This opinion addresses restrictions on the ability of a corporation to perform contractual obligations to redeem shares based on DGCL Section 160 and over a century of case law and commentary, despite an otherwise straightforward charter provision.
This 32-page decision should be required reading for anyone who needs to know the latest Delaware law on the restrictions that are imposed on a corporation notwithstanding what might otherwise be a clear contractual provision in the charter that one would expect to be enforced regarding the right of a shareholder or other party to have shares redeemed by the corporation.
The factual background to this case was previously provided in a 2006 Chancery decision highlighted on this blog here.
Among the several key principles of law recited in this opinion are the following:
1) Under Delaware law, a corporation is not required to redeem shares if to do so would render the corporation insolvent.
2) The corporation is also not required to redeem shares if it does not have “legally available funds.” The Court explained in scholarly detail why the term “surplus” is not the same as “legally available funds.”
3) The restraints on the corporation’s ability to redeem shares are based in both Section 160 of the Delaware General Corporation Law, as well as over a century of court decisions and commentary that are provided in thorough detail, both in the text and in the footnotes of this gem of a decision.
4) The Court discusses the standard by which it will review a board’s decision on the issue of whether or not to redeem shares. See page 24. The Court explained that:
“Under Delaware law, when directors have engaged deliberatively in the judgment-laden exercise of determining whether funds are legally available, a dispute over that issue does not devolve into a mini-appraisal. Rather, the plaintiff must prove that in determining the amount of funds legally available, the board acted in bad faith, relied on methods and data that were unreliable, or made a determination so far off the mark as to constitute actual or constructive fraud.” (citations omitted.)
There is much more to commend this opinion which provides copious citations to scholarly treatises and court decisions that support its statement that: “An unbroken line of decisional authority dating back to the late nineteenth century prohibits a corporation from redeeming shares when the payment would render the corporation insolvent.”
The Court further reasoned that even if the corporation in this case were deemed to have “surplus,” it was not shown that the corporation had “funds legally available” from which to redeem the shares. Therefore, a judgment was entered in favor of the corporation and against the party seeking a judgment that they had the right to have their stock redeemed.