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A recent Delaware Court of Chancery ruling that non-Delaware attorneys and law firms can be sued in the state for their advice to Delaware-incorporated companies has raised concerns about courts’ jurisdictional reach and about a lawyer’s duty to challenge a client’s business decisions. The case is of concern to law firms, investment banks and others who advise companies on Delaware issues, said Barry Sher, the chairman of the litigation practice in the New York office of Paul, Hastings, Janofsky & Walker. “With relatively minimal actual contact with the state of Delaware in the normal jurisdictional sense, they could nonetheless be brought into court,” Sher said. Since many U.S. companies are chartered in Delaware and subject to Delaware corporation law, Delaware Court of Chancery decisions have had a major impact on corporate law. The case involves allegations that law firm Baker Hostetler and a Columbus, Ohio-based corporate partner, Joseph Boeckman, aided and abetted the breach of fiduciary duty committed by three managers of Lima, Ohio-based bronze ball bearings maker Randall Bearings Inc. Sample v. Morgan, No. 1214-VCS (New Castle Co., Del., Ch.). According to court papers, the managers and their lawyer allegedly orchestrated a scheme to entrench and enrich themselves by buying a large block of voting stock from the company at an unfairly low price. ‘Public policy interest’ In a recent decision, Vice Chancellor Leo Strine noted that it’s difficult for plaintiffs to bring aiding and abetting claims against a company’s lawyers in fiduciary duty cases, but he said the state has “no public policy interest in shielding corporate advisors” when plaintiffs have a viable case against the advisers. “If well-pled facts can be pled that support the inference that a corporate advisor knowingly assisted corporate directors in breaching their fiduciary duties, Delaware has a public policy interest in ensuring that its courts are available to derivative plaintiffs who wish to hold that advisor accountable to the corporation,” Strine wrote. Plaintiffs’ attorneys on the case at Chimicles & Tikellis of Wilmington, Del., declined to comment because the firm is preparing for trial in the case. Laurence Cronin of Smith Katzenstein & Furlow in Wilmington, Del., whose firm represents Baker Hostetler and Boeckman, also declined to comment, but said his clients would not seek an interlocutory appeal. The stockholders authorized Randall Bearings to issue shares at one-tenth of a penny per share, instead of the $1 per share value previously used by the company for newly issued stock. The new stock was part of a so-called “Equity Incentive Plan,” which was also approved by stockholders, for the stated purpose of “attracting and retaining key employees.” But court papers claim that the top managers behind the scheme and Boeckman always intended that the managers would get to buy the cut-rate stock. In the end, the managers bought 200,000 shares for $200, instead of the $200,000 it would have cost if they were issued at $1 per share, and the company took out a loan to pay the managers’ $930,000 in taxes on the stock grants. Also according to court papers, Boeckman advised the managers on their options for gaining voting control and hired a company to file the necessary papers in Delaware once the shareholders approved the equity incentive plan and stock value changes. The managers and Boeckman also found a friendly buyer for a large block of stock owned by the family of the deceased former CEO. The buyer, a company affiliated with Randall Bearings’ major supplier, and the managers together control 58% of the voting stock. Strine’s decision said the proxy statement that shareholders voted on didn’t disclose Randall Bearings’ contract with the stock buyer. As part of the deal, Randall Bearings agreed not to issue more stock for five years � other than the 200,000 shares for the incentive plan � a move that would keep the voting bloc’s power intact. An ‘aggressive’ ruling Law firms around the country advise Delaware-chartered companies like Randall Bearings, but lawyers shouldn’t necessarily be subject to court action in all 50 states and any country if a dispute arises about their legal work, said Proskauer Rose New York partner Steve Krane. Krane called the decision an “aggressive” use of a long-arm statute. “I thought it was excessive to basically haul a law firm into a state’s court because they said things on their Web site about being a national firm [when] they sat in Ohio giving advice about Delaware law,” Krane said. In his opinion, Strine noted that the defendant firm advertises itself as corporate-governance experts “able to provide coast-to-coast legal services.” Strine later said it “fails the straight-face test” for “sophisticated counsel” to say they didn’t realize that acting as de facto outside general counsel to a Delaware corporation might expose it to the Chancery Court’s jurisdiction. David Furbush, a California attorney who co-leads Pillsbury Winthrop Shaw Pittman’s securities litigation team, said including lawyers in breach of fiduciary duty cases against officers and directors is a much greater worry than jurisdictional issues. Corporate managers, not lawyers, normally decide what’s in the company’s best interest, Furbush said. “If the officers and directors conclude that a certain act is in the best interest of a corporation and direct the attorneys to draw up some papers, is the attorney required to second-guess that?” Furbush said. “Is the attorney required to say, ‘I don’t think it’s in the best interest of the corporation?’ “ Some comfort Although the case opens up jurisdictional risks for legal and other advisers to Delaware-chartered companies, Paul Hastings’ Sher takes some comfort in that the Delaware Chancery Court has no jury trials and no punitive damages. “It’s a highly sophisticated court,” Sher said. “If you’re going to be sued, it’s an extremely high-quality court.” The case against the officers and directors has also been moving forward since Strine’s January denial of their motion to dismiss. Claims against them include class action breach of fiduciary duty claims, derivative breach claims brought on behalf of the company, wrongful self-dealing and corporate waste, which refers to a transaction that no reasonable person would conclude was in the company’s best interest. Firms representing other parties in the case did not return calls for comment, including Morris, Nichols, Arsht & Tunnell of Wilmington, which represents Randall Bearings; Philadelphia’s Blank Rome, which represents the three Randall Bearings manager-directors; and Pinckney Harris & Poppiti, also of Wilmington, which represents two directors on Randall Bearings’ board.

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