Richard L. Renck – Page 3 – Duane Morris Delaware Business Law

May 14, 2019 by Richard L. Renck

Delaware Court of Chancery Weighs In on Federal Computer Fraud and Abuse Act

When employees leave their employment and take with them their former employer’s confidential information, the ensuing litigation often contains a claim against the former employee for violations of the Computer Fraud and Abuse Act (the “CFAA”). This was so in the recent decision by the Court of Chancery in the case AlixPartners, LLP, et al. v. Benichou, C.A. No. 2018-0600-KSJM (May 10, 2019). In a matter of first impression for the state courts of Delaware, the Court of Chancery was asked to interpret and apply the CFAA’s provision creating liability for any person who “intentionally accesses a computer without authorization, or exceeds authorized access, and thereby obtains . . . information form any protected computer.”

In this case, the complaint alleges that the former employee downloaded company confidential information to a personal hard drive on two occasions–once before his resignation and a second time after he was given a notice of his dismissal and was no longer performing work for the employer. At issue were the terms “without authorization” and “exceeds authorized access” of the CFAA, and how they might apply to this factual scenario.

In ruling, the Court of Chancery discussed in detail the split in authority on the application of those terms into a “broad” approach and a “narrow” approach. Under the more broad interpretation, courts have found that conduct might violate the CFAA where a person has accessed “a computer or information in violation of one’s use obligations,” which will often involve an examination of the person’s intent or use of such information. The Court, however, applied principles of statutory construction and adopted the more narrow approach to the application of this provision of the CFAA. Under that interpretation, the Court held that the terms “without authorization” and “exceeds authorized access” apply “only when an individual accesses a computer or information on that computer without permission. The statute does not impose liability for misusing information to which the individual had authorized access.”

Given this ruling, the Court dismissed the CFAA claims against the former employee related to first instance of downloading of files (when he was authorized to access the files), but allowed the claims related to the second instance–after he was allegedly no longer authorized to access the company’s computer system–to proceed.

Ultimately, while the Court ruled that claims under the CFAA may not be available to address situations where persons who are technically authorized to access computers or information have nonetheless misused that information, that misuse of data may still very well violate certain contractual duties of use and non-disclosure or other state law causes of action (for instance, under an applicable Uniform Trade Secrets Act).

April 22, 2019 by Richard L. Renck

A Minute about Minutes–Part II

A few years ago we highlighted on this blog an opinion where the Court of Chancery’s analysis turned, in part, on its impression of the quality of the corporate minutes at issue. As we also noted in that post, the drafting of corporate minutes is an art rather than a science.

While counsel to Delaware corporations may debate the level of detail that should be included in minutes of meetings of the board of directors or committees of the board, the Court of Chancery has recently noted that for the minutes to be deemed an accurate portrayal of the conduct of such meetings, there must be evidence that they were created, reviewed and approved roughly contemporaneously with the meeting. In FrontFour Capital Group LLC, et al. v. Taube, et al., C.A. No. 2019-0100-KSJM, at p. 25, n. 98 (March 11, 2019), the Vice Chancellor did not view the minutes of the meetings of a Special Committee reviewing a transaction “as contemporaneous evidence or give them presumptive weight” where there was evidence that the minutes were not finalized until months after the meetings occurred and after litigation was filed.

As this opinion makes clear, when judicial officers are asked to review minutes as a contemporaneous memorialization of the actions taken at meetings of boards of directors, they will look to see whether the minutes were, indeed, created contemporaneously with the actions–when memories are fresh and likely unclouded by later events. Therefore, it remains a worthwhile practice for boards (or their committees) to ensure that their minutes are drafted, reviewed and approved by the next meeting of the body.

February 14, 2019February 14, 2019 by Richard L. Renck

Delaware Supreme Court Issues Additional Guidance on Scope of Section 220 Inspections

In the case KT4 Partners LLC v. Palantir Technologies, Inc., No. 281, 2018 (Jan. 29, 2019), the Supreme Court of Delaware provided additional guidance as to two issues that can arise in disputes over statutory inspections of books and records demanded by stockholders. First, the court clarified when the scope of an inspection being demanded might include email communications of officers and directors of the corporation. Second, the court addressed the fact-specific inquiry involved in determining whether a forum-use restriction would be placed on the stockholder’s future use of the fruits of an inspection in litigation.

On the issue of whether email communications are properly within the scope of a statutory inspection under Section 220 of the DGCL, the Supreme Court reiterated that the analysis depends on the facts and circumstances present, but that the bar remains fairly high for a stockholder to show that such documents are necessary for the purpose they have articulated in their demand for inspection. Here, the Supreme Court also took the opportunity to put a finer point on the legal standard stockholders, corporations, and the trial court should apply to determine the proper scope of an inspection of books and records. While at various times the decisions of the courts have used the terms “necessary” or “essential” or “sufficient,” in this opinion the Supreme Court holds that the scope of documents subject to inspection are those “that are essential and sufficient to the stockholder’s stated purpose,” that is, “the court must give the petitioner everything that is essential, but stop at what is sufficient” (internal quotations omitted). The Supreme Court went on to find that in this case, the Court of Chancery should have permitted the inspection of electronic communications because the company did not have other, more formal board-level documents to memorialize the actions that were the target of the inspection. As the court concluded: “Ultimately, if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions and official letters, it will likely be able to satisfy a Sec. 220 petitioner’s needs solely by producing those books and records. But if a company instead decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which Sec. 220 entitles them.”

The Supreme Court also addressed when it is appropriate for a stockholder’s use of the information from a statutory inspection be limited to the potential for bringing litigation in a specific jurisdiction–often Delaware as the state of incorporation. The court reiterated that (a) “the Court of Chancery must be cautious about limiting the jurisdiction in which a petitioner can use in litigation the books and records it receives from a Sec. 220 action,” and (b) the circumstances when such restrictions are appropriate “must be justified by case-specific factors” (internal quotations omitted). The most important of those case-specific factors continues to be whether the subject corporation’s bylaws or charter contains a forum-selection clause limiting litigation by stockholders addressing the internal affairs of the corporation to the courts of Delaware.

February 4, 2019 by Richard L. Renck

Director Access to Corporate Books and Records

The Court of Chancery recently affirmed the long-standing principle that directors of Delaware corporations are vested with “virtually unfettered rights to inspect books and records” of the company they serve. Schnatter v. Papa John’s Int’l., Inc. C.A. No. 2018-0542-AGB (Jan. 15, 2019). The Chancellor went on to reiterate that a director of a Delaware corporation that makes a demand to inspect the books and records of the corporation pursuant to Sec. 220 of the Delaware General Corporation Law should generally have “access at least equal to that of the remainder of the board.”

Directors of a company make a prima facie case for a statutory inspection of books and records where they show that: (a) they are a director, (b) they have demanded an inspection, and (c) the demanded inspection has been refused. Upon that showing, the company will then bear the burden of proving that the director making the demand for inspection was for an improper purpose–that is, the director’s “motives are improper, or that they are in derogation of the interest of the corporation. . . .”

February 1, 2019 by Richard L. Renck

Resolving Contractual Disputes With “An Expert Not An Arbitrator”

The Delaware courts have been asked several times in the last few years to interpret contracting parties’ intent when they have relegated certain disputes to “an expert not an arbitrator” as a form of alternative dispute resolution. On January 29, 2019, the Court of Chancery issued the latest opinion on this topic in Ray Beyond Corp. v. Trimaran Fund Mgt., LLC, C.A. No. 2018-0497-KSJM., and reiterated that such language will be construed as limiting the ADR professional’s jurisdiction to deciding “factual disputes within the decision maker’s expertise.”

In this case, the decision maker was to be an independent accountant, and thus, the court found that the clause at issue was to delegate factual disputes regarding calculation disputes to that “expert” but that legal disputes were reserved for the courts to decide as judicial officers.

The takeaway from these decisions continues to be a lesson in “words matter.” If contracting parties wish certain disputes that might arise be decided by someone other than through litigation in courts, they should carefully spell out the authority of the persons resolving those disputes. “Experts” will likely be relegated to deciding factual matters within their expertise, while “arbitrators” will likely be found to exercise judicial-like functions.

December 5, 2016 by Richard L. Renck

“Fraud in the Inducement” Is No Defense To Advancement Claims By Officers and Directors

On November 28, 2016, the Supreme Court of Delaware confirmed what had become a common thread in several previous decisions by the Court of Chancery–that a Delaware entity cannot avoid expansive advancement rights it has granted to its officers and directors by arguing that they had fraudulently induced the company to grant those rights. In Trascent Mgm’t Consulting, LLC v. Bouri, No. 126, 2016 (Del. Supr.), the Supreme Court held that such a challenge to an officer’s right to advancement of fees and expenses for litigation was more properly heard during later proceedings to determine whether the officer was ultimately entitled to a right to indemnification upon the close of the underlying proceedings.

Trascent had hired Mr. Bouri as an officer and manager of the LLC with responsibility for the human resources, IT, and finance functions. Mr. Bouri was employed pursuant to an employment agreement, which among other things, granted him broad rights to advancement of any fees and expenses he incurred in certain types of proceedings. Trascent and Mr. Bouri parted ways, and Trascent sued Mr. Bouri for, among other things, breaches of his employment agreement. Pointing to the terms of that employment agreement, Mr. Bouri sought advancement of his fees and expenses for defending against his former employer’s claims. Trascent, however, argued that the same agreement upon which its claims were founded was induced by fraud, and therefore, Mr. Bouri’s claims for advancement should be denied.

The Court of Chancery rejected this defense, and the Supreme Court (with Chief Justice Strine writing for the court) affirmed that ruling. As the Supreme Court noted: “[A]llowing Trascent to avoid its contractual duty to make immediate advancement payments by making a belated fraudulent inducement claim would impede the efficiency of the summary mechanism provided by 8 Del. C. 145(k) and impair the public policies served by contractual advancement provisions made in reliance upon that provision of the DGCL as well as the Limited Liability Company Act,” and therefore “the Court of Chancery properly refused to delay enforcing the plain language of the contract.”

The Supreme Court, in a footnote, also noted that the reasoning and public policy supporting this ruling was equally applicable to agreements to arbitrate disputes–another area where the Court found these fraudulent inducement arguments to reflect “unproductive gamesmanship.” The court warned that parties should make such arguments to the arbitrator in the first instance and not a court in trying to avoid the contractual choice of venue for dispute resolution.

December 1, 2016 by Richard L. Renck

How Emails Between Counsel Can Bind Their Clients To ADR

The Court of Chancery of the State of Delaware recently issued a Memorandum Opinion finding that feuding members of a Delaware limited liability company had validly entered into an agreement to mediate, and if necessary arbitrate, their dispute where their respective counsel had engaged in an email exchange the court found to contain the elements of a binding agreement.

In Gomes v. Karnell, et al., C.A. No. 11814-VCMR (Del. Ch. Nov. 30, 2016), Vice Chancellor Montgomery-Reeves held she did not have subject matter jurisdiction to hear certain aspects of the dispute because she held that the parties were bound by the representations of their attorneys and rejected plaintiff’s arguments that no agreement could exist because it was missing essential terms. While recognizing that there is no consensus among courts regarding what constitute the “essential terms” of an agreement to arbitrate, she found that the email exchange contained (i) evidence of assent; (ii) identified the parties to the potential ADR proceeding; (iii) identified the scope of the potential ADR proceeding and (iv) set forth the timing of the potential ADR proceeding. The court found these terms were sufficient to constitute a binding agreement to mediate and/or arbitrate the dispute, and to the extent any other terms needed to be supplied, the parties should look to the Federal Arbitration Act.

August 10, 2016August 10, 2016 by Richard L. Renck

Court of Chancery Critically Reviewing “Mootness” Fee Applications

In two recent decisions, the judges of Delaware’s Court of Chancery have demonstrated their intent to carefully review fee applications made by counsel for stockholder plaintiffs where the litigation has been rendered moot by actions of the company, and the litigation has been dismissed.

In In re Xoom Corp. Stockholder Litigation, C.A. No. 11263-VCG (Aug. 4, 2016), Vice Chancellor Glasscock awarded plaintiff’s counsel fees of $50,000 (of a requested $275,000) after the company rendered the litigation moot by making supplemental disclosures in advance of a transaction, and which were only marginally beneficial to the stockholders. A few weeks earlier, in In re Keurig Green Mountain, Inc. Stockholders Litigation, C.A. No. 11815-CB (July 22,2016)(trans. ruling), Chancellor Bouchard refused to award any fees to plaintiff’s counsel (of a requested $300,000) where he found the additional disclosures by the company in advance of the transaction were of no additional value to the company’s stockholders.

A “mootness” fee application is typically filed by counsel for class or derivative plaintiffs where their litigation has arguably caused the company to take action that renders the pending litigation moot. In the two cases discussed here, that action took the form of supplemental disclosures in advance of a stockholder vote to approve a transaction. Once it has been determined (or conceded) that the actions of the stockholder plaintiff caused the company to take the mooting action, the court will apply “a subspecies of the common-benefit doctrine, which recognizes that, where a litigation provides a benefit to a class or group, costs necessary to the generation of that benefit should also be shared by the group or its successor.” See In re Xoom, at p. 8.

In the Xoom matter, Vice Chancellor Glasscock declined to apply the “plainly material” standard for reviewing the value of disclosures to stockholders in advance of a stockholder vote that was announced in the Court’s earlier decision in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016). He held that where the court is reviewing a proposed settlement that includes a broad release of claims by the stockholders, the “plainly material” standard would be appropriate. Where, however, no such release is being sought (as in Xoom, where the litigation had been dismissed, with prejudice, as to the named plaintiff only), the Vice Chancellor found that a fee could be awarded where the disclosures have provided “some benefit to stockholders.” To determine the fee that might be appropriate in the circumstances, the court will look to the five factors announced in Sugarland Indus., Inc. v. Thomas: (1) the benefit achieved; (2) the contingent nature of the undertaking; (3) the difficulty of the litigation and the efforts of counsel; (4) the quality of the work performed; and (5) the standing and ability of counsel.

Looking primarily at the benefit achieved, in Xoom the court found that the requested fee of $275, 000 was not warranted where the benefit achieved was marginal and where the effort expended by counsel (63 hours) on the matter would result in an implied hourly rate of $4,000/hr. Instead, he awarded counsel for the plaintiff a fee of $50,000, which reflects an implied hourly rate of $794.00/hr.

In the Keurig matter, Chancellor Bouchard also looked primarily at the benefit achieved by the litigation efforts of the stockholder plaintiff and found that the supplemental disclosures made by the company to moot the litigation did not “confer any benefit on the corporation because they did not correct a materially misleading disclosure” in the original proxy materials. Because he found no benefit at all had been achieved, the Chancellor rejected, in whole, the request by plaintiff’s counsel for a fee of $300,000.

Richard L. Renck

RLRenck@duanemorris.com

June 25, 2015 by Richard L. Renck

Update on Fee Shifting or Forum Selection Bylaws

On June 24, 2015, the Governor of Delaware signed Senate Bill No. 75, which amends the DGCL and (1) prohibits charter or bylaw provisions that would shift the company’s fees and costs of an unsuccessful “internal corporate claim” to the stockholder prosecuting that claim, but (2) allows the certificate of incorporation or bylaws to specify that internal corporate claims be brought only in the courts of Delaware. The text of the amendments may be accessed here.

The prohibition on fee shifting provisions was accomplished via amendments to Sections 102(f) and 109(b) of the DGCL, which provide that the certificate of incorporation or the bylaws “may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim, as defined in Sec. 115 of this title.”

The Bill also created a new Section 115 of the DGCL, which addresses forum selection provisions in a company’s governance documents. That new section provides in its entirety:

The certificate of incorporation or the bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State. “Internal corporate claims” means claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.

The Bill also contains fairly significant revisions to Section 204, which allows for the ratification of defective corporate acts and stock, and which we will highlight in an upcoming post.

March 18, 2015 by Richard L. Renck

Fee-Shifting Bylaws–Remain In A State of Flux

As we previously reported on this page, the topic of fee-shifting bylaws being adopted to shift the costs of shareholder litigation to shareholder plaintiffs and those who assist them has been the subject of activity in both Delaware’s courts and its General Assembly. While the General Assembly is poised to take up the issue of fee-shifting bylaws in the new legislative session (the subject of an upcoming blog post), we wanted to report on the issuance of the first written decision from the Court of Chancery addressing a challenge to a fee-shifting bylaw that had been adopted by a stock corporation.

On March 16, 2015, Chancellor Bouchard issued his decision in Strougo v. Hollander, et al., C.A. No. 9770-CB (Del. Ch. March 16, 2015), in which he granted plaintiff’s motion for judgment on the pleadings, and which challenged the efficacy of a fee-shifting bylaw adopted by the board of directors of First Aviation Services, Inc. It is important to note that the facial validity of fee-shifting bylaws was not before the court on this motion. Rather, the plaintiff moved on a much narrower issue, that is, whether a fee-shifting bylaw adopted after he was no longer a stockholder–but before he filed litigation challenging conduct that occurred while a stockholder–was valid for that litigation.

The board of directors of First Aviation, at the behest of its controlling stockholder, adopted a reverse stock split that had the purpose and effect of freezing out the minority shareholders and taking the company private. Plaintiff Strougo’s interest in First Aviation was eliminated via the transaction. Shortly after the reverse stock split, First Aviation adopted the following bylaw:

Section VII.8. Expenses for Certain Actions. In the event that (i) any current or prior stockholder or anyone on their behalf (collectively a “Claiming Party”) initiates or asserts [any] claim or counterclaim (collectively a “Claim”), or joins, offers substantial assistance to or has a direct financial interest in any Claim against the Corporation or any director, officer, assistant officer or other employee of the Corporation, and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party has a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance or amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the Corporation and any such director, officer, assistant officer or employee for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) that the parties may incur in connection with such Claim.

First Aviation did not disclose to its former stockholders that it had adopted this new bylaw provision. After the adoption of the bylaw, and unaware of its existence, former-stockholder Strougo filed suit in the Court of Chancery alleging that the reverse stock spit was unfair to the minority stockholders. When the company informed Mr. Strougo and his counsel of the bylaw, plaintiff amended his pleading to also challenge the fee-shifting bylaw.

Chancellor Bouchard rejected the application of the fee-shifting bylaw to Mr. Strougo and this litigation. Because the courts of Delaware have consistently construed bylaws as a contract between the company and its stockholders, he held the new bylaw could not apply to Mr. Strougo and his suit because it was adopted after he was no longer a stockholder, and thus, not a party to that “contract.” Moreover, the litigation challenged conduct that occurred prior to the adoption of the fee-shifting bylaw.

While acknowledging the “serious policy questions implicated by fee-shifting bylaws in general” and the fact that the total value of the reverse stock split was less than $100,000, the Chancellor noted the reality that “applying the bylaw in this case would have the effect of immunizing the Reverse Stock Split from judicial review because, in [his] view, no rational stockholder–and no rational plaintiff’s lawyer–would risk having to pay the Defendants’ uncapped attorneys’ fees to vindicate the rights of the Company’s minority stockholders, even though the Reverse Stock Split appears to be precisely the type of transaction that should be subject to Delaware’s most exacting standard of review to protect against fiduciary misconduct.”

With this decision–and pending legislation on this front–the topic of how Delaware corporate entities might use bylaw provisions to control shareholder litigation continues to be a hot topic in Delaware corporate law.