WILMINGTON, Del. (Legal Newsline) - A company that got about $65 million worth of bad advice from a law firm during a buyout of stockholders should have sued the lawyers before the share price was finalized and while the lawyers were still representing the company, a Delaware judge has ruled.
But the company, ISN Software Corp., gave notice last week that it will appeal the ruling issued by Superior Court Judge Mary M. Johnston.
Johnston on Feb. 18 granted a motion to dismiss ISN Software’s legal malpractice suit against Richards, Layton & Finger, which bills itself as Delaware’s largest law firm. The judge ruled that a three-year statute of limitations expired prior to ISN Software filing its suit against the law firm.
ISN Software had argued that it couldn’t have filed the suit during the three-year period because it did not yet know the extent of damages caused by the law firm’s actions – or even if there would be any damages – because the share price had not yet been determined.
Background
In 2012, ISN Software sought legal advice from RLF regarding the company’s options to buy back its own shares to convert from a C-Corp to an S-Corp. The law firm developed a merger plan that would cash-out four stockholders at about $38,000 per share.
The law firm gave the company advice on whether a certain stockholder would have appraisal rights – the right to have a Delaware Court of Chancery decide the price per share at the conclusion of an appraisal action. The law firm advised that the shareholder, who held 544 shares, would not have appraisal rights.
ISN Software moved ahead with the merger, which was consummated in January 2013. A few days later the law firm notified the company that its initial advice was incorrect – that the stockholder in fact would have appraisal rights.
ISN Software says the law firm assured the company, however, that it would obtain a positive outcome in the appraisal action.
In February 2013, the company and the law firm executed a “consent letter” that acknowledged that RLF’s continued representation of the company would create a “potential conflict” because “litigating issues arising from a law firm’s prior legal work may generate a conflict of interest.” The letter also stated there “may be an issue” concerning the law firm’s advice on “the availability of appraisal rights in connection with the merger.”
In April 2013, the stockholder filed an appraisal action. Nearly three years later -- in August 2016 – the Court of Chancery issued an opinion valuing the shares at $98,783 per share. The buyout ended up costing ISN Software about $65 million more than the company expected it to cost.
Ruling
ISN Software filed its legal malpractice suit against RLF in August 2018. In its suit against the law firm, ISN Software argued that it could not have known the extent of damages – or even if there would be damages – until after the Court of Chancery set the value of the shares.
The law firm, however, argued that the three-year statute of limitations began running when the company became aware of the law firm’s mistake. The law firm argued that the company became aware of the mistake in February 2013, when the “consent letter” was executed.
Johnston, in her ruling, wrote that ISN Software could have filed its legal malpractice suit while the appraisal action was being decided.
“The malpractice action could have been stayed pending resolution of the appraisal value, in order to ascertain the precise measure of damages,” she wrote.
Representatives from ISN Software and Richards, Layton & Finger did not immediately respond to requests for comment. The law firm did not admit liability for legal malpractice, but did not dispute that it gave erroneous advice regarding appraisal rights of stockholders.