January 2010 Volume 10, Issue 1 Delaware Corporate and Alternative Entity Law Update Special points of No Threat of Litigation, No Advancement of Expenses. No Kidding. interest: In Duthie v. CorSolutions o r n n o o net e m s t i t e’ i et nt udr k a claims were resolved in arbi- Advancement of Medical, Inc., 2009 WL a clinical and financial audit of tration, and Matria represented Expenses 1743650 (Del. Ch. June 16, oS l i s d es aae uo s C ro t n’ i aem ng- to the Chancery Court that it 2009), the Chancery Court ment programs. As part of a had no intentions of pursuing Fiduciary Standards held that a provision in a cor- defensive strategy, the CEO further claims against the offi- Short-form Merger i ic e oao’ eti t f n r prt nscrf a o i o- c and COO asserted affirmative cr B cue t of es es . eas h fcr e i ’ poration requiring advance- claims for defamation, tortious claims against Matria were no Material Adverse ment of expenses in defense of interference with economic n r l gr“ d etrsos t o e a i c epne o , Effects litigation no longer applied advantage, and ERISA. Cor- or negation of, any claims after no further threat of litiga- o t n’ eti t f n r uo ic e S l i s crf a o i o- c gi t h , h hney n e aa s t m ” t C acr e Liquidation tion against the officers ex- poration required the advance- Court held that the claims Preferences isted. This case arose out of ment of expenses incurred by were solely offensive and were ta el cr’ 05 c r t Ma i H ahae 20 a- s its officers and directors in therefore not eligible for ad- Duty of Good Faith quisition of CorSolutions. defense of litigation, and the vancement. Following the acquisition, Chancery Court had held in a Legislative Updates Matria sued the former CEO 2008 decision that the officers and COO of CorSolutions were entitled to mandatory (both of whom were also di- advancement of litigation ex- rectors) for fraud and breach penses in asserting their af- Inside this issue: of contract, alleging failure to firmative claims. Following Link to Court Opinion: disclose a CorSolutions cus- the 2008 decision, the fraud Click Here Gantler v. Stephens 2 Berger v. Pubco 2 Accused of Breaching Fiduciary Duty, Law Firm Receives Advancement of Corp. Expenses from Accuser Hexion Specialty 2 In Jackson Walker L.L.P. v. holders reached an agreement on behalf of Spira in relations Chemicals Inc. v. Spira Footwear, Inc., 2008 that resulted in a change of with third parties, it was an Huntsman Corp. WL 2487256 (Del. Ch. June control of Spira. Afterwards, aet n a n td o ” “gn ad w s etl t ie 23, 2008), the Chancery Court new management terminated advancement of its litigation In re: Trados Incor- 3 held that outside litigation the law firm and filed an ac- expenses. The court distin- porated Shareholder one w s n aet l i cusl a a “gn eg ” i- tion against the firm for guished Fasciana v. Electronic Litigation ble for advancement of ex- breach of fiduciary duties and Data Systems Corp., 829 A.2d Lyondell Chemical 3 penses under 8 Del.C. §145 i r s ic e el ec. p a eti t ng gne S i ’ crf a 160 (Del. Ch. 2003), which Company v. Ryan e n h o pn’ eti t ad t cm ayscrf a ic e of incorporation and bylaws held that counsel engaged in of incorporation and bylaws. both provided for mandatory corporate advisory work was Changes to the Dela- 4 A law firm had acted as out- dacm n o aonys et avne et f t re’ f s e not an agent. ware GCL side litigation counsel for n xess o ad epne fr S i ’ pars Spira Footwear in a Texas “i c r of ese p ye d et s fcr m l es r o, i , o Link to Court Changes to Dela- 4 action arising out of a stock- ad aet” T e C acr n gn . s h hney Opinion: ware General Corpo- ration and Alterna- holder contest for control of Court held that because the Click Here tive Entity Laws Spira. The competing stock- law firm had the power to act Page 2 Officers and Directors Held to the Same Fiduciary Standard Gantler v. Stephens, 965 A.2d fiduciary duty claims against the proposal without discus- 695 (Del. 2009) involved alle- the officers. The Supreme sion, were material, stating gations that the directors and Court directly held, apparently that without such representa- officers of First Niles Finan- for the first time, that officers tion, a shareholder might have cial breached their fiduciary of Delaware corporations owe evaluated the reclassification duties by rejecting an opportu- the same fiduciary duties of of shares more skeptically. nity to sell First Niles in favor care and loyalty as directors Finally, the Court rejected the of a reclassification of the owe. In so doing, the Su- defense of stockholder ratifica- o pn’ sae. i t is cm ays hrs Fr Nl s e preme Court noted that 6 tion of the reclassification of had received three bids to pur- Del.C. § 102(b)(7) does not shares, holding that ratifica- chase the company, and cer- authorize a provision in the tion is limited to (i) circum- tain officers had failed to in- certificate of incorporation stances whereas a fully in- form the board of directors of exculpating officers from formed vote approves action failures by the company to monetary liability for a breach that does not require stock- comply with certain due dili- of their duty of care. The holder approval to become gence requests, which failure Court also held that statements effective, and (ii) director ac- Link to Court Opinion: ultimately resulted in a with- in proxy materials concerning tions and conduct that the Click Here drawal of a bid. The Dela- e h or’ crf ” os - t bads“ae l cni u d stockholders are specifically ware Supreme Court reversed eration and deliberation of a asked to approve. hney ors i i a o’ s s C acr C ut d m s l f third-party offer, when in fact h hrhl r rah f e t saeo e’ bec od s the board had voted to reject Minority Shareholders Involuntarily Cashed Out in Merger Berger v. Pubco Corp., 976 Corporation Law governing h o r ors i i s f e w t l e cut f d g o ’ nn A.2d 132 (Del. 2009) involved stockholder appraisal rights. breach of the fiduciary duty of minority stockholders involun- In a class action by minority disclosure, the Delaware Su- tarily cashed out in a short- stockholders, the Chancery preme Court held that the form merger. The case in- Court held that such stock- Chancery Court had erred in volved a short-form merger holders were entitled to a fashioning a remedy that in- where the notice of merger (i) quasi-appraisal proceeding, l e ot ” n srw u -i c dd “p n ad eco provided no significant detail including supplemental disclo- requirements. The Court rea- of the plans, prospects or op- sures and requirements that ot t p soned that the “p u a- -o ” Link to Court Opinion: erations of the company, and the minority stockholders both proach is less burdensome to Click Here (ii) was accompanied by an opt into the class and escrow a the stockholders and benefits outdated version of Section portion of the merger pro- the stockholders by reducing 262 of the Delaware General ceeds. While agreeing with the risk of forfeiture. ei s ae f ue’ e os o s ASr u C s o B yr R m re In Hexion Specialty Chemi- Huntsman. There was no Hexion's performance. The cals, Inc. v. Huntsman Corp., f ac g u rv i n n “i ni ot poio,a ” sn s Court held that Hexion had 965 A.2d 715 (Del. Ch. is often typical. After the deal breached the agreement by 2008) the Delaware Chancery no longer seemed attractive to scuttling its own financing and Court specifically enforced a Hexion, it concluded that the by not acting in good faith. $10.4 billion merger agree- combined entity after the ac- The Hexion decision contains ment, holding that the acquir- quisition would be insolvent a detailed discussion of ing company had intentionally and, that as a consequence, MAEs. breached numerous covenants financing would be unavailable under the contract. In 2007, and that a Material Adverse Link to Court Opinion: Hexion had agreed to stringent f c (MA ” hd h e e e Ef t“ E ) a t rfr e o Click Here terms for the purchase of occurred, effectively excusing Page 3 V o lu me 1 0 , I ssu e 1 Divergent Stockholder Interests Lead to Class Action In re: Trados Incorporated cents per share. In denying a equally with the common. Shareholder Litigation, 2009 motion to dismiss, the Dela- The Court remarked that the WL 2225958 (Del. Ch. July ware Chancery Court held that common stockholders would 24, 2009) was a class action the interests of the preferred have been no worse off had suit brought by a former and common shareholders merger not occurred, but shareholder of Trados. The diverged with respect to the noted that it would not neces- complaint alleged breaches of decision of whether to pursue sarily be a breach of fiduciary fiduciary duties arising out of the merger, and that plaintiffs u fr bad o prv a y dt “o a or t apoe a $60 million purchase by had pled sufficient facts to transaction that, as a result of merger of Trados by SDL, permit an inference that a ma- liquidation preferences, does plc. Of the purchase price, jority of the board had im- not provide any consideration preferred stockholders re- properly favored the interests o h o m n t ko es e t t cm o s chl r ” o d . ceived $52 million, executive of the preferred shareholders. Finally, the Court noted that officers received $8 million The Court also held that al- [ ]i ts r h a n - l u a “w h eii t et t ni i d pursuant to a recently adopted h g eeay h or’ o t uh gnrl t badsl e vidual stockholder that is not a Link to Court Opinion: compensation plan, and com- duty is to prefer the interests controlling stockholder can mon stockholders received of the common stockholders, generally vote in its individual Click Here nothing. A majority of the directors owe fiduciary duties interest, the same cannot be directors were designees of the to both the preferred and com- said of directors designated to preferred stockholders, and mon stockholders where the the board by such a stock- the board had earlier deter- right claimed by the preferred holder. ” mined the fair market value of is not a preference as against the common stock was 10 the common but one shared Breach of Good Faith Following up on the Care- a potential bid was a breach of strating a conscious disregard mark, Disney, and Stone v. h ic r u e r o ’ y f od t d et s dt o go o h u e. cod g o s i ” fr i dts A cri t n Ritter cases, the Delaware faith. Distinguishing a breach the Supreme Court, the appro- Supreme Court continued to of the duty of care from a lack priate question is not whether flesh out the contours of the of good faith, the Delaware the directors should have done duty of good faith in Lyondell Supreme Court held that lack everything in their power to Chemical Co. v. Ryan, 970 of good faith sufficient to sus- obtain the best price for the A.2d 235 (Del. 2009) in the tain a claim of the breach of company, but rather whether Link to Court Opinion: context of a sale of the com- the duty of loyalty may be h e i c r u el ae o r o t s d et s“tr f l t y id pany. The plaintiffs in Lyon- on f “i c r n n o- d a t i fudia f ui yi et n to attempt to obtain the best Click Here dell alleged that the board of ally fails to act in the face of a a re e c” slpi . director's passive approach to known duty to act, demon- Page 4 V o lu me 1 0 , I ssu e 1 Changes to the Delaware General Corporation Law Section 145(f) was amended to stockholders entitled to vote at the right of the corporation prohibit elimination or impair- a meeting and stockholders a conviction of a felony or a ment of rights to indemnifica- entitled to notice of the meet- tion or advancement of ex- ing. judgment of a breach of the penses by amending the cer- duty of loyalty, in either Section 225(c) was added to case in connection with the tificate of incorporation or the grant the Chancery Court duties of the director to the bylaws, as the case may be, power to remove directors corporation after the occurrence of the act under certain circumstances; or omission to which the ex- a failure by the director to namely: penses are related. act in good faith, and Click on the highlighted text to be directed to the affected application for removal by Section 213(a) was amended to a finding by the Court that Section of the DE GCL permit the board of directors the corporation or by a stockholder derivatively in judicial removal is necessary to fix separate record dates for to avoid irreparable harm Changes to Delaware Alternative Entity Law Section 18-1101 of the Lim- Similarly, Section 15-1201 of applies to partnerships and ited Liability Company Act the Delaware Revised Uniform limited partnerships, respec- was amended to clarify that Partnership Act and Section tively. the doctrine of independent 17-1101 of the Delaware Re- legal significance, as devel- vised Uniform Limited Part- Click on the highlighted text oped in Delaware corporate nership Act were amended to to be directed to the affected law, applies to limited liability clarify that the doctrine of Sections of the DE LLCA, UPA and ULPA companies. independent legal significance A Boutique Law Firm Providing Services in Matters Pertaining to Delaware and Nevada Corporate and Commercial Law Delaware: With locations in Wilmington, Delaware and Las Vegas, Nevada, The Stewart Law Firm has risen to na- The Nemours Building, 14th Floor tional prominence as a respected and valued resource for in-house counsel, out-of-state law firms, and 1007 Orange Street accounting firms in matters related to the use and maintenance of alternative entities as well as general Wilmington, Delaware 19801 corporate and commercial law matters. Phone: 302.652.5200 Fax: 302.652.7211 Entity Formation / Dissolution E-mail: email@example.com Corporate Governance Nevada: Mergers and Acquisitions 2520 Saint Rose Parkway Suite 211 Recapitalizations Henderson, Nevada 89074 Spin-offs Phone: 702.836.3500 Conversions Fax: 702.446.8030 E-mail: firstname.lastname@example.org Restructurings Trustee Counsel Please visit us on Asset Securitization the web at Special Purpose Vehicles www.stewartlaw.pro State Tax Audit Defense Unclaimed Property / Escheat Captive Insurance Case Analysis / Reporting Local Counsel Services Legal Opinions Delaware Corporate and Alternative Entity Law Update About the Author: Keith R. Sattesahn, Partner, received his B.S. degree from Juniata College and his J.D. degree from Temple University School of Law (where he was a member of the Temple University Law Quarterly). Mr. Sattesahn concentrates his prac- tice in the areas of complex corporate restructurings, corporate governance and alternative entity law as well as Informa- tion Technology and Intellectual Property law. He is admitted to practice in Delaware and Pennsylvania. You can reach Keith at 302.652.5200 or email@example.com. Special thanks to Andrew J. Rennick, Law Clerk, for his valuable contributions to this newsletter. This update is for informational purposes only and should not be considered legal advice. Please consult an attorney regarding your specific situation before taking any action. Receipt of this update does not constitute an attorney-client relationship.
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