Case 1:18-cv-00966-CFC-CJB Document 994 Filed 12/02/22 Page 1 of 9 PageID #: 38341
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF DELAWARE
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`VLSI TECHNOLOGY LLC,
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`Plaintiff,
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`v.
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`INTEL CORPORATION,
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`Defendant.
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`No. 18-966-CFC-CJB
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`DECLARATION OF PROFESSOR LAWRENCE A. HAMERMESH
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`I.
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`INTRODUCTION
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`1.
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`I have been engaged by counsel for plaintiff VLSI Technology LLC (“VLSI”) to
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`evaluate the Court’s standing order entered on April 18, 2022 (the “April 18 Standing Order”)
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`from the perspective of its treatment of different types of business entities and owners of interests
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`in such types of business entities. As explained more fully, it is my opinion that the terms of the
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`April 18 Standing Order are not reasonably calculated to achieve the apparent purposes of that
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`order, and do not justifiably differentiate among types of business entities or types of business
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`entity interest holders.
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`II.
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`BACKGROUND AND QUALIFICATIONS
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`2.
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`I have been a professor at Widener University Delaware Law School (“Delaware
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`Law School”) since 1994. In that capacity I have taught classes in business organizations,
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`securities regulation, professional responsibility, corporate finance, mergers and acquisitions and
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`equity/equitable remedies. I have also been a visiting professor at the University of Pennsylvania
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`Law School and the University of Michigan Law School, and have taught as an adjunct professor
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`at New York University School of Law. I am currently Professor Emeritus at Delaware Law School
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`1
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`and Executive Director of the Institute for Law and Economics at the University of Pennsylvania
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`Law School. A true and correct copy of my curriculum vitae, which includes a list of
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`the publications I have authored in the previous ten years, is attached hereto as Exhibit A.
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`3.
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`After graduating from Yale Law School in 1976, I was a practicing attorney at
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`Morris, Nichols, Arsht & Tunnell in Wilmington, Delaware, where I was an associate from 1976
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`to 1984, and a partner from 1985 to 1994. At Morris Nichols, my practice focused on litigation
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`involving the Delaware General Corporation Law (“DGCL”) and other business entity statutes.
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`4.
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`From 2001 to 2007, I served as an appointed member of the ABA Business Law
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`Section’s Corporate Laws Committee, which is responsible for the drafting of the Model Business
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`Corporation Act. In 2011, I was appointed as Associate Reporter for that Committee, and I served
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`as the Reporter from 2013 through 2020. In that capacity I supervised the preparation of the Fifth
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`Edition of the Model Business Corporation Act Annotated, which compiles corporate statutes and
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`case law from all 50 states and the District of Columbia, addressing the full range of topics covered
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`by the Model Business Corporation Act. I served as an elected member of the Council of the ABA
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`Business Law Section from 2009 to 2012. From 2002 to 2003, I served as the Reporter for the
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`ABA’s Presidential Task Force on Corporate Responsibility. From 1995 to 2022, I was a member
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`of the Council of the Corporation Law Section of the Delaware State Bar Association, on which I
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`served as Chair from 2002 until 2004. That Council has primary responsibility for reviewing,
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`drafting, and proposing amendments to the DGCL and Delaware’s other business entity laws.
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`5.
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`From 2010 to mid-2011, I served as Special Counsel in the Office of Chief Counsel
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`of the Division of Corporation Finance of the Securities and Exchange Commission in
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`Washington, D.C. In that position my primary responsibility was to advise the Division’s staff
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`concerning matters of Delaware corporate law affecting potential regulatory initiatives. I am also
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`2
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`an elected member of the American Law Institute, and am an appointed member of the advisers to
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`its project to prepare a Restatement of the Law of Corporate Governance.
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`6.
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`For the time I have devoted to consideration of this matter, I am being compensated
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`at my customary rate of $750 per hour. Payment of my fees is not contingent upon the content or
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`substance of the opinions expressed in this report or any testimony.
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`III. DISCUSSION
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`A. Analysis of the April 28 Standing Order
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`7.
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`In the April 18 Standing Order, Chief Judge Colm F. Connolly directed that in all
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`cases assigned to him, including the present case which I understand had already been pending
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`before Chief Judge Connolly for several years, any “party [that] is a nongovernmental joint
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`venture, limited liability corporation [sic], partnership, or limited liability partnership, … must
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`include in its disclosure statement filed pursuant to Federal Rule of Civil Procedure 7.1 the name
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`of every owner, member, and partner of the party, proceeding up the chain of ownership until the
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`name of every individual and corporation with a direct or indirect interest in the party has been
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`identified.”
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`8.
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`The April 18 Standing Order does not expressly disclose its purpose, although Chief
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`Judge Connolly’s Memorandum Order in this action entered on October 17, 2022 (the “October
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`17 Memorandum Order”) suggests that information specified in the April 18 Standing Order is
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`intended to enable the Court to determine whether it has “a conflict of interest that precludes it
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`from presiding over the case” and that “presiding over the case will not create an appearance of
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`impropriety.”1 The October 17 Memorandum Order further suggests that, although VLSI has
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`1 A recent amendment to F.R.C.P. Rule 7.1, which takes effect on December 1, 2022, only
`applies in diversity cases and is aimed at determining a party’s citizenship for purposes of
`diversity jurisdiction. Memorandum From the Comm. on Rules of Practice and Procedure to
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`3
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`certified to the Court that it has already provided all information responsive to the April 18
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`Standing Order in VLSI’s possession, the Court may dismiss the case due to “failure to provide
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`the information required by the Court’s April 18 [] Standing Order … .”
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`9.
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`For purposes of the analysis set forth below, it is assumed that indirect ownership
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`by a judge or the judge’s family of a party through a common investment fund is not a conflict
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`requiring disqualification unless the judge participates in the management of the fund. E.g., Code
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`of Conduct for United States Judges Canon 3(C)(1)(c)(i). Recognizing that the right of a Delaware
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`limited liability company (such as VLSI) to pursue litigation to enforce its legal rights is enshrined
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`in the Delaware statute governing LLCs,2 the April 18 Standing Order is unsustainable because:
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`(1) its discrimination among types of business entities lacks a rational basis; and (2) even apart
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`from such discrimination, it requires disclosure of information that cannot serve the assumed
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`purpose of the order, yet it also fails to require disclosure of information necessary to serve that
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`purpose.
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`B. Unsupportable Discrimination Among Forms of Business Entity
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`10.
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`It is not entirely clear which forms of business entities the April 18 Standing Order
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`covers. Although it refers to “limited liability corporation[s],” there is actually no entity under
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`Scott S. Harris, Clerk, Sup. Ct. of the U.S. (Oct. 18, 2021). That does not appear to be the
`purpose of the April 18 Standing Order as it applies here; I understand this is not a diversity
`jurisdiction case.
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`2 Section 18-106(a) of the Delaware Limited Liability Company Act (“DLLCA”) confers upon
`all Delaware LLCs, such as VLSI, the power to “carry on any lawful business, purpose or
`activity, whether or not for profit, with the exception of the business of banking as defined in
`§126 of Title 8.” Any doubt that this language empowers LLCs to sue to enforce their legal
`rights is dispelled by DLLCA Section 18-1001, which specifies who has standing to bring a
`derivative action on behalf of an LLC, and refers to “the right of a limited liability company to
`recover a judgment in its favor” – thereby confirming that an LLC can sue to enforce its legal
`rights.
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`4
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`Delaware law with that designation.3 Similarly, it refers to a “nongovernmental joint venture,”
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`which is not a statutorily recognized form of business entity under Delaware law. Moreover, while
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`it refers to “partnership,” its additional reference to a “limited liability partnership,” and the
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`principle of inclusio unius est exclusio alterius, suggests that it does not apply to other specific
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`types of partnership, like limited partnerships or limited liability limited partnerships. In any event,
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`the April 18 Standing Order does not on its face apply to corporations of any sort, or to other
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`business entities, like statutory trusts or business trusts.
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`11.
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`To the extent the April 18 Standing Order imposes its disclosure requirements on
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`limited liability companies but not corporations, it is not reasonably calculated to serve its purpose,
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`because direct or indirect ownership interests in a corporation can be substantively identical, in
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`their control significance and economic significance, to ownership interests in an LLC. Indeed, it
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`is not an exaggeration to say that in terms of control and economic significance, the substance of
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`any direct or indirect interest in an LLC can be replicated in a corporation.4
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`12.
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`By way of specific example, I understand that the voting power in the election of
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`plaintiff VLSI’s Board and the equity interest in VLSI is held by CF VLSI Holdings LLC
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`(“Holdings”), also a Delaware limited liability company. Because VLSI and Holdings are limited
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`liability companies, the April 18 Standing Order apparently requires VLSI to disclose the members
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`of Holdings, which I understand VLSI has already done. If plaintiff VLSI were instead a
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`3 The April 18 Standing Order thus literally does not apply to plaintiff VLSI, a Delaware limited
`liability company. I understand that subsequent orders entered by the Court in this case have
`clarified that this Order was intended to apply to VLSI.
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`4 For that reason, and without in any way altering the substance of its ownership and control, any
`Delaware limited liability company that would be subject to the April 18 Standing Order could
`seemingly avoid the requirements of that order by the simple expedient of converting to a
`corporation, as authorized by DLLCA Section 18-216 (“a domestic limited liability company
`may convert to a corporation”).
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`5
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`corporation, the voting power in the election of the corporation’s board of directors and the equity
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`interest of the corporation could also be held by Holdings, which would have the same control and
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`financial interest in the corporation as Holdings has in plaintiff VLSI. Yet, no further disclosures
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`would apparently be required under the April 18 Standing Order despite Holdings’ identical direct
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`interest because, under this scenario, VLSI would be a corporation instead of a limited liability
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`company.
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`13.
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`Similarly, FCOF IV UST LLC (“FCO IV”), a Delaware LLC, has a majority equity
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`interest in Holdings and thus has an indirect majority equity interest in plaintiff VLSI. If VLSI
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`were a corporation instead of an LLC, FCO IV could equally have an indirect majority interest in
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`the corporation that would be substantively identical to FCO IV’s indirect interest in plaintiff
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`VLSI. But, again, under this scenario, apparently no further disclosure would be required under
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`the April 18 Standing Order. In my opinion, there is no rational basis for applying the requirements
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`of the April 18 Standing Order to a limited liability company but not to a corporation.
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`14.
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`The problem of discrimination among types of business entities has another
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`manifestation in the April 18 Standing Order: for whatever types of party entities it applies to, it
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`requires disclosure until “every individual and corporation” in the chain of ownership is identified.
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`This requirement is subject to at least two interpretations, both of which involve unjustifiable
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`discrimination. Under one interpretation, interest holders in the chain of ownership must be
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`identified up until (but not after) the chain reaches an individual or a corporation. Under another
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`interpretation, the order requires disclosure of “every individual and corporation” in the chain of
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`ownership, even where an individual or corporation holds its indirect interest through another
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`entity (for example, a plaintiff corporation that is owned by an LLC that is in turn owned by a
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`corporation).
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`6
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`15.
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`Under either interpretation, the order is critically flawed. For example, a limited
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`liability company that is a party is required to disclose the identity of any individual or corporation
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`who is a member, but if such a member (including for example a controlling member) is a
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`corporation, the party is apparently not required to disclose the identity of a limited liability
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`company or limited partnership that owns all of that corporation’s stock. Yet in that example, the
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`ultimate owner (an LLC or limited partnership) has just as much control and economic interest as
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`any “individual” or “corporation” that is a controlling member. As another example, a party that
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`is a non-public corporation would apparently not be required to disclose either an LLC or a person
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`(individual or otherwise) owning all of that corporation’s stock; but if the party were instead an
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`LLC with hundreds of indirect investors through other LLCs and/or LPs, it would apparently be
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`required to disclose the identity of all those indirect investors, even if none has a controlling
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`interest. In light of the Court’s purposes for the April 18 Standing Order as identified in the October
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`17 Memorandum Order, there is no rational basis for requiring entities such as LLCs that are in
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`the chain of ownership to disclose their direct and indirect owners, but not requiring corporations
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`to disclose their direct and indirect owners.
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`C. Inconsistent Scope of the Requirements of the April 18 Order
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`16.
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`The breadth of the April 18 Standing Order is also not reasonably calculated to
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`serve its apparent purpose, in that it requires disclosure of persons having direct and indirect
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`ownership interests in a party that cannot possibly involve any control or material economic
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`interest in the party. Consider the following example: we know that FCO MA LSS LP, a Delaware
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`limited partnership, holds a minority indirect interest in VLSI; FCO MA LSS, LP may in turn
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`have, as one of its limited partners, a minority investor such as a limited partnership; that limited
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`partnership in turn may have a limited partner that is a mutual fund or retirement fund; and that
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`mutual fund or retirement fund in turn may have thousands of holders of its shares.5 In that
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`situation, the April 18 Standing Order would arguably require VLSI (because it is an LLC rather
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`than a corporation) to disclose the identities of each holder of shares in the mutual funds and/or
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`retirement funds that are indirect investors in VLSI, even though any one such holder is likely to
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`have (i) no control rights whatsoever in VLSI, and (ii) at most a de minimis indirect economic
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`interest in VLSI. What the April 18 Standing Order lacks, then, is an approach reasonably
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`calculated to identify persons – of all business entity types – having a control or economic interest
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`that is sufficiently significant to implicate any concern about conflict of interest or appearance of
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`impropriety.
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`17.
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`The difficulty with such overbreadth is matched by the underinclusiveness of the
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`April 18 Standing Order. If the purpose of that order is, as assumed, to enable the Court to evaluate
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`whether persons affiliated with a party have sufficient control or economic interest to create a
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`conflict of interest or appearance of impropriety, it would be critical to know the extent of that
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`control and economic interest. Yet while the April 18 Standing Order requires disclosure of the
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`identities of all persons with any economic interest, it has no requirement for disclosing the nature
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`or degree of such control or economic interest. Literal compliance with the order would
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`indiscriminately disclose the names of all individuals and entities having an indirect interest in an
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`entity party that is not a corporation, no matter how small that indirect interest, but would not
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`require information necessary to evaluate whether any such individual’s or entity’s interest would
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`create a conflict of interest or appearance of impropriety.
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`5 For example, I understand that the University of Texas/Texas A&M Investment Management
`Company (“UTIMCO”) is an investor in some of the entities that hold an indirect interest in
`VLSI. I would expect that UTIMCO holds that indirect interest on behalf of hundreds or more
`likely thousands of persons.
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`IV.
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`CONCLUSION
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`18.
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`In sum, and for the reasonsset forth above, it is my opinion that the terms of the
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`April 18 Standing Order are not reasonably calculated to achieve the apparent purposes ofthat
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`order, and do not justifiably differentiate among types of business entities or types of business
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`entity interest holders.
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`I declare under penalty of perjury under the laws of the United States of America that the
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`foregoing is true and correct to the best of my knowledgeandbelief.
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`By: /s/ | A. Khe
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`Lawrence A. Hamermesh
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`DATE: December1, 2022
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