KFC National Council and Advertising Cooperative, Inc. v. KFC Corp., C.A. No 5191- VCS (Del. Ch. Jan. 31, 2011), read 65-page opinion here. The Court of Chancery agreed with the arguments of the franchisees in their interpretation of a corporate charter that impacted a dispute over who controlled advertising and marketing strategy for the 5,000 restaurant KFC chain. More details about this important decision will come later.
ABC News reported on the case here.
This case involved a dispute between parties over who has authority to determine national advertising strategy for the KFC brand, based on the organizational documents of the entity involved.
Plaintiff “NCAC” is a non-stock corporation that is authorized to serve as the “advertising arm” for the KFC brand in the U.S. The NCAC Committee serves as the NCAC’s governing body. The franchisees have a majority control of the NCAC Committee.
The resolution of this case revolves around an interpretation of the NCAC’s Certificate of Incorporation. The key question was the extent to which the NCAC Certificate constitutes a contract in which NCAC agreed to give veto power to KFCC on advertising matters.
As with any contract case, the Court provided extensive background details about the basic dispute giving rise to the case and then a consideration of the relevant contractual test.
Based on the theory that readers of this blog do not want a case summary that competes with the 65-page length of this opinion, I will use the time-honored approach of using bullet points for selected key legal parts of the opinion.
Key Legal Principles Addressed:
● The Court applied common principles of contract interpretation to address the dispute regarding the meaning of the Certificate of NCAC; and due to ambiguity in its terms, the Court looked to decades of extrinsic evidence, including course of performance. FNs 45 to 50.
● However, parol evidence is typically not helpful in governing instruments such as a certificate that are not the produce of bilateral negotiation. FNs 53 and 54.
● Moreover, when the rights of equity holders are curtailed, those restrictions must be clear, and any ambiguity will be construed against the diminishment of power that would otherwise be vested in a majority of stockholders or board members. FNs 55 to 57.
● Chancery did not limit its analysis only to the text of the certificate, but also relied on the public policy “default position” supporting majority rule by the corporate board (in this case the NCAC Committee).
● But the extrinsic evidence also supports the franchisees’ interpretation of the Certificate and how its power interfaces with the role of KFCC in the parties’ relationship.