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Frederick Hsu Living Trust v. ODN Holding Corp.

Court of Chancery of Delaware

January 31, 2017, Submitted; April 14, 2017, Decided

C.A. No. 12108-VCL

Opinion

MEMORANDUM OPINION

LASTER, Vice Chancellor

In 2008, funds sponsored by the venture capital firm Oak Hill Capital Partners1 invested $150 million in Oversee.net, a California corporation. To facilitate the investment, the parties formed ODN Holding Corporation (the "Company") as a holding company for Oversee.net. In return for its cash, Oak Hill received shares of Series A Preferred Stock (the "Preferred Stock") from the Company. Oak Hill had the right to require the Company to redeem its Preferred Stock in 2013.

In 2009, Oak Hill became the Company's controlling stockholder. Initially, little changed. The Company continued to expand through acquisitions and reinvested its capital for growth. Then, in 2011, the Company switched into liquidation mode. It stopped investing for growth, sold two of its four lines of business, and hoarded the resulting cash. When Oak Hill exercised its redemption right in 2013, the Company used as much of its cash as possible for redemptions. When that wasn't enough to redeem [*3]  the Preferred Stock in full, the Company sold its third line of business and used the resulting cash for more redemptions. The process turned a once-promising company into a shell of its former self.

Frederick Hsu—one of the Company's founders—brought this action against Oak Hill, the Company's board of directors (the "Board"), and certain of the Company's officers. His complaint asserts claims sounding in both law and equity. At law, the complaint contends that the redemptions violated statutory limitations and common law doctrine because the Company lacked sufficient funds legally available to make the redemptions. In equity, the complaint contends that the individual defendants and Oak Hill breached their duty of loyalty by seeking in bad faith to benefit Oak Hill by maximizing the value of Oak Hill's redemption right, rather than by striving to maximize the value of the corporation over the long-term for the benefit of the undifferentiated equity. The Complaint asserts fallback counts against Oak Hill for aiding and abetting breaches of duty by the other defendants, against the directors for waste, and against Oak Hill and the officers for unjust enrichment.

The Complaint fails to [*4]  state a claim for an unlawful redemption. Because of the capital-generating actions that the individual defendants took, the Company had sufficient funds legally available to make them.

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2017 Del. Ch. LEXIS 67 *

THE FREDERICK HSU LIVING TRUST, Plaintiff, v. ODN HOLDING CORPORATION, OAK HILL CAPITAL PARTNERS III, L.P., OAK HILL CAPITAL MANAGEMENT PARTNERS III, L.P., OHCP GENPAR III, L.P., OHCP MGP PARTNERS III, L.P., OHCP MGP III, LTD., ROBERT MORSE, WILLIAM PADE, DAVID SCOTT, DEBRA DOMEYER, JEFFREY KUPIETZKY, ALLEN MORGAN, LAWRENCE NG, SCOTT JARUS, KAMRAN POURZANJANI, ELIZABETH MURRAY, TOOD H. GREENE, and SCOTT MORROW, Defendants.

Notice: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.

Subsequent History: As Corrected April 25, 2017.

 [*1] As Corrected April 24, 2017.

Later proceeding at The Frederick Hsu Living Trust v. ODN Holding Corp., 2017 Del. Ch. LEXIS 308 (Del. Ch., May 12, 2017)

Judgment entered by Frederick Hsu Living Trust v. Oak Hill Capital Partners III, L.P., 2020 Del. Ch. LEXIS 173 (Del. Ch., May 4, 2020)

CORE TERMS

redemptions, preferred stock, redeem, redemption right, reasonable inference, shares, fiduciary, stockholders, funds, maximize, alleges, fiduciary duty, holders, line of business, undifferentiated, standard of review, conceivable, terms, stock, liquidation, allegation of the complaint, bad faith, good faith, insolvent, standard of conduct, unjust enrichment, circumstances, long-term, Oversee, Domain

Civil Procedure, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Business & Corporate Law, Corporations, Shareholder Actions, Actions Against Corporations, Corporate Finance, Dividends & Reacquisition of Shares, Cancellation & Redemption, Initial Capitalization & Stock Subscriptions, Classes of Stock, Directors & Officers, Management Duties & Liabilities, Fiduciary Duties, Business & Corporate Compliance, Business & Corporate Law, Corporations, Governments, Legislation, Interpretation, Causes of Action & Remedies, Breach of Fiduciary Duty, Elements, Fiduciary Duties, Duty of Care, Duty of Loyalty, Duty of Good Faith, Contracts Law, Breach, Efficient Breach, Duties & Liabilities, Breach of Fiduciary Duty, Contracts Law, Third Parties, Business Judgment Rule, Duty to Third Parties, Evidence, Burdens of Proof, Allocation, Inferences & Presumptions, Presumptions, Rebuttal of Presumptions, Pleading & Practice, Pleadings, Complaints, Shareholders, Shareholder Duties & Liabilities, Controlling Shareholders, Burden Shifting, Burdens of Production, Responses, Motions to Dismiss, Inferences, Dissolution & Receivership, Causes of Action, Corporate Governance, Directors & Officers, Torts, Intentional Torts, Multiple Defendants, Concerted Action, Civil Aiding & Abetting, Controlling Shareholders, Remedies, Equitable Relief, Quantum Meruit, Affirmative Defenses, Laches, Equity, Maxims, Follows the Law Principle, Statute of Limitations, Time Limitations, Statute of Limitations, Pleadings & Proof, Standing, Demands, Futility