January 2022 in Brief: Business Litigation & Dispute Resolution

Business Litigation

Delaware Court of Chancery Strictly Applies Statutory Standing Requirement to Dismiss Books and Records Action by Former Stockholder Who Filed Hours After Effective Time of Merger

By K. Tyler O’Connell and Bryan Townsend of Morris James LLP

In Swift v. Houston Wire & Cable Co., 2021 WL 5763903 (Del. Ch. Dec. 3, 2021), the Delaware Court of Chancery applied Section 220(c) of the Delaware General Corporation Law to dismiss a books and records complaint filed shortly after an event that, under the terms of a merger agreement, caused the plaintiff’s shares to be cancelled. After the corporation entered into an agreement for a cash-out merger, a stockholder made a books and records demand. Under the merger agreement, upon the filing of the certificate of merger with the Delaware Secretary of State, stockholders’ shares would be cancelled and converted into the right to receive the merger consideration. The plaintiff filed his books and records action a few hours after that filing. In granting the corporation’s motion to dismiss, the Court of Chancery reasoned that Section 220(c) unambiguously required that a plaintiff “is” a stockholder at the time he files a Section 220 complaint; because here the plaintiff’s shares had already been canceled, he lacked standing. It was not relevant that the merger agreement set a later time for the closing of the merger, because the agreement deemed the shares cancelled upon the “effective time,” which was defined by reference to the filing of the certificate of merger. The Court also reasoned that, although the “shares” formally kept trading on the public market for a few hours after the certificate of merger was filed, all that was being traded at that point was the right to receive the merger consideration.

Dispute Resolution

Supreme Court to Determine Whether Prejudice Impacts a Determination of Waiver of Arbitrability

By Leslie Ann Berkoff, Partner at Moritt Hock & Hamroff LLP, Chair of Dispute Resolution Practice Group

The Court has granted a Petition for Writ of Certiorari in Robyn Morgan v. Sundance, Inc. (No. 21-328) and will decide whether prejudice is a required element in determining whether the right to arbitrate has been waived. In the decision below, issued by the Eighth Circuit, the Court found that Sundance, Inc., which owns more than 150 Taco Bell franchises nationwide, had not waived its right to arbitrate the plaintiff’s claims, despite waiting almost eight months after the filing of the Complaint to move to compel arbitration.

There is currently a circuit split as to whether courts should consider prejudice when determining if a party has waived its right to arbitrate. Nine Circuits—the First, Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, and Eleventh—require a showing of prejudice to establish waiver of a party’s arbitration rights. However, the Seventh, Tenth, and D.C. Circuits do not require such a showing.

In the underlying action, the plaintiff had filed suit on behalf of herself and a proposed putative class alleging that Sundance had failed to pay employees for overtime hours in violation of the Fair Labor Standards Act. After initial motion practice and an unsuccessful mediation, Sundance moved to compel arbitration, eight months after the filing of the Complaint. No discovery had taken place, and the Court had not even conducted an initial scheduling conference; however, the Court denied the request, holding that Sundance had waived its right to arbitration because it acted inconsistently by first turning to what the Court termed “litigation machinery,” which prejudiced plaintiff.

On appeal, the Eighth Circuit reversed, finding that the totality of the circumstances did not lead to a conclusion that the plaintiff had been prejudiced by the delay because, during that time, the parties were waiting on a court decision on the motion to dismiss rather than litigating the merits of the claim.

Plaintiff has asked the Court to determine whether requiring the proponent of a contractual waiver defense to prove prejudice violates the Court’s prior instruction in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) that lower courts must “place arbitration agreements on an equal footing with other contracts.” A determination by the Court will potentially resolve the circuit split and provide clarity on what has to be proven in order to sustain a waiver argument.