Manichaean Capital, LLC v. Exela Techs., Inc. - 251 A.3d 694 (Del. Ch. 2021)

Rule:

In the context of outsider reverse veil-piercing, rather than insider veil-piercing, it must be emphasized that, just like with traditional veil-piercing, reverse veil-piercing should be sanctioned only in the most exceptional circumstances. The framework to evaluate reverse veil-piercing claims comes with an express recognition that such claims, if not guided by appropriate standards, can threaten innocent third-party creditors and shareholders and lead to a host of unpredictable outcomes for these constituencies. Only in cases alleging egregious facts, coupled with the lack of real and substantial prejudice to third parties, should the court even consider utilizing the reverse veil-piercing doctrine. With prejudice to third-parties in mind and a framework designed to deal with such concerns, however, reverse veil-piercing can act as a deterrent to owners of companies, particularly those that are closely held, from shuffling their assets among their controlled entities with the express purpose of avoiding a judgment.

Facts:

Former stockholders of SourceHOV Holdings, Inc., ("SourceHOV Holdings") dissented when presented with the decision of the SourceHOV Holdings board of directors to merge the company with Exela Technologies, Inc., and then sought statutory appraisal of their SourceHOV Holdings shares. They pursued their appraisal rights at great costs, both opportunity and financial, and were vindicated in their efforts when the court awarded them an appraisal judgment reflecting their shares were worth well in excess of what they were offered in the merger. SourceHOV Holdings appealed and the plaintiffs prevailed again. Following the entry of final judgment, the court entered a charging order against SourceHOV Holdings' interests in its subsidiaries to facilitate the payment of the judgment. Yet the judgment remains unsatisfied. The plaintiffs in this action, and in a parallel action, sought to hold Exela (as acquirer) and its affiliated entities accountable for the appraisal judgment. According to the plaintiffs, as the appraisal action was nearing its inevitable conclusion, and since the appraisal judgment and subsequent charging order were entered against SourceHOV Holdings, Exela and its subsidiaries have been executing a scheme to prevent post-merger SourceHOV Holdings from paying the judgment. Against this backdrop, the plaintiffs sought to hold Exela and its subsidiaries liable under two theories: (1) given the abuse of corporate form by Exela and its subsidiaries, principally through fraudulent maneuvers, the Court should pierce the SourceHOV Holdings corporate veil upwards to reach Exela and downwards to reach SourceHOV Holdings' solvent subsidiaries so that Plaintiffs can enforce their charging order against these entities; and (2) given that Exela now holds a 100% stake in SourceHOV Holdings but has refused to pay all SourceHOV Holdings stockholders for their share of the company, the Court should determine that Exela was unjustly enriched and order it to pay the plaintiffs restitution in the amount of the appraisal judgment plus interest. Exela filed a motion to dismiss.

Issue:

Did the plaintiffs sufficiently claim "exceptional circumstances" for reverse veil-piercing?

Answer:

Yes.

Conclusion:

The court denied Exela’s motion to dismiss the veil piercing claim because a reverse veil-piercing claim was viable under Delaware law. Further, plaintiffs stated a claim for outsider reverse veil-piercing because an analysis of alter ego factors and an eight-factor inquiry showed exceptional circumstances allowing for reverse veil-piercing, and the charging order did not prohibit the claim pursuant to Del. Code Ann. tit. 6, § 18-703. The claim for unjust enrichment was dismissed because the charging order prevented the use of equitable claims and remedies, such as unjust enrichment, as separate means to reach LLC assets subject to the charging order.