Delaware Practice Benefits From A Powerful And Effective Judiciary

Monday, May 2, 2011 - 00:00

Editor: On January 18, 2011, the Delaware Court of Chancery became one of the first state courts to issue a guideline for the preservation of electronically stored information (ESI). Can you provide some background on this development?

Bissell: The development of best practices for handling ESI has received a lot of attention in the federal courts, in particular by U.S. District Court Judge Shira A. Scheindlin of the Southern District of New York, and The Sedona Conference has been promulgating guidelines for over a decade.In Delaware, Vice Chancellor Donald F. Parsons, Jr. has taken a great interest in and spoken about ESI issues extensively, most recently at The ABA Business Law Section spring meeting in Boston.

Although the guidelines reflect what already should exist in typical practice, they also highlight that Delaware courts are paying attention to the issues and expense of discovery involving ESI. Historically, the Delaware courts have been trusting of the parties to work out ESI issues with a minimum of judicial supervision. But there is a growing appreciation for the potential for abuse, with requesting parties seeking too much information, and producing parties not meeting obligations to preserve and search. In the Delaware Court of Chancery (Chancery), there remains an expectation that parties will take discovery obligations seriously. Because of the expedited nature of many Chancery cases, the courts really expect an efficient discovery process, particularly from members of the Delaware Bar. But litigants and counsel occasionally need reminders, and the Delaware courts want to signal that they stand ready to stop abuses.

The guidelines outline a best-practices approach in lieu of a strict mandate. This principles-oriented approach works well because each case is different in terms of the depth and scope of searches, whether metadata needs to be produced and when or how data will be produced. Different approaches to each case also depend on the size of the dispute - what's at stake - and the breadth of its issues. Thus, general principles to determine these parameters are preferred over detailed rules that apply to all cases in a "one-size-fits-all" manner.

Editor: Do you agree that Delaware's Complex Commercial Litigation Division (CCLD) offers a kind of arbitration with an opinion, that is, one that creates precedent?

Bissell: I do.Like arbitration, commercial litigants in the CCLD will have a commercially sophisticated tribunal. Unlike commercial arbitration or mediation, decisions from the CCLD create case law, which future litigants can use as guidance. Sometimes it is unclear why or how privately arbitrated disputes are resolved.So there is the expectation that a lot of useful decisional law will come from the CCLD. The CCLD also permits appeal, which is unavailable in most arbitrations.

CCLD will en-hance the Delaware bench's reputation as a premiere forum for commercial disputes. Like the court-annexed arbitration and mediation provisions that were developed over the last ten years, CCLD allows Delaware to leverage its highly vaunted bench and creates another way for commercial litigants to access Delaware's judiciary.

While Chancery's jurisdiction is broad with respect to corporate and alternative entity disputes, it is limited to cases involving equity, certain claims under Delaware corporation law or an enumerated set of corporate documents, such as a merger or purchase agreement, articles of incorporation and LLC or LLP documents to which Chancery has a specific jurisdictional grant. Thus, some commercial disputes remained outside Chancery - for example, insurance coverage, complex contractual and certain employment disputes. The CCLD now allows litigants to put these disputes before a judge with commercial expertise.

Editor: The Delaware judiciary seems not to be protective or resentful of federal and other state courts that decide Delaware law cases, except cases that had de novo facts. What are your comments on this statement?

Bissell: My experience is that the Delaware Federal District and Bankruptcy Courts strive to render Delaware corporation law decisions that are consistent with those from Delaware's state courts, and they have been largely successful in doing so. For example, there was an interesting decision by then United States District Court Judge Kent A. Jordan in the Tower Air bankruptcy. While Judge Jordan's decision to grant a motion to dismiss at the trial court level was consistent with what Chancery would have done, the Third Circuit reversed.

A few months later, another of Judge Jordan's opinions included a lengthy footnote, in which he articulated a respectful dissent to the Third Circuit's decision and explained how the Third Circuit mistook certain aspects of Delaware state corporation law. The footnote reflects the extent to which Delaware-based federal judges try to keep federal decisions consistent with Delaware state court decisions. This offers litigants some assurance of consistent results across both court systems.

Editor: There are many who view Dodd-Frank (the Bill) as an encroachment on traditional areas of state law, such as say-on-pay and proxy access. To what extent will the Bill preempt Delaware law in your practice?

Bissell: The Bill is clearly an encroachment on traditional state law and internal corporate governance issues. More fundamentally, the Bill doesn't seem to be sound or well conceived policy. That being said, it remains unclear to what extent it will preempt Delaware law in M&A or D&O liability litigation.

More specifically, it will be interesting to see how the Bill's proxy access provisions affect disputes about director elections - whether it creates more disputes and whether it requires Delaware courts to interpret a statute that isn't the state's own. Litigation about executive compensation may increase. I have heard that boards receiving negative say-on-pay votes are being sued derivatively, under a waste theory that asserts the board should not have offered higher pay than the stockholders felt the officers were worth.

Editor: The Delaware Supreme Court heard a number of takeover cases in 2010, for example, Airgas, Inc. v. Air Products and Chemicals, Inc .What are the key developments in this practice area?

Bissell: Along with Yucaipa American Alliance Fund II, L.P. v. Riggio and Versata Enterprises, Inc. v. Selectica , the Airgas case affirms the enduring power of the poison pill and the respect Delaware courts have for directors as managers of the business. The decisions show the solidity of judicial support for the pill - which has been under attack by shareholder activist groups for years - and for the primacy of director power under Delaware law.

There are some other M&A developments in 2010, involving mergers in the oil and gas area where the businesses were structured either as LLCs or LPs. These cases serve to define the acceptable extent and scope of exculpation clauses that remove fiduciary duties with those alternative entities. Collectively, these decisions reflect that the power to remove fiduciary duties is very extensive.

Editor: Please discuss the recent House Bill No. 372 that clarified legislative intent - in opposition to a Delaware Supreme Court case, Olson v. Halvorsen - rendering the Statute of Frauds inapplicable in LLC agreements.

Bissell: The Olson decision holding that courts should not imply a repeal of the Statute of Frauds based on the Limited Liability Company Act (LLC Act) as then drafted is hard to assail as a matter of statutory interpretation. The decision may also reflect a number of cases that had asked the courts to interpret and enforce either an unwritten LLC agreement or an unsigned written agreement.Reflecting the Delaware courts' "objectivist" approach to contract interpretation, the courts would prefer to interpret written agreements that don't have ambiguities - that don't depend on memories or on conflicting oral testimony.

On the other hand, part of the appeal of Delaware's LLC Act is its flexibility, and it specifically allows oral agreements. Concerns arise with LLCs and LPs because it can be difficult to obtain all signatures - from large groups of members or partners - on the agreements. Agreements that are not completely executed can create problems in the formation of the entity and the enforcement of merger agreements.

So the LLC Act was amended to reintroduce that flexibility and exempt LLC agreements from the Statute of Frauds. Nonetheless, I strongly advise clients to get written (and fully executed) LLC operating agreements. Although oral LLC agreements are enforceable and are not subject to the Statute of Frauds, they are subject to greater uncertainty in their interpretation and enforcement, and they are not what the courts prefer to see. Editor: How has the economic downturn affected the body of Delaware case law in distressed or bankruptcy-related matters?

Bissell: There was refinement of federal bankruptcy law that involved the ability of debtors to avoid a crash landing and liquidation by having a speedy Section 363 sale. In a typical Section 363 sale, nearly all the debtor's assets are sold, sometimes as fast as within three to four months of filing for bankruptcy, often to a stalking horse bidder. The Section 363 sale solves what's known as the "melting ice cube problem," a compelling image that highlights the need to engage someone who can own and manage the debtor's assets quickly and efficiently - before those assets waste away during a potentially lengthy reorganization process.

Delaware's Bankruptcy Courts processed a large volume of Section 363 sales during the financial crisis. This has fostered the development of case law about how to value assets and what constitutes a fair sales process in Section 363 sales. In Section 363 sales, there are often concerns about whether the debtor has marketed assets to the highest bidder and whether the sale process is fair and conflict-free.

Delaware's Bankruptcy Courts proved they can adroitly address such concerns, resolving sale-related matters quickly and justly. Anyone wishing to review these decisions likely will conclude that the courts did a remarkable job under great pressure during the depths of the financial crisis.

Editor: What is the impact of Galaviz v. Berg (N.D. Cal. Jan. 3, 2011) on a corporation's ability to mandate forum selection? I understand this case addresses the power of directors to pass a bylaw that would make Delaware the forum for a case.

Bissell: The repercussions are not clear. Even before Galaviz, many people, including myself, were advising that a forum selection clause will have greater teeth if it is put in the corporate charter, which requires both director and shareholder votes.

In Galaviz, the forum selection clause was put in through a director-enacted bylaw, that is, without shareholder approval. It is difficult to say whether the existence of stockholder approval would necessarily have led to a different decision in Galaviz. But the argument for its enforcement is stronger if both directors and stockholders state a preference for Delaware as the dispute resolution forum. You can make that argument with a charter amendment, but you can't make it with a director-enacted bylaw.

That's not to say that every court will follow Galaviz and find that the director-enacted bylaw is insufficient.In short, an amendment to the charter has the better chance of standing up.

Editor: Do you have additional thoughts for our readers?

Bissell: While M&A litigation and D&O liability form the centerpiece of my practice, corporate governance is an endlessly fascinating and rich subject.Moreover, it has potential to help clients run their businesses efficiently, fairly and successfully. Staying current with corporate governance developments, both inside and outside of Delaware, is essential to my practice.

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