Delaware Chancery Court Finds Limited Liability Companies Can Be Liable For Advancement To Members, Even Under Delaware Corporate Law
On April 30, 2019, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery held that plaintiff Freeman Family LLC (“Freeman”), a member of Park Avenue Landing LLC (the “Company”), is entitled to advancement pursuant to Delaware corporate case law. Freeman Family LLC v. Park Avenue Landing LLC, No. C.A. 2018-0683 (Del. Ch. April 30, 2019). In January 2017, plaintiff was sued by the Company’s managing member in the United States District Court for the District of New Jersey (the “New Jersey action”). Thereafter, plaintiff argued the Company must provide advancement of legal fees arising from the New Jersey action because its operating agreement provides that all members shall receive advancement if they are made party to an action as a result of their status as a member. In granting plaintiff’s motion for judgment on the pleadings, the Court first found that Delaware corporate case law applied “by analogy” because the advancement provision in the Company’s operating agreement incorporated language from the Delaware General Corporation Law, 8 Del. C. § 145. However, the Court found that plaintiff was nevertheless entitled to advancement because a “causal relationship” existed between the New Jersey action and plaintiff’s official capacity as manager.
New York Court Denies Approval Of Disclosure-Only Settlement, Finding Supplemental Disclosures “Useless”
On February 8, 2018, Justice Shirley Werner Kornreich of the New York Supreme Court denied a motion for final approval of a disclosure-only settlement in a class action suit brought by shareholders of Martin Marietta Materials, Inc. (“MMM”) regarding its acquisition of Texas Industries, Inc. (“TXI”). City Trading Fund v. Nye, 2018 WL 792283 (N.Y. Sup. Ct., Feb. 8, 2018). Plaintiff, which owned only ten shares in MMM, asserted breach of fiduciary duty claims and sought to enjoin the merger on the ground of inadequate disclosures in the proxy provided to shareholders. The parties, however, reached a settlement, which required defendants to make certain “supplemental disclosures” and provided for the payment of $500,000 in attorneys’ fees to plaintiff’s counsel. Justice Kornreich previously denied approval of the settlement, but that decision was reversed by the New York Supreme Court, Appellate Division and remanded for a fairness hearing. City Trading Fund v. Nye, 144 A.D.3d 595, 21 (N.Y. App. Div. 2016). Moreover, in the interim, the Appellate Division, in Gordon v. Verizon Communications, Inc., 148 A.D.3d 146 (N.Y. App. Div. 2017), adopted a more lenient approval standard for disclosure-only settlements than that followed recently by courts in Delaware and elsewhere. Nevertheless, Justice Kornreich found the supplemental disclosures “utterly useless to the shareholders” and, therefore, declined to approve the settlement.
New York Appellate Division Refines The Colt Standard For Nonmonetary Settlements Of Merger-Related Class Action Suits
On February 2, 2017, in Gordon v. Verizon Communications, Inc., No. 653084/13 (N.Y. App. Div. Feb. 2, 2017) (“Gordon”), the New York Supreme Court, Appellate Division, First Department reversed the decision of the trial court and approved a proposed nonmonetary settlement of a putative shareholders’ class action challenging the acquisition by Verizon Communications, Inc. (“Verizon”) of the 45% interest in Verizon Wireless held by subsidiaries of Vodafone Group PLC. In doing so, the Appellate Division added to the five-factor Colt standard of review—and focused on—two additional factors for the evaluation of proposed nonmonetary class action settlements: “whether the proposed settlement is in the best interests of the putative settlement class as a whole, and whether the settlement is in the best interest of the corporation.” Id. at *21; see also In re Colt Indus. S’holder Litig., 155 A.D.2d 154 (N.Y. App. Div. 1990), aff’d as modified sub nom. Colt Indus. S’holder Litig. v. Colt Indus. Inc., 77 N.Y.2d 185 (1991).
Delaware Supreme Court Holds That Employer May Not Avoid Advancing Former Executive’s Litigation Expenses By Claiming Hiring Was Induced By Fraud
On November 28, 2016, in a decision penned by Chief Justice Leo E. Strine Jr., the Delaware Supreme Court affirmed the Delaware Court of Chancery’s ruling that fraud in the inducement could not be raised as a defense to a summary advancement proceeding. Trascent Mgmt. Consulting, LLC v. Bouri, No. 126, 2016 (Del. Nov. 28, 2016). More specifically, the Court held: “Where a party has employed an officer under a contract where that party agreed to provide for advancement [of legal fees and costs] . . . until a court’s final judgment that the officer is not entitled to indemnification, that party may not escape the obligation by injecting into a summary advancement proceeding a defense based on the argument that the underlying contract under which the parties are operating is invalid altogether, because of fraud in the inducement.”
Read moreCATEGORY: Attorneys’ Fees
Delaware Court Of Chancery Denies Litigation Financier’s Request For Litigation Fees, Notwithstanding Benefit To Company
On September 19, 2016, Vice Chancellor Travis Laster of the Delaware Court of Chancery denied a fee application submitted by Preferred Spectrum Investments, LLC (“PSI”), a third-party that had funded successful shareholder litigation against Preferred Communication Systems, Inc. (“PCSI”). Judy v. Preferred Communication Systems, Inc., Consol. C.A. No. 4662-VCL (Del. Ch. Sept. 19, 2016). In rejecting PSI’s application, the Court held that litigation financiers that are not parties to the action lack standing to seek a fee award under Delaware’s “common benefit doctrine,” and that “parties cannot obtain an equitable fee award when they use litigation in support of a takeover.”
Read moreCATEGORY: Attorneys’ Fees
Delaware Court Of Chancery Slashes Attorneys’ Fee Request In Mootness Dismissal Context Despite Applying More Lenient Standard Based On Shareholder Benefit
On August 4, 2016, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery awarded counsel to shareholders of an acquired company $50,000 in attorneys’ fees—less than 20 percent of their requested fee award—in a mootness proceeding. In re Xoom Corp. Stockholder Litig., C.A. No. 11263-VCG (consol.) (Del. Ch. Ct. Aug. 4, 2016). The Xoom decision signals that despite the Court’s previously expressed openness to awarding attorneys’ fees to plaintiffs’ counsel for securing supplemental disclosures in the mootness context, see In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884, 898-99 (Del. Ch. 2016), that it will still heavily scrutinize the “get” part of the equation—i.e., the benefit of the additional disclosures to shareholders—even when there is no “give” (i.e., a broad class-wide release of claims) against which to weigh it.