The Delaware Supreme Court and the Delaware Court of Chancery have issued collectively over 100 opinions during the first half of 2009. From those decisions, we selected a number of key cases that we thought would be of the most wide-ranging interest and that could be highlighted in this short article. We recognize that many notable Delaware corporate decisions from early 2009 have already been the subject of extensive scholarly commentary, and thus this short article does not attempt to address those decisions in great detail. Copies of the complete decisions cited in this article are available at www.delawarelitigation.com.

Liability of Directors
Inthe opinion styled In re Citigroup Shareholder Derivative Litigation, 964 A.2d 106 (Del. Ch.2009), the court found that Caremark-type duties were not designed to impose oversight liability for business risk. This opinion was the first detailed analysis of potential liability of directors under Delaware law for claims relating to a company suffering major losses resulting from substantial exposure to subprime debt. (For a discussion of this case's executive compensation claim—the only claim that survived a motion to dismiss in this decision—see the article by Michael J. Biles and Kimberly G. Davis in this issue, titled "Delaware Court Allows Claims Based on Executive Compensation to Go Forward.")

This action was brought by shareholder plaintiffs against current and former directors (i) alleging breach of fiduciary duties for failing to properly monitor and manage the risks that Citigroup faced concerning problems in the subprime lending market and (ii) for failing to properly disclose the company's exposure with respect to its subprime assets. Plaintiffs claimed that there were extensive "red flags" starting in May 2005 that should have put defendants on notice about problems "that were brewing in the real estate and credit markets." Defendants allegedly ignored the warnings and sacrificed the long-term viability of Citigroup for short-term profits. The court noted that "to establish oversight liability a plaintiff must show that the directors knew that they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities such as by failing to act in the face of a known duty to act." In addition, in order for the plaintiffs to succeed, "a showing of bad faith is a necessary condition to director oversight liability."

The court stated: "[a]lthough these claims are framed by plaintiffs as Caremark claims, plaintiffs' theory essentially amounts to a claim that the director defendants should be personally liable to the Company because they failed to fully recognize the risk posed by subprime securities." The burden was on the plaintiffs not only to show gross negligence but to rebut the presumption that the directors acted in good faith, on an informed basis, and in the honest belief that the action was taken in the best interests of the company. In light of the "extremely high burden" placed on plaintiffs, the court concluded that plaintiffs' conclusory allegations (and thus their failure to plead particularized facts) were insufficient to state a Caremark claim, thereby excusing demand. To the contrary, Citigroup had procedures and controls in place that were designed to monitor risk and the plaintiffs did not contest these standards. And even if there were warning signs, they are not evidence that the directors consciously disregarded their duties or otherwise acted in bad faith but may only be evidence that the directors made bad business decisions.

The court then went on to distinguish another 2009 court of chancery decision that did allow a Caremark "failure to monitor" claim to survive a motion to dismiss. That case was American International Group, Inc. Consolidated Derivative Litigation,2009 WL 366613 (Del. Ch. Feb. 10, 2009) (AIG case). The AIG case was distinguishable from this Citigroup case, the court observed, in part because unlike the allegations against Citigroup, the defendant directors in the AIG case "allegedly failed to exercise reasonable oversight over pervasive fraudulent and criminal conduct" (emphasis in original). Indeed, the court in AIG even stated that the complaint there supported the assertion that top AIG officials were leading a "criminal organization" and that the "diversity, pervasiveness, and materiality of the alleged financial wrongdoing at AIG is extraordinary." Finally, the court in Citigroup stated that "[o]versight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk" (emphasis in original).

Revlon Duties of Directors Clarified

The Delaware Supreme Court reversed the court of chancery's decision denying summary judgment for the directors of Lyondell Chemical Company (Lyondell) as to the "Revlon" and "deal protection" claims and whether the directors of Lyondell acted in good faith in conducting the $13 billion sale of Lyondell, in Lyondell Chemical Company, et al. v. Ryan, 970 A.2d 235 (Del. 2009).

The class action complaint alleged that the Lyondell directors breached their fiduciary duties of care, loyalty, and candor and put their personal interests ahead of the interests of the Lyondell shareholders. The court of chancery rejected all of the plaintiffs' claims except those directed at the process by which the directors sold the company and the deal protection provisions in the merger agreement, in particular, whether under Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986), the directors failed to obtain the best available price in selling the company.

The supreme court noted that the court of chancery improperly (i) "imposed Revlon duties on the directors before they either decided to sell, or before the sale had become inevitable"; (ii) "read Revlon and its progeny as creating a set of requirements that must be satisfied during the sale process"; and (iii) "equated an arguably imperfect attempt to carry out Revlon duties with a knowing disregard of one's duties that constitutes bad faith."

The supreme court made clear that Revlon duties arise not because a company is "in play" (such as in this case where there was a Schedule 13D filing), but rather when the company "embarks on a transaction—on its own initiative or in response to an unsolicited offer—that will result in a change of control." The supreme court further noted that "there are no legally prescribed steps that directors must follow to satisfy their Revlon duties" and that the Lyondell directors' failure to take any specific steps during the sale process could not have demonstrated a "conscious disregard of their duties."The supreme court reasoned that instead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, "the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price."

Director and Officer Fiduciary Duties
In Gantler v. Stephens,965 A.2d 695 (Del. 2009), the Delaware Supreme Court for the first time confirmed and clarified that officers of Delaware corporations have the same fiduciary duties as directors of Delaware corporations. The board of directors of First Niles Financial decided to sell the company, but then the board failed to take seriously the three offers that it received, and instead appeared to favor a privatization or a reclassification plan.

The Delaware Supreme Court for the first time explicitly held what has been implicitly stated previously, and has been also acknowledged by the Delaware Court of Chancery, and that is: "officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same of directors." The court made that determination while acknowledging that Delaware General Corporation Law § 102(b)(7) does not exculpate officers from liability for breaches of their duty of care in the current statutory provision. In addition, the supreme court determined that the proxy disclosures concerning the deliberations of the board about the offer that was rejected were materially misleading. The court reviewed the materiality standard and reached a different conclusion than the trial court, thus allowing that claim to proceed.

Advancement of Director Legal Fees
In Underbrink v. Warrior Energy Services Corp., 2009 WL 536904 (Del. Ch. Feb. 24, 2009), the court of chancery addressed the application of its prior decision awarding advancement of fees to a dispute about what specific fees incurred in a Texas proceeding were covered by the prior advancement decision. It is well-settled law in Delaware that one who is entitled to advancement is also entitled to "fees on fees" for the cost of vindicating one's right to advancement. The specific amount of the claim for fees and expenses was the central issue that this letter decision addressed.

Although this letter decision analyzes in detail the dispute about the exact amount of fees and expenses covered by the advancement right, the court noted in its prior decision in this case that "the function of a Section 145(k) advancement case is not to inject this Court as a monthly monitor of the precision and integrity of advancement requests. . . . [A] balance of fairness and efficiency concerns would seem to counsel deferring fights about details until a final indemnification proceeding." Underbrink, 2008 WL 2262316, at *16 (Del. Ch. 2008). Also of interest on this issue is the case of LaPoint v. AmeriSourceBergen Corp., 970 A.2d 185 (Del. 2009) (Delaware Supreme Court addressed separate but related issue of indemnification for purposes of avoiding the waiver of an indemnification claim based on res judicata to the extent that there was a missed opportunity to address indemnification in a prior proceeding). The court in this case established the procedure for use of a "Special Master" to which the parties were directed to submit future disputes about the specific amount of fees that would be covered under the advancement right previously established by the court. In this letter decision, the court ordered as interim relief that a percentage of the amounts requested must be paid promptly, subject to modification at a later date in the contemplated, detailed proceedings before the Special Master.

Part of the challenge for the parties and the court was to attempt to separate time and expenses, incurred in Texas litigation on behalf of the two former directors entitled to advancement, from other fees for other parts of the litigation not subject to advancement.

The court did note for the edification of the parties that "neither advancement nor indemnification is appropriate for expenses that cannot be appropriately proven." Moreover, the court observed that a request that included $19,000 for "first class airline tickets [is] an expense generally considered unreasonable." This decision is helpful for the general rule that the court does not want to become entangled in the minutiae of fee disputes in connection with advancement rights, but in appropriate circumstances will address those issues when necessary. A related decision on this topic is Lillis v. AT&T, 2009 WL 663946 (Del. Ch. Feb. 25, 2009) (court of chancery reviewed the disputed amounts of fees to be awarded in advancement case involving unusual procedural posture).

Previous Advancement Modified
In Duthie v. CorSolutions Medical, Inc., et al., 2009 WL 1743650 (Del. Ch. June 16, 2009), the court of chancery revisited a prior decision awarding advancement due to changed circumstances that differed from those on which the initial award was based.

The important nugget from this relatively short letter decision is that the advancement can be modified based on changes in factual circumstances that occur after an order granting advancement rights is entered. Specifically, in this case, the court had ordered advancement to be provided in order for the plaintiff to pursue affirmative claims that the court determined were defensive in nature and were for purposes of responding to and offsetting claims that were pending against the plaintiff in a separate forum. The prior case is Duthie v. CorSolutions Medical, Inc.,2008 WL 4173950 (Del. Ch. Sept. 10, 2008). More specifically, the court held that the right to advancement included fees incurred in connection with a defamation action that was filed by an accused director.

In this most recent ruling in this case, the court of chancery relied on the new representation to the court that the defendants did not intend to bring any other actions against the ex-director. It was those suits against the ex-director that had been the genesis of the affirmative claims for which the court ordered advancement. Based on the fact that the justification for the advancement of fees and expenses incurred in pursuing the affirmative claims no longer existed, the court agreed to modify its prior award and amend the prior decision granting advancement.

The court reasoned that the threat here was over; thus, the court emphasized that there could be no right to advancement of fees and expenses for affirmative claims that were designed to defeat a threat that no longer existed. The court referred to the following cases for that point: Donahue v. Corning,949 A.2d 574, 579 (Del. Ch. 2008); Zaman v. Amedeo Holdings, Inc., 2008 WL 2168397, at *37 (Del. Ch. May 23, 2008).

Stockholder Books/Records Demands
In Beiser v. PMC-Sierra, Inc., 2009 WL 483321 (Del. Ch. Feb. 26, 2009), the Delaware Court of Chancery addressed the request of a stockholder plaintiff for books and records under section 220 of the Delaware General Corporation Law. The plaintiff was also the lead plaintiff in a related federal lawsuit in which discovery had been stayed pursuant to the Private Securities Litigation Reform Act of 1995 (PSLRA). The court explained why this particular plaintiff did not plead a "proper purpose," which is a prerequisite for a demand for books and records under section 220. The court explained that when "the only end use for the requested documents that may be inferred is to assist in the prosecution of a federal action where discovery is stayed under the PSLRA," the court will not grant a request for books and records under section 220.

The court recognized existing rulings from both Delaware courts and federal courts to the effect that neither the PSLRA nor the Securities Litigation Uniform Standards Act of 1998 pre-empts section 220 actions, especially where safeguards are present, such as not using the records obtained in the related federal cases that are pending. In the instant Delaware case, however, the court determined that the only purpose to the section 220 demand was to use any data obtained for the pending federal securities case, which was not a "proper purpose" under section 220.

The statutory definition of a proper purpose is "a purpose reasonably related to [one's] interest as a stockholder." Although Delaware courts have held that investigating the possible wrongdoing by officers and directors is a proper purpose under section 220, at the pleading stage, the plaintiff must do more than merely state in a conclusory manner a generally accepted proper purpose. Rather, one must "state a reason for the purpose, i.e., what it will do with the information, or an end to which that investigation may lead." The Delaware courts also have consistently encouraged plaintiffs to utilize section 220 before filing a derivative action.

In this case, unfortunately for the plaintiff, the only inference the court could make was that the purpose would be to aid the plaintiff in the pending federal securities action in which discovery had been stayed. Thus, finding no proper purpose, the court dismissed the case with prejudice.

Demand for Books/Records Denied
In Norfolk County Retirement System v. Jos. A. Bank Clothiers, Inc., 2009 WL 353746 (Del. Ch. Feb. 12, 2009), the court of chancery also denied a demand for books and records under section 220. As in the Beiser case, this case involved a related federal securities lawsuit, and also the request for books and records was not made until several months after the federal securities suit had been filed.

This case was presented on the procedural basis of two cross motions for summary judgment. Although the court acknowledged that an investigation of a potential corporate wrongdoing is generally a proper purpose under section 220, in order to prevail, one also must present "some evidence to suggest a credible basis from which a court can infer mismanagement, waste or wrongdoing may have occurred." Such a standard does not require that a stockholder making a section 220 demand have actual proof of mismanagement, but rather the stockholder must make a "credible showing through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing."

Moreover, documents available to a stockholder under section 220 are limited even when the requirements of section 220 are met. Specifically, a plaintiff is not entitled to inspect all the documents that he or she believes are relevant, or that would lead to information related to the proper purpose. Rather, the courts in Delaware have repeatedly held that "[t]he scope of inspection should be circumscribed with precision and limited to those documents that are necessary, essential and sufficient to the stockholder's purpose." In this case, Norfolk was seeking documents related to circumstances surrounding the allegedly false and misleading statements also at issue in the pending securities class action and a separate derivative action. The company had previously provided a copy of the report of its Special Litigation Committee (SLC) and all exhibits thereto, and the minutes of the meetings of the SLC, as well as the minutes of the meeting of the company's board approving the creation of the SLC. The court reasoned that Norfolk did not establish a need for additional documents beyond what the company had already provided.