The United States District Court for the District of Delaware recently issued a Jury Trial Notice on April 5, 2021, stating that jury trials will resume, subject to the discretion of each individual judge as to whether and when any particular case will proceed to trial.

Previously, on February 5th, the Chief District Court Judge issued a Standing Order RE: Criminal and Civil Jury Trial Suspension, which cancelled all jury trials for two months, in light of the continuing impact of the COVID-19 pandemic.

Citing current conditions and after consultation with the Court’s Reopening Committee, the District Court of Delaware determined that it will not extend the February 5th Standing Order.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In the recent decision of Blackmon v. O3 Insight, Inc., C.A. No. 2020-1014-SG (Del. Ch. Mar. 9, 2021), the Delaware Court of Chancery held that the arbitrability of a Delaware director’s claim for advancement must be determined by an arbitrator.

The Petitioner, Theodore Blackmon, is a director and stockholder of respondent O3 Insight, Inc. (the “Company”), a Delaware corporation.  In September of 2020, the Company sued Blackmon in Alabama alleging breach of his fiduciary duty to the Company. The Certificate of Incorporation and Bylaws of the Company provide for advancement following tender of an undertaking to repay.

Blackmon filed an action in the Delaware Court of Chancery seeking advancement of his legal fees. The Company moved to dismiss for lack of subject matter jurisdiction.  The Petitioner had signed an agreement (the “Stockholders Agreement”), which stated: “any dispute, controversy or claim arising out of, relating to, or in connection with, this Agreement . . . shall be finally settled by arbitration. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association” (the “AAA rules”).

Vice Chancellor Glasscock noted that under the AAA rules, issues of arbitrability—whether the arbitrator is empowered to decide a particular issue—are reserved for the arbitrator.

The Company argued that because the Stockholders Agreement invokes the rules of the AAA, the Court of Chancery is without jurisdiction to determine whether the issue of the Petitioner’s entitlement to advancement of legal fees is reserved to arbitration.

In conducting its analysis, the Court noted that “Delaware arbitration law mirrors federal law”, and that “[j]ust as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, so the question of who has the primary power to decide arbitrability turns upon what the parties agreed about that matter.”  Slip op. at 3 (quoting James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78-79 (Del. 2006)).

Given that “the question of who decides arbitrability is itself a question of contract”, the Court analyzed whether the parties contractually bound themselves to have arbitrability in this context decided by an arbitrator.  The Court noted that the arbitration clause of the stockholders agreement submitted all issues “arising out of, relating to, or in connection with” the Stockholder’s Agreement to arbitration under the AAA rules. Slip op. at 4.

The Court, citing Willie Gary, found that the decision of whether the claims are subject to arbitration, a gateway issue referred to as “substantive arbitrability”, must be decided by the arbitrator in the first instance.  Accordingly, the Court granted the Company’s motion to stay the action pending the arbitrator’s decision on the arbitrability of the advancement claim.

Key Takeaway: Although the Delaware Court of Chancery is vested with subject matter jurisdiction to adjudicate advancement claims of directors of Delaware corporations, such jurisdiction may be contractually vested in an arbitrator, and the Court will look to the operative agreement to determine whether the Court, or the arbitrator, decides the arbitrability of the claim.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In a recent letter opinion, 250ok, Inc. v. Message Sys., Inc., C.A. No. 2020-0588-JRS (Del. Ch. Jan. 22, 2021), the Court of Chancery held that a claim under the Delaware Uniform Trade Secrets Act (“DUTSA”), 6 Del. C. § 2001 et seq., preempted a common law claim for unjust enrichment, when both claims arose from the same purported wrongdoing.

In dismissing the unjust enrichment claim, Vice Chancellor Slights held that, under established Delaware Supreme Court precedent, a trade secret claim under the DUTSA “occupies the field” and preempts a common law unjust enrichment claim. Slip op. at 1.

The Court further explained that preemption applies not just to tort-based claims, but to any “alternative common law claims” ” beyond those expressly exempted from preemption in the statute.  Id. at 13. Moreover, preemption applies at the dismissal stage of a proceeding, even though the Court may later find that the DUTSA does not protect the information at issue. Accordingly, the Court of Chancery dismissed plaintiff’s unjust enrichment claim.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In a noteworthy and recent Court of Chancery decision, Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021), the Delaware Court of Chancery ruled upon a member’s request to invalidate dissolution of a Delaware limited liability company.  The opinion is an important read as the Court considered whether the LLC deadlock–which provided the basis for dissolution–was genuine or simply “contrived” by one member to force the appearance of deadlock.

In this action, Plaintiff Mehra and Defendant Teller had equal say over the member and board decisions of the limited liability company at issue (“Company”), a consumer goods company.  After several successful years, the Company suffered a series of setbacks that soured the parties’ relationship and left Teller strapped for cash.

The LLC agreement contained a deadlock provision which, according to the Court, “created a trapdoor with a hair trigger” (slip op. at 1), in that one member could propose a business divorce to the board, declare deadlock if the other disagreed, and exit the shared-control arrangement between the two parties.

Here, Teller held a meeting whereby he proposed a resolution to remove Mehra as CFO of a Company subsidiary.  As the parties could not agree on this resolution, Teller declared the board deadlocked and dissolved the Company.

Mehra brought suit before the Delaware Court of Chancery to invalidate the dissolution in order to restore the shared-control arrangement among Mehra and Teller.  The Court resolved the issue in Teller’s favor, finding that although Teller may have contrived the circumstances giving rise to the deadlock, Teller nonetheless proved that the parties had an irreconcilable disagreement over Mehra’s continuing management of the Company.  As such, the Court found that the deadlock was genuine and sufficient to warrant dissolution.

The Court also denied Mehra’s assertion that dissolution should be rendered invalid due to Teller’s alleged breach of a “good faith” provision of the LLC Agreement.   The Court disagreed, finding that Teller acted with the honest belief that his conduct was necessary for the Company.

Key Takeaway:

This decision is notable in that while the Court found that Teller was the party responsible for creating the circumstances giving rise to deadlock, a genuine deadlock nonetheless existed, which warranted dissolution.  Members of a Delaware limited liability company who have equal rights and say over the affairs of such LLC should carefully take this opinion into consideration in the event that one member seeks to dissolve an entity over deadlock.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

On January 29, 2021, Chief Judge Leonard P. Stark issued a Standing Order setting forth new procedures for the filing, service, and management of highly sensitive documents, defined as “HSD”. The Standing Order was issued in response to recent widespread disclosures of breaches of both private sector and government computer systems.

As the Order makes clear, most documents are presumptively deemed to not contain highly sensitive information (“HSI”), including “most sealed filings in civil cases, including the overwhelming majority (if not all) sealed documents filed in intellectual property and Chapter 11 cases.”  Standing Order, at 3.

If the document qualifies as an HSD, then the Standing Order provides a separate motion procedure the designating party must follow.

The Standing Order provides that the following documents are presumptively HSDs: (i) applications for electronic surveillance under 18 U.S.C. § 2518, and (ii) documents that adversely affect: national security; integrity of government operations; reputational interests of the US; a foreign sovereign interest; on-going law-enforcement investigations and intelligence-gathering operations; safety of public officials or individual cooperating with law enforcement; and the ability of an entity to maintain cybersecurity.

The Standing Order clarifies that few documents will qualify for this designation, however, stating that, in connection with business and other entities, “documents will likely constitute HSI only (if ever) when they are among the most sensitive records created in the entity’s history and that, if wrongfully disclosed, could result in catastrophic financial and/or other loss for the entity.” Standing Order, at 2.

Of significance, the Order clarifies that the HSD is “exceptional treatment” and the party moving to file the documents as such “bears the burden to justify such exceptional treatment.” Standing Order, at 2.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

A common tactic employed by experienced Chancery litigators defending a lawsuit is to file a motion to stay discovery while a motion to dismiss is pending. The argument is that if the case is dismissed, the expense of undertaking discovery while a motion to dismiss is pending should be avoided.

A recent short letter opinion issued by Vice Chancellor Slights, in the case of Soo Hyun Kim v. Coupang, LLC f/k/a Forward Ventures, LLC, C.A. No. 2020-0772-JRS (Del. Ch. Jan. 22, 2021), adjudicated such a motion to stay discovery while a motion to dismiss was pending.

The Court of Chancery recited the well-known standard for granting a motion to stay discovery pending a motion to dismiss:

Absent special circumstances, discovery will normally be stayed pending the determination of a motion to dismiss the complaint. ‘Special circumstances’ have been found to include situations where (i) the motion does not offer a ‘reasonable expectation’ of avoiding further litigation, (ii) plaintiff has requested interim relief, and (iii) the plaintiff will be prejudiced because the information may be unavailable at a later time.

Slip op. at 1-2 (internal citations omitted).

Counsel for plaintiff opposed the motion to stay discovery on the grounds that the motion to dismiss did not offer a reasonable expectation of avoiding further litigation because the Court will likely deny it.

The Court rejected that argument.  In so ruling, Vice Chancellor Slights wrote that: “But whether vel non the Motion to Dismiss will be granted or denied is not the question on this Motion. The question, instead, is whether the Motion to Dismiss, if successful, will avoid the need for further litigation.”  Id. at 2.

The Court also rejected plaintiff’s argument that the requested discovery would not impose an undue burden, stating that such consideration “is not the standard by which this court reviews applications to stay discovery in the midst of pending dispositive
motion practice.” Id. 

Takeaway

This pithy opinion reinforces the Court’s proclivity to grant a stay of discovery pending a motion to dismiss, provided none of the special circumstances referenced above are met.  This decision should be considered by parties seeking to oppose discovery pending a motion to dismiss.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

According to a recent announcement, the Delaware Court of Chancery amended various rules to match current practices in the Court and to clarify the Court’s expectations.  The Court amended Rules 79, 89, 114, 176, and 180-B.  A summary of the changes, as set forth in the announcement, are set forth below:

  • Rule 79 is amended to remove outdated language regarding how the Register in Chancery maintains its dockets.
  • Rule 89 is amended to remove the outdated language in the standard text of the Court’s form bonds.
  • Rule 114 is amended to clarify that all trust accountings are expected to be filed within ninety (90) days of the end of the accounting period.
  • Rule 176 is amended to permit those petitioning for guardianship to provide notice to interested parties by any courier service that provides real-time tracking of delivery.
  • Rule 180-B is amended to confirm that the Office of the Public Guardian may provide forms for its annual guardianship reviews, subject to the Court’s approval.

A link to the revised rules can be found here, and a redline reflecting the revisions can be found here.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

Delaware stockholders and directors have an important tool in their arsenal to obtain information from a Delaware corporation: Section 220 of the Delaware General Corporation Law (“DGCL”). The statute confers standing upon stockholders or directors to demand inspection of the books and records of a Delaware corporation.  Del. C. § 220. This post will provide a primer on the litigation of books and records demands pursuant to Section 220 of the DGCL before the Delaware Court of Chancery.

The Books and Records Demand

The first step in making a books and records demand under Section 220 is to submit a formal demand letter to the corporation that complies with the provisions of Section 220.  These requirements include:

  • The demand must be made under oath.
  • Where the stockholder is not a record holder of stock or member of a nonstock corporation, the demand shall: (a) state the person’s status as a stockholder, (b) be accompanied by documentary evidence of beneficial ownership of the stock, and (c) state that such documentary evidence is a true and correct copy of what it purports to be.
  • The demand must be directed to the corporation at its registered office in Delaware or at its principal place of business.
  • If the demand it not made by the stockholder (but rather, for example, by its counsel), then the demand must be accompanied by a power of attorney or such other writing authorizing the attorney or agent to so act on behalf of the stockholder.

8 Del. C. § 220(b).

The Delaware Court of Chancery strictly construes the technical requirements set forth in Section 220.  If a petitioning stockholder or director fails to comply with these requirements, the demand may be denied.

Proper Purpose

Under Section 220(b), a books and records demand must also state a proper purpose for why the documents are being sought.  Proper purposes include, but are not limited to: (1) to value the stockholder’s interest in the corporation, and (2) to investigate mismanagement or wrongdoing.  This is not an exclusive list.

To investigate mismanagement or wrongdoing, “a stockholder must present some credible basis from which the Court can infer that mismanagement, waste or wrongdoing may have occurred.” Thomas & Betts Corp. v. Leviton Mfg. Co. Inc., 681 A.2d 1026, 1031 (Del. 1996); Murfey v. WHC Ventures, LLC, et al., 236 A.3d 337, 341 (Del. 2020).  A demand will not be approved for “idle curiosity” or to permit a “fishing expedition.”

Scope of Documents Requested

Section 220(b) permits a stockholder, upon stating a proper purpose under oath, to inspect: (1) the corporation’s stock ledger, (2) its list of stockholders, and (3) “other books and records” of the corporation.

As to demands for “other books and records” of a corporation, the Court of Chancery will only permit inspection for those categories of documents that are “narrowly tailored” or “necessary and essential” to the proper purpose set forth in the demand.  A stockholder will be allowed to inspect only those documents that it proves to be “essential and sufficient” to the accomplishment of its stated purpose(s).  Tactron, Inc. v. KDI Corp., 1985 WL 44694, at *1 (Del. Ch. Jan. 10, 1985).

Time Period for Compliance

Under Section 220(c), if the Delaware corporation refuses to permit compliance with the demand within 5 business days, then the stockholder or director may file an action with the Delaware Court of Chancery to compel the corporation to permit inspection of the requested books and records.

In Which Court Must a Section 220 Action be Filed?

Under Section 220(c), the Delaware Court of Chancery is “vested with exclusive jurisdiction to determine whether or not the person seeking inspection is entitled to the inspection sought.” In other words, if the action is asserted in Delaware, the Delaware Court of Chancery is the proper court in which to file such an action.

The question has arisen as to whether a books and records action seeking documents of a Delaware corporation can be litigated outside of the State of Delaware, for example, in the state in which the corporation is located.  The Court of Chancery issued a ruling last year holding that a books and records demand under Section 220 must be brought in Delaware even though the company was headquartered in California and that state’s statutory scheme permits foreign entities to bring such actions in that state.  That ruling was discussed in a prior post here.

How Quickly Are Books and Records Actions Litigated?

Section 220 books and records actions are summary proceedings that are litigated at a faster pace than non-expedited actions.  A Section 220 petition must be accompanied by a motion to expedite the proceedings.  Often times, litigators request that a trial be scheduled 60-90 days from the filing of the complaint.  The scheduling of the trial can depend on a number of factors, including the court’s availability, whether some external event is scheduled that may impact timing (i.e. an annual shareholder meeting, a proposed sale of the company, etc.), and whether irreparable harm has been shown by the plaintiffs.

What Discovery is Permissible in a Books and Records Action?

Narrow and targeted discovery is permitted in a Delaware books and records action.  Discovery can be taken on, for example, the purpose stated in the demand letter, the need for the documents demanded, or the affirmative defenses raised in opposition to the demand.  Depositions may take place to evaluate these issues.  Of course, the stockholder cannot seek in discovery the books and records that are ultimately being sought in the demand.

Does Section 220 Apply to Alternative Entities, i.e. LLC’s or LP’s?

Section 220 only applies to Delaware corporations. Demands for books and records made upon Delaware limited liability companies or Delaware limited partnerships are made pursuant to Section 18-305 of the Delaware LLC Act, and Section 17-305 of the Delaware Revised Uniform Limited Partnership Act, respectively.

What Does a Books and Records Trial Entail?

Books and records trials are often more akin to an “evidentiary hearing” given the narrow scope of issues being litigated.  The Court of Chancery will typically set aside a full-day or half-day hearing for evidence to be heard.  No opening or closing statements are made, and there is no jury in the Court of Chancery. Rather, the parties’ arguments are set forth in pre-trial or post-trial submissions.

Often times, parties will stipulate to having the case “tried on the papers” if there are no material facts in dispute.  This means that the parties will forego live testimony and instead hold oral argument before the Court based upon the paper record before it.

How Quickly will the Court Rule?

This can vary.  In some instances, the Court may issue a bench ruling the day of the evidentiary hearing or, if tried on the papers, the day of oral argument.  In other instances, the Court may request post-trial briefing, and then issue a ruling after reviewing the post-trial submissions.

Will the Court Shift Fees in Favor of the Prevailing Party?

This is a very common question.  The Court of Chancery follows the American Rule, meaning that each side must bear their own fees.  However, the Court may shift fees in the event that a party engages in bad faith conduct during the course of the litigation.  The Court also has discretion to shift fees in the event that an underlying contract or agreement permits fee-shifting.

Can a Books and Records Action be Appealed?

Yes, books and records actions can be appealed.  A notice of appeal must be filed within 30 days of the final ruling by the Court of Chancery. The appeal is made directly to the Delaware Supreme Court.  After briefing is submitted, Delaware’s High Court will determine whether oral argument is necessary.  If so, oral argument will be scheduled, and the Court will then rule on the appeal.  This full appeal process may take up to 6 to 12 months from the filing of the notice of appeal, absent the appellant seeking expedited review.

Takeaway

Section 220 of the DGCL provides stockholders and directors with an invaluable resource to inspect a corporation’s books and records or stockholder list, and can serve useful purposes such as valuing a stockholder’s interest, communicating with other shareholders before an election of directors, investigating corporate misconduct or wrongdoing by the fiduciaries of a corporation, among other purposes.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

My colleagues at FisherBroyles, LLP, Kevin Gluntz and Paul D. Economon, have recently authored an insightful article on the extension and modification of the Paycheck Protection Program (PPP), titled Client Alert – PPP Re-Run!  The contents of the article are set forth below.

Client Alert- PPP Re-Run!

A copy of this Client Alert can be found HERE.

Congress Extends and Modifies Paycheck Protection Program

After significant and inexplicable delays, Congress has agreed on the Consolidated Appropriations Act, 2021 (H.R. 133) and President Trump signed the same into law yesterday.  This bill provides $900 billion in stimulus relief for the COVID-19 Pandemic in addition to the $1.4 trillion omnibus spending bill for the 2021 fiscal year.   Included in this bill is an appropriation of $284 billion for the Paycheck Protection Program that was a part of the CARES Act passed in March of 2020.  The extension of the Paycheck Protection Program presents an opportunity for our clients to maintain their businesses during the economic challenges of the COVID-19 Pandemic.

What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is a loan program through the Small Business Administration (SBA).  Under the PPP, small businesses may borrow funds at a low interest rate for certain uses.  The amount of funds is based on the amount the borrower paid its employees during a particular base period.  After the loan, the borrower may have some or all of its loan forgiven if it meets certain criteria.  Forgiveness of a PPP loan is not imputed to the borrower as income for tax purposes.

Second Round of Loans

The extension of the PPP enables qualified businesses to apply for another round of PPP funding capped at $2 million and which is calculated at 2.5X the average monthly payroll costs, except for entities in industries assigned to NAICS code 72 (Accommodations and Food Services) who may receive loans of up to 3.5X average monthly payroll costs.  Eligibility requirements include having no more than 300 employees, having fully used the first PPP draw, and having experienced at least a 25% reduction in gross receipts in any one quarter in 2020 as compared to the same quarter in 2019. The extended PPP also includes set-asides for borrowers with 10 or fewer employees, first time borrowers who were not eligible for the first round of loans, and for returning borrowers.

Borrowers will be eligible to have the full amount of this loan forgiven if they spend 60% or more of the loan proceeds on payroll costs.  Other permitted uses of loan proceeds include payment of rent, mortgage expenses, utilities, supplier costs on existing contracts and purchase orders, costs related to worker protection equipment, and technology operation expenditures.

Changes to the PPP

In addition to offering a second round of loans, Congress made several changes to the PPP.  It expanded the permissible uses of loan proceeds to include all of the uses explained above.  Additionally, the modified PPP provides that business expenses on all PPP loans are fully deductible even if the balance of the PPP loan was forgiven.

How to receive a loan

For clients who received a PPP loan – and therefore have a PPP lender, which is the financial institution that underwrote the original loan – we suggest going back to the same lender, because approaching a new lender may slow the application process unnecessarily.  For clients who did not obtain a PPP loan the first time around, we suggest establishing a relationship with a known, approved SBA lender, including community, regional or national banks.

We anticipate that the second draw process will involve the issuance of new rules, forms, and guidance under the new Act by the SBA within 10 days from enactment – which means at the earliest, we would expect guidance from the SBA in January, 2021.

All of the foregoing presents an opportunity for our clients to obtain additional relief during the COVID-19 pandemic.  We are happy to advise our clients in obtaining these loans and in tax planning as 2020 nears its close.

For additional information, please contact any of the following with any questions or more specific situations:

Kevin Gluntz, Partnerkevin.gluntz@fisherbroyles.com

Paul Economon, Partner, paul.economon@fisherbroyles.com

On December 30, 2020, the Delaware Supreme Court extended the current judicial emergency for an additional 30 days, effective January 4, 2021.  The Chief Justice of the Delaware Supreme Court issued Administrative Order No. 15 memorializing the same.

Previously, on October 5, 2020, the Delaware Courts had moved to a modified Phase 3 of the Delaware Judiciary’s four-phase reopening plan that was released in May by the Courts Reopening Committee.  The move to a modified Phase 3 allowed court facilities and staffing to increase up to 75 percent capacity and increase the number of people allowed in courtrooms to accommodate jury trials.

On November 16, 2020, citing the deterioration of COVID-19 conditions in the State, the Chief Justice had ordered the courts to postpone jury trials and transition back to Phase 2 of the Reopening Plan, as memorialized in Administrative Order No. 13.

Through Administrative Order No. 15, the Chief Justice has continued the judicial emergency for an addition thirty days, effective January 4, 2021, ordering that courts shall continue to operate under Phase 2 of the Reopening Plan, and that all Delaware Courts are authorized to continue to utilize audiovisual devices at their facilities and remotely to conduct proceedings, with the exception of jury trials.

Moreover, the suspension of requirements for sworn affidavits, verifications, oaths or affidavits filed in the Delaware Courts, as set forth under Administrative Order No. 3, remains in effect.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.