In re Native American Energy Group, Inc., C.A. No. 6358-VCL, 2011 WL 1900142 (Del. Ch. May 19, 2011).

Issues Addressed

The Court addressed a petition seeking a declaratory judgment under Section 225(b) of the Delaware General Corporation Law (DGCL), 8 Del. C. § 225(b).

Procedural Setting

On October 19, 2009, Native American Energy Group, Inc. (“Old Energy Group”) merged into Flight Management International, Inc. (“FMGM”).  Shortly thereafter, FMGM assumed the name of Native American Energy Group, Inc. (“New Energy Group”).  On May 27, 2010, the Depository Trust & Clearing Company (“DTC”) placed a “Global Lock” on New Energy Group’s shares because of uncertainty about the validity of shares (“Old Halstead Shares”) arising from a erroneous transaction back in the days of Old Energy Group.  The New Energy Group board of directors acted to resolve the situation by acknowledging and confirming that the capital stock of New Energy Group currently includes those shares derived from the Old Halstead Shares.  On April 8, 2011, New Energy Group, Inc. filed this litigation seeking an unopposed declaratory judgment under 8 Del. C. § 225(b).

The Court’s Obligation

The first obligation the Court of Chancery has is “to determine whether it can properly exercise jurisdiction over a matter, ‘regardless of whether the issue has been raised by the parties.’” Op. at 4.  The court must determine whether an actual controversy exists sufficient to warrant adjudicating the dispute.  The court recited the following four elements for determining jurisdiction:

(1) It must be a controversy involving the rights or other legal relations of the party seeking declaratory relief; (2) it must be a controversy in which the claim of right or other legal interest is asserted against one who has an interest in contesting the claim; (3) the controversy must be between parties whose interests are real and adverse; (4) the issue involved in the controversy must be ripe for judicial determination.

Section 225(b)

The Court of Chancery observed that prior to its amendment, Section 225 only authorized a stockholder to bring a summary proceeding to determine the result of a stockholder vote.  Even when a corporation was faced with a ripe dispute, it lacked standing under 225 to seek a judicial determination and was forced to wait for the filing of an action by a stockholder.  Op. at 5.

In 2008, the General Assembly amended Section 225(b) to “authorize a corporation to file a petition in the Court of Chancery to ‘determine the result of any vote of stockholders upon matters other than the election of directors or officers.’” (citing 8 Del. C. § 225(b)).  The synopsis of the bill amending the statute supports a legislative intent that “the bill amended § 225(b) to include the corporation itself as a permissible applicant in an action brought under that subsection.” Op. at 5. In an earlier case, the Court of Chancery found that § 225 was not to be used as a means of seeking declaratory relief, “particularly where no actual controversy exists.” (citing Palmer v. Arden-Mayfair, Inc., 1978 WL 2506 (Del. Ch. July 6, 1978)).  The Court of Chancery then reasoned that there is nothing in the amendment or associated commentary “which would suggest a legislative intent to alter the basic nature of Section 225(b)” by allowing a corporation “to seek an advisory opinion from this Court.”  Op at 5.

In analyzing New Energy Group’s petition for declaratory judgment, the court determined that there is no actual controversy over the board and stockholder consents, and concluded that if there were an actual controversy over the outcome of a vote that turned on the validity of the Old Halstead Shares, then the Court could adjudicate the issue under § 225(b). The court determined that New Energy Group only sought a determination on whether non-unanimous ratification can validate invalidly issued shares.  The court found that New Energy Group’s petition did reveal an actual adversary in DTC and thus concluded that:

If New Energy Group believes that its securities have been issued validly and that DTC breached its contractual obligations by imposing the Global Lock, then New Energy Group can seek relief against DTC.  In that action, there would be true adversity and a litigable controversy.

The Court of Chancery concluded that it lacks jurisdiction to render an advisory opinion in this case under Section 225(b).