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Recent Delaware Corporate Law Decisions

August 3, 2010

Court of Chancery Addresses Disclosure of Free Cash Flow Estimates
In two recent decisions, the Court of Chancery addressed the issue of disclosure of free cash flow estimates in connection with a merger. In Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc., C.A. No. 5402-VCS (Del. Ch. May 13, 2010), the Court enjoined the challenged merger pending disclosure of free cash flow estimates. But in Steamfitters Local Union 447 v. Walter, C.A. No. 5492-CC (Del. Ch. June 21, 2010) (Transcript), the Court denied a motion to expedite, holding that disclosure of free cash flow estimates would not be material and distinguishing PLATO Learning.
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Court of Chancery Expedites Challenge of Top Up Option
In Olson v. ev3, Inc., C.A. No. 5583-VCL (Del. Ch. June 25, 2010) (Transcript), the plaintiff sought to enjoin a merger between ev3, Inc. (“ev3”) and Covidien Group S.a.r.l. (“Covidien”), arguing, among other things, that the top up option granted to Covidien was invalid and coercive, and that ev3’s disclosure regarding the top up option was materially misleading and incomplete. The Court of Chancery granted, in part, the plaintiff’s motion to expedite, finding that the potential coercive nature of the top up option and the disclosure regarding the top up option gave rise to a basis to claim irreparable harm.
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Court of Chancery Dismisses Books and Records Actions Filed After Derivative Actions
In two recent decisions, the Court of Chancery dismissed books and records actions under 8 Del. C. § 220 (“Section 220”) that were filed after the plaintiffs had filed derivative actions. In King v. VeriFone Holdings, Inc., C.A. No. 5047-VCS (Del. Ch. May 12, 2010), the Court dismissed the plaintiff’s Section 220 action, holding that his demand, made in an attempt to avoid discovery restrictions in an earlier-filed derivative action, lacked a proper purpose. Similarly, in Baca v. Insight Enterprises, Inc., C.A. No. 5105-VCL (Del. Ch. June 3, 2010), the Court dismissed the plaintiff’s later-filed Section 220 action because the plaintiff lacked a proper purpose. The Court suggested in both cases that it may be time to re-examine the “first-to-file sweepstakes,” which rewards plaintiffs’ counsel who may file representative actions without adequate pre-suit investigation.
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Court of Chancery Holds that Unsecured Promissory Note Not Valid Consideration for Issuance of Stock of a Delaware Corporation Under Pre-August 2004 DGCL
In Prizm Group, Inc. v. Anderson, C.A. No. 4060-VCP (Del. Ch. May 10, 2010), Prizm Group, Inc., a Delaware corporation (“Prizm”), sought a declaration that Mark E. Anderson (“Anderson”), who was issued common stock of Prizm in exchange for an unsecured promissory note, had failed to provide valid consideration for the shares and that the shares were void ab initio or voidable at the election of Prizm. The Court of Chancery held that under Delaware law in effect prior to August 1, 2004, an unsecured promissory note did not constitute valid consideration for the issuance of stock of a Delaware corporation. The Court therefore issued a declaratory judgment that Anderson no longer owned the shares of Prizm, but it declined to determine whether the shares were void ab initio or voidable at the election of Prizm.
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Court of Chancery Reaffirms Primarily Contractual Nature of Preferred Stockholders’ Rights
In Fletcher Int’l, Ltd. v. ION Geophysical Corp., C.A. No. 5109-VCP (Del. Ch. May 28, 2010), the Court of Chancery reaffirmed the primarily contractual nature of the duties owed to, and the rights of, preferred stockholders under Delaware law. Although the Court recognized that preferred stockholders may be owed fiduciary duties under some circumstances, it made clear that unless fiduciary duty claims are based on duties and rights not provided for by contract, a preferred stockholder may not maintain both contractual and fiduciary duty claims arising from the same alleged wrongdoing.
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