Category Archives: General

“Per Capita” v. “Per Share” Voting in Agreements–Words Matter

In Salamone, et al. v. Gorman, No. 343, 2014 (Del. Dec. 9. 2014), the Supreme Court of Delaware writes for nearly 60 pages sorting out contradictory provisions in a voting agreement that was supposed to clearly spell out the rights of various investors and investor groups to elect directors to the board.  It did not, and the Court was forced to resolve ambiguities in the document that made it unclear whether directors were to be elected and removed on a “per share” or a “per capita” basis by different classes of investors.

The voting agreement at issue intended to set forth a scheme by which, among other things, (1) one independent director was to be designated by “the majority of holders of the Series A Preferred Stock, and (2) two directors were to be “elected by the Key Holders,” who were defined in the agreement.  The potential ambiguity in the wording of the director election provisions came to the fore when compared to the director removal clause which provided, in material part, that the removal of the two types of directors noted would only be valid where “such removal is directed or approved by the affirmative vote of the Person, or of the holders of more than fifty percent (50%) of the then outstanding Shares entitled under Section 1.2 to designate that director.”

The litigation centered upon the efforts of one of the stockholders, who controlled a majority of the voting shares, to single-handedly remove and replace the independent director and the two directors to be elected by the Key Holders based on that majority voting power.  Such power would follow from a “per share” voting scheme.  The opposing parties, however, argued that the voting agreement was designed to disaggregate voting power and to give particular investors an equal voice in selecting directors to represent their respective class of equity.  Thus, they argued that the voting agreement set forth a “per capita” scheme pursuant to which the majority shareholder had just one of several votes, and thus must convince a majority of the individual investors that either held Series A Preferred or who were Key Holders to support his nominees.

After employing a host of contractual interpretation devices, the Supreme Court ultimately found that (1) the “majority of the holders” language regarding the independent director’s election referred to a “per share” basis for election and removal, and (2) that the Key Holders elected and removed their representative directors on a “per capita” basis.  In so ruling, the Supreme Court’s decision seems to turn on two important points.  First, the Supreme Court found that the election and removal provisions should be read as setting forth the same–rather than contradictory–methods for the election and removal of directors.  Second, the Court applied the judicial presumption under Delaware law that, absent clear and convincing evidence to the contrary, the Court will not infer an intent to disenfranchise a majority stockholder by recognizing that “[a] court ought not to resolve doubts in favor of disenfranchisement.”

This facts presented in this case, and the Supreme Court’s efforts to bring order to the voting agreement’s terms, show that terms like “majority of the holders” can be ambiguous in application and that carefully considering such provisions can avoid the troubles presented in this litigation.

A Bit About Break-up Fees in M&A

In In re Comverge, Inc. Shareholders Litig., C.A. No. 7368-VCP, a decision on a motion to dismiss by Court of Chancery, Vice Chancellor Parsons provided practitioners and clients with a thorough and helpful analysis (essentially a road-map) of  how the Court of Chancery reviews challenges to third-party sale transactions, that are approved by a disinterested board, under the enhanced scrutiny of Revlon.  In addition to the primer on a Revlon analysis, the opinion is worth a read for its discussion of what the Court considers the outer bounds for break-up fees.  The Vice Chancellor allowed claims challenging the break-up fees in this transaction to go forward because, when viewed in the aggregate, they could total north of 11% of the equity value.  For purposes of this motion, the Vice Chancellor accepted the plaintiff’s argument that a convertible note held by the buyer, if converted, could add more than $3 million to the purchase price if another bidder emerged, and thus should be considered an enhancer of the termination fees.  The Vice Chancellor held he could not dismiss this claims because it is reasonably conceivable that the plaintiffs might be able to show that this decision by the board was so far out of bounds as to be only explainable as “bad faith”—and thus not exculpable under a Section 102(b)(7) exculpatory clause.

How Immediate is “Prompt” in a Contract? New Delaware Supreme Court Justice Vaughn Finds that It Depends

What does the term “prompt” mean in a contract? Well, it depends, according to Judge James T. Vaughn Jr., who was recently confirmed to the Delaware Supreme Court. In an opinion issued last week from his prior post in the Superior Court (Complex Commercial Division), Justice Vaughn found that notice after ten months may in some circumstances constitute “prompt notice.”

In Avaya, Inc. v. Charter Communications Holding Company, LLC, C.A. No. N14C-03-052, Plaintiff Avaya, Inc. (“Avaya”) moved for summary judgment, arguing that defendants Charter Communications Holding Company, LLC and Charter Communications, Inc. (together “Charter”) failed to satisfy a contractual indemnity requirement to “promptly notify” Avaya of a claim or suit for which indemnity was requested. Charter was served with the complaint at issue on September 5, 2006. However, Charter did not provide a copy of that complaint and tender its defense to Avaya until approximately ten months later on July 2, 2007.

Justice Vaughn denied Avaya’s summary judgment motion, declining to find that notice given ten months after the filing of a lawsuit was, as a matter of law, not prompt. Instead, the Court found that Charter should have the opportunity to conduct discovery to develop the “attendant facts and circumstance.”

Avaya and Charter were party to a Master Purchase Service Agreement (“Agreement”) pursuant to which Charter purchased certain equipment and software from Avaya, including a “private branch exchange system,” an “automatic call distribution system,” and customer management software.

Under the Agreement, Avaya was required to “defend, or settle, at its own expense”, and “pay all damages and costs” relating to, any claims for infringement of patent, copyright or trade secret brought against Charter related to Charter’s use of Avaya products purchased under the Agreement. However, the Agreement also provided, among other things, that “Avaya’s obligation is expressly conditioned upon the following: (1) [Charter] shall promptly notify Avaya in writing of such claim or suit…” The Agreement further provided that if any Avaya product is, or is likely to become, the subject of an infringement lawsuit, that Avaya would procure sufficient rights for Charter to continue using the product without infringement, or would provide a sufficient replacement product or a refund.

On September 1, 2006, Ronald A. Katz Technology Licensing, L.P., sued Charter in the United States District Court for the District of Delaware (the “Infringement Suit”), alleging that Charter’s “call process systems” and “telephone bill pay services” (among other things) infringed Katz’s patents. Charter was served with the complaint on September 5, 2006 and Charter gave notice ten months later.

Avaya initially rejected the indemnification request on grounds that the Infringement Suit did not specifically allege infringement by an Avaya product. Avaya did not initially raise lack of “prompt notice.” On March 16, 2014, Avaya filed the declaratory judgment action in the Delaware Superior Court seeking a determination that “prompt notice” was not given and that Avaya had no duty to defend and indemnify Charter in the Infringement Suit.

Avaya argued that providing notice in 10 months is not “prompt notice” as a matter of law, and that there are no mitigating factors here that would excuse Charter’s delay. Judge Vaughn rejected the argument. “I am not persuaded that the fact alone of a ten month period between the commencement of the Katz Lawsuit and the giving of the July 2, 2007 notice constitutes lack of prompt notice as a matter of law. I agree with Charter that the phrase is subject to some interpretation, and that the interpretation may be influenced by attendant facts and circumstances.”

The Agreement was governed by New York law, and while there was no caselaw discussion, Justice Vaughn did cite to one case in a footnote: Am. Transtech Inc. V. U.S. Trust Corp., 933 F. Supp. 1193, 1200 (S.D.N.Y. 1996). The court in Transtech found that “prompt notice” in an indemnification provision meant notice that gives the indemnitor sufficient time to participate in the defense and that a determination of “sufficient time” required consideration of all of the circumstances.

Delaware Supreme Court Finds Secured Lender’s Subjective Intent Irrelevant to Effect of UCC Termination Statement

The subjective intent of a secured lender is not relevant to a determination of whether a termination statement was effective under the Delaware Uniform Commercial Code (“UCC”) to terminate the secured lender’s perfected security interest, the Delaware Supreme Court has ruled.

The Delaware Supreme Court considered the issue as a question certified to it by the US Court of Appeals for the Second Circuit in In re: Motors Liquidation Company, 755 F.3d 78, 86 (2d Cir. 2014).  The opinion serves as a reminder (and cautionary tale) for agents, lenders and their counsel to closely scrutinize not only transaction documents, but also financing statements and termination statements being filed as part of a closing. Continue reading Delaware Supreme Court Finds Secured Lender’s Subjective Intent Irrelevant to Effect of UCC Termination Statement

Corporations Don’t Independently Owe Fiduciary Duties to Stockholders

On August 7, 2014, Vice Chancellor Glasscock issued a letter opinion in the matter Buttonwood Tree Value Partners, L.P., et al. v. R.L. Polk & Co., Inc., et al., C.A. No. 9250-VCG that is not attention-grabbing because it wrestles with some nuanced topic du jure of Delaware corporate law, but rather because it deals nearly entirely with the rather pedestrian, but not often explicated, principal that a Delaware corporation does not independently owe its stockholders fiduciary duties. Rather, fiduciary duties are owed to the stockholders (and the company) by the directors and officers who are the actual actors on behalf of the company. Continue reading Corporations Don’t Independently Owe Fiduciary Duties to Stockholders

Fee-Shifting Corporate Bylaws–The Judicial Challenges Begin

As discussed in a previous post, the Delaware General Assembly has tabled its consideration of a bill that would ban fee-shifting bylaws for traditional corporations until the next legislative session. This legislative push followed the Delaware Supreme Court’s holding, in responding to certified questions of law, that “fee shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law”. See ATP Tour, Inc., et al. v. Deutscher Tennis Bund (German Tennis Federation), et al., No. 534, 2013 (Del. Supr. May 8, 2014). The fee-shifting bylaws being considered are designed to shift the company’s costs (including attorneys’ fees) of successfully defending against litigation prosecuted by a company’s stockholders to the stockholder plaintiff. As one might imagine, such a scenario might be seen as a “game changer” with regard to shareholder representative litigation.

Continue reading Fee-Shifting Corporate Bylaws–The Judicial Challenges Begin

Delaware Fee-Shifting Bill Shelved For 2014

A joint resolution of the Delaware State Senate and House of Representatives, with the approval of Governor Markell, has shelved a bill to ban Delaware stock corporations from adopting bylaw provisions to shift attorneys’ fees and expenses in corporate litigation to unsuccessful plaintiffs.

The bill was drafted and approved by the Delaware State Bar Association and presented to the General Assembly following the May 8, 2014, en banc response of the Delaware Supreme Court to certified questions of law from the U.S. District Court for the District of Delaware in ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), et al., No. 534, 2013 (Del. May 8, 2014). The Supreme Court stated in ATP that a “fee shifting” bylaw provision in a non-stock corporation’s bylaws “can be valid and enforceable under Delaware law.” The bylaw at issue would shift the company’s defense fees and costs to a member who had sued the company (or any other member) and was unsuccessful in “substantially achiev[ing], in substance and amount, the full remedy sought” in the litigation.

Continue reading Delaware Fee-Shifting Bill Shelved For 2014

Amendments to Delaware LLC and Partnership Acts Pass House

Proposed changes to Delaware’s alternative entity statutes, including amendments providing greater flexibility in finance and other transactions, were passed unanimously by the state House of Representatives on June 10, 2014.

The proposed amendments to the Limited Liability Company Act, 6 Del. C. §§ 18-101, et seq. (LLC Act), the Revised Uniform Limited Partnership Act, 6 Del. C. §§ 17-101, et seq. (LP Act) and the Revised Uniform Partnership Act, 6 Del. C. §§ 15-101, et seq. (GP Act), if approved by the Senate and Governor Markell, by their own terms will become effective on August 1, 2014.

Continue reading Amendments to Delaware LLC and Partnership Acts Pass House

Recent Developments in Business and Commercial Courts

While once somewhat of a novelty, the creation and adoption of specialized business or commercial courts—designed to adjudicate complex business and commercial disputes in an efficient manner to meet the needs of a jurisdiction’s corporate and commercial citizens—continues to mature. Moreover, the resources available discussing these specialized courts or dockets are constantly expanding.

Continue reading Recent Developments in Business and Commercial Courts

Proposed Amendment to Delaware Statute of Limitations Would Extend Time for Contract Claims to 20 Years (Without Seal)Proposed Amendment to Delaware Statute of Limitations Would Extend Time for Contract Claims to 20 Years (Without Seal)

A proposed amendment to the Delaware statute of limitations for contract claims should go a long way toward eliminating uncertainty in parties’ attempts to extend limitations periods by written agreement or by entering into contracts under seal. Parties generally cannot extend (or waive) a statutory limitations periods by agreement, and the requisite formalities required to enter into contracts under seal can be easily botched due to a lack of guidance and inconsistent caselaw. The amendment would allow parties to extend the limitations period in writing to up to 20 years and would only apply to contracts involving at least $100,000.

Continue reading Proposed Amendment to Delaware Statute of Limitations Would Extend Time for Contract Claims to 20 Years (Without Seal)Proposed Amendment to Delaware Statute of Limitations Would Extend Time for Contract Claims to 20 Years (Without Seal)