Justice Friedman Allows Breach of Fiduciary Duty Claim to Proceed Against Corporate Directors Under Delaware Law

In AP Services, LLP v. Lobell et. al, No. 651613/2012, 2015 NY Slip Op 31115(U) (N.Y. Sup. Ct. June 19, 2015) (argued Feb. 21, 2014), Justice Friedman, applying Delaware Law, denied a motion to dismiss plaintiff AP Services, LLP’s first cause of action alleging breach of fiduciary duty against the defendants, former directors of Paramount Acquisition Corp., while granting dismissal of the second cause of action against them for allegedly aiding and abetting the breach of fiduciary duty. Continue Reading

Pay to Play: Appellate Division Upholds Ruling that Payment is Required to Qualify for Champerty Safe Harbor Provision

In Justinian Capital SPC v. WestLB AG, etc. et al., 2015 N.Y. Slip Op. 04381 (1st Dep’t May 21, 2015), the Appellate Division affirmed the February 25, 2014 decision of the New York County Supreme Court, Commercial Division (Kornreich, J.), 43 Misc. 3d 598, holding that actual payment for the transfer of rights to a legal claim is required in order to qualify for the champerty doctrine’s safe harbor provision. Continue Reading

Delaware Supreme Court Reinforces Importance of Clear and Precise Bylaw Provisions and Specifically Drafted Notices of Annual Meetings

In Hill International, Inc. v. Opportunity Partners L.P., No. 305, 2015, 2015 WL 4035069 (Del. July 2, 2015), the Delaware Supreme Court affirmed the Court of Chancery’s grant of injunctive relief as it recognized the plaintiff stockholder’s — as opposed to defendant corporation’s — interpretation of a bylaw as its plain meaning interpretation.  In so holding, both courts reinforced the importance of clear and precisely drafted corporate charter and bylaw provisions, as well as specifically drafted notices of annual meetings of stockholders. Continue Reading

“Dead Hand Proxy Puts” Garner Increased Stockholder Scrutiny In Delaware

A ruling last fall by the Delaware Chancery Court has prompted a wave of 8 Del. C. § 220 books and records inspection demands on (and threatened litigation against) Delaware corporations that have entered into credit agreements containing so-called “dead hand proxy put” provisions.  A “dead hand proxy put” provision allows the corporation’s lenders to demand immediate payment of all outstanding debt if, within a specified measuring period, a majority of incumbent board members is replaced in a threatened or actual contested election.  In Pontiac General Employees Retirement System v. Healthways, Inc., C.A. No. 9789-VCL (Del. Ch. Oct. 14, 2014) (transcript ruling), the Court declined to dismiss a breach-of-fiduciary-duty challenge to a “dead hand proxy put,” even where the exercise of the provision was not imminent.  The Court held that the complaint adequately alleged facts showing the provision had caused a present injury to the corporation’s stockholders by deterring a possible stockholder-led proxy contest.  Other than the facts alleged, the ruling left uncertain the attendant circumstances needed to state a mature “dead hand proxy put” claim.  As a result, all public company boards with credit agreements containing “dead hand proxy puts” now face Section 220 books and records inspection demands, and potential litigation. Continue Reading

Second Circuit Narrows Scope of SLUSA Preclusion

In In re Kingate Management Ltd. Litigation, No. 11-1397, 2015 U.S. App. LEXIS 6725 (2d Cir. Apr. 23, 2015), the United States Court of Appeals for the Second Circuit held that in order for the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 78bb(f), to preclude state law claims that fall within the anti-falsity provisions of the Securities Act of 1933 and Securities Exchange Act of 1934, (1) the claims must allege that the defendant, not some third party, engaged in the requisite false conduct and (2) the allegation of false conduct must be necessary to liability under the state laws alleged.  The Court also held that SLUSA does not require that an entire complaint be dismissed if only certain claims or parts of claims are precluded.  Those claims which are not covered by SLUSA must be allowed to proceed.  This decision clarifies the scope of SLUSA preclusion. Continue Reading

Delaware Chancery Court Holds that Creditor Plaintiffs in Derivative Suits May Satisfy Standing Requirement by Showing Corporation’s Insolvency at Time of Suit, Regardless of Later Solvency

In Quadrant Structured Products Co., Ltd. v. Vertin, C.A. No. 6990-VCL, 2015 WL 2062115 (Del. Ch. May 4, 2015), the Delaware Court of Chancery held that a creditor plaintiff needs only establish that a corporation was insolvent at the time the suit was filed in order to establish standing to sue derivatively on behalf of the corporation.  Creditors do not need to show that the corporation was continuously insolvent throughout the litigation to maintain standing, nor do they need to show that the corporation was “irretrievably insolvent.”  The decision clarifies a murky area of Delaware law regarding creditor-led derivative suits and may further broaden the situations in which creditors can assert derivative breach of fiduciary duty claims. Continue Reading

Delaware Supreme Court Holds That a Stockholder Plaintiff Must Plead a Non-Exculpated Claim to Avoid Section 102(b)(7)-Based Dismissal When Seeking Damages From Independent and Disinterested Directors

In the consolidated appeal In re Cornerstone Therapeutics Inc., Stockholder Litigation and In re Zhongpin Stockholders Litigation, Nos. 564, 2014 and 706, 2014, 2015 Del. LEXIS 231 (Del. May 14, 2015), the Delaware Supreme Court considered for the first time the pleading burden a stockholder plaintiff must meet when seeking to recover monetary damages from an independent and disinterested director who is protected by an exculpatory charter provision authorized under 8 Del. C. § 102(b)(7).  The Court held that to survive a motion to dismiss by that director, the complaint must plead a non-exculpated claim against that director, even if the underlying standard of review is entire fairness.  Cornerstone confirms the need for the Chancery Court to analyze exculpation on a director-by-director basis in all cases at the earliest practical time, including at the pleading stage, in order to fulfill Section 102(b)(7)’s legislative purpose. Continue Reading

SEC Takes Aggressive Approach to Fortify Dodd-Frank’s Whistleblower Rules

On April 1, 2015, the Securities & Exchange Commission (the “SEC” or “Commission”) fined a public company $130,000 for requiring employees involved in internal investigations to sign a confidentiality agreement that the Commission deemed violative of the whistleblower protections contained in the Dodd-Frank Act.  KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015).  This case was the first brought by the SEC involving anti-disclosure language of this type. Continue Reading

United States Supreme Court Resolves Circuit Split Regarding Section 11 Claims Predicated Upon Allegedly Misleading Statements of Opinion

In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, 2015 WL 1291916 (U.S. Mar. 24, 2015), the United States Supreme Court addressed the circumstances under which a claim alleging that an issuer made a false statement of opinion in a registration statement suffices to state a claim for relief under Section 11 of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. § 77k.  The Court held that (1) a statement of opinion does not constitute an “untrue statement . . . of fact” in violation of Section 11 merely because it is ultimately proven incorrect and (2) a statement of opinion which omits material facts about the issuer’s knowledge may be misleading if the omitted facts conflict with what a reasonable investor would infer from reading the statement in context.  The Court’s decision resolved a split in the Circuits and may spawn a new wave of “omission” litigation under the 1933 Act. Continue Reading

California and Delaware Courts Agree: Amendments to Corporate Bylaws Do Not Apply Retroactively to Impair Pursuit of Previously Accrued Claims

Two recent decisions, one from the Delaware Court of Chancery and one from the California Court of Appeal, Fourth Appellate District, refused to apply bylaws that impaired a shareholder/member plaintiff’s ability to pursue his or her claims against the corporation where the the relevant bylaw was adopted after the plaintiff’s claims accrued. Continue Reading