Andrew J. Czerkawski of the Lewis Brisbois Delaware office prepared this post.
Seeking to compel its Delaware subsidiary to issue a replacement stock certificate evincing ownership of all 1,000 of the subsidiary’s issued and outstanding shares, a foreign parent corporation filed suit in the Delaware Court of Chancery under the rarely litigated DGCL § 168, in Venezuela v. PDC Holding, Inc., 2023 Del. Ch. LEXIS 582 (Del. Ch. Nov. 28, 2023).
BRIEF FACTUAL OVERVIEW
This action took place as one part of a vast web of internationally connected litigation sagas and geopolitical intrigue. A non-party Canadian corporation sought to execute on its $1.2 billion international arbitration judgment against a foreign nation. That nation’s government wholly owned the parent entity which in turn wholly owned all of the instant defendant Delaware corporation’s shares (the subsidiary itself in turn wholly owns one of the largest operating petroleum refining companies in the United States).
In federal court, the non-party Canadian corporation successfully moved to attach and foreclose on the parent’s shares of its Delaware subsidiary, arguing the parent acts only as an alter ego of the foreign nation. The federal court eventually ordered the sale of the foreign parent’s shares of its Delaware subsidiary to satisfy the foreign nation’s debt to the non-party Canadian corporation and required the parent to submit its original stock certificate evincing its ownership of the Delaware subsidiary shares. If the parent could not produce the stock certificate, the order gave the option for the parent to seek the Court of Chancery’s expedited aid in procuring a replacement. The parent did just that: it filed the instant DGCL § 168 action against its wholly owned Delaware subsidiary to compel the issuance of a replacement stock certificate (the parties aligning interests in connection with the foreign nation did not escape the Court; multiple creditors of the foreign nation filed amici curiae briefs supporting the certificate’s reissuance, pointing to the foreign parent and its Delaware subsidiary’s “repeated acts of recalcitrance” to “slow down the sales process”).
KEY ANALYSIS
Beginning with the language itself, the Court laid out the Delaware precedent detailing Section 168’s primary requirements, the burden of which rests on the plaintiff to show: (i) the plaintiff demanded corporate management issue a replacement certificate; (ii) management refused the demand; (iii) the plaintiff lawfully owns the complained-of capital stock; and (iv) the original stock certificate “has in fact been lost, stolen, or destroyed.” If the plaintiff satisfies her burden on these elements, then the rebuttal burden shifts to the corporation to demonstrate “good cause” in opposition to the reissue. And if the corporation fails to carry its rebuttal burden, then the Court “shall make an order requiring the corporation to issue and deliver to the plaintiff” a new stock certificate.
The parties left the primary elements virtually undisputed. But, receiving the lion’s share of the Court’s attention, Section 168 also mandates the plaintiff receiving the new certificate give the corporation an indemnity bond. Providing the “upper limit of the corporation’s liability for actions arising out of” the reissuance, the plaintiff must first “‘give the corporation a bond in such form and with such security as to the court appears sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new . . . certificate.’”
The defending subsidiary initially requested the plaintiff parent post an indemnity bond “between $32 and $40 billion,” eventually settling on $1 to $2 billion. Though the amici creditors contended the Court could dispense with the statutory indemnity bond requirement altogether, Delaware precedent held the opposite: if the issuer insists on one, the Court cannot waive the bond and security requirement altogether.
Yet, the Court enjoys discretion to set the bond’s amount—an amount sufficient “to protect the issuer if the original stock certificate is presented.” The Court described the reason for the bond requirement: “A bond ‘is necessary because the absence of a certificate constitutes notice to the corporation that a third party might have superior title to the underlying stock and that the corporation could be liable for conversion to one holding the original certificate in good faith under a superior title.’” But if the issuing party appears to face little to no “cognizable harm,” the Court may set a “nominal bond.”
Setting the discretionary bond amount required the Court to examine all the circumstances surrounding the low-but-not-zero risk posed to the subsidiary for the reissuance. The Court pointed to a litany of reasons supporting a nominal, unsecured bond: neither party disputed the parent’s record ownership; unlike a “typical retail stockholder of a publicly traded company seeking a replacement certificate,” the particular certificate represents absolute control over one of the planet’s largest oil companies worth potentially hundreds of billions of dollars—only “Rip Van Winkle” would not know of the shares’ involvement in the tumultuous litigation sagas; no other party had claimed any interest in the shares or certificate; Delaware corporations cannot issue bearer shares, and no party had requested the subsidiary to change its books reflecting a transfer; and no adequate evidence indicated the parent secretly pledged the shares.
Declining to “suspend disbelief” on an unrealistic threat to the subsidiary for reissuing the certificate, the Court refused to find good cause opposing the reissue and ordered the foreign parent plaintiff to post an unsecured $10,000 bond.
PRACTICAL TAKEAWAY
Though typically arising these days in connection with a startup or closely-held company, this decision lays out a clean, succinct blueprint for Delaware investors to procure replacement stock certificates.