Which 2016 Delaware Supreme Court and Chancery Court decisions should local Delaware business leaders pay attention to?
Francis G.X. Pileggi, member-in-charge of Eckert Seamans’ Wilmington office, has compiled an annual list of key Delaware business decisions from Delaware courts for the last 12 years. Summarizing key decisions throughout the year, he picks the most noteworthy corporate and commercial decisions from the more than 200 opinions published by the Delaware Supreme Court and Delaware Court of Chancery each year.
“Reasonable people can disagree about the most important cases,” said Pileggi. “I try to pick ones that might not be as well known.”
Pileggi’s litigation practice emphasizes representation in high-stakes disputes of corporations, stockholders, members of boards of directors, members and managers of LLCs, and those with managerial or ownership interests in other forms of entities.
Following are some of Pileggi’s top picks, and their implications for business leaders in the First State.
Delaware Supreme Court
OptimisCorp v. Waite
Pileggi: This ruling provides indispensable insights from Delaware’s high court on the duties and limitations imposed on directors who are appointed by particular stockholders. These board members, sometimes referred to as “blockholder directors,” are often torn between their allegiance to the corporation and their ties to the stockholder that appointed them — often by written agreement as a condition to an investment in the company.
Although it reads like an opinion, the format of this ruling is an order of the court. Specifically, the court expressed displeasure with a “Pearl Harbor-like . . . ambush” of a stockholder board member when that stockholder had the ability to remove the directors that ambushed him if he had known of their insurgent intentions prior to the meeting.
Why it’s important: “It’s important to anybody who is a director of a Delaware company — in particular someone appointed as a director in connection with an investment in a company,” said Pileggi. “For example, if I invested $1million in a company, one of the conditions I might request is that I get to appoint a director.
“This decision addressed the loyalty the director owes to the corporation, which supersedes any obligation that the director thinks he or she owes to the stockholder.”
Court of Chancery
Marino v. Patriot Rail Company LLC
Pileggi: This Court of Chancery opinion is noteworthy for providing the most detailed historical analysis, doctrinal underpinning and legislative exegesis of the statutory scheme that requires corporations under certain circumstances to provide advancement to former directors and officers that has come along in many years. The decision also explains why companies are barred from terminating such advancement for former directors and officers unless certain prerequisites are satisfied.
In a nutshell: “This has to do with an officer or director of company who gets sued, especially if you are a former officer or director and you get sued for something you did, but you’re not there anymore … and the current people don’t like you so much,” explained Pileggi. “The company cannot terminate your right to get paid for legal fees without satisfying prerequisites. It describes the obligations of the company to pay those fees.”
Amalgamated Bank v. Yahoo! Inc.
Pileggi: This opinion provides a treasure trove of corporate law jewels. This decision will likely be cited often, and it belongs in the pantheon of seminal Delaware decisions because it is the first opinion to directly and comprehensively discuss directors’ obligations to produce electronically stored information (ESI) in connection with a stockholder’s request for corporate books and records … The court also required the production of relevant personal e-mails of directors and officers from personal e-mail accounts. Additionally, the court provided exemplary guidance in how to fulfill fiduciary duties when considering and approving executive compensation proposals.
Why it’s relevant: “Because it talks about the right of a stockholder in a company to obtain the books and records about that company,” explained Pileggi. “If you own stock in a company, it has to do with your right to obtain corporate records. It gives new clarification and guidance. In some cases, management has to produce personal emails with regard to relevant topics. That’s new.
“This case reads like a novel because of the details involving high-stakes decisions and personalities,”
Medicalgorithmics S.A. v. AMI Monitoring Inc.
Pileggi: This opinion earns a place among my annual list of noteworthy cases for its counterintuitive finding that a non-signatory was bound by the agreement at issue. Although other Delaware opinions have found that non-signatories were bound by the terms of an agreement, in this decision, the non-signatory was an affiliate of the signatory, and was controlled by the signatory; moreover, the agreement applied to affiliates. Additionally, the non-signatory also accepted the benefits of the agreement.
Why it’s important: “This is counterintuitive,” said Pileggi. “In some instances you can be bound by a contract even if you didn’t sign it.” For example, if you are an affiliate of someone who signed the agreement, in some circumstances, you might also be bound.
“Under the Delaware LLC statute, if you’re a party to an LLC agreement you might be bound by amendments approved by majority even if you didn’t sign the amendment,” added Pileggi.
Bizzarri v. Suburban Waste Services Inc.
Pileggi: This decision should be read by all those who advise directors or their corporations on what corporate records a director is entitled to – or not. This opinion provides an excellent recitation of the many nuanced prerequisites for demanding corporate books and records and when the otherwise unfettered right of directors to corporate records can be circumscribed and restricted.
In addition to being noteworthy for providing corporations with defenses to demands for corporate records from directors and stockholders, this ruling explores the types of data that one can demand in connection with asserting the proper purpose of valuation of an interest in a closely held company.
What it means: “Similar to the issues in the Yahoo! case [Amalgamated Bank v. Yahoo! Inc.], generally speaking, directors of companies are entitled to the books and records of the company without limitation,” according to Pileggi. “This case dealt with a director doing things not in the best interest of the company so his access to books and records was restricted.”
Larkin v. Shah
Pileggi: This Court of Chancery decision should be read by those interested in one of the most pithy restatements in any recent opinion of basic corporate governance principles such as the: (1) articulation of the fiduciary duties of directors; (2) presumption of the BJR as a standard of review; (3) when the BJR applies; and (4) how the BJR is rebutted. This opinion also provides an eminently clear articulation and application of the various permutations of one-sided or both-sided controlling stockholder transactions, and what standard of review applies in those circumstances, as well as the standard that applies in this case, where there is no controlling stockholder, but there is stockholder approval.
Why it’s matters: “This is helpful for anybody who wants to understand what the specific duties of director are and what standard Delaware courts use to review conduct of directors and officers,” said Pileggi. “If you’re an officer or director of a Delaware company you should know what standard the court is going to use to review your conduct if you’re sued.”