With No Appellate Outlet, Ex-Delaware Co. Director Wins Vacatur of Breach Finding

Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...

By Michael Greene

June 1 — In a unique ruling, the Delaware Chancery Court May 29 vacated an earlier decision finding that a corporate director breached his fiduciary duties.

Vice Chancellor John W. Noble determined that under Court of Chancery Rule 60(b), vacating his earlier memorandum opinion was warranted because the director lost the opportunity to appeal the earlier decision through no fault of his own.

The court justified the unusual relief even though it was sought primarily as “a matter of reputation” because there was no liability, other than for routine court costs, imposed by the underlying decision.

Noble opined that “the appellate process exists for many purposes, and, one must assume, [defendant's] reputation is one of them, especially where he would have had the right to appeal if judgment had been entered as one would have anticipated.”

Unique Circumstances

In a 2012 opinion, Noble concluded that Shocking Technologies Inc. director Simon J. Michael breached his duty of loyalty by interfering with the company's efforts to raise additional capital and by sharing confidential company information with potential investors. Despite this finding, the court declined to award the company damages because it failed to establish that Michael's behavior materially impacted investors.

After the court issued its opinion, the company was liquidated in bankruptcy and an implementing order was never submitted. As a result, Michael had nothing to appeal.

‘Troubling' Relief

Despite granting Michael's motion for vacatur, Noble found the relief sought to be “troubling,” given that his earlier opinion “demonstrated how badly behaving directors can still be sanctioned in a public forum, even if the removal process contemplated by 8 Del. C. § 225(c) is not a readily viable option.”

However, Noble still found that granting Michael's motion was warranted under the circumstances.

“Collateral ramifications, even if the direct relief at issue is not material, will support a motion under Rule 60(b)(5) & (6) in order to protect a party whose expectation of appellate review has been frustrated because of events not within his control,” he wrote.

Restoring Reputation

Lawrence A. Hamermesh, a professor at Widener University School of Law, Wilmington, Del., told Bloomberg BNA that Noble's decision is in line with Delaware precedent.

He noted that in a prior chancery court decision—In re IBP Inc. Shareholder Litigation, 793 A.2d 396 (Del. Ch. 2002)—now-Delaware Supreme Court Justice Leo Strine Jr. held that when a party has been deprived of the right to appeal through no fault of its own, that is a proper basis for withdrawing an opinion.

However, Professor Hamermesh found that the abstract relief sought here may be like “un-ringing the bell.”

The whole history of this case is one of advisory opinions, with the court admonishing the defendant despite not awarding the company relief, he observed. “It's not like the opinion is going to go away, people will know where to find it,” he said, adding that unlike expunging a criminal record, there may not be practical consequences for seeking this type of relief.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/Shocking_Technologies_Inc_v_Michael_No_7164VCN_2015_BL_170767_Del.

The order vacating the opinion is available at http://www.bloomberglaw.com/public/document/STAYED_CONF_ORD_Shocking_Technologies_Inc_vs_Simon_J_Michael_Dock.