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NYU 2 Court of Chancery Case Questions

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CASE 44-14
United Technologies Corp. is a Delaware corporation. Lawrence Treppel, a United
Technologies shareholder, sent the company a litigation demand letter, seeking to “investigate,
address, remedy, and commence proceedings against certain officers and directors.” Treppel’s
claims arose out of a June 2012 investigation by the U.S. Department of Justice into violations
of federal law by United Technologies in exporting software to the Chinese government for use
in a military helicopter.
However, the board rejected Treppel’s demand, stating that it had determined that litigation
was “not in the best interests of the Company.” The letter contained only two paragraphs and
did not provide any additional explanation for the board’s decision. Treppel then sought to use
his inspection rights under § 220 to “evaluate” the board’s decision to reject his litigation
demand. After several unsuccessful rounds of negotiation between the parties, Treppel filed a
§ 220 action in the Court of Chancery, seeking access to United Technologies’s books and
records without any usage restrictions. United Technologies responded to Treppel’s claims in
the Court of Chancery with two separate, but related, arguments:
1. That Treppel’s intention to use information from his inspection to file outside of
Delaware negated his proper purpose under § 200(b).
2. Alternatively, if Treppel’s purpose was proper, the Court of Chancery should limit the
use of information gained from a books and records inspection to legal action in a Delaware
court, using its authority under § 200(c) to prescribe limitation or conditions in connection with
granting the inspection.
In its post-trial bench opinion, the Court of Chancery ruled that United Technologies was
not entitled to the restriction it sought. The Court of Chancery determined that the limit “is not
the type of restriction that 220(c) seeks to impose.” The Court of Chancery also held that
Treppel’s purpose for inspecting United Technologies’s books and records (inquiring into the
board’s decision to deny his litigation demand) was proper.
On appeal, United Technologies argues that the Court of Chancery erred in limiting its own
authority to impose the requested restriction, and that the company is entitled to the restriction
in this case.
Strine, Chief Justice
The ability to limit the use of information gathered from an inspection—not just the scope
of the inspection itself—has long been recognized as within the Court of Chancery’s discretion.
“Delaware courts have repeatedly ‘placed reasonable restrictions on shareholders’ inspection
rights in the context of suit brought under 8 Del. C. § 220.’”
In some cases, inspections have been denied entirely if the plaintiff’s “proper purpose” for
seeking books and records could not be effectuated. For example, a plaintiff would lack
standing to sue if the inspection warranted further legal action. Aware of the costs of inspections,
which are ultimately borne by stockholders, Delaware courts have been reluctant to grant § 220
relief when there is other pending litigation against the corporation and discovery is thus the
more appropriate mechanism for obtaining relevant documents.
In restricting a stockholder’s ability to use corporate books and records in certain ways,
Delaware case law has consistently reflected the underlying principle that the stockholder’s
inspection right is a “qualified” one. Accordingly, the Court of Chancery has a wide discretion
to shape the breadth and use of inspections under § 220 to protect the legitimate interests of
Delaware corporations. Nothing in the text of § 220 itself or in any Delaware case law that
interprets the section limits the Court of Chancery’s authority to restrict the use of material
from an inspection when those interests are threatened, and thus, in this case, the Court erred
when it concluded that it lacked the statutory authority to impose its own preclusive limitation.
However, it should be noted that caution is still needed because use restrictions under §
220(c) have traditionally been tied to case-specific factors. For example, if a petitioner files for
books and records and has a good faith purpose to investigate possible wrongdoing, and there
has been no prior litigation, then the Court of Chancery might conclude that there is no reason
to impose a use restriction of the kind United Technologies seeks here. In that situation, the
Court of Chancery can consider in its discretion whether a forum use restriction is warranted,
because the possible complications the restriction injects into the § 220 litigation may not be
justified by any substantial interests of the respondent corporation. Further, the absence of preexisting litigation would be relevant because the company and its stockholders would not have
suffered the costs of defending duplicative litigation.
CASE 44-21
Zapata Corporation had a share option plan that permitted its executives to purchase Zapata
shares at a below-market price. Most of the directors participated in the share option plan. In
1974, the directors voted to advance the share option exercise date in order to reduce the federal
income tax liability of the executives who exercised the share options, including the directors.
An additional effect, however, was to increase the corporation’s federal tax liability.
William Maldonado, a Zapata shareholder, believed that the board action was a breach of
a fiduciary duty and that it harmed the corporation. In 1975, he instituted a derivative suit in a
Delaware court on behalf of Zapata against all of the directors. He did not make a demand on
the directors to sue themselves, alleging that this would be futile because they were all
The derivative suit was still pending in 1979, when four of the defendants were no longer
directors. The remaining directors then appointed two new outside directors to the board and
created an Independent Investigation Committee consisting solely of the two new directors.
The board authorized the committee to make a final and binding decision regarding whether
the derivative suit should be brought on behalf of the corporation. Following a three-month
investigation, the committee concluded that Maldonado’s derivative suit should be dismissed
as against Zapata’s best interests.
Zapata asked the Delaware court to dismiss the derivative suit. The court refused, holding
that Maldonado possessed an individual right to maintain the derivative action and that the
business judgment rule did not apply. Zapata appealed to the Supreme Court of Delaware.
Quillen, Justice
We find that the trial court’s determination that a shareholder, once demand is made and
refused, possesses an independent, individual right to continue a derivative suit for breaches of
fiduciary duty over objection by the corporation, as an absolute rule, is erroneous.
Derivative suits enforce corporate rights, and any recovery obtained goes to the
corporation. We see no inherent reason why a derivative suit should automatically place in the
hands of the litigating shareholder sole control of the corporate right throughout the litigation.
Such an inflexible rule would recognize the interest of one person or group to the exclusion of
all others within the corporate entity.
When, if at all, should an authorized board committee be permitted to cause litigation,
properly initiated by a derivative stockholder in his own right, to be dismissed? The problem
is relatively simple. If, on the one hand, corporations can consistently wrest bona fide derivative
actions away from well-meaning derivative plaintiffs through the use of the committee
mechanism, the derivative suit will lose much, if not all, of its effectiveness as an intracorporate
means of policing boards of directors. If, on the other hand, corporations are unable to rid
themselves of meritless or harmful litigation and strike suits, the derivative action, created to
benefit the corporation, will produce the opposite, unintended result. It thus appears desirable
to us to find a balancing point where bona fide shareholder power to bring corporate causes of
action cannot be unfairly trampled on by the board of directors, but the corporation can rid
itself of detrimental litigation.
We are not satisfied that acceptance of the business judgment rationale at this stage of
derivative litigation is a proper balancing point. We must be mindful that directors are passing
judgment on fellow directors in the same corporation and fellow directors, in this instance, who
designated them to serve both as directors and committee members. The question naturally
arises whether a “there but for the grace of God go I” empathy might not play a role. And the
further question arises whether inquiry as to independence, good faith and reasonable
investigation is sufficient safeguard against abuse, perhaps subconscious abuse.
We thus steer a middle course between those cases that yield to the independent business
judgment of a board committee and this case as determined below, which would yield to
unbridled shareholder control.
We recognize that the final substantive judgment whether a particular lawsuit should be
maintained requires a balance of many factors—ethical, commercial, promotional, public
relations, employee relations, fiscal, as well as legal. We recognize the danger of judicial
overreaching, but the alternatives seem to us to be outweighed by the fresh view of a judicial
After an objective and thorough investigation of a derivative suit, an independent
committee may cause its corporation to file a motion to dismiss the derivative suit. The Court
should apply a two-step test to the motion. First, the Court should inquire into the independence
and good faith of the committee and the bases supporting its conclusions. The corporation
should have the burden of proving independence, good faith, and reasonable investigation,
rather than presuming independence, good faith, and reasonableness. If the Court determines
either that the committee is not independent or has not shown reasonable bases for its
conclusions, or if the Court is not satisfied for other reasons relating to the process, including
but not limited to the good faith of the committee, the Court shall deny the corporation’s motion
to dismiss the derivative suit.
The second step provides the essential key in striking the balance between legitimate
corporate claims as expressed in a derivative stockholder suit and a corporation’s best interests
as expressed by an independent investigating committee. The Court should determine, applying
its own independent business judgment, whether the motion should be granted. The second
step is intended to thwart instances where corporate actions meet the criteria of step one, but
the result does not appear to satisfy its spirit, or where corporate actions would simply
prematurely terminate a stockholder grievance deserving of further consideration in the
corporation’s interest. The Court of course must carefully consider and weigh how compelling
the corporate interest in dismissal is when faced with a non-frivolous lawsuit. The Court should,
when appropriate, give special consideration to matters of law and public policy in addition to
the corporation’s best interests.
The second step shares some of the same spirit and philosophy of the statement of the trial
court: “Under our system of law, courts and not litigants should decide the merits of litigation.”
Judgment reversed in favor of Zapata. Case remanded to the trial court.
3. The Eliason family owned a majority (5,238) of the 9,990 shares of Brosius-Eliason Co.,
a building and materials company, with James Eliason (3,928 shares) and his sister Sarah
Englehart (1,260) holding the controlling block. The Brosius family owned a total of 3,690
shares. Frank Hewlett owned the remaining 1,062 shares. On July 31, James Eliason executed
a proxy giving his daughter, Louise Eliason, authority to vote his shares. Only in the notary
public’s acknowledgment verifying James’s signature did the proxy state that it was irrevocable.
The body of the proxy, the part signed by James, did not state it was irrevocable. Two weeks
later, James and his sister Sarah made a voting agreement that ensured Eliason family control
over the corporation by requiring their shares to be voted as provided in the agreement. The
voting agreement was irrevocable because it was coupled with an interest in each other’s shares.
Soon after, Sarah and Louise had a falling out when Louise tried to assert her family’s control
of the company. Consequently, Sarah voted her shares with the Brosiuses and Hewlett in
violation of the agreement with James. She argued that she was not bound by the voting
agreement with James on the grounds that James could not make the agreement because he had
given Louise an irrevocable proxy two weeks earlier. Was Sarah right?
5. VeriFone Holdings, a Delaware corporation with its principal place of business in San
Jose, California, designs, markets, and services electronic payment transaction systems. In
2006, VeriFone acquired Lipman Electronic Engineering Ltd. In 2007, VeriFone publicly
announced that it would restate its reported earnings for the prior three fiscal quarters. Earnings
had been materially overstated due to accounting and valuation errors made while Lipman’s
inventory systems were being integrated with VeriFone’s. After that restatement announcement,
VeriFone’s stock price dropped more than 45 percent. The next day, Charles King, a VeriFone
shareholder, filed a derivative action on behalf of VeriFone against certain of its officers and
board of directors, asserting various federal securities fraud claims. A few months later, King
demanded that VeriFone permit him to inspect the company’s books and records, including
VeriFone’s Audit Committee Report, which contained the results of an internal investigation of
VeriFone’s accounting and financial controls conducted after the 2007 restatement
announcement. VeriFone refused to grant to King access to the Audit Report on the grounds he
lacked a proper purpose under Delaware law because he had previously elected to bring a
derivative action. Was VeriFone correct?
Langvardt et al., BUSINESS LAW (17th ed. 2018)
Robert S. Wiener
Problem solutions and examination essay answers are similar. Both call upon
you to apply legal principles to practical business situations. Your answers must set
forth reasons for conclusions stated. Organize and write them clearly using standardEnglish syntax and spelling. Include the area of law, parties, and legal issues. Include,
explain, and apply legal terms.
Problem solving prepares you to write examination essays. Read the chapter and
assigned case opinions and write your case briefs. Then read the first assigned problem
a couple of times. Return to the text and analytically read the part of the chapter that
discusses the legal issue(s) raised in the problem. Keep an eye out for legal terms in
the problem. They are a key to the legal issue(s) and may appear in bold type in the
text. Read the problem again. You may want to make notes for your solution now — at
least, organize it in your mind. Do this without looking back at the text.
You are ready to write your problem solution. The advice given in “Cases and
Briefs” will help. For problems containing multiple questions, repeat the brief format writing your solution as an essay using separate paragraphs for separate sections. You do
not need to use headings. Leave space at the margins and between the sections of
your solution to revise it, for example, during/after classroom review.
The format for a problem solution and essay answer is a modification of your
brief format. It will generally look like this:
January 28, 211/28/21
Langvardt et al., BUSINESS LAW (17th ed. 2018)
(Question of Law)
HOLDING (Answer of Law)
In the first section, present your judgment. Omit the facts section. Copying facts
takes time with no benefit; however, you will refer to specific facts in your applied analysis section. Unlike briefs where you are asked to show your understanding of the
judge’s judgment, here you give your judgment (legal decision) based upon legal principles. Usually, in your problem solution you are called upon to judge a case, that is, to
decide who wins and explain why. If you are not yet clear on your judgment, leave this
section blank and return to it after you have written your reasoning sections.
Now your real work begins. In this section write the key legal principle guiding
your judgment, that is, your issue and holding. Merely writing the judgment is not
enough, even if it is correct. More importantly, you must explain your judgment. How
did you arrive at your conclusion?
Langvardt et al., BUSINESS LAW (17th ed. 2018)
This is General Analysis is the first part of your legal reasoning, your, including
the area of law. Elaborate on the issue and holding and discuss secondary legal issues.
This section should be fully developed, step-by-step, particularly for examination essays. You will base this on legal principles learned from reading the textbook, reading
and briefing cases, and class lecture and discussion.
In Applied Analysis apply the general analysis to the problem’s relevant facts.
Repeat your judgment to confirm that this is the legal decision to which your analysis leads. Has your judgment changed? If so, correct the judgment in your first section
so that both judgments match.
Problems and essay questions are often tricky. You may be unsure of the judgment. That is OK. There may be no clear answer. The correct answer usually earns only
10 points on an examination. And you may earn full credit for either of two different answers. Your objective is to convey that you have thought through the case from a business law perspective; therefore, the most important parts of your problem solutions and
essay answers are your legal principle and reasoning section.
How much time should this take? In order to be prepared to write well-organized
and thorough exam essays, for homework problem solutions, first read the relevant part
of the of textbook, then spend at least 20 minutes answering each problem.
January 28, 211/28/21
Langvardt et al., BUSINESS LAW (17th ed. 2018)
Essay answers are different from problem solutions in a few ways. Exams are
closed book and timed. You may have aout 40 minutes to answer an exam essay compared to 15-20 minutes on a CPA exam. First, read the question at the end of the essay. Next, use your case reading techniques to read the question’s facts several times.
Plan your answer before you begin writing. Crossing out and rewriting essay answers
wastes time. Exam questions are likely to be lengthier and more complicated than problems, with more facts and raising several legal issues rather than just one.
Grading of Essay Answers
Your grades on exam essay answers largely reflect your preparation. If you have
written your assignments (both case briefs and problem solutions), participated in class,
taken effective notes, and studied your assignments and notes well, reviewing them
soon after class, you should understand the legal principles and be able you to apply
them to new situations.
To earn more essay points, spot legal issues in essay questions. Then answer
those questions using legal terms to explain and apply relevant legal principles learned
in class. Basic terms, especially those written on the board, may earn credit if used appropriately and explained. A minimum of 120 points will be available for each exam; correct judgments earn 10 points. Sometimes, legal labeling of parties, for example, assignor and assignee in an assignment of rights contract case, will earn credit.
The better you prepare for exam essays by writing class assignments (and even
writing extra practice problem solution essays), the better you will perform on the exam
Case Briefs
CASE 43-13
Eisner and other Disney directors (defendants) did not breach fiduciary duties in the hiring
and firing of Ovitz. While serving as president, Ovitz did not commit any act of malfeasance or
gross negligence that would lead to his termination. Thus, his payment of the non-fault
termination (NFT) payment was quite in order because there was no way he could have been
terminated for cause. None of the directors acted in bad faith, and even though they exhibited
some level of negligence in the process of his hiring, it could not be held against them because
they did not breach their fiduciary obligations and their actions were fundamentally in good
A. Issue
Whether Eisner and the other Disney directors complied with fiduciary duty in the
approval of the OEA and the subsequent election of Ovitz as president, whether the board also
maintained their fiduciary obligation in approving the NFT severance payment to Ovitz upon his
B. Holding
A. General Reasoning
The conduct of every fiduciary is fundamentally founded on such elements as
faithfulness, devotion, and allegiance, and this cover such more specific duties of corporate
fiduciaries as loyalty and care. While duties of loyalty and care are constituted in the good faith
element of corporate fiduciaries, they are not the only requirements that should guide the
understanding of what fiduciary entails—the ultimate devotion to the vast array of interests of
the entity and its stakeholders must be exhibited. When the board acts in a manner other than that
which advances the best interests of the stakeholders, that would be regarded as a failure to act in
good faith. Also, when the board acts in violation of the applicable positive law, it would be
interpreted as bad faith. Another interpretation of bad faith would arise when the fiduciary fails
to act when they have a known duty to undertake such an action, or when they consciously and
knowingly fail to exercise their duties to prevent the occurrence of an event that would the
circumstances of the stakeholders. In the context of the current case, however, the shareholders
failed to prove that the directors breached any of these aspects that would make the interpretation
of their actions to be founded on bad faith.
B. Applied Reasoning
There are two categories of actions that can be applied in this case to determine whether
the director’s actions constitute bad faith or not. The first one is subjective bad faith, where the
acts of the fiduciary conducts itself in a manner that can be proven to be aimed at harming
another party. The second category entails fiduciary actions that are acts of malevolence or gross
negligence. Using these two categories, it is clear that the directors did not act in bad faith. They
informed themselves of the material facts before going forth with the hiring of Ovitz. Moreover,
ordinary negligence does not suffice to constitute the fiduciary violation.
The directors should not be held liable for fiduciary breach as their actions were within the
confines of the law. Since the Delaware General Corporation Law (DGCL) empowers the board
to exercise their delegation power and appoint committees to act on its behalf, the executive
compensation decisions made by the compensation committee were legally correct.
CASE 43-20
The proposed settlement would be approved. Caremark International was expected to have in
place a robust system of policies that would constantly monitor all company operations for any
violations that would have a negative impact on the interests of the entity, as well as those of the
stakeholders. However, there was no sufficient evidence showing that the directors were aware
of the Anti-Referral Payments Law (ARPL) violations. Most importantly, the board did pave the
way for systematic or systemic failure to exercise their expected level of oversight.
A. Issue
Whether Caremark’s directors breached their duty of care by failing to supervise the offending
executives, thereby exposing the company to criminal and civil liability?
B. Holding
A. General Reasoning
Shareholders believed that both the company and its directors breached their duties of
care when they failed to exercise supervision to the offending executives, which would have
effectively prevented the violation of the ARPL laws and as a result prevented the losses that the
company was ultimately forced to incur as settlement for the violation. While the company was
found guilty and would end up paying damages, the court did not find the directors to have
lacked good faith in their exercise of the responsibilities of monitoring. The assertions brought
forth by the shareholders were weak and could not justify the holding of the directors as liable.
B. Applied Analysis
In the current case, lack of good faith would have been established if there had been
proof of the directors’ ignorance of activities within the corporation that had triggered the
liability. Unfortunately, this test of liability—where sustained or systematic failure to exercise
reasonable oversight must be proven—is quite high and perhaps impossible to determine. While
the plaintiff’s claims were weak in regard to the liability of the directors, the proposed settlement
was found to be justifiable as it furthered the interests of all parties involved.
The settlement of $250 million in civil penalties should be approved. However, the directors
are not liable as they did not lack good faith in their exercise of monitoring duties. The proposed
settlement in adequate and reasonable. It is quite beneficial to all the stakeholders of the case,
including the directors, who would have had a lot more to lose had they been held personally
liable for the violation. In re Caremark Int’l, 698 A.2d 959 (Del. Ch. 1996)
The court ruled that the board of directors could not be forced to install lights at Wrigley
Field, nor could they be compelled to schedule night games. Since the Cubs is a purely business
entity, the board of directors has absolute authority when conducting and effecting decisions for
the business, as long as their actions are within the confines of the law. The complaint thus did
not provide for a cause of action. The courts cannot and should not interfere in the management
practices of a corporation unless such practices are related to fraud, breach of faith, or any other
illegality as enshrined in the rule of law. There was no conflict of interest that arose in the
board’s decision of not installing the lights. The shareholder (plaintiff) who launched the
complaint was simply basing his arguments on mere conclusion, rather than sufficiently proving
that the directors had acted in a manner that warranted their exception from the business
judgment rule. Shlensky v. Wrigley – 95 Ill. App. 2d 173, 237 N.E.2d 776 (1968).
Yes, Michael breached his fiduciary duty to Shocking. The duty of loyalty barred him
from embracing conduct and actions that would have an adverse implication on the interests of
the entity. The fact that Michael encouraged Littlefuse to demand more from the deal that was
about to be sealed with Shocking ended up frustrating Shocking’s efforts to raise the funds they
direly needed. Shocking’s and Littlefuse’s relationship was severely injured by Michael’s
actions. He thus had violated his affirmative duty of ensuring that the interests of his company
were protected. Shocking Techs., Inc. v. Michael, C.A. No. 7164-VCN (Del. Ch. Oct. 1, 2012).
Moreover, Michael should not have informed Littlefuse that they were the sole investor.
Disclosing such critical information to a third jeopardized Shocking’s bargaining power and
worsened its economic circumstances. The information was regarded as confidential and was
seen as having unfairly increased Littlefuse’s leverage. Even though Michael had good intentions
in his actions, he ended up causing more far-reaching harm to his company than the good that
would be obtained.

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