Sinchareonkul v. Fahnemann ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
VEERASITH SINCHAREONKUL, )
)
Plaintiff, )
)
v. ) C.A. No. 10543-VCL
)
THOMAS FAHNEMANN, RICHARD )
EHRENFELDNER, GERHARD )
KLINGENBRUNNER, and CLEMENS )
EICHLER, )
)
Defendants. )
MEMORANDUM OPINION
Submitted: January 20, 2015
Decided: January 22, 2015
A. Thompson Bayliss, Steven C. Hough, ABRAMS & BAYLISS LLP, Wilmington,
Delaware; Attorneys for Plaintiff.
Samuel A. Nolen, Kevin M. Gallagher, Matthew D. Perri, RICHARDS, LAYTON &
FINGER, P.A., Wilmington, Delaware; Attorneys for Defendants.
LASTER, Vice Chancellor.
The plaintiff is a director of non-party Sempermed USA, Inc. (“SUSA” or the
“Company”), a Delaware corporation. He seeks declaratory judgments invalidating
two bylaws that confer disproportionate voting power on the defendants, who are also
directors of the Company. He seeks a third declaratory judgment invalidating a resolution
adopted by the defendants through the exercise of their disproportionate voting powers.
He has moved to schedule an expedited hearing on an application for a preliminary
injunction, which he asks to be heard before February 10, 2015. Although the plaintiff
has stated a colorable claim, he has not identified a sufficient threat of irreparable harm to
warrant an immediate injunction hearing. Instead, good cause exists for a two-day trial in
approximately 90-120 days so that a final decree can be entered.
I. FACTUAL BACKGROUND
The operative facts are drawn from the complaint and the documents it
incorporates by reference. “In assessing a motion to expedite, the Court need not—and,
indeed, should not—make factual findings. It is, instead, guided by the well-pled, verified
allegations of the Complaint.” Shocking Techs., Inc. v. Michael, 2012 WL 165561, at *1
(Del. Ch. Jan. 10, 2012). At this procedural stage, the plaintiff receives the benefit of all
reasonably conceivable inferences.1 Certain seemingly non-controversial background
facts have been drawn from a declaration provided by defendant Clemens Eichler.
1
“[T]he standard for expedition, colorability, which simply implies a non-frivolous set of
issues, is even lower that the „conceivability‟ standard applied on a motion to dismiss.” In re
BioClinica, Inc. S’holder Litig., 2013 WL 5631233, at *1 n.1 (Del. Ch. Oct. 16, 2013). “In
considering a motion to dismiss . . . the Court takes the well-pleaded allegations of the complaint
as true and affords the plaintiff the benefit of all reasonable inferences that can be drawn from
1
A. The Company
Semperit Technische Produkte Gesellschaft m. b. H. (“Semperit”), Sri Trang
Agro-Industry Public Co., Ltd. (“Sri Trang”), and Siam Sempermed Corporation Ltd.
(“Siam Sempermed”) agreed to form the Company in 1998 for the purposes of
manufacturing latex surgical gloves and then distributing and selling them in the United
States market. Each of the stockholders brought business expertise to the venture.
Semperit is a world-wide manufacturer, producer, and distributor of specialized rubber-
based products. Its medical products include a wide range of examination, protective, and
surgical gloves, which it distributes under several brands, including the SEMPERMED
trademark. Sri Trang has experience sourcing field latex and manufacturing latex
concentrate and other rubber products. Siam Sempermed manufactures latex gloves.
To document their business relationship, Semperit, Sri Tang, and Siam
Sempermed entered into a Joint Venture Agreement dated April 30, 1998 (the “JV
Agreement” or “JVA”). The JV Agreement called for SUSA‟s formation as a
Delaware corporation. It contemplated that SUSA would have an eight member board
of directors (the “Board”), evenly split between nominees of Semperit and Sri Trang.
JVA § 6.1. To avoid deadlock, it provided as follows:
The chairman of the board of directors shall be elected out of the four (4)
directors nominated by Semperit and shall have a casting vote. Therefore, if
no majority can be obtained within the board of directors on any such issue
those allegations.” Shamrock Activist Value Fund, L.P. v. iPass Inc., 2006 WL 3824882, at *1
(Del. Ch. Dec. 15, 2006). A fortiori, at least the the same plaintiff-friendly standard, if not a
somewhat more plaintiff-friendly standard, should apply to a motion to expedite.
2
or resolution, the chairman of the board of directors shall have a second
vote. However, the chairman of the board of directors shall have no casting
(tie breaking vote) vote in the matters described in Article 6.4 (7), (9) and
2
(18) hereof.
Embracing the language of the provision, this decision refers to the tiebreaking vote
allocated to the chairman as the “Casting Vote.”
The JV Agreement acknowledged that the Company would have a certificate of
incorporation and bylaws, but provided that “[i]n the event that any conflict or
discrepancy arises between such Certificate of Incorporation and this Agreement, the
provisions of the latter [i.e., the JV Agreement] shall prevail and the Certificate of
Incorporation shall be promptly amended accordingly.” JVA § 3.2. The JV Agreement
also provided for mandatory arbitration of any disputes between the parties:
Any dispute between the parties under and in connection with this
Agreement shall be decided by three arbitrators appointed under the
Rules of Conciliation and Arbitration of the International Chamber of
Commerce in Paris. The place of Arbitration shall be Zürich,
Switzerland, the language of the arbitration proceeding shall be English.
Documentary evidence may be submitted in a different language, unless
the arbitration tribunal requests the submitting party to submit a
translation thereof. The arbitral award shall determine the liability of the
parties as to the costs of the arbitration, including reasonable attorneys,
[sic] fees incurred by the parties. Judgment upon the award may be
entered in any court having jurisdiction or application may be made to
such court for a judicial acceptance of the award and for an order of
enforcement, as the case may be.
2
JVA § 6.3 (footnote added). Sections (7), (9) and (18) of Article 6.4 are not applicable
here. See id. § 6.4(7) (addressing the “entry into any new business requiring investment in excess
of 20% of [the Company‟s] capital per project or the abandonment of an existing line of
business”); § 6.4(9) (addressing the “mortgage or disposal of properties or assets of [the
Company] exceeding per transaction 10% of [the Company‟s] capital”); § 6.4(18) (addressing
“any modification of the Rules of management (Art. 7.3)”).
3
JVA § 20.2.
SUSA‟s certificate of incorporation (the “Charter”) and its bylaws implemented
the JV Agreement‟s governance scheme imperfectly. Under the Charter, SUSA‟s
authorized capitalization consists of 4,000 shares of common stock divided into three
series: 2,000 shares of Series A common stock, 1,000 shares of Series B common stock,
and 1,000 shares of Series C common stock. Siam Sempermed owns the Series A
common stock, Sri Trang owns the Series B common stock, and Semperit owns the
Series C common stock. As contemplated by the JV Agreement, the Charter fixes the
number of directors at eight, with four elected by the holders of the Series B common
stock and four elected by the holders of the Series C common stock. Charter Arts.
FOURTH C.3 and SEVENTH. For simplicity, this decision refers to the directors elected
by the holders of the Series B common stock as the “Sri Trang Directors” and the
directors elected by the holders of the Series C common stock as the “Semperit
Directors.”
The Charter does not provide for the chairman to be designated from among
Semperit Directors, nor does it grant the chairman the Casting Vote. These provisions
appear in the bylaws. Article III, § 11 of the bylaws states:
Chairman of the Board. The chairman of the board shall be elected by the
board from among the four (4) directors elected by [Semperit]. The
chairman thus elected shall cast the deciding vote in the event of a deadlock
of the board of directors in respect of any issue submitted to the board or
that is subject to board approval or that for any reason requires board
approval.
4
This decision refers to the portion of this provision addressing the election of the
chairman as the “Chairman Election Bylaw.” It refers to the portion allocating the
Casting Vote to the chairman as the “Casting Vote Bylaw.”
B. The Royalty Resolution
Also as contemplated by the JV Agreement, Semperit and the Company executed
the STP Trademark and Name Licensing Agreement (the “Licensing Agreement” or
“LA”), pursuant to which Semperit granted a non-exclusive, non-transferable license to
the Company to use Semperit‟s trademark “to sell or distribute gloves bearing the
Trademark . . . in the United States of America” on certain conditions. See LA, Art. 2 § 1.
The Licensing Agreement has a term of one year, but renews automatically for additional
one-year terms unless terminated by either party giving six months notice. Id., Art. 7, § 1.
To date, neither party has terminated the Licensing Agreement.
For the first year, the annual royalty under the Licensing Agreement was $10. Id.,
Art. 2, § 2. The Licensing Agreement provided that “[i]f the term of this agreement is
extended by the mutual agreement of the parties, the annual royalty payment shall be
adjusted to fair market value.” Id.
From the date of its execution until October 2014, the Licensing Agreement
renewed automatically. In October 2014, Semperit determined that it was time to adjust
the royalty payment to “fair market value.” At the Company‟s October 23, 2014 meeting
of the Board, a vote was held on the retention of VLF Consulting, Inc. (“VLF”), a
trademark valuation firm, to determine the fair market value of the royalty payment. The
Semperit Directors voted in favor of the resolution. The Sri Trang Directors purported to
5
vote by proxy against the resolution. To avoid any argument that the vote was
deadlocked, the Chairman of the Board, defendant Thomas Fahnemann, exercised the
Casting Vote in favor of the resolution. The complaint concedes that the Sri Trang
Directors could not vote by proxy under Delaware law, making their opposition
ineffective even without the Casting Vote.
On December 12, 2014, VLF issued its Evaluation of Appropriate Royalties under
Sempermed USA‟s Licensing Agreement (the “Valuation Report”). VLF determined that
the fair market value of the SEMPERMED trademark called for a royalty equal to 2.0%
of net sales. In 2013, SUSA had net sales of $150 million, implying a royalty of $3
million.
The Board met again on January 13, 2015. A vote was held on a resolution to
amend the royalty payment to 1.75% of the Company‟s net sales beginning May 2015—
less than the 2% royalty contemplated by the Valuation Report (the “Royalty
Resolution”). The Semperit Directors voted in favor of the Royalty Resolution. The Sri
Trang Directors voted against the Royalty Resolution. Chairman Fahnemann exercised
the Casting Vote in favor of the Royalty Resolution.
C. This Litigation
On January 14, 2015, plaintiff Veerasith Sinchareonkul filed suit against the
Semperit Directors. The plaintiff is a Sri Trang Director. He is also a director of Sri Trang
itself and a major stockholder of Sri Trang. He is the son of Dr. Viyavood Sincharoenkul,
who is the chairman, chief executive officer, managing director and a major stockholder
of Sri Trang.
6
The complaint contains three counts. Count I seeks a declaratory judgment that the
Casting Vote Bylaw is void. Count II seeks a declaratory judgment that the Chairman
Election Bylaw is void. Count II also seeks a declaratory judgment that because the
Chairman Election Bylaw is void, Fahnemann has not been elected as chairman and does
not hold that office. Count III seeks a declaratory judgment that the Royalty Resolution is
void because its adoption depended on the validity of the Casting Vote.
D. The Proposed Charter Amendment
On January 19, 2015, after the filing of this lawsuit, the Semperit Directors noticed
a meeting of the Board for February 10, 2015. At the meeting, the Board will consider an
amendment to the Charter to incorporate the provisions regarding the designation of the
Chairman and the Casting Vote in that document, thereby conforming its terms to the JV
Agreement (the “Proposed Amendment”). The resolution adopting the Proposed
Amendment calls for a meeting of stockholders to be held on February 27, 2015, so that
SUSA‟s stockholders may vote on the Proposed Amendment. The Semperit Directors
argue that if the Sri Trang Directors fail to vote in favor of the Proposed Amendment, or
if Sri Trang fails to vote in favor of it at the stockholder meeting, then a dispute will exist
under the JV Agreement that must be decided by arbitration.
II. LEGAL ANALYSIS
“Delaware courts are always receptive to expediting any type of litigation in the
interests of affording justice to the parties.” Box v. Box, 697 A.2d 395, 399 (Del. 1997).
The Court of Chancery Rules give the court broad discretion to accelerate the pace of
proceedings. See, e.g., Ct. Ch. R. 12(a) (authorizing shortened time to answer complaint)
7
Ct. Ch. R. 30(a) (authorizing expedited depositions); Ct. Ch. R. 33(b)(3) (authorizing
expedited responses to interrogatories); Ct. Ch. R. 34 (b) (authorizing expedited
responses to requests for production). When a party like the plaintiff seeks a declaratory
judgment, Rule 57 authorizes the court to “order a speedy hearing.” Ct. Ch. R. 57.
If a plaintiff wishes to apply for a preliminary injunction, then the plaintiff must
make a colorable showing that the hearing is warranted. Such a hearing will be scheduled
only if “the plaintiff has articulated a sufficiently colorable claim and shown a sufficient
possibility of a threatened irreparable injury, as would justify imposing on the defendants
and the public the extra (and sometimes substantial) costs of an expedited preliminary
injunction proceeding.” Giammargo v. Snapple Beverage Corp., 1994 WL 672698, at *2
(Del. Ch. Nov. 15, 1994) (Allen, C.). This two-part test is a specific application of the
general standard that a proceeding will be accelerated upon a showing of good cause:
“This Court does not set matters for an expedited hearing or permit expedited discovery
unless there is a showing of good cause why that is necessary.” Greenfield v. Caporella,
1986 WL 13977, at *2 (Del. Ch. Dec. 3, 1986). “To successfully earn expedition, the
movant must show good cause why it is necessary to impose upon the counterparty and
the Court these substantially increased burdens of time, effort, and expense.” In re
Yahoo! Inc. S’holders Litig., 2008 WL 2627851, at *1 (Del. Ch. June 16, 2008).
The plaintiff in this case has asked the court to issue three declaratory judgments.
In addition, the plaintiff has asked the court to schedule a hearing on a preliminary
injunction that would bar the defendants from exercising the Casting Vote or
implementing the Royalty Resolution pending a final decision on the merits. Because the
8
plaintiff has asked for an expedited hearing on a preliminary injunction, the two-part
Snapple framework provides an appropriate rubric for analyzing the motion.
A. Standing
As a threshold matter, the defendants argue that the plaintiff lacks standing to file
suit. To establish standing to sue, a plaintiff must demonstrate that (i) he suffered an
injury in fact, (ii) there is a causal connection between the injury and the conduct
complained of, and (iii) the injury will likely be redressed by a favorable decision. In re
Celera Corp. S’holder Litig., 59 A.3d 418, 429 (Del. 2012). All three elements are met.
An individual who serves as a director of a Delaware corporation possesses certain
rights. See generally J. Travis Laster & John Mark Zeberkiewicz, The Rights and Duties
of Blockholder Directors, 70 Bus. Law. 33 (2015). One obvious and familiar right is a
director‟s ability to obtain information about the corporation she serves.3 But perhaps the
most fundamental right is the ability to participate in the board‟s collective deliberations
and any resulting exercise of its power and authority over the business and affairs of the
3
See 8 Del. C. § 220(d); Schoon v. Troy Corp., 2006 WL 1851481, at *1 n.8 (Del. Ch.
June 27, 2006) (noting that a director‟s right to information is “essentially unfettered in nature”
(quoting Milstein v. DEC Ins. Brokerage Corp., C.A. Nos. 17586, 17587, at 3 (Del. Ch. Feb. 1,
2000) (TRANSCRIPT)); Intrieri v. Avatex, 1998 WL 326608, at *1 (Del. Ch. June 12, 1998)
(same); Belloise v. Health Mgmt., Inc., 1996 Del. Ch. LEXIS 127, at *36 (Del. Ch. June 11,
1996) (Allen, C.) (same); see also Moore Bus. Forms, Inc. v. Cordant Hldgs. Corp., 1996 WL
307444, at *5 (Del. Ch. June 4, 1996) (explaining that the director‟s right to information includes
“equal access to „board information‟”); Hall v. Search Capital Gp., Inc., 1996 WL 696921, at *2
(Del. Ch. Nov.15, 1996) (noting that a company “cannot pick and choose which directors will
receive [which] information”).
9
corporation.4 If one or more other directors interfere with or deny a director‟s rights, then
the director has suffered injury and has standing to sue. See Kalisman v. Friedman, 2013
WL 1668205, at *7 (Del. Ch. Apr. 17, 2013) (holding that director had standing to sue
where director had been denied access to information and the opportunity to participate in
board deliberations on an equal basis with other directors).
Valid board action rests on the premise that the matter in question has received
affirmative votes from a requisite majority of directors voting on a subject at a meeting at
which a quorum is present. 8 Del. C. §141(b). A essential premise for valid board action
is that each director has only exercised that degree of voting power to which she is
lawfully entitled. If a director has purported to exercise greater voting power, then that
director has placed a thumb on the scales and exercised disproportionate influence over
the outcome, to the detriment of other directors who have had their right to participate
and the value of their votes diminished. The latter directors have been injured and have
standing to sue, just as stockholders who have had their voting power diluted suffer an
individual injury and can sue directly.5
4
See 8 Del C. §141(a); McMullin v. Beran, 765 A.2d 910, 916 (Del. 2000) (“One of the
fundamental principles of the Delaware General Corporation Law statute is that the business
affairs of a corporation are managed by or under the direction of its board of directors.” (citing 8
Del. C. § 141(a)); Lippman v. Kehoe Stenograph Co., 95 A. 895, 899 (Del. Ch. 1915) (“Each
member of a corporate body has the right to consultation with the others and has the right to be
heard upon all questions considered.”).
5
See Gentile v. Rossette, 906 A.2d 91, 99-100 (Del. 2006) (explaining that claims
alleging equity dilution can be direct or derivative and that claim for dilution of voting power is
direct); accord Loral Space & Commc’ns Inc. v. Highland Crusader Offshore P’rs, L.P., 977
A.2d 867, 868-69 (Del. 2009); Gatz v. Ponsoldt, 925 A.2d 1265, 1274 (Del. 2007).
10
Citing Roven v. Cotter, 547 A.2d 603 (Del. Ch. 1988), the defendants correctly
observe that a director who can be removed from office has no vested right to continue
serving as a director. From this proposition, the defendants make the unjustified leap to
positing that a director has no subsidiary right to exercise the particular powers of his
office while serving as a director, such that any claim for interference with his rights must
be asserted derivatively by a stockholder. In my view, an individual who is serving as a
director has an interest in having her rights respected and can sue to enforce them.
B. A Colorable Claim
Each of the three counts of the complaint turns on whether the bylaws can confer
greater voting power on a particular director or group of directors. In all three cases, the
plaintiff has articulated a colorable claim.
When assessing challenges to corporate acts, Delaware law distinguishes between
arguments that the act is not legally permissible and arguments that it was inequitable
under the circumstances presented for those in control of the corporation to take
otherwise legally permissible action. The corporate scholar and statesman Adolf A. Berle
highlighted the distinction, explaining that
in every case, corporate action must be twice tested: first, by the technical
rules having to do with the existence and proper exercise of the power;
second, by equitable rules somewhat analogous to those which apply in
favor of a cestui que trust to the trustee‟s exercise of wide powers granted
to him in the instrument making him a fiduciary.
11
Adolf A. Berle, Corporate Powers As Powers In Trust, 44 Harv. L. Rev. 1049, 1049
(1931). Delaware adheres to the twice-testing principle.6
When evaluating corporate action for legal compliance, a court examines whether
the action contravenes the entity-specific corporate contract. The components of that
contract form a hierarchy, comprising from top to bottom (i) the Delaware General
Corporation Law (the “DGCL”), (ii) the certificate of incorporation, and (iii) the bylaws.7
Each of the lower components of the contractual hierarchy must conform to the higher
components. A bylaw that conflicts with the charter is void, as is a bylaw or charter
provision that conflicts with the DGCL.
When analyzing the validity of a bylaw, the starting point is Section 109(b) of the
DGCL, which specifies what bylaws can address. It states:
6
Sample v. Morgan, 914 A.2d 647, 673 (Del. Ch. 2007) (Strine, V.C.) (explaining that
corporate acts are “„twice-tested‟—once by the law and again by equity.”); accord Carsanaro v.
Bloodhound Techs., Inc., 65 A.3d 618, 641 (Del. Ch. 2013) (“Corporate acts are „twice-tested,‟
once for statutory compliance and again in equity.”); see Reis v. Hazelett Strip-Casting Corp., 28
A.3d 442, 457 (Del. Ch. 2011) (“A reviewing court‟s role is to ensure that the corporation
complied with the statute and acted in accordance with its fiduciary duties.”).
7
See Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 940 (Del. Ch.
2013) (“[O]ur Supreme Court has long noted that bylaws, together with the certificate of
incorporation and the broader DGCL, form part of a flexible contract between corporations and
stockholders.”); accord Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1188 (Del. 2010)
(“Corporate charters and bylaws are contracts among a corporation‟s shareholders . . . .”);
STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (“[A] corporate charter is
both a contract between the State and the corporation, and the corporation and its
shareholders.”); Centaur P’rs, IV v. Nat’l Intergroup, Inc., 582 A.2d 923, 928 (Del. 1990)
(“Corporate charters and by-laws are contracts among the shareholders of a corporation . . . .”);
see also Fed. United Corp. v. Havender, 11 A.2d 331, 333 (Del. 1940) (“It is elementary that
[the Delaware General Corporation Law‟s] provisions are written into every corporate charter.”).
12
The bylaws may contain any provision, not inconsistent with law or with
the certificate of incorporation, relating to the business of the corporation,
the conduct of its affairs, and its rights or powers or the rights or powers of
its stockholders, directors, officers or employees.
8 Del. C. § 109(b). Two aspects of Section 109(b) immediately jump out. The first is its
breadth. The range of subjects that a bylaw can address is expansive, including anything
“relating to . . . the rights or powers of its . . . directors.” By this metric, a provision like
the Casting Vote Bylaw or the Chair Election Bylaw would seem to fall within the types
of bylaws authorized by Section 109(b). Cf. ATP Tour, Inc. v. Deutscher Tennis Bund, 91
A.3d 554, 558 (Del. 2014) (observing that “[a] bylaw that allocates risk among parties in
intra-corporate litigation would also appear to satisfy the [Section 109(b)‟s] requirement
that bylaws must „relat[e] to the business of the corporation, the conduct of its affairs, and
its rights or powers or the rights or powers of its stockholders, directors, officers or
employees.‟”).
But a second aspect of Section 109(b) is equally important. By its terms, Section
109(b) builds into the analysis of a bylaw‟s validity the hierarchy of corporate
documents. Although the hierarchy would apply regardless, Section 109(b) eliminates
any possible doubt by specifying that a bylaw must not be “inconsistent with law or with
the certificate of incorporation.” Section 394 of the DGCL provides that “[t]his chapter
and all amendments thereof shall be a part of the charter or certificate of incorporation of
every corporation.” 8 Del. C. § 394. For purposes of a evaluating the statutory validity of
a bylaw, therefore, it is not enough to measure it only against the “relating to” language
of Section 109(b). It is also necessary to consider what other sections of the DGCL say
13
about the matter. Cf. ATP Tour, 91 A.3d at 558 n.16 (considering whether bylaw
conflicted with 8 Del. C. § 102(a), which specifies the mandatory contents of the
certificate of incorporation).
Section 141(d) of the DGCL addresses the possibility of a subset of directors
holding different or greater voting rights than other directors. It states:
The certificate of incorporation may confer upon holders of any class or
series of stock the right to elect 1 or more directors who shall serve for such
term, and have such voting powers as shall be stated in the certificate of
incorporation. The terms of office and voting powers of the directors
elected separately by the holders of any class or series of stock may be
greater than or less than those of any other director or class of directors. In
addition, the certificate of incorporation may confer upon 1 or more
directors, whether or not elected separately by the holders of any class or
series of stock, voting powers greater than or less than those of other
directors. Any such provision conferring greater or lesser voting power
shall apply to voting in any committee or subcommittee, unless otherwise
provided in the certificate of incorporation or bylaws. If the certificate of
incorporation provides that 1 or more directors shall have more or less than
1 vote per director on any matter, every reference in this chapter to a
majority or other proportion of the directors shall refer to a majority or
other proportion of the votes of the directors.
8 Del. C. § 141(d). Notably, whenever this passage speaks about differential voting
powers for directors, it refers to the different voting powers being set forth the certificate
of incorporation. “The plain, unambiguous meaning of the quoted language is that if one
category or group of directors is given distinctive voting rights not shared by the other
directors, those distinctive voting rights must be set forth in the certificate of
incorporation.” Carmody v. Toll Bros., 723 A.2d 1180, 1191 (Del. Ch. 1998). The
specific reference to the certificate of incorporation is “a „bylaw excluder,‟ in the sense
that those words make clear that the specific grant of authority in that particular statute is
14
one that can be varied only by charter and therefore indisputably not one that can be
altered by a § 109(b) bylaw.” Jones Apparel Gp., Inc. v. Maxwell Shoe Co., 883 A.2d
837, 848 (Del. Ch. 2004).
Under Section 141(d), “[t]he certificate of incorporation” may grant the holders of
a particular series of stock, such as SUSA‟s Class C common stock, the right to elect one
or more directors, such as the Semperit Directors, and the designated directors may “have
such voting powers as shall be stated in the certificate of incorporation.” Section 141(b)
does not authorize a provision conferring differential voting rights on directors to appear
in the bylaws; it must appear in the certificate of incorporation. Under Section 109(b), a
bylaw that conflicts with the DGCL is void. 8 Del. C. § 109(b); accord ATP Tour, 91
A.3d at 557-58 (“[A] bylaw must be authorized by the [DGCL], consistent with the
corporation's certificate of incorporation, and its enactment must not be otherwise
prohibited.” (footnotes omitted)); Crown EMAK P’rs, LLC v. Kurz, 992 A.2d 377, 398
(Del. 2010) (“[A] bylaw provision that conflicts with the DGCL is void.”).
The Casting Vote Bylaw and the Chairman Election Bylaw both run afoul of these
principles. The plaintiff has stated a colorable claim that the Casting Vote Bylaw and the
Chairman Election Bylaw are void, and that the Royalty Resolution adopted in reliance
on these bylaws is therefore also void.
In response to the plaintiff‟s claim, the defendants did not offer much in the way
of statutory analysis. They argued instead that it is inequitable for a party to have agreed
to a governance scheme in an overarching agreement like the JV Agreement, then to
invoke what the defendants regard as legal technicalities in an effort to escape a
15
fundamental feature of that regime. There is authority indicating that a court cannot credit
equitable defenses to validate a void act. See STAAR Surgical, 588 A.2d at 1137;
Waggoner v. Laster, 581 A.2d 1127, 1137 (Del. 1990). But on the current record and at
this procedural stage, the defendants‟ arguments cannot be evaluated thoroughly. It
suffices for present purposes to find that the plaintiff has stated a colorable claim.
C. Irreparable Harm
The second requirement for the scheduling of an expedited hearing on an
application for a preliminary injunction is a showing of irreparable harm. The plaintiff
primarily alleges that he faces a threat of irreparable harm and requires an imminent
hearing because the defendants may rely on the Casting Provision to cause the Board to
approve the Proposed Amendment on February 10, 2015. The Proposed Amendment,
however, only can go into effect if it receives both Board approval on February 10 and
stockholder approval on February 27. If Sri Trang votes against the proposal, then
Semperit will be forced to commence arbitration in an effort to compel Sri Trang to
comply with the JV Agreement and revise the Charter. It seems highly unlikely that the
arbitration will be completed within a matter of weeks. The prospect for an arbitrator
being able to resolve this dispute promptly becomes more remote given that the plaintiff
and the other Sri Trang Directors are not parties to the JV Agreement. The plaintiff has
indicated that he and his fellow Sri Trang Directors will dispute the ability of an
arbitrator to order them act as directors to approve the Proposed Amendment. As the
plaintiff sees it, the arbitrator might be able to order Sri Trang to vote in favor of the
Proposed Amendment as a stockholder, but the arbitrator cannot compel the Sri Trang
16
Directors to act as directors. That issue is obviously for the arbitrator to decide, and
perhaps there are other remedies that could be imposed. It is enough for now to note that
this issue complicates the arbitration, making it unlikely that the exercise of the Casting
Vote on February 10 would result in irreparable harm
The plaintiff also alleges that because the Semperit Directors have taken action in
reliance on bylaw provisions that appear on their face to be statutorily invalid, his voting
rights as a director have been infringed, resulting in irreparable harm. Any infringement
of the plaintiff‟s voting rights in connection with the Royalty Resolution has already
happened. That vote has occurred, and there is nothing for this court to enjoin. That does
not mean that the injury cannot be remedied. The Royalty Resolution could be
invalidated or the subject of permanent injunctive relief, but both forms of relief are more
appropriately considered as part of a final decree crafted after a trial on the merits, not
based on a preliminary record. See C & J Energy Servs., Inc. v. City of Miami Gen.
Empls.’, 2014 WL 7243153, at *17 (Del. Dec. 19, 2014) (“To issue a mandatory
injunction . . . the Court of Chancery must either hold a trial and make findings of fact, or
base an injunction solely on undisputed facts.”).
Admittedly, part of the Royalty Resolution remains prospective. The resolution
provided that the royalty would not go into effect until May 2015, so it would be possible
for the court to enjoin the defendants preliminarily from carrying out the Royalty
Resolution. Any harm from the payment of royalties, however, can be remedied by
money damages, and the prospect of that harm remains four months away.
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Under the circumstances, there is not a sufficient threat of irreparable harm to
warrant scheduling a preliminary injunction hearing before February 10, 2015. Good
cause does exist, however, for a “speedy hearing” in the form of a two-day trial on the
merits in approximately 90-120 days. Ct. Ch. R. 57. That schedule will allow the parties
to develop a factual record and brief the legal issues presented by the case thoroughly.
After a trial on the merits, the court will be able to rule definitively on the validity of the
two bylaws and the Royalty Resolution under the Company‟s current constitutive
documents. If the defendants prevail, this court‟s decision will moot the need for the
arbitration. If the plaintiff prevails, this court‟s decision will help frame the issues for
arbitration, so that the parties will know whether they need to seek relief from the
arbitrator that would operate at both the Board and stockholder levels.
III. CONCLUSION
The motion to expedite is granted in part and denied in part. The court will not
schedule a hearing on an application for a preliminary injunction. The case will proceed
to a two-day trial on the merits in approximately 90-120 days. The parties will confer and
submit a scheduling order.
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