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Recent Delaware Corporate Law Decisions

March 2, 2012

In recent months, Delaware courts have addressed a number of issues important to Delaware corporations and their advisors. In Dweck v. Nasser, C.A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), the Court of Chancery imposed liability for breach of the fiduciary duty of loyalty on directors and officers of a Delaware corporation who established competing companies that usurped corporate opportunities, and joint and several liability on an officer who approved expense reimbursements for a disloyal director without considering their validity or asking any questions. In Shiftan v. Morgan Joseph Holdings, Inc., C.A. No. 6424-CS (Del. Ch. Jan. 13, 2012), the Court of Chancery concluded on summary judgment that a specific, non-speculative future redemption right of preferred stockholders must be taken into account when determining the fair value of their shares in an appraisal. In In re Appraisal of Aristotle Corp., C.A. No. 5137-CS (Del. Ch. Jan. 10, 2012), the Court of Chancery granted a motion to dismiss claims of breach of the fiduciary duty of disclosure brought by certain stockholders who had dissented from a short-form merger under 8 Del. C. § 253 and perfected their appraisal rights, on grounds that the plaintiffs lacked standing. In Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012), the Court of Chancery imposed sanctions on representative plaintiffs for improper trading practices. In Sherwood v. Chan, C.A. No. 7106-VCP (Del. Ch. Dec. 20, 2011), the Court of Chancery issued a temporary restraining order enjoining a corporation from holding its annual meeting for a period of 20 days to allow adequate time for corrective disclosures and consideration of a competing slate of director nominees by the stockholders. In In re Compellent Technologies, Inc. Shareholder Litigation, C.A. No. 6084-VCL (Del. Ch. Dec. 9, 2011), the Court of Chancery ruled on an application for attorneys’ fees brought by class counsel who had secured a settlement loosening the “buyer-friendly” deal protection provisions of a merger agreement. In SV Investment Partners, LLC v. ThoughtWorks, Inc., No. 107, 2011 (Del. Nov. 15, 2011), the Delaware Supreme Court affirmed the Court of Chancery’s holding that a corporation did not have “funds legally available” to satisfy a preferred stockholder’s redemption demand, but determined that it did not need to address the Court of Chancery’s other holding that “funds legally available” is not equivalent to “surplus” under 8 Del. C. § 160.

Dweck v. Nasser: In Classic Usurpation of Corporate Opportunity Case, the Court of Chancery Also Imposes Joint and Several Liability on An Officer for Failure to Act in the Face of a Known Duty to Act 
In its post-trial opinion, Dweck v. Nasser, C.A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), the Court of Chancery found that officers and directors of children’s apparel manufacturer Kids International Corporation (“Kids”) breached their fiduciary duties of loyalty to Kids by establishing competing clothing companies that usurped opportunities and converted resources from Kids. In addition, the Court found that an officer who approved expense reimbursements of another officer and director without considering their validity or asking any questions failed to act in the face of a known duty to act, and imposed liability for the improper expenses on a joint and several basis.
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Shiftan v. Morgan Joseph Holdings, Inc.: Court of Chancery Finds That Non-Speculative Future Redemption Right of Preferred Stockholders Must Be Taken Into Account In An Appraisal
In Shiftan v. Morgan Joseph Holdings, Inc., C.A. No. 6424-CS (Del. Ch. Jan. 13, 2012), the Court of Chancery concluded on summary judgment that a specific, non-speculative future redemption right of preferred stockholders must be taken into account when determining the fair value of their shares in an appraisal under 8 Del. C. § 262(h). 
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In re Appraisal of Aristotle Corp.: Court of Chancery Finds No Standing for Fiduciary Duty of Disclosure Claims Brought Belatedly By Appraisal Petitioners
In In re Appraisal of Aristotle Corp., C.A. No. 5137-CS (Del. Ch. Jan. 10, 2012), the Court of Chancery granted a motion to dismiss, for lack of standing, a complaint for breach of the fiduciary duty of disclosure brought by certain stockholders who had dissented from a short-form merger under 8 Del. C. § 253 and perfected their appraisal rights. The complaint, which was filed 18 months after petitioners commenced appraisal proceedings, alleged that directors of Aristotle Corporation (“Aristotle”) failed to disclose all material facts in connection with the merger, including that the merger allegedly had been consummated without a majority of the minority stockholder vote in contravention of Aristotle’s certificate of incorporation. As a remedy, petitioners sought the fair value of their shares, the same remedy they were already seeking under the appraisal statute. Notably, petitioners sought only to represent themselves and not a class of other stockholders.
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Steinhardt v. Howard-Anderson: Court of Chancery Sanctions Representative Plaintiffs For Improper Trading Practices
In Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012), the Court of Chancery imposed sanctions on representative plaintiffs for improper trading by plaintiff-fiduciaries. Michael Steinhardt and two funds managed by him filed suit as representative plaintiffs on behalf of stockholders of Occam Networks, Inc. (“Occam”) challenging the acquisition of Occam by Calix, Inc. (“Calix”). Steinhardt short-sold shares of Calix stock after the Court entered a confidentiality order restricting trading on the basis of confidential information obtained in the lawsuit and after Steinhardt had received information about the lawsuit from another representative plaintiff. The Court sanctioned Steinhardt and the funds by (i) dismissing them from the case with prejudice, (ii) barring them from recovering anything from the litigation, (iii) requiring them to self-report to the SEC, (iv) directing them to disclose the Court’s opinion in any future application to serve as lead plaintiff, and (v) ordering disgorgement of profits in the amount of $534,071.45.
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Sherwood v. Chan: Court of Chancery Grants Temporary Restraining Order Enjoining Corporation’s Annual Meeting for 20 Days To Allow Adequate Time for Corrective Disclosures and Consideration of a Competing Slate of Director Nominees 
In Sherwood v. Chan, C.A. No. 7106-VCP (Del. Ch. Dec. 20, 2011), the Court of Chancery issued a temporary restraining order enjoining ChinaCast Education Corporation (“ChinaCast”) and certain of its directors (collectively, “Defendants”) from holding ChinaCast’s annual meeting for a period of 20 days so that stockholders could express their “fully informed” views in the corporate election. Plaintiffs Ned Sherwood and ZS EDU, L.P. (collectively, “Plaintiffs”) brought the action on December 12, 2011, asserting claims for breach of fiduciary duty and defamation and seeking a temporary restraining order against Defendants so that certain corrective disclosures could be made and Plaintiffs’ competing slate of nominees could be considered prior to the annual meeting, which was scheduled to take place on December 20, 2011. The Court noted that, of the Plaintiffs’ claims, only the disclosure claims could warrant a temporary restraining order, and proceeded to find that: (i) those claims were colorable, (ii) irreparable harm existed because of the threat of an uninformed stockholder vote, and (iii) while the equities claimed by both Plaintiffs and Defendants might be in equipoise, the balance of equities as between Defendants and ChinaCast’s stockholders tipped decidedly in favor of granting the temporary restraining order. 
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In re Compellent Technologies, Inc. Shareholder Litigation: Court of Chancery Awards Fee for Settlement that Reduced Buyer-Friendly Deal Protections 
In In re Compellent Technologies, Inc. Shareholder Litigation, C.A. No. 6084-VCL (Del. Ch. Dec. 9, 2011), the Court of Chancery ruled on an application for attorneys’ fees brought by class counsel who had secured a settlement loosening the “buyer-friendly” deal protection provisions of a merger agreement. Based upon the benefits conferred by the settlement, which shifted the merger agreement’s protective array of defensive measures from the aggressive end of the spectrum towards the middle, the Court rejected plaintiffs’ counsel’s request for a $6 million fee award and awarded $2.4 million. 
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SV Investment Partners, LLC v. ThoughtWorks, Inc.: Delaware Supreme Court Affirms Court of Chancery Decision Without Addressing Whether “Funds Legally Available” is Equivalent to “Surplus”
In SV Investment Partners, LLC v. ThoughtWorks, Inc., No. 107, 2011 (Del. Nov. 15, 2011), the Delaware Supreme Court affirmed the Court of Chancery’s holding that SV Investment Partners, LLC (“SVIP”) failed to prove that ThoughtWorks, Inc. (“ThoughtWorks”) had “funds legally available” to satisfy SVIP’s redemption demand, even assuming that SVIP was correct in arguing that the phrase “funds legally available,” as used in ThoughtWorks’ certificate of incorporation, was equivalent to the term “surplus,” as used in 8 Del. C. § 160. Thus, the Supreme Court determined that it did not need to address the Court of Chancery’s other holding that “funds legally available” was not equivalent to “surplus.” 
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