LexisNexis® CLE On-Demand features premium content from partners like American Law Institute Continuing Legal Education and Pozner & Dodd. Choose from a broad listing of topics suited for law firms, corporate legal departments, and government entities. Individual courses and subscriptions available.
In re: Shawe & Elting LLC, C.A. No. 9661-CB (Del. Ch. Aug. 13, 2015) [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance].
There are many important principles of Delaware corporate law addressed in this 104-page post-trial opinion, but for the benefit of busy readers, I will highlight those aspects of this decision that have the widest practical applicability to those involved in corporate and commercial litigation.
The factual background of this case involves a company called Transperfect Global, Inc., owned by two 50% stockholders who were also the only two directors of the company.
The primary issue addressed was whether the court should grant a petition to appoint a custodian under DGCL § 226 even though the corporation is highly profitable. The court found that the state of management of the corporation devolved into one of complete dysfunction between the two directors/stockholders who were also co-CEOs. The irretrievable deadlocks over significant matters caused the business to suffer and threatened the business with irreparable injury notwithstanding its profitability.
The court found that the requirements of both § 226(a)(1) and § 226(a)(2) were satisfied. A separate request for dissolution of a LLC subsidiary pursuant to 6 Del. C. § 18-802 was also granted to dissolve that entity. DGCL § 273, which provides a summary basis to dissolve a joint venture which is owned 50/50, could not be used because technically speaking, the stockholders in this case were not 50/50 stockholders. They were 50/50 on a de facto basis, but 1% was actually held by a third party who was controlled by one of the directors/co-CEOs.
Painfully detailed facts take up more than half of the opinion. The factual background could be the basis for a compelling novel, but for purposes of this brief blog post, I will focus on the most useful legal principles involved.
Key Legal Principles
“Directors of a Delaware corporation owe fiduciary duties of care and loyalty to the corporation and to its stockholders. The duty of care requires the exercise of an informed business judgment. The duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally. To that end, a director may not allow his self-interest to jeopardize his unyielding obligations to the corporation and its shareholders. A director must, therefore, exercise good faith in advancing the corporation’s interest.” (footnotes omitted.)
“The Chief Justice once observed, with respect to business co-managers or co-owners whose relationships have soured, that ‘if people are really good business people . . . you just wonder . . . whether they’re only able to use their brains in some limited compromised way that allows them to make money, then, when they function on a broader dynamic, all their economic rationality and intuition just goes out the window.”
Utilisave, LLC v. Khenin, C.A. No. 7796-CS, Transcript (Del. Ch. Jan. 11, 2013; filed Jan. 15, 2013). See also more recent decisions in the Khenin case, unrelated to this quote: Utilisave, LLC, et al. v. Mikhail Khenin, C.A. No. 7796-ML, final report 2 (Del. Ch. Aug. 18, 2015) [lexis.com | Lexis Advance].
Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.
For more information about LexisNexis products and solutions, please connect with us through our corporate site.