WILMINGTON, Del. (Legal Newsline) – A software company that unsuccessfully sued a law firm for allegedly providing about $65 million worth of bad advice during a buyout of stockholders is appealing to the Delaware Supreme Court.
The company, ISN Software Corp., lost its suit against the law firm when Delaware Superior Court Judge Mary M. Johnston ruled that the company should have sued the lawyers before the company's share price was finalized and while the lawyers were still representing the company. The judge ruled that a three-year statute of limitations expired prior to ISN Software filing its suit against the law firm.
In Johnston's ruling, she granted a motion to dismiss ISN Software’s legal malpractice suit against Richards, Layton & Finger, which bills itself as Delaware’s largest law firm.
ISN Software had argued that, until the share price was determined, it could not yet determine the extent of the damages it suffered - or even if there would be any damages.
In its appeal of the Superior Court's ruling filed with the Supreme Court on April 24, ISN Software argues that the injury caused by the lawyers' advice "did not ripen into a legal malpractice claim" until the share price was finalized.
"Before that, ISN had suffered no resulting loss from the erroneous advice," ISN stated in its appeal.
The company also argued that "if ISN had attempted to file a malpractice claim before the appraisal opinion, ISN's claims would have been dismissed for failure to establish the third element of a negligence claim -- a resulting loss."
ISN Software sought legal advice in 2012 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 involved cashing out four stockholders, at about $38,000 per share.
RLF advised ISN Software that a certain shareholder who held 544 shares, would not have appraisal rights – the right to have a Delaware Court of Chancery decide the price per share at the conclusion of an appraisal action.
ISN Software proceeded with the merger, which was finalized in January 2013. However, several days later, RLF told the company that its initial advice was incorrect – the stockholder 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, ISN Software and the law firm approved a “consent letter" acknowledging 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 consent 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. 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.