Chancery Recognizes Right to Appoint Receiver of Solvent Corp.

Zutrau v. Jansing, C.A. No. 7457-VCP (Del. Ch. Mar. 18, 2013).

Issues addressed in this Court of Chancery opinion: (1) The right to have a receiver appointed for a solvent corporation based on allegations of fraud and breach of fiduciary duty of directors; (2) direct claim for breach of fiduciary duty in connection with controllers effecting a reverse stock split that eliminated the minority’s shares; (3) breach of oral promise for equity in return for working at the company, (4) res judicata and collateral estoppel, and (5) waiver of arguments not included in opening brief based on Chancery Rules 7(b) and 171 (i.e., cannot be raised in reply brief for the first time).

At a mere 15 pages, this is a relatively short opinion compared to the average Chancery decision, so I’ll just provide a few key points for the busy reader, but if any of the issues listed above are of interest, I encourage you to read the whole thing.

Some of the issues in this opinion were also addressed in two other separate Chancery decisions also decided in March. In Eluv Holdings v. Dotomi, highlighted here, one of the parties had been given a promise for stock in exchange for working for the company. Also, in Carsanaro v. Bloodhound, highlighted here, the court addressed whether dilution of a minority’s shares can be the basis of a direct claim as compared to a derivative claim.

  • The court cites to what it refers to as “well-established precedent” (not statutory authority) for the appointment of a receiver based on fraud and fiduciary misconduct, even for a solvent corporation–although a “strong showing” must be made. This basis is in addition to the more well-know bases of insolvency and director deadlock. See cases cited at footnotes 25 and 26 and accompanying text.
  • Additional reasons for this court to exercise this extraordinary equitable power include: “positive misconduct by corporate officers, breach of trust or extreme circumstances showing imminent danger of great loss which cannot otherwise be prevented.” Slip op. at 11.
  • “Mere dissension among corporate stockholders seldom, if ever, justifies the appointment of a receiver for a solvent corporation.”
  • In this case, the court explained in denying the motion to dismiss, that if the allegations are proven at trial regarding fraud and mismanagement, they are “sufficient to state a cliam that might, at some later stage, lead to the Court’s appointing a custodian to the corporation.”
  • Although an earlier motion to dismiss the original complaint argued lack of standing to pursue a derivative claim after the merger, it does not appear to have been included in the latest motion to dismiss the amended complaint.