By Jeff Montgomery

Law360 (May 12, 2020, 10:50 PM EDT) -- A Delaware Chancery Court dispute over alleged subterfuge in a private company's restructuring efforts emerged as a First Amendment battleground Tuesday, with one side challenging claims by the other that the state's COVID-19 emergency court orders temporarily lifted some public document filing duties.

Attorneys for New York architectural and engineering firm EYP Group Holdings Inc. and four directors told Vice Chancellor Kathaleen S. McCormick during a teleconference argument that the Delaware Supreme Court's pandemic-related modification of court procedures included a right to delay the filing of unsealed, redacted complaints or other documents until June 1.

Attorneys for three other directors, including the company's former CEO, sued last week for records and a temporary restraining order and injunction related to the restructuring proposal. They wanted to file a public version of the complaint, but the defendants have said the state Supreme Court extended the deadline for doing so to June 1.

When challenging the defendants on the filing of the public version, the plaintiffs argued that no other Chancery Court litigants had used the emergency order as a public disclosure exemption and asked for an order to keep the court's ordinary rules and deadlines for unsealing records in place.

"We think that's an improper use of the COVID-19 judicial emergency to hide from public view allegations about fraudulently obtained board resolutions and improper freezing out of board members in an expedited governance dispute," said Joel S. Friedlander of Friedlander & Gorris PA, counsel to former EYP Chief Executive Officer Tom Birdsey and two other directors.

Friedlander said the defendants were attempting to keep under seal information that the public is entitled to know about the merits of the case.

"This case is a poster child for saying, yes, it's worth fighting for the First Amendment and the meaning and intent of court disclosure rules," Friedlander said. He noted that calls to delay public access to court documents arose "amidst an expedited effort to get a restructuring plan effectuated without the proper deliberative process of a board."

Kenneth J. Nachbar of Morris Nichols Arsht & Tunnell LLP, counsel to EYP Group and two of four other directors, acknowledged that the vice chancellor could modify the deadlines, but said that the other side should have to justify an exception to the emergency order from April 14.

The order, in part, said that "deadlines in court rules or state or local statutes and ordinances applicable to the judiciary that expire between March 23, 2020 and May 14, 2020 are extended through June 1, 2020" for Delaware, where a statewide stay-at-home order remains in effect.

"Basically, he attacks the Supreme Court order insofar as it would extend the deadline," Nachbar said of Friedlander, referring to court rules that require filing a public version of confidential documents within three days. "He ought to write a letter to the Supreme Court and ask them to amend the order. But that's not what he did."

Vice Chancellor McCormick said she would take the arguments under advisement, but also expressed concerns about the alleged loophole created by the emergency order.

"I worry that it might be viewed as an opportunity for people who simply want to avoid having public filings on the docket that would otherwise occur but for the pandemic. They'd be opportunistically seizing on the administrative order" for their own ends, the vice chancellor said, noting that she would try to rule quickly.

The vice chancellor's decision to take the disclosure issue under advisement came during a proceeding that also saw the court expedite proceedings on a books and records demand by the directors who sued and a motion for a declaratory judgment that would invalidate the board's ratification of a special committee's authority to pursue restructuring options.

Although the vice chancellor declined to enter a temporary restraining order, the court did expedite the case, with arguments on both issues to be scheduled for June, the court said.

Jonathan M. Sperling of Covington & Burling LLP, counsel to the directors who sued, said that his clients, who also are noteholders, are seeking relief from a "self-interested scheme" and a process "that stinks on its face."

According to a description of the suit — not yet publicly available but summed up in court — the noteholders accused the board and management of agreeing to form an independent committee to assess restructuring options without providing it with independent counsel, and allegedly without independent authority to make commitments.

Instead, two recently named directors appointed to the special committee and King & Spalding LLP "formed a working group with management and company counsel and ultimately presented a plan that would provide extraordinary benefits to company management."

"What's emerged is this fraudulent process to try to freeze out these outside directors and essentially create a surrogate board," Sperling said. He added that, after the filing of the suit last week, EYP's board met on Sunday, May 11, on short notice and ratified the special committee's actions.

In one of the decisions from the bench on Tuesday, the vice chancellor enjoined EYP from acting on any restructuring recommendations without 10 days' notice, pending further proceedings.

Plaintiffs former CEO Tom Birdsey and directors David Watkins and Ira Starr are represented by Joel Friedlander, Jeffrey M. Gorris and Bradley P. Lehman of Friedlander & Gorris PA, Scott Watnik and Alan D. Zuckerbrod of Wilk Auslander, and Jonathan M. Perling, Christopher Y.L. Yeung and Anders Linderot of Covington & Burling LLP.

EYP Group Holdings Inc., current CEO Scott Butler and director Kefalari Mason are represented by Kenneth J. Nachbar and Thomas P. Will of Morris Nichols Arsht & Tunnell LLP.

EYP directors Sherman Edmiston III and Jill Frizzley are represented by Gregory P. Williams and Raymond J. DiCamillo of Richards Layton & Finger PA.

The case is Tom Birdsey et al. v. EYP Group Holdings Inc. et al., case number 2020-0335, in the Court of Chancery of the State of Delaware.

--Editing by Jack Karp.

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