October 2023 in Brief: Business Litigation & Dispute Resolution

Business Litigation

Delaware Court of Chancery to Award Disclosure-Based Mootness Fees Only When Plaintiff Shareholder Obtains Additional Disclosures That Are “Plainly Material”

By Leona Yazdidoust

In Anderson v. Magellan Health, Inc., No. 2021-0202-KSJM (Del. Ch. July 6, 2023), the Delaware Court of Chancery affirmed the judgment of the trial court awarding $75,000 in fees and expenses to Plaintiff Shareholder’s counsel, instead of the requested award of $1,100,000. The Court held that the requested award was unreasonable in light of the corporate benefits achieved. In the underlying case, Plaintiff Shareholder filed suit to enjoin Magellan Health, Inc. from merging with Centene Corporation. In exchange for a voluntary dismissal by Plaintiff Shareholder, Magellan Health agreed to issue supplemental disclosures that in turn caused the underlying issues to become moot. In response, Plaintiff Shareholder requested $1,100,000 in mootness fees on the theory that the supplemental disclosures were corporate benefits.

In order to determine whether the fee award was reasonable, the Court followed several factors established in Sugarland Indus. v. Thomas, 420 A.2d 142 (Del. 1980). Of these factors, the Court’s primary consideration was the size of the benefit conferred. Although the Court recognizes that supplemental disclosures constitute a corporate benefit, the standard for placing a value to that benefit requires re-examination into recent litigation developments. The Court in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), established that supplemental disclosures in disclosure-only settlements must be “plainly material,” while the Court in In re Xoom Corporation Stockholder Litigation, 2016 WL 4146425 (Del. Ch. Aug. 4, 2016), modified this standard by requiring supplemental disclosures in mootness proceedings be merely “helpful.”

Although the Court analyzed the corporate benefit of the supplemental disclosures under the Xoom standard, this Court distinguished the factor that supplemental disclosures must be more than just “helpful,” but must be “plainly material.” Here, the Court agreed that the supplemental disclosures constituted a corporate benefit; however, a fee award in the amount of $75,000 was more in line with mootness fees commonly negotiated in federal litigation.

Moving forward, Delaware courts will approve mootness fees only when the supplemental disclosures are “plainly material” or required by law..

Delaware Court of Chancery Applies Entire Fairness Review to Determine a Controller’s Breach of Fiduciary Duty

By Gurtej Grewal, Penn State Law

In In re Straight Path Communications Inc., the Delaware Court of Chancery found that a controlling shareholder breached his duty of loyalty to the minority stockholders by coercing a special committee to approve a transaction through a “flagrant[ly]” unfair process involving a “campaign of abuse and coercion.” However, the Court found that the transaction nevertheless caused no harm to Straight Path shareholders because the price was fair, even though, in connection with the transaction, Straight Path agreed to settle an indemnity claim against an affiliate for $10 million (to the benefit of the controller), when the value of the claim was believed to be approximately $300 million. After an in-depth analysis, the Court concluded that shareholders would likely have recovered no more than the $10 million that the controller negotiated in connection with the claim, while Straight Path shareholders benefited from its $3.1 billion merger with Verizon—amounting to roughly $184 per share. This decision serves as a reminder that while Delaware courts will scrutinize a sales process involving a controller, a fair price can help insulate the controller from liability.

Dispute Resolution

U.S. District Court Orders Samsung to Pay over $4 Million in Arbitration Fees; Takes Unique Judicial Notice Regarding Smartphone Users

By Cole Hodge and Gregg D. Stevens, McGlinchey Stafford, PLLC

The U.S. District Court for the Northern District of Illinois recently held in Wallrich v. Samsung Elecs. Am., Inc. that the Northern District of Illinois was an improper arbitration venue for 14,335 users of smartphone devices (“Petitioners”) manufactured by Samsung who did not live there. However, the court found that the Northern District of Illinois was the proper venue for 35,651 Petitioners, granted the Motion to Compel Arbitration for these Petitioners, and ordered Samsung to pay its portion of the arbitration fees.

Petitioners initially filed individual arbitration demands with the American Arbitration Association (“AAA”), pursuant to Samsung’s Term and Conditions. As a requirement to arbitrate, the AAA invoiced Petitioners and Samsung to pay their share of the initial arbitration fees. While Petitioners compliantly paid, Samsung refused to pay the remaining fees (aside from those for fourteen Petitioners now living in California), which totaled $4,125,000.00. Because both Petitioners and Samsung refused to pay Samsung’s portion of the fees, no arbitrator was assigned to the claims, and no venue was designated for the arbitration. Rather, the AAA administratively closed Petitioners’ claims. In response, Petitioners filed their motion to compel arbitration with the U.S. District Court for the Northern District of Illinois, and Samsung moved to dismiss on the basis that the court was an improper venue for the arbitration.

Concerning the AAA’s administrative fees, Samsung argued the court should not interrupt the AAA’s discretionary authority to determine Samsung’s responsibility in paying them. If this issue was merely procedural, the court acknowledged, it would not be able to order Samsung to pay. However, the court ultimately determined that it could not expect the AAA to perform its services without ordering the fee payment. Because arbitration was conditioned on payment of fees required by the AAA, the fees were substantive, in that they are bound up in the right to arbitrate. Thus, the court determined that it could order Samsung to pay the fees.

With regard to venue, the court analyzed the venue provision of the Federal Arbitration Act (“FAA”) and the general venue provision under 28 U.S.C. § 1391. Under the FAA, Petitioners could establish venue by either the Samsung Terms and Conditions or designation by the AAA. The court held that neither applied. In analyzing 28 U.S.C. § 1391, the court considered whether venue was afforded to the Northern District of Illinois because a substantial part of the events giving rise to the claims occurred there. The court took judicial notice that smartphone users were likely to purchase and use these devices near their residences. Therefore, the 35,651 Petitioners who alleged they lived within the Northern District of Illinois established that, for them, the venue lay within that district. However, because 14,335 Petitioners did not reside within the Northern District of Illinois, the court dismissed their claims for improper venue. With respect to the remaining Petitioners, the court determined the cases were only “administratively closed,” and the court could order arbitration, for it was not improperly second-guessing a final and binding decision of the AAA.