Kevin Brady, a highly regarded Delaware litigator, provides the following synopsis.
In yet another “sign of the troubled financial times” fund investors brought suit when their redemption rights were temporarily suspended. The Court of Chancery denied plaintiffs’ motion for preliminary injunction and then on July 10, 2009, the Court denied their application for certification of an interlocutory appeal and a concurrent motion for injunctive relief pending appeal of the interlocutory order.
Suspended Redemption Rights No Basis For Injunction
Plaintiffs are investors in Steel Partners II, which is managed by Warren Lichtenstein. In the fall of 2008, when investors rushed to redeem approximately 38% of the assets invested in the funds, the funds suspended all redemption rights. The funds then announced a plan with two options. In Option A, the investors’ interests in the assets of the fund would be transferred to a publicly traded limited partnership, and the interests in the partnership would be given to investors in exchange for their existing interests in the funds with no right of redemption with respect to the units of the new entity. In Option B, the default election, there would be a pro rata distribution of securities held by the funds equal to the value of their investments.
After plaintiffs filed a motion to preliminarily enjoin the proposed plan, on June 19, 2009, the Court of Chancery denied the request for an injunction, holding that plaintiffs had failed to establish the threat of immediate and irreparable harm. The plaintiffs alleged that those investors who were relegated to the default Option B by failing to choose one of the options would be harmed because they could obtain more value for the assets by forcing a liquidation as opposed to the distribution under Option B. However, because the plaintiffs could not show that they had the right to force a liquidation or that such a liquidation was likely, the Court held that there was not a threat of immediate and irreparable harm.
Plaintiffs Failed to Satisfy Supreme Court Rule 42(b)
Applying the first two prongs of the criteria under Supreme Court Rule 42(b), the Court held that the June 19 order did not determine a substantial issue, nor did it establish a legal right. As the Court reasoned, all that was “determined” was “that plaintiffs had failed to establish a sufficient threat of irreparable injury if an injunction were not issued.” This was not a ruling on the merits. Moreover, quoting Chancellor Allen, “the ‘establishment’ of such a ‘non-right’ cannot satisfy Rule 42. If it could, all determinations of such applications would be heard on appeal immediately, which, of course, is not the case.” The practical consequences of a denial of injunctive relief do not rise to the establishment of a legal right.
Plaintiffs also failed to satisfy one of the numerous factors of Rule 42(b)(i)-(v). First, the Court refuted plaintiffs’ argument that the interlocutory order involved “a question of law in the first instance” and was “inconsistent” with the prior decision of the Court of Chancery. The June 19 Order did not “determine” anything with respect to the partnership and even if it did, the Court’s interpretation of the governing partnership agreement pertaining to the ability of the funds to offer investors the above options was nothing more than an interpretation of a contractual provision and “would not necessarily involve a question of law in the first instance in Delaware.” Second, plaintiffs’ allegation that the interlocutory order “appears to contradict” Court precedent was insufficient as plaintiffs incorrectly construed the interlocutory order. Third, Rule 42(b)(iii) was also not met as the interlocutory order “clearly” did not “reverse or set aside a prior decision of the court, a jury, or an administrative agency.” Finally, Rule 42(b)(v) was not satisfied as the denial of the injunction did not determine a case dispositive issue.
Plaintiffs Denied Injunction Pending Appeal
Having failed to meet the requirements of Rule 42 – which sets forth the same standard for the Court of Chancery and Delaware Supreme Court to review plaintiffs’ application – the Court of Chancery held that there was no “pending appeal” and that the corresponding motion predicated on that appeal should be denied. The Court nonetheless addressed other reasons why the plaintiffs failed to establish an entitlement for injunctive relief. First, the Court, citing Kirpat Inc. v. Delaware Alcoholic Beverage Control Commission, 741 A. 2d 356 (Del. 1998), held “it is highly unlikely that plaintiffs will be able to establish that this Court abused its discretion in declining to enter the injunction plaintiffs requested.” Second, the Court did not reiterate its analysis of, but only its conclusion from the motion for preliminary injunction that the plaintiffs would not suffer irreparable injury. Finally, the Court held that third parties would be injured if an injunction regarding the plan was issued and there was little public benefit to the Supreme Court’s review of the Court of Chancery’s denial of the injunctive relief.
Supreme Court Denies Plaintiffs’ Appeal
After the Court of Chancery denied the plaintiffs’ above-referenced applications on July 10, 2009, the plaintiffs appealed the decision denying their request for a preliminary injunction to the Delaware Supreme Court. On July 14, 2009, the Supreme Court found that exceptional circumstances (as required by Rule 42), did not exist so the Court refused the plaintiffs’ interlocutory appeal.