October 28, 2014

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Compiled by Eric B. Amstutz

Delaware corporate bylaws may require that plaintiffs bring intra-corporate litigation in the state of the corporation’s headquarters.

In September 2014, the Delaware Chancery Court upheld the validity of a bylaw adopted by a Delaware corporation that required intra-corporate litigation be brought in the state of the corporation’s headquarters (in that case North Carolina). The bylaw requirement applied to suits alleging derivative claims, fiduciary duty breach claims and claims arising pursuant to the Delaware General Corporation Law.  The decision is City of Providence v. First Citizens Bancshares, Inc. (Del. Ct. Chancery 9/8/14). The decision is consistent with the recent judicial trend to honor corporate forum selection bylaw provisions. See for example Groen v. Safeway Inc. (Calif. Sup. Ct. 5/14/14) and Hemg Inc. v. Aspen University (N.Y. Sup. Ct. 11/4/13). Some corporations may choose, as the exclusive forum, their state of incorporation where the courts presumably have the most experience interpreting their corporate law. Other corporations may select their headquarters state as most convenient.  Forum selection clauses can significantly reduce litigation costs for corporations with stockholders in numerous jurisdictions.  Most court decisions do acknowledge that the particular facts surrounding adoption of an exclusive forum bylaw could lead to invalidation of such a bylaw.

The business judgment rule may protect the pursuit by an insolvent corporation’s board of a riskier business strategy.

Under Delaware law, an insolvent corporation’s board of directors owes fiduciary duties that may be asserted in derivative litigation by the corporation’s creditors. In a recent Delaware Chancery Court case, the plaintiff creditors asserted that the insolvent corporation’s board (which included stockholder representatives) had adopted a risky business strategy that would benefit the stockholders if successful but would harm the creditors if not successful. The court dismissed the claim, finding that the duty of the board of an insolvent corporation (similar to the duty of a solvent corporation’s board) is to attempt to maximize the economic value of the firm as a whole, and that the business judgment rule protected the directors’ decisions as to how to do so. The court found that “a riskier business strategy could return greater value for the Company and all of its residual claimants, including its creditors.” Under the reasoning of this decision, the standard for assessing a board’s business strategy decisions would appear not to change when a corporation becomes insolvent. The decision is Quadrant Structured Products Company, Ltd. v. Vertin (Del. Ct. Chancery 10/1/14). Delaware corporate law decisions are often given weight by courts in other jurisdictions.

A lender that unknowingly helped fund fraudulent transfers may be vulnerable to a fraudulent conveyance claim unless the lender can affirmatively prove good faith.

A United States Court of Appeals recently held, under the Bankruptcy Code and applicable state law, that a fraudulent conveyance claim could be pursued against a bank lender without alleging that the bank made the loans with fraudulent intent. The case involved a claim against a bank that argued that it unknowingly lent amounts used to fund fraudulent transfers. The court held that a fraudulent conveyance claim could be made out without the plaintiff having to prove fraudulent intent on the bank’s part. In order to defeat the claim, the bank had the burden of proving its own good faith and provision of value. The case is SB Liquidation Trust v. Preferred Bank (In re Syntax-Brillian Corp.) (3rd Cir. 8/11/2014). Which party in litigation bears the burden of proof is sometimes dispositive in the outcome of a suit.

In fiduciary duty breach litigation, corporate attorney-client privileged communications may be subject to discovery by plaintiff stockholders.

The Delaware Supreme Court recently ruled that a corporation may be required in certain circumstances to reveal attorney-client privileged information to stockholders who allege fiduciary duty breaches by management. The case arose in the context of a stockholder seeking corporate books and records under Delaware’s corporate code, but the decision could likewise apply in derivative fiduciary duty breach litigation. The court acknowledged that the circumstances requiring disclosure are “narrow, exacting, and intended to be very difficult to satisfy.” But not impossible, because the court ordered disclosure of documents relating to an internal Foreign Corrupt Practices Act investigation. The decision is Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW (Del. Sup. Ct. 7/23/14). Delaware corporate law decisions are frequently followed by courts in other states.

What issues may become potential deal killers in trying to sell a business?

In a recent article published in Business Black Box, Andy Coburn outlined some of the issues that may become deal killers in trying to sell a business.