THE SUPREME COURT AND RECENT ISSUES INVOLVING DELAWARE CORPORATE LAW AND ALTERNATIVE ENTITY LAW

I. THE OF THE DELAWARE SUPREME COURT

Del. Const. art. IV, § 11:

The Supreme Court shall have jurisdiction as follows:

(1)(a) To receive from the Superior Court in civil causes …. (1)(b) To receive appeals from the Superior Court in criminal causes, upon application of the accused in all cases in which the sentence shall be death, imprisonment exceeding one month, or fine exceeding One Hundred Dollars .... … (4) To receive appeals from the Court of Chancery and to determine finally all matters of in the interlocutory or final decrees and other proceedings in chancery. … (8) To hear and determine questions of law certified to it by other Delaware courts, the Supreme Court of the United States, a Court of Appeals of the United States, a United States District Court, the United States Securities and Exchange Commission, or the highest of any other state, where it appears to the Supreme Court that there are important and urgent reasons for an immediate determination of such questions by it. The Supreme Court may, by rules, define generally the conditions under which questions may be certified to it and prescribe methods of certification.

Supreme Court State of Delaware, 2010 Annual Report Statistical Information

Caseload Disposition 2009 2010

Criminal Appeals 387 401 Civil Appeals 271 273 Certifications of Questions of Law 3 2 Original Applications 32 34 Board of Professional Responsibility 11 11 Board of Bar Examiners 0 1 Board on the Unauthorized Practice of Law 0 1 Advisory Opinions 1 0 Other 0 1 TOTAL 705 724

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Breakdown of the 273 Civil Appeals in 2010 Court of Chancery 70 Superior Court 140 Family Court 63

Breakdown of Types of the 724 Dispositions in 2010 Affirmed 398 Affirmed in Part/Reversed in Part 13 Reversed 30 Remanded 20 Voluntary Dismissal 90 Court Dismissal 133 Leave to Appeal Denied 24 Other 16

II. THE AVAILABILITY OF APPELLATE REVIEW

Review of Final Judgments

Certification of Questions of Law

Delaware Supreme Court Rule 41(b):

Certification will be accepted in the exercise of the discretion of the Court only where there exist important and urgent reasons for an immediate determination by this Court of the questions certified. A certification will not be accepted if facts material to the issue certified are in dispute. A certificate shall state with particularity the important and urgent reasons for an immediate determination by this Court of the question certified. Without limiting the Court's discretion to hear proceedings on certification, the following illustrate reasons for accepting certification: (i) Original question of law. The question of law is of first instance in this State; (ii) Conflicting decisions. The decisions of the trial courts are conflicting upon the question of law; (iii) Unsettled question. The question of law relates to the constitutionality, construction or application of a statute of this State which has not been, but should be, settled by the Court.

When Can Certification Be Used by Litigants By Other Courts?

“Had a federal or state court taken advantage of the process of the certification of questions of law that the Delaware Constitution provides, the Delaware Supreme Court may have resolved, at a much earlier date, the question raised by

2 {BMF-W0269388.4} Chancellor Allen's Credit Lyonnais footnote as well as the viability of a ‘deepening insolvency’ claim.”

“But there are success stories…. My first example involves the Securities and Exchange Commission's certification of two questions of law to the Delaware Supreme Court in the 2008 case of CA, Inc. v. AFSCME Employees Pension Plan., [953 A.2d 227 (Del. 2008)] …. Our opinion in AFSCME provided courts and the SEC with important guidance. First, it reaffirmed the bedrock principle in Delaware that the directors manage the business and affairs of a corporation. And second, the opinion confirmed that shareholder bylaws on process are permitted, but they may not interfere with the board's ability to fulfill its fiduciary duties. The speed with which the Court answered the question is also worth noting: we accepted the SEC’s questions on July 1, heard oral argument on July 9, and issued an opinion on July 17.”

The Hon. Henry duPont Ridgely, Avoiding the Thickets of Guesswork: The Delaware Supreme Court and Certified Questions of Corporate Law, 63 SMU L. Rev. 1127, 1135‐37 (2010)

Interlocutory Appeals

Delaware Supreme Court Rule 41(b):

No will be certified by the trial court or accepted by this Court unless the order of the trial court determines a substantial issue, establishes a legal right and meets 1 or more of the following criteria: (i) Same as certified question. Any of the criteria applicable to proceedings for certification of questions of law set forth in Rule 41; or … (iii) Substantial issue. An order of the trial court has reversed or set aside a prior decision of the court … from which an appeal was taken to the trial court which had determined a substantial issue and established a legal right, and a review of the interlocutory order may terminate the litigation, substantially reduce further litigation, or otherwise serve considerations of justice; or … (v) Case dispositive issue. A review of the interlocutory order may terminate the litigation or may otherwise serve considerations of justice.

3 {BMF-W0269388.4} III. WHEN APPELLATE REVIEW IS OR IS NOT AVAILABLE IN CORPORATE LAW LITIGATION

Hostile Takeover Litigation  Grant or Denial of Preliminary Injunctions  Expedited Review of Outcome of Election Contests

Shareholder Litigation  Motions to Dismiss  Post‐Trial

 Acceptance of Interlocutory Review of a Denial of Summary Judgment (Over Objection by Court of Chancery)

Lyondell Chemical Co. v. Ryan, No. 401, 2008 (Del. Sept. 15, 2008) (Order)

The Court of Chancery denied defendants’ motion for summary judgment and denied their application for certification of an interlocutory appeal.

“The Court has concluded that Lyondell’s application for interlocutory review meets the requirements of Supreme Court Rule 42(b) and should be accepted, and that the related motion for stay of proceedings should be granted.”

The Delaware Supreme Court subsequently reversed and granted summary judgment for the defendants on the claim for damages under Revlon.

 Refusal of Interlocutory Review Governing Standard of Review (Even Though Certified by the Court of Chancery)

In re CNX Gas Corporation Shareholders Litigation, Cons. C.A. No. 5377‐VCL, mem. op. at 2, 6 (Del. Ch. July 5, 2010)

“The Applications seeks interlocutory appellate review of the appropriate standard of review for a controller’s unilateral two-step freeze-out…. The current state of our law warrants interlocutory review…. At least three different standards of review have been applied.”

In re CNX Gas Corporation Shareholders Litigation, No. 333, 2010 (Del. July 8, 2010)

“We have concluded that the appellants’ application for interlocutory review should be refused based upon the current state of the record. The issues raised in this application should be addressed after the entry of a final judgment.”

4 {BMF-W0269388.4} IV. HOW THE AVAILABILITY OF APPELLATE REVIEW IMPACTS CORPORATE LAW

 Expedited Review of Defensive Measures in Takeover Contests

 Durability of Legal Standards Governing Controlling Stockholder Transactions

“In In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 443-46 (Del. Ch. 2002); In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 547-51 (Del. Ch. 2003), In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 617 (Del. Ch. 2005), and more recently, In re CNX Gas Corp. S’holders Litig., 4 A.3d 397, 406-14 (Del. Ch. 2010), the Court of Chancery has explained why there might be utility to having further guidance from the Supreme Court in this sensitive area of the law and the reasons why the standard articulated in Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110, 1117 (Del. 1994), makes it difficult for parties to actually present questions regarding the standard to the Supreme Court. See In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d at 619-22 (explaining why this is so).”

In re Southern Peru Copper Corp. S’holder Deriv. Litig., C.A. No. 961‐CS, mem. op. at 46‐47 n.70 (Del. Ch. Oct. 14, 2011)

 Limited Opportunity for Appellate Review of Deal Protection Decisions in Stockholder Litigation

 Ability of Shareholder Plaintiffs to Pursue Claims in Other

 The Trajectory of Omnicare to Bear Stearns

Omnicare, Inc. v. NCS Healthcare, Inc., No. 605, 200 (Del. Dec. 10, 2002) (Order).

“[E]ven if one assumes that the board of directors attempted to seek a transaction that would yield the highest value reasonably available to the stockholders, the deal protection measures must be reasonable in relation to the threat and neither preclusive nor coercive. The action of the NCS board fails to meet those standards because, by approving the Voting Agreements, the NCS board assured shareholder approval, and by agreeing to a provision requiring that the merger be presented to the shareholders, the directors irrevocably locked up the merger. In the absence of a fiduciary out clause, this mechanism precluded the directors from exercising their continuing fiduciary obligation to negotiate a sale of the company in the interest of the shareholders.”

5 {BMF-W0269388.4} Two years later Chief Justice Steele said:

“So while I don’t suggest that you rip the Omnicare pages out of your notebook … I do suggest that there’s the possibility, one could argue, that the decision has the life expectancy of a fruit fly.”

David Marcus, Man of Steele, D & O Advisor, Sept. 2004, at 16, 16.

A recent law review article observes:

“Although Omnicare has been criticized, and many Delaware practitioners expect that it will be overruled or limited when the issue is next taken up by the Delaware Supreme Court, there are no post-Omnicare Delaware Supreme Court opinions that cast any doubt on it.”

Marcel Kahan and Edward Rock, How to Prevent Hard Cases from Making Bad Law: Bear Stearns, Delaware, and the Strategic Use of Comity, 58 Emory L.J. 713, 730 n.113 (2009)

The same law review article discusses (i) how the deal protection measures in the Bear Stearns-J.P. Morgan merger agreement were probably invalid under current Delaware doctrine, including Omnicare, (ii) the dilemma Delaware faced when asked to adjudicate a transaction that, on the one hand, was arguably needed to prevent the collapse of the financial system but that, on the other hand, was hard to reconcile with existing Delaware law, and (iii) how Delaware escaped this dilemma by staying the Delaware action in favor of a contemporaneous action filed in state court.

The New York Supreme Court ended up granting summary judgment for the defendants based on the business judgment rule.

In the Matter of Bear Stearns Litigation, 870 N.Y.S.2d 709 (NY Supr. Dec. 4, 2008)

V. THE DIFFERENCE BETWEEN CORPORATE LAW AND ALTERNATIVE ENTITY LAW

CML V, LLC v. BAX, No. 735, 2010 (Del. Sept. 2 corrected Sept. 6, 2011)

“Limited liability companies, unlike corporations, did not exist at . The corporate form existed in 1792, but LLCs came into existence in Delaware in 1992 when the General Assembly passed the Delaware Limited Liability Act.”

“[I]n the LLC context specifically, the General Assembly has espoused its clear intent to allow interested parties to define the contour of their relationships with each other to the maximum extent possible.”

6 {BMF-W0269388.4} “[W]hen adjudicating the rights, remedies and obligations associated with Delaware LLCs, courts must look to the LLC Act because it is only the statute that creates those rights, remedies and obligations.”

“[W]here the General Assembly has not defined a right, remedy, or obligations with respect to an LLC, courts should apply the common law.”

“[A]s pertains to this case, the Delaware Constitution only guarantees the Court of Chancery the equity jurisdiction to extend derivative standing to prevent failures of justice in cases involving corporations.”

VI. EFFECTIVE ADVOCACY IN THE DELAWARE SUPREME COURT

 How Important Is Oral Argument?  Who Should Argue?  What Is the Import of Legal Scholarship and Corporate Blogs?

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