiff would suffer irreparable harm if the court should decline to issue a preliminary injunction restraining defendants from committing further breaches. The court denied plaintiff’s motion with respect to its claims for breach of the non-compete and non-solicitation agreements, determining that these agreements had either expired before the alleged misconduct took place or were unenforceable as a matter of law.

In Third Point LLC v. Ruprecht, et al.,89 Vice Chancellor Parsons, in a memorandum opinion, denied plaintiffs’ motion for a preliminary injunction to postpone Sotheby’s

87 C.A. No. 9073-ML (Del. Ch. May 30, 2014). 88 C.A. No. 9537-VCL, 2014 WL 2861018 (Del. Ch. Jun. 23, 2014).89 C.A. No. 9469-VCP, 2014 WL 1922029 (Del. Ch. May 2, 2014).

annual meeting until the court determined the validity of the shareholder rights plan that Sotheby’s board adopted in response to the threat posed by activist investors, including plaintiff Third Point LLC (“Third Point”). Plaintiffs alleged that Sotheby’s board breached its fiduciary duties by: (i) adopting a two-tiered shareholder rights plan in response to Third Point’s acquisition of 9.4 percent of Sotheby’s stock; and (ii) Sotheby’s refusal to waive the acquisition trigger in the plan for Third Point. The rights plan was triggered by a 10 percent acquisition of stock by Schedule 13D filers or by a 20 percent acquisition of stock by passive Schedule 13G filers. Plaintiffs alleged that the plan was disproportionate to any threat posed by Third Point, unduly discriminatory and was adopted to maintain certain incumbent directors’ positions on the board. Defendants responded that the adoption of the plan was proportionate given the threat that activist investors posed. The court applied the Unocal90 standard rather than the more stringent Blasius91 standard, which required the court to consider the reasonableness of the threat posed and the proportionality of the board’s response. The court found that the rights plan was not coercive or preclusive and that the adoption of the plan and refusal to grant Third Point a waiver was within the “range of reasonableness” in light of the threat of “creeping control.” The court denied plaintiffs’ request for injunctive relief, because plaintiffs had not demonstrated a reasonable probability of success on the merits of their claims. On the eve of the annual meeting, the parties settled the action, agreeing to allow Third Point to increase its ownership to 15 percent of outstanding stock and to appoint its three nominees to Sotheby’s board.

Temporary Restraining Orders

In AVI-SPL Holdings, Inc. v. McClain,92 Vice Chancellor Parsons, in a transcript ruling, granted plaintiffs’ motion for a temporary restraining order to prevent defendant former employee of AVI-SPL Holdings, Inc. (“AVI-SPL”) from violating certain confidentiality and nonsolicitation provisions in a stock option agreement. Defendant had left AVI-SPL to work for a competitor and had allegedly shared confidential information and trade secrets in violation of the agreement. Although the court found that plaintiffs had established likelihood of success on the merits of their claims and that a preliminary injunction was appropriate, the court questioned the scope of the appropriate remedy – whether it was to prevent defendant from working for the competitor or something less severe. The court invited the

90 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). 91 Blasius Industries v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).92 C.A. No. 9446-VCP (Del. Ch. Apr. 7, 2014).

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parties to negotiate a consent order as to the appropriate relief, and the parties agreed to, among other things, restrict defendant from working for plaintiff’s competitor for a period of 45 days while they attempt to resolve the matter and complete discovery. The court agreed and granted the temporary restraining order containing the terms proposed by the parties.

Jurisdiction

Forum Selection; Personal Jurisdiction

In Darby Emerging Markets Fund, LP v. Ryan,93 Vice Chancellor Parsons, in transcript ruling, denied defendant’s motion to dismiss plaintiff’s complaint for breach of fiduciary duty and breach of a stockholders agreement. Defendant, a Brazilian citizen, argued that the court lacked personal jurisdiction because defendant had disclaimed the Delaware forum selection provision contained in the stockholders agreement. The court rejected this argument, finding that the forum selection provision was ambiguous and could be interpreted to subject the defendant to the court’s personal jurisdiction. The court thus declined to resolve this jurisdictional issue at the motion to dismiss phase.

Personal Jurisdiction

In VTB Bank v. Navitron Projects Corp.,94 Vice Chancellor Noble, in a memorandum opinion, granted defendant Navitron Projects Corporation’s (“Navitron”) motion to dismiss plaintiff VTB Bank’s (“VTB”) complaint for lack of personal jurisdiction. Navitron, a Panamanian corporation, argued that it was not subject to the court’s long-arm jurisdiction because its only contact with Delaware, as alleged in the complaint, was that it is the managing member of defendant Development Max, LLC (“Development Max”). Because VTB failed to address this argument in its responsive brief, the court held that VTB waived the issue of whether the court could exercise long-arm jurisdiction over Navitron. The court further held that it could not exercise personal jurisdiction over Navitron under 6 Del. C. § 18-109(a), which authorizes service of process on the managers of Delaware limited liability companies in actions “involving or relating to the business” of the company. The court reasoned that exercising personal jurisdiction over Navitron pursuant to this statute would be “inconsistent with due process, and thus unconstitutional” because VTB did not assert claims relating to Navitron’s “rights, duties, or responsibilities as a

93 C.A. No. 8381-VCP (Del. Ch. Apr. 8, 2014).94 C.A. No. 8514-VCN, 2014 WL 1691250 (Del. Ch. Apr. 28, 2014).

managing member of Development Max.” Finally, the court denied defendant Development Max’s motion to dismiss on forum non conveniens grounds.

Motions to Dismiss

In Eurofins Panlabs, Inc., v. Ricerca Biosciences, LLC, et al.,95 Vice Chancellor Noble, in a memorandum opinion, granted in part defendants’ motion to dismiss plaintiff Eurofin Panlabs, Inc.’s (“Eurofins”) claims arising out of a stock and asset purchase agreement (the “SAPA”) between Eurofins and certain of the defendants. Plaintiff alleged that defendants breached the SAPA by, among other ways, making fraudulent statements regarding the business to be sold to Eurofins and one of its key customers. The court dismissed plaintiff’s claims relating to the business, reasoning that plaintiff’s allegations failed to satisfy the particularity requirements of Court of Chancery Rule 9(b). The court, however, denied defendants’ motion to dismiss with respect to certain of plaintiff’s claims alleging defendants made fraudulent statements concerning a key customer of the business. According to the court, these claims were pled with sufficient particularity and presented factual questions that the court could not resolve at the motion to dismiss phase.

In Jacono v. Jacono Enterprises, Inc.,96 Vice Chancellor Laster, in a transcript ruling, granted in part defendants’ motion to dismiss. Plaintiffs alleged that defendant Anthony Jacono, the ex-husband of plaintiff Tina Jacono, improperly transferred property and business opportunities belonging to Jacono Enterprises, Inc. (“JE”), a company owned by Anthony and Tina. The court dismissed, under the laches doctrine, plaintiffs’ claims arising out of defendants’ alleged conversion of one percent of Tina’s interest in JE. According to the court, Tina had constructive knowledge of these claims outside of the applicable limitations period. The court also granted defendants’ motion to dismiss plaintiffs’ claims for mandatory injunction and accounting, noting that these claims are remedies, not causes of action. The court, however, denied defendants’ motion to dismiss with respect to plaintiffs’ breach of fiduciary duty and conversion claims relating to Anthony’s alleged transfer of JE’s assets, concluding that these claims satisfied the “reasonable conceivability” standard applied at the motion to dismiss stage.

95 C.A. No. 8431-VCN, 2014 WL 2457515 (Del Ch. May 30, 2014).96 C.A. No. 8454-VCL (Del. Ch. Apr. 4. 2014).

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In PCMS International, Inc., v. 2295113 Canada, Inc.,97 Vice Chancellor Laster, in a transcript ruling, denied defendant’s motion to dismiss plaintiff’s action for breach of license agreements. Plaintiff, a software developer and marketer, granted two licenses to defendant, a software module developer. According to plaintiff, defendant breached the license agreements by granting licenses to third parties to use, develop and sell software featuring the code used in plaintiff’s products. The court, in denying defendant’s motion to dismiss, determined that, based on plaintiff’s allegations, it was “reasonable conceivable” that defendant improperly disclosed plaintiff’s confidential information in breach of the license agreements.

In Sustainable Energy Generation Group, LLC, v. Photon Energy Projects B.V., et al.98 Vice Chancellor Parsons, in a memorandum opinion, granted in part defendants’ motion to dismiss plaintiff’s action arising from the exchange of confidential information. Plaintiff, a Delaware based renewable energy company, was solicited by defendants, a group of Dutch companies, to partner on solar energy projects in the United States. The parties executed a confidentiality agreement and plaintiff purportedly shared confidential information with defendants. Plaintiff, with defendants’ consent, subsequently represented to the owners of certain sustainable energy projects that defendants were interested in investing in those projects. In its complaint, plaintiff alleged that defendants never intended to partner with it, but instead were only interested in using plaintiff’s confidential information to help them raise capital through a bond offering. Plaintiff asserted claims for interference with plaintiff’s prospective business relationships with the owners of the sustainable energy projects, breach of the confidentiality agreement, and misappropriation of plaintiff’s confidential information. The court granted defendants’ motion to dismiss plaintiff’s interference claim, finding that the complaint lacked sufficient allegations from which the court could draw a “reasonable inference” that plaintiff had a “reasonable expectancy” in the energy projects. The court, however, denied defendants’ motion to dismiss plaintiff’s remaining claims, holding that, based on plaintiff’s allegations, it was “reasonably conceivable” that defendants had breached the confidentiality agreement and misappropriated plaintiff’s confidential information. The court also rejected defendants’ argument that the court lacked personal jurisdiction over them, finding that plaintiff’s claims arose from defendants’ transaction of business in Delaware.

97 C.A. No. 8406-VCL, (Del. Ch. May 2, 2014).98 C.A. No. 8524-VCP, 2014 WL 2433096 (Del. Ch. May 30, 2014).

Practice and Procedure

Filing Under Seal

In Al Jazeera America, LLC v. AT&T Services, Inc.,99 Vice Chancellor Glasscock, in a letter opinion, granted plaintiff’s motion to stay the court’s order, which required plaintiff to file an unredacted version of the complaint, while the parties finalized a settlement and sought an expungement of the record. While the court was not convinced that judicial records may be expunged without disclosure to the public, it recognized that the potential harm to the public interest from the proposed stay was “incremental and comparatively light,” even if the motion to expunge was denied. Although the court had previously found that the public interest outweighed the potential business ramifications of unsealing the complaint, it also noted that plaintiff’s interest in maintaining confidential treatment of its court filings through appropriate judicial channels would be forfeited upon unsealing.

Motions to Expedite

In In re TriQuint Semiconductor, Inc. Stockholders Litig.,100 Vice Chancellor John Noble, in a letter opinion, denied plaintiff stockholders’ motion to expedite their claims that TriQuint Semiconductor, Inc.’s (“TriQuint”) board breached its fiduciary duties by agreeing to a merger with RF Micro Devices, Inc. According to the court, plaintiffs failed to articulate a colorable claim that the board staved off a more favorable offer in order to “entrench itself from a potential proxy contest” by a TriQuint stockholder. The court reasoned that the board was just as likely to face a proxy contest from the same stockholder in the event the merger was effectuated. The court also rejected plaintiffs’ claim that the merger agreement contained unreasonable and preclusive deal protection measures, noting that the provisions challenged by plaintiffs, including a no solicitation provision and a termination fee, “are not uncommon.” Finally, the court determined that plaintiffs lacked colorable disclosure claims, opining that plaintiffs sought “additional details that are not just granular, but border on minutiae.”

Motions to Intervene

In In re Interstate General Media Holdings, LLC,101 Vice Chancellor Parsons, in a letter opinion, granted the Newspaper Guild of Greater Philadelphia’s (the “Guild”) motion to intervene in a dissolution action under Court of Chancery Rule 24(b). The motion to intervene was opposed

99 C.A. No. 8823-VCG, 2014 WL 2538762 (Del. Ch. Jun. 5, 2014).100 C.A. No. 9415-VCN, 2014 WL 2700964 (Del. Ch. June 13, 2014).101 C.A. No. 9221-VCP, 2014 WL 1364938 (Del. Ch. Apr. 7, 2014).

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by General American Holdings, Inc. (“General American”), the petitioner in the dissolution action. The source of the contention between the parties was not whether Interstate General Media Holdings, LLC (“Interstate”) should dissolve, but rather whether Interstate should be sold via public or private auction, and in the latter case, which entities should be allowed to participate in the auction. In its amended petition for leave to intervene, Guild sought a declaratory judgment that Interstate should be sold in a public auction, or, alternatively, that Guild is entitled to participate as a bidder should the court order that Interstate be dissolved through a private auction. The court found that Guild’s claim presented questions of law and fact in common with the “main action” and that as such, Guild was entitled to intervene under Rule 24(b). The court did not address General American’s assertion that Guild’s motion to intervene failed to comply with the terms of Rule 24(c), because the court allowed Guild to submit an amended petition for leave to intervene that included the requisite pleading.

Rights of First Refusal

In Johnson v. Gaucho, LLC,102 Chancellor Bouchard, in a transcript ruling, denied plaintiff’s motion to expedite proceedings and motion for a temporary restraining order. Plaintiff alleged that he was denied the opportunity to exercise his right of first refusal in connection with the sale of certain of defendant corporation’s ownership interests. The court, in denying plaintiff’s motion to expedite, noted that plaintiff’s complaint lacked allegations that plaintiff would have exercised his purported right of first refusal if granted the opportunity. The court rejected plaintiff’s motion for a temporary restraining order, finding that plaintiff could not demonstrate irreparable harm because the transaction at issue had already closed.

In Uthaman v. Fair Hill, L.P.,103 Vice Chancellor Glasscock, in a transcript ruling, denied defendant’s motion to dismiss. The dispute concerned whether plaintiff enjoyed a right of first refusal with regard to the sale of certain real-estate properties located in a commercial complex in which he had already leased space. Defendant argued that the writing that plaintiff submitted in support of his asserted right was insufficient to prove the essential terms governing the right of first refusal. The court agreed with defendant that the document was sketchy but applied the “reasonable conceivability” standard since the court was deciding the issues in a motion to dismiss context. Applying that standard, the court found that defendant’s statute of frauds contention was sufficiently countervailed

102 C.A. No. 9687-CB (Del. Ch. May 29, 2014). 103 C.A. No. 9135-VCG (Del. Ch. Apr. 23, 2014).

by plaintiff’s partial performance (i.e. the improvements plaintiff made to the property). The court also found that it was not warranted to grant dismissal for the defendant based on the claim that there was no consideration for the right of first refusal amendment to the lease. Instead, the court found that plaintiff’s claim that his decision to renew the lease served as consideration was plausible enough to support his suit.

Settlements

In Leonid Systems, Inc. v. Singh,104 Vice Chancellor Laster, in a transcript ruling, granted plaintiff’s motion for enforcement of a settlement agreement, finding that informal email correspondence setting forth the terms of the settlement constituted a valid and enforceable contract. Initially, this action was brought by Deepinder Singh, a former employee and current stockholder of Leonid Systems, Inc. (“Leonid”), as a books and records action in connection with a dispute over the scope of his options agreement. A declaratory judgment action was filed by Leonid in which Singh asserted various counterclaims. The parties engaged in settlement negotiations over email, and defendant’s counsel accepted plaintiff’s settlement offer over email. The parties then tried to memorialize their agreement in a formal settlement document but were unable to do so. The court considered whether the parties’ email correspondence constituted an enforceable contract and found that it did, because the language was clear and unambiguous and confirmed the parties’ intent. The court did not find any of Singh’s defenses – estoppel, fraud or mutual or unilateral mistake – to have any merit.

In Sequoia Presidential Yacht Group LLC v. FE Partners, LLC,105 Vice Chancellor Glasscock, in a letter opinion, held that defendant was entitled to pre- and post-judgment interest on its counterclaim for breach of contract at the 8.75 percent interest rate specified in the loan agreement at issue. The court rejected plaintiff’s argument that the lower statutory interest rate should govern the assessment of post-judgment interest, reasoning that the agreement at issue was governed by 6 Del. C. § 2301(c), which provides that “there shall be no limitation on the rate of interest which may be legally charged for the loan or use of money, where the amount of money loaned or used exceeds $100,000 . . . .” While Section 2301(c) is silent with respect to the assessment of post-judgment interest, the court held that the legislative rationale behind 6 Del. C. § 2301(a),

104 C.A. No. 8555-VCL (Del. Ch. Apr. 4, 2014).105 C.A. No. 8270-VCG, 2014 WL 2610577 (Del. Ch. Jun. 12, 2014).

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which provides that post-judgment interest should be assessed according to a contract rate “so long as that rate is lawful,” should apply in this context.

Status Quo Orders

In United Brotherhood of Carpenters Pension Plan v. Fellner,106 Vice Chancellor Noble, in a letter opinion, vacated the entry of a status-quo order in connection with petitioners’ action to remove a trustee. Petitioners disagreed with a real estate transaction undertaken by the trustee and sought to block the transaction, resulting in the court issuing a status quo order to prevent the execution of the transaction. Respondents sought to have the order lifted. The court considered whether petitioners had demonstrated a likelihood of success on the merits, whether they would suffer irreparable harm if the order were lifted, and whether harm to petitioners outweighed harm to respondents. The court found that petitioners did not demonstrate a likelihood of success on the merits, because in order to remove the trustee under the trust agreement, petitioners were required to establish that the trustee breached his fiduciary duties – a claim that was not even asserted in petitioners’ pleadings. Petitioners also sought removal under 12 Del. C. § 3327 but failed to explain why the trustee should be removed under this provision. The court then considered irreparable harm and found that petitioners were not likely to suffer irreparable harm, because they may be awarded damages if the transaction was found to be improper and a product of a breach of fiduciary duty. Although the court found that harm to petitioners might outweigh harm to respondents if an improper transaction was executed, this alone did not justify maintaining the status quo order in light of the flaws with petitioners’ underlying claim.

Stay of Proceedings

In In re Molycorp, Inc. Shareholder Derivative Litigation,107 Vice Chancellor Noble, in a letter opinion addressing when a derivative action should or should not be stayed in favor of securities litigation elsewhere, granted plaintiffs’ motion for leave to file an amended complaint and to lift the stay that was entered in plaintiffs’ stockholder derivative action. The court had granted the stay in May 2013 finding that plaintiffs’ claims were substantially similar to those asserted in a federal securities fraud class action pending in the United States District Court for the District of Colorado. Plaintiffs argued that the court should grant its motion to amend to eliminate the overlapping claims,

106 C.A. No. 9475-VCN, 2014 WL 1813280 (Del. Ch. May 1, 2014).107 C.A. No. 7282-VCN, 2014 WL 1891384 (Del. Ch. May 12, 2014).

because this would eliminate the risk to defendants of mounting duplicative defenses or being subject to inconsistent judgments. The court agreed and granted plaintiffs’ motion to amend. Plaintiffs next argued that there was good cause to lift the stay, because the proposed amended complaint eliminated the claims dependent on a finding of liability in the federal action. The court found that although the allegations of the two actions partially overlap, the claims in the amended complaint implicated an evolving and important question of Delaware law and that liability under the amended complaint was separate from and not contingent on the federal securities action. The court concluded that Delaware’s interest in having the derivative action decided promptly, uniformly and authoritatively constituted good cause to lift the stay, and defendants’ defending of the two actions simultaneously would not be unfairly prejudicial.

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Delaware Quarterly


This Quarter’s Authors Jonathan W. Miller, John E. Schreiber and Matthew L. DiRisio are partners, and Jill K. Freedman, Ian C. Eisner, Paul Whitworth, Shawn R. Obi, Jonathan R. McCoy and Saher Shakir are associates, in the Litigation Department of Winston & Strawn LLP, resident in the Firm’s New York and Los Angeles offices.

The Delaware Quarterly Advisory Board

ChicagoRonald S. Betman +1 (312) 558-7942 [email protected] Oscar A. David +1 (312) 558-5745 [email protected] William C. O’Neil +1 (312) 558-5308 [email protected] Robert Y. Sperling +1 (312) 558-7941 [email protected]

HoustonCasey Berger +1 (713) 651-2611 [email protected]

Los AngelesNeal R. Marder +1 (213) 615-1728 [email protected]

New YorkMatthew L. DiRisio +1 (212) 294-4686 [email protected] Jonathan W. Miller +1 (212) 294-4626 [email protected] Robert J. Rawn +1 (212) 294-6721 [email protected] Richard W. Reinthaler +1 (212) 294-4631 [email protected] John E. Schreiber +1 (212) 294-6850 [email protected] James P. Smith III +1 (212) 294-4633 [email protected]

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