Franchise Svc of North America v. United States Tr

Case: 18-60093 Document: 00514512729 Page: 1 Date Filed: 06/14/2018
REVISED June 14, 2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 22, 2018
No. 18-60093
Lyle W. Cayce
Clerk
In Re: FRANCHISE SERVICES OF NORTH AMERICA, INCORPORATED,
Debtor
FRANCHISE SERVICES OF NORTH AMERICA, INCORPORATED,
Appellant
v.
UNITED STATES TRUSTEE; MACQUARIE CAPITAL (USA),
INCORPORATED; MICHAEL JOHN SILVERTON; DANIEL RAYMOND
BOLAND; BOKETO, L.L.C.,
Appellees
Appeal from the United States Bankruptcy Court
for the Southern District of Mississippi
Before KING, JONES, and GRAVES, Circuit Judges.
KING, Circuit Judge:
Under longstanding Supreme Court precedent, state law dictates the
procedures a corporation must follow to authorize a bankruptcy filing. When
those procedures place the decision in the hands of the corporation’s creditors,
some courts have allowed the bankruptcy to proceed even though the creditors
withheld consent. This case presents a related but distinct question: when the
Case: 18-60093 Document: 00514512729 Page: 2 Date Filed: 06/14/2018
No. 18-60093
certificate of incorporation requires the consent of a majority of the holders of
each class of stock, does the sole preferred shareholder lose its right to vote
against (and therefore avert) a voluntary bankruptcy petition if it is also a
creditor of the corporation?
In this case, the shareholder made a $15 million investment in exchange
for 100% of the debtor’s preferred stock. At the same time, the debtor
reincorporated in Delaware and amended its certificate of incorporation. As a
prerequisite to filing a voluntary bankruptcy petition, the amended certificate
requires the consent of a majority of each class of the debtor’s common and
preferred shareholders. Following the ill-fated acquisition of a new subsidiary,
the debtor filed for bankruptcy. Fearing that its shareholders might nix the
filing, it never put the matter to a vote. The sole preferred shareholder filed a
motion to dismiss the bankruptcy petition as unauthorized. But the debtor
argued that the shareholder had no right to prevent the filing. The
shareholder’s parent company, explained the debtor, was an unsecured
creditor by virtue of a $3 million bill the debtor refused to pay. The bankruptcy
court disagreed and dismissed the petition. On appeal, the debtor asks us to
reverse and to allow it to proceed with the bankruptcy.
We decline to do so. Federal law does not prevent a bona fide shareholder
from exercising its right to vote against a bankruptcy petition just because it
is also an unsecured creditor. 1 Under these circumstances, the issue of
corporate authority to file a bankruptcy petition is left to state law. The debtor
is a Delaware corporation, governed by that state’s General Corporation Law.
1 As we note later in this opinion, our holding goes no further. This case involves a
bona fide shareholder. The equity investment made by the shareholder at issue here was $15
million and the debt just $3 million. We are not confronted with a case where a creditor has
somehow contracted for the right to prevent a bankruptcy or where the equity interest is just
a ruse.
2
Case: 18-60093 Document: 00514512729 Page: 3 Date Filed: 06/14/2018
No. 18-60093
Finding nothing there that would nullify the shareholder’s right to vote against
the bankruptcy petition, we AFFIRM.
I.
The debtor in this case is Franchise Services of North America
(“FSNA”)—once one of the largest car rental companies in North America.
Among FSNA’s competitors is the Hertz Corporation. In 2012, the Hertz
Corporation was trying to consummate a merger with Dollar Thrifty
Automotive Group, Inc. Antitrust concerns prompted Hertz to sell one of its
subsidiaries, Simply Wheelz, LLC, better known under its trade name,
Advantage Rent-A-Car (“Advantage”).
FSNA decided to buy Advantage. To do so, it enlisted the help of an
investment bank, Macquarie Capital (U.S.A.), Inc. (“Macquarie”). Adreca
Holdings Corporation (“Adreca”), one of Macquarie’s subsidiaries, would first
buy Advantage from Hertz and then merge into FSNA. Adreca bought
Advantage in December 2012 and merged into FSNA in May 2013.
Macquarie created another fully-owned subsidiary to help finance the
transaction. Boketo, LLC (“Boketo”), was formed in 2012 to make a $15 million
investment in FSNA. In exchange for the capital infusion, FSNA gave Boketo
100% of its preferred stock in the form of a convertible preferred equity
instrument. Boketo’s stake in FSNA would amount to a 49.76% equity interest
if converted, making it the single largest investor in FSNA. As a condition of
the investment, FSNA in May 2013 reincorporated in Delaware and adopted a
new certificate of incorporation. The new certificate provides that FSNA may
not “effect any Liquidation Event” unless it has the approval of both “(i) the
holders of a majority of the shares of Series A Preferred Stock then
outstanding, voting separately as a class . . . , and (ii) the holders of a majority
of the shares of Common Stock then outstanding, voting separately as a class.”
Another section of the certificate clarifies that any “preparatory steps towards
3
Case: 18-60093 Document: 00514512729 Page: 4 Date Filed: 06/14/2018
No. 18-60093
or filing a petition for bankruptcy” falls within the ambit of “Liquidation
Event.”
FSNA agreed to pay Macquarie a $2.5 million “arrangement fee” and a
$500 thousand “financial advisory fee” for its services. Macquarie billed FSNA
for the arrangement fee in March 2013, shortly before the merger closed. That
fee remains unpaid and is the subject of litigation between the parties in other
forums. 2
Matters quickly took a turn for the worse. It turned out that FSNA had
bought a lemon. Advantage went into bankruptcy within a year, and FSNA
followed just a few years later. Advantage filed its petition under Chapter 11
of the Bankruptcy Code just six months after the acquisition. A sale of
substantially all of Advantage’s assets ensued, and the case was dismissed in
January 2016. In June 2017, FSNA filed its own voluntary petition under
Chapter 11. It did so without requesting or securing the consent of a majority
of its preferred and common shareholders.
Therein lies the rub. Macquarie and Boketo filed a motion to dismiss the
bankruptcy petition, citing FSNA’s failure to seek shareholder authorization.
FSNA countered that the shareholder consent provision was an invalid
restriction on its right to file a bankruptcy petition. It also asserted that the
provision violated Delaware law. The bankruptcy court held an evidentiary
hearing on the matter during which it heard live testimony from two witnesses.
Because Boketo was an owner, rather than creditor, of FSNA, the bankruptcy
court determined that conditioning FSNA’s right to file a voluntary petition on
Boketo’s consent was not contrary to federal bankruptcy policy. The court
2 The parties’ briefing makes clear that the bankruptcy case is but one front in a larger
conflict. In one case in New York state court, Macquarie is suing to collect its fees. FSNA has
counterclaimed for its loss of capital value, blaming Macquarie for its tribulations. We need
not dwell on the details of the various hostilities. They do not affect our analysis of federal
bankruptcy law.
4
Case: 18-60093 Document: 00514512729 Page: 5 Date Filed: 06/14/2018
No. 18-60093
likewise declined to deem the shareholder consent provision contrary to
Delaware law. It instead opted to leave that issue for the Delaware courts to
decide in the first instance. As a result, the court granted Boketo’s motion to
dismiss.
On FSNA’s motion, the bankruptcy court certified a direct appeal of its
order to this court pursuant to 28 U.S.C. § 158(d)(2)(A). After finding that
FSNA’s proposed questions were too narrow to warrant certification of a direct
appeal, the bankruptcy court certified the following three questions to this
court:
1. Is a provision, typically called a blocking provision or a golden
share, which gives a party (whether a creditor or an equity holder)
the ability to prevent a corporation from filing bankruptcy valid
and enforceable or is the provision contrary to federal public
policy?
2. If a party is both a creditor and an equity holder of the debtor
and holds a blocking provision or a golden share, is the blocking
provision or golden share valid and enforceable or is the provision
contrary to federal public policy?
3. Under Delaware law, may a certificate of incorporation contain
a blocking provision/golden share? If the answer to that question
is yes, does Delaware law impose on the holder of the provision a
fiduciary duty to exercise such provision in the best interests of the
corporation?
This court authorized the appeal. See 28 U.S.C. § 158(d)(2)(A).
II.
We review a bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. Ad Hoc Grp. of Timber Noteholders, LLC v. The
Pac. Lumber Co. (In re Scotia Pac. Co., LLC), 508 F.3d 214, 218 (5th Cir. 2007).
III.
Before moving to the merits of this case, we must first narrow the
questions presented. The bankruptcy court certified three broad questions to
5
Case: 18-60093 Document: 00514512729 Page: 6 Date Filed: 06/14/2018
No. 18-60093
this court, each of them involving the enforceability of “a provision, typically
called a blocking provision or a golden share.” As an initial matter, these terms
are not synonymous, nor have they been precisely defined. Courts appear to
use the term “blocking provision” as a catch-all to refer to various contractual
provisions through which a creditor reserves a right to prevent a debtor from
filing for bankruptcy. See, e.g., In re Squire Court Partners Ltd. P’ship, 574
B.R. 701, 706-07 (E.D. Ark. 2017); cf. In re Lake Mich. Beach Pottawattamie
Resort LLC, 547 B.R. 899, 911 (Bankr. N.D. Ill. 2016) (describing “blocking
director” structures whereby secured creditors appoint directors with the
ability to veto a voluntary bankruptcy petition).
Generally speaking, a “golden share” is “[a] share that controls more
than half of a corporation’s voting rights and gives the shareholder veto power
over changes to the company’s charter.” E.g., Golden Share, Black’s Law
Dictionary (10th ed. 2014); see also Mariana Pargendler, State Ownership and
Corporate Governance, 80 Fordham L. Rev. 2917, 2967 (2012) (noting that in
the context of formerly stated-owned entities, “[g]olden shares are essentially
a special class of stock issued to the privatizing government that grants special
voting and veto rights that are disproportionate to, or even independent of, its
cash-flow rights in the company”). As used in the bankruptcy context, the term
generally refers to the issuance to a creditor of a trivial number of shares that
gives the creditor the right to prevent a voluntary bankruptcy petition,
potentially among other rights. See, e.g., In re Intervention Energy Holdings,
LLC, 553 B.R. 258, 261-62 (Bankr. D. Del. 2016).
We need not dwell on whether this case involves a “blocking provision”
or a “golden share.” The facts do not fit neatly into either definition. Boketo
made a $15 million equity investment in FSNA. In return, FSNA issued
convertible preferred stock to Boketo, amounting to 100% of its preferred stock.
6
Case: 18-60093 Document: 00514512729 Page: 7 Date Filed: 06/14/2018
No. 18-60093
The preferred stock carried with it the right, granted in the certificate of
incorporation, to vote on certain corporate matters.
We must therefore narrow the certified questions. The bankruptcy court
requested that we opine generally on the legality of “blocking provisions” and
“golden shares.” That we cannot do. “[T]he oldest and most consistent thread
in the federal law of justiciability is that the federal courts will not give
advisory opinions.” Flast v. Cohen, 392 U.S. 83, 96 (1968). The prohibition of
advisory opinions is a constitutional limit on the power of the courts. Id.; see
U.S. Const. art. III, § 2, cl. 1. The bankruptcy court’s statutory authority to
certify questions to this court does not include the authority to request advisory
opinions. True, in amending the law to allow direct appeal to the courts of
appeal, Congress anticipated that our review would focus on “unresolved
questions of law” rather than “fact-intensive issues.” See H.R. Rep. 109-31(I),
at 148-49 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 206. But this does not
license us to answer a question of law divorced from the facts of the case before
us and broader than necessary to resolve that case.
We have declined to stray beyond the confines of the certified question
in at least one case. Peake v. Ayobami (In re Ayobami), 879 F.3d 152, 153 (5th
Cir. 2018). 3 But there is no prohibition against narrowing the certified
question—particularly where doing so would avoid rendering an advisory
opinion while still addressing an important question of law. We treat certified
questions under 28 U.S.C. § 158(d)(2)(A) “essentially as we treat certified
questions from district courts” under 28 U.S.C. § 1292(b). Crosby v.
Orthalliance New Image (In re OCA, Inc.), 552 F.3d 413, 418 (5th Cir. 2008).
Review under § 1292(b) looks to the entire certified order “and is not tied to the
3 In Ayobami, “[w]e answer[ed] the certified question only,” declining to address
another question lurking in the background of the case. 879 F.3d at 153-55. We did not opine
on our ability to answer that question.
7
Case: 18-60093 Document: 00514512729 Page: 8 Date Filed: 06/14/2018
No. 18-60093
particular question formulated by the district court.” Yamaha Motor Corp.,
U.S.A. v. Calhoun, 516 U.S. 199, 205 (1996). This is because § 1292(b) provides
for an appeal “from the order” and, thus, it is the order that is appealable, not
the certified question. Id. Just as § 1292(b) provides for an appeal “from the
order,” § 158(d)(2) provides for an “appeal of the judgment, order, or decree.”
28 U.S.C. § 158(d)(2); see Marshall v. Blake, 885 F.3d 1065, 1072 n.6 (7th Cir.
2018).
In this case, we decline to answer the bankruptcy court’s first certified
question regarding the enforceability of “blocking provisions” and “golden
shares” generally. “That question is appropriately reserved for a case in which
it is not hypothetical.” Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663, 672
(2016). Instead we confine our analysis to whether U.S. and Delaware law
permit the parties to do what they did here: amend a corporate charter to allow
a non-fiduciary shareholder fully controlled by an unsecured creditor to
prevent a voluntary bankruptcy petition.
IV.
A bankruptcy case can be initiated in one of two ways. A qualified
“debtor,” see 11 U.S.C. § 109, can file a voluntary petition, see id. § 301. Or,
subject to certain requirements and limitations, creditors can file an
involuntary petition against the debtor. 4 See id. § 303(a)-(b). This case concerns
a voluntary petition filed under Chapter 11 of the Bankruptcy Code. Id.
§§ 1101-1174. A corporation like FSNA is a qualified debtor under Chapter 11.
See id. § 109(a)-(b), (d). It may therefore file a voluntary petition under that
chapter. See id. § 301. But a corporation cannot act on its own; it can act only
if authorized by appropriate agents. See, e.g., W.G. Yates & Sons Const. Co.
4 Though not relevant to this case, the partners of a partnership or “a foreign
representative of the estate in a foreign proceeding concerning” the debtor may also file an
involuntary petition. See 11 U.S.C. § 303(b)(3)-(4).
8
Case: 18-60093 Document: 00514512729 Page: 9 Date Filed: 06/14/2018
No. 18-60093
Inc. v. Occupational Safety & Health Review Comm’n, 459 F.3d 604, 607 (5th
Cir. 2006). The Bankruptcy Code provides that an “entity that may be a debtor”
may commence a voluntary case by filing a petition. See 11 U.S.C. § 301(a).
Still, when the entity is a corporation that can act only through its agents, the
Bankruptcy Code does not specify who may file a petition on its behalf.
“In absence of federal incorporation, that authority finds its source in
local law.” Price v. Gurney, 324 U.S. 100, 106 (1945). State law thus determines
who has the authority to file a voluntary petition on behalf of the corporation.
See id. at 106-07; In re Nica Holdings, Inc., 810 F.3d 781, 789 (11th Cir. 2015).
If the petitioners lack authorization under state law, the bankruptcy court “has
no alternative but to dismiss the petition.” Price, 324 U.S. at 106. “It is not
enough that those who seek to speak for the corporation may have the right to
obtain that authority.” Id. Rather, they must have it at the time of filing. See
id. at 106-07. Absent a duly authorized petition, the bankruptcy court has no
power “to shift the management of a corporation from one group to another, to
settle intracorporate disputes, and to adjust intracorporate claims.” Id.FSNA contends that even assuming Delaware law authorizes the
arrangement here, federal law would forbid it. Federal law forbids the
arrangement, in FSNA’s view, not because it is contrary to any specific statute
or binding caselaw, but instead because it violates a federal public policy
against waiving the protections of the Bankruptcy Code. Several courts of
appeals—though not this one—have opined that a pre-petition waiver of the
benefits of bankruptcy is contrary to federal law and therefore void. See In re
Thorpe Insulation Co., 671 F.3d 1011, 1026 (9th Cir. 2012) (“This prohibition
of prepetition waiver has to be the law; otherwise, astute creditors would
routinely require their debtors to waive.” (quoting Bank of China v. Huang (In
re Huang), 275 F.3d 1173, 1177 (9th Cir. 2002))); Klingman v. Levinson, 831
F.2d 1292, 1296 n.3 (7th Cir. 1987) (stating in dictum that “[f]or public policy
9
Case: 18-60093 Document: 00514512729 Page: 10 Date Filed: 06/14/2018
No. 18-60093
reasons, a debtor may not contract away the right to a discharge in
bankruptcy”); Fallick v. Kehr, 369 F.2d 899, 904 (2d Cir. 1966) (stating in
dictum that “an advance agreement to waive the benefits of the [Bankruptcy]
Act would be void”). Boketo agrees that a debtor cannot contract away the
protections of bankruptcy. Moreover, this case does not involve a contractual
waiver of the right to file for bankruptcy or to a discharge. As this case is
framed, we can assume without deciding that such a waiver is invalid. We
leave the resolution of that issue for another case, one in which it is squarely
presented.
Instead, this case involves an amendment to a corporate charter,
triggered by a substantial equity investment, that effectively grants a
preferred shareholder the right to veto the decision to file for bankruptcy. In
FSNA’s view, this is just a wolf in sheep’s clothing—a creditor masquerading
as a bona fide equity owner. Boketo is fully controlled by Macquarie, meaning
the veto right in fact belongs to Macquarie—an unsecured creditor by virtue of
its unpaid fees. In support of its argument, FSNA cites a slew of bankruptcy
court cases. These cases all involve arrangements whereby a lender extracts
an amendment to the organization’s foundational documents granting the
lender a veto right in exchange for forbearance. See In re Lexington Hosp. Grp.,
LLC, 577 B.R. 676, 679-81, 684-86, 688 (Bankr. E.D. Ky. 2017) (denying motion
to dismiss where lender conditioned financing on grant of equity interest and
appointment of non-fiduciary blocking director with right to prevent
bankruptcy); In re Intervention Energy Holdings, 553 B.R. at 261, 266 (denying
motion to dismiss where lender conditioned forbearance on issuance of single
common unit in exchange for $1 and amendment of operating agreement to
require unanimous consent for bankruptcy); In re Lake Mich. Beach
Pottawattamie Resort, 547 B.R. at 903-04, 911-15 (denying motion to dismiss
where lender conditioned forbearance on appointment of lender as non-
10
Case: 18-60093 Document: 00514512729 Page: 11 Date Filed: 06/14/2018
No. 18-60093
fiduciary “special member” with right to prevent bankruptcy but without right
to distributions or obligation to make capital contributions); In re Bay Club
Partners-472, LLC, No. BR 14-30394-RLD11, 2014 WL 1796688, at *3-6
(Bankr. D. Or. May 6, 2014) (denying motion to dismiss where lender requested
provision in operating agreement prohibiting filing voluntary petition before
all debts were paid in full).
None of these cases concerns the situation here. Even treating Boketo
and Macquarie as a single entity, 5 there is no evidence that their arrangement
was merely a ruse to ensure that FSNA would pay Macquarie’s bill. In 2012,
Macquarie, through Boketo, took a substantial equity stake in FSNA, buying
convertible preferred stock for $15 million. In 2013, Macquarie issued an
invoice for the $2.5 million arrangement fee. 6 FSNA would have us believe the
tail wags the dog. It strains credulity to believe that Macquarie made a $15
million equity investment just to hedge against the possibility that FSNA
might not pay a $3 million bill. We do not doubt that Macquarie would have
preferred to avoid the cost and inconvenience of trying to collect some portion
of its $3 million fee as an unsecured creditor in bankruptcy. 7 But if it was
anxious about whether FSNA would fail to pay the fee, then it was just
5 The bankruptcy court found that Macquarie fully controlled Boketo and, as we do,
assumed for the sake of argument that the companies were one and the same. Although
FSNA derides Boketo as a “paper company,” there is nothing inherently improper or
suspicious about creating a limited liability entity in order to facilitate an investment. At the
hearing on this motion, both parties’ witnesses testified that this practice is “very common”
and “typical.”
6 It is not clear from the record when Macquarie billed FSNA for the $500 thousand
financial advisory fee.
7 Boketo’s position in bankruptcy is actually worse than Macquarie’s. Shareholders
are the residual claimants of the estate, see 11 U.S.C. § 726(a)(6), entitled only to whatever
remains after payment of the various secured and unsecured creditors, see id. §§ 507, 726; cf.
Torch Liquidating Tr. ex rel. Bridge Assocs. L.L.C. v. Stockstill, 561 F.3d 377, 385 (5th Cir.
2009) (“When a corporation is insolvent . . . its creditors take the place of the shareholders as
the residual beneficiaries of any increase in value.” (emphasis removed) (quoting N. Am.
Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007))).
11
Case: 18-60093 Document: 00514512729 Page: 12 Date Filed: 06/14/2018
No. 18-60093
throwing good money after bad—$15 million of good money. FSNA points to no
evidence that would allow us to set aside our incredulity and conclude that
Macquarie invested $15 million in FSNA to ensure payment of a $3 million
bill. 8
The Supreme Court held more than seventy years ago that corporate
authority to file for bankruptcy “finds its source in local law.” See Price, 324
U.S. at 106. FSNA has provided us no reason to depart from that general rule
in this case. There is no prohibition in federal bankruptcy law against granting
a preferred shareholder the right to prevent a voluntary bankruptcy filing just
because the shareholder also happens to be an unsecured creditor by virtue of
an unpaid consulting bill. “It is one thing to look past corporate governance
documents and the structure of a corporation when a creditor has negotiated
authority to veto a debtor’s decision to file a bankruptcy petition; it is quite
another to ignore those documents when the owners retain for themselves the
decision whether to file bankruptcy.” In re Squire Court Partners, 574 B.R. at
708; see also In re Glob. Ship Sys., LLC, 391 B.R. 193, 199, 203 (Bankr. S.D.
Ga. 2007) (holding that owner of 20% equity stake and $18 million debt “wears
two hats” and may exercise a right to prevent a voluntary bankruptcy petition).
In sum, there is no compelling federal law rationale for depriving a bona fide
equity holder of its voting rights just because it is also a creditor of the
corporation.
FSNA urges that even if a shareholder-creditor could hold a bankruptcy
veto right, such a right remains void in the absence of a concomitant fiduciary
duty. But FSNA offers no good legal or logical rationale for such a holding. No
FSNA repeatedly alleges throughout its brief that Boketo was trying to force it to
8
draw on a $7.5 million Boketo line of credit. FSNA therefore labels Boketo a “potential”
creditor. But FSNA admits that it never drew on the line of credit, regardless of the pressure
it may have felt to do so. Consequently, the existence of the untapped line of credit is
immaterial to the outcome of this case.
12
Case: 18-60093 Document: 00514512729 Page: 13 Date Filed: 06/14/2018
No. 18-60093
statute or binding caselaw licenses this court to ignore corporate foundational
documents, deprive a bona fide shareholder of its voting rights, and reallocate
corporate authority to file for bankruptcy just because the shareholder also
happens to be an unsecured creditor. Cf. Price, 324 U.S. at 106 (“[U]nder the
Bankruptcy Act the power of the court to shift the management of a corporation
from one group to another, to settle intracorporate disputes, and to adjust
intracorporate claims is strictly limited to those situations where a petition has
been approved.”). The bankruptcy court opinions FSNA cites are not
controlling and not to the contrary. They involve creditors’ attempts to appoint
non-fiduciary officers and directors with the ability to prevent a bankruptcy
filing. See In re Lexington Hosp. Grp., 577 B.R. at 684-86 (holding veto right of
creditor-controlled LLC member invalid where the LLC’s governing documents
directed member to consider only the creditors’ interests); In re Lake Mich.
Beach Pottawattamie Resort, 547 B.R. at 913 (“The essential playbook for a
successful blocking director structure is this: the director must be subject to
normal director fiduciary duties . . . .” (emphasis added)). 9 As a matter of
federal law, fiduciary duties are not required to allow a bona fide shareholder
to exercise its right to prevent a voluntary bankruptcy petition.
This is not an advisory opinion, and our holding is limited to the facts
actually presented in this case. We hold simply that federal bankruptcy law
does not prevent a bona fide equity holder from exercising its voting rights to
prevent the corporation from filing a voluntary bankruptcy petition just
because it also holds a debt owed by the corporation and owes no fiduciary duty
to the corporation or its fellow shareholders. A different result might be
warranted if a creditor with no stake in the company held the right. So too
9 Contrary to the representations in FSNA’s brief, the bankruptcy court in In re
Intervention Holdings expressly declined to consider this issue. See 553 B.R. at 262-63.
13
Case: 18-60093 Document: 00514512729 Page: 14 Date Filed: 06/14/2018
No. 18-60093
might a different result be warranted if there were evidence that a creditor
took an equity stake simply as a ruse to guarantee a debt. We leave those
questions for another day.
V.
We turn now to the main event: does Delaware law allow Boketo to
exercise the blocking right? Authority to file for bankruptcy is, after all, a
matter of state law. See Price, 324 U.S. at 106-07. This question has two parts.
First, whether Delaware law allows parties to provide in the certificate of
incorporation that the consent of both classes of shareholders is required to file
a voluntary petition for bankruptcy. Second, whether Delaware law would
impose a fiduciary duty on a minority shareholder with the ability to prevent
a voluntary bankruptcy petition.
A.
This is not a diversity case. But because we apply state law to determine
whether a corporate bankruptcy petition was properly authorized, the same
principles apply. In evaluating issues of state law, we look to the decisions of
the state’s highest courts. Temple v. McCall, 720 F.3d 301, 307 (5th Cir. 2013).
In the absence of a controlling decision, we make an “Erie 10 guess” as to how
the state’s highest court would resolve the issue. Id. Unless persuaded that the
state’s highest court would decide the issue differently, we also defer to the
decisions of the state’s intermediate appellate courts. Id.; see Howe ex rel. Howe
v. Scottsdale Ins. Co., 204 F.3d 624, 627 (5th Cir. 2000). To determine corporate
authority to file for bankruptcy, we apply the law of the state of incorporation—
here, Delaware. See Price, 324 U.S. at 104 & n.1, 106.
10 Erie R. Co. v. Tompkins, 304 U.S. 64 (1938).
14
Case: 18-60093 Document: 00514512729 Page: 15 Date Filed: 06/14/2018
No. 18-60093
B.
Under the Delaware General Corporation Law, a certificate of
incorporation “may” contain:
Any provision for the management of the business and for the
conduct of the affairs of the corporation, and any provision
creating, defining, limiting and regulating the powers of the
corporation, the directors, and the stockholders, or any class of the
stockholders, or the governing body, members, or any class or
group of members of a nonstock corporation; if such provisions are
not contrary to the laws of this State.
Del. Code tit. 8, § 102(b)(1). As a default rule, “[t]he business and affairs of
every corporation . . . shall be managed by or under the direction of a board of
directors.” Id. § 141(a). There is, however, an exception to the default rule: the
management prerogative rests with the board, “except as may be otherwise
provided in this chapter or in its certificate of incorporation.” Id. If the
certificate departs from the default rule, then “the powers and duties conferred
or imposed upon the board of directors by this chapter shall be exercised or
performed to such extent and by such person or persons as shall be provided
in the certificate of incorporation.” Id.
“Delaware’s corporate statute is widely regarded as the most flexible in
the nation.” Jones Apparel Grp., Inc. v. Maxwell Shoe Co., 883 A.2d 837, 845
(Del. Ch. 2004). Instead of dictating a rigid structure, “it leaves the parties to
the corporate contract (managers and stockholders) with great leeway to
structure their relations, subject to relatively loose statutory constraints.” Id.“Sections 102(b)(1) and 141(a) . . . embody Delaware’s commitment to private
ordering in the charter.” Id. In light of that commitment and the “broad effect”
of these statutes, Delaware courts do “not lightly find that certificate
provisions are unlawful.” Id. at 845-46. A provision is not contrary to Delaware
law just because it withdraws traditional power from the board. The “obvious
15
Case: 18-60093 Document: 00514512729 Page: 16 Date Filed: 06/14/2018
No. 18-60093
purpose” of § 141(a) “is to permit (absent some conflict with Delaware public
policy) certificate provisions to withdraw authority from the board.” Id. at 852.
We nonetheless decline to resolve whether the shareholder consent
provision violates Delaware law. In the bankruptcy court, FSNA argued that
the shareholder consent provision is invalid under Delaware law. On appeal,
however, FSNA has expressly waived any such argument, stating that the
“abstract question as to whether Delaware would ever allow a blocking
provision need not be debated.” When a party expressly waives an issue or
argument, we lack the benefit of adversarial briefing and generally decline to
consider the issue. See Procter & Gamble Co. v. Amway Corp., 376 F.3d 496,
499 n.1 (5th Cir. 2004). We have all the more reason to do so here. The parties
have not identified, and we have not discovered, any on-point Delaware cases.
We decline to decide in the first instance whether the Delaware General
Corporation Law would tolerate a provision in the certificate of incorporation
conditioning the corporation’s right to file a bankruptcy petition on shareholder
consent. 11 For the purposes of this case, we assume it would.
C.
FSNA contends that Delaware law would classify Boketo as a controlling
minority shareholder because of its ability to block a bankruptcy filing. As a
result, fiduciary obligations would arise, invalidating any attempt to exercise
the bankruptcy veto right. FSNA is wrong on both fronts.
1.
Under Delaware law, a shareholder is generally free to act in its self-
interest, unencumbered by any fiduciary obligation. See Ivanhoe Partners v.
Newmont Min. Corp., 535 A.2d 1334, 1344 (Del. 1987). But there are two
exceptions. “[A] shareholder owes a fiduciary duty only if it owns a majority
11 The bankruptcy court declined to decide this issue for the same reason.
16
Case: 18-60093 Document: 00514512729 Page: 17 Date Filed: 06/14/2018
No. 18-60093
interest in or exercises control over the business affairs of the corporation.” Id.Delaware law thus imposes fiduciary duties on two kinds of shareholders:
majority shareholders and minority controlling shareholders. See Kahn v.
Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113-14 (Del. 1994); Ivanhoe
Partners, 535 A.2d at 1344; see also Lewis v. Knutson, 699 F.2d 230, 235 (5th
Cir. 1983) (applying Delaware law). Boketo owns convertible preferred shares
that would amount to a 49.76% equity stake in FSNA if converted. That
interest, though formidable, is just shy of majority control. Boketo could
therefore only owe a fiduciary duty if it qualifies as a controlling minority
shareholder. See Weinstein Enters., Inc. v. Orloff, 870 A.2d 499, 507-08 (Del.
2005); Kahn, 638 A.2d at 1113-14.
The standard for minority control is a steep one. Potential control is not
enough. See In re Primedia Inc. Derivative Litig., 910 A.2d 248, 257 (Del. Ch.
2006). Instead, the shareholder must “dominat[e]” the corporation “through
actual control of corporation conduct.” Kahn, 638 A.2d at 1114 (emphasis
added) (quoting Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53,
70 (Del. 1989)); see Lewis, 699 F.2d at 235; cf. Solomon v. Armstrong, 747 A.2d
1098, 1117 n.61 (Del. Ch. 1999) (“[A] plaintiff must allege literal control of
corporate conduct.” (emphasis added)), aff’d, 746 A.2d 277 (Del. 2000)
(unpublished table disposition). The “actual control test” is not easily satisfied.
See In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 992 (Del. Ch.
2014), aff’d sub nom. Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del.
2015). A minority shareholder exercises “actual control” only when it has “such
formidable voting and managerial power that [it], as a practical matter, [is] no
differently situated than if [it] had majority voting control.” Id. (quoting In re
PNB Holding Co. S’holders Litig., No. CIV.A. 28-N, 2006 WL 2403999, at *9
(Del. Ch. Aug. 18, 2006)).
17
Case: 18-60093 Document: 00514512729 Page: 18 Date Filed: 06/14/2018
No. 18-60093
In making that determination, Delaware courts focus on control of the
board. See id. at 992-93 (first citing Superior Vision Servs., Inc. v. ReliaStar
Life Ins. Co., No. CIV.A. 1668-N, 2006 WL 2521426, at *4 (Del. Ch. Aug. 25,
2006); then citing In re Morton’s Rest. Grp., Inc. S’holders Litig., 74 A.3d 656,
665 (Del. Ch. 2013)). The shareholder’s command over the board must be “so
potent that independent directors . . . cannot freely exercise their judgment,
fearing retribution.” In re Morton’s Rest. Grp., 74 A.3d at 665 (alteration in
original) (quoting In re PNB Holding Co., 2006 WL 2403999, at *9). In short, a
minority controlling shareholder must have “a combination of potent voting
power and management control such that the s[hare]holder could be deemed
to have effective control of the board without actually owning a majority of
stock.” Corwin, 125 A.3d at 307 (footnote omitted).
“A plaintiff who alleges domination of a board of directors and/or control
of its affairs must prove it.” Kaplan v. Centex Corp., 284 A.2d 119, 122 (Del.
Ch. 1971); see 12B William Meade Fletcher et al., Fletcher Cyclopedia of the
Law of Corporations § 5811.50 (perm. ed., rev. vol. 2017) (“There must be some
evidence demonstrating control, however, since the presumption is against
it.”). FSNA’s argument for a finding of control boils down to this: Boketo owned
preferred stock convertible to a 49.76% equity stake; it appoints two of the five
directors (that is, a minority); and it is seeking to exercise its veto right
(allegedly to squelch a lawsuit against its parent company). Although the size
of the shareholder’s equity stake is a factor in the analysis, it is not dispositive.
See In re PNB Holding Co., 2006 WL 2403999, at *9. “[T]he cases do not reveal
any sort of linear, sliding-scale approach whereby a larger share percentage
makes it substantially more likely that the court will find the stockholder was
a controlling stockholder.” In re Crimson Expl. Inc. Stockholder Litig., No.
CIV.A. 8541-VCP, 2014 WL 5449419, at *10 (Del. Ch. Oct. 24, 2014); see also
id. at *10 n.50 (collecting cases); compare, e.g., In re W. Nat’l Corp. S’holders
18
Case: 18-60093 Document: 00514512729 Page: 19 Date Filed: 06/14/2018
No. 18-60093
Litig., No. 15927, 2000 WL 710192, at *1, *29-30 (Del. Ch. May 22, 2000)
(granting summary judgment based on finding that 46% shareholder did not
exercise actual control), with Kahn, 638 A.2d at 1115 (“[N]otwithstanding its
43.3 percent minority shareholder interest, Alcatel did exercise actual control
over Lynch by dominating its corporate affairs.”).
In other words, the size of Boketo’s stake is not enough. Instead, to
demonstrate that Boketo is a controlling shareholder, FSNA must prove that
Boketo actually dominated FSNA’s corporate conduct. See Kahn, 638 A.2d at
1114; Kaplan, 284 A.2d at 122-23.
In Kahn—the “seminal” controlling shareholder case, In re KKR Fin.
Holdings, 101 A.3d at 991—the Delaware Supreme Court found that a
shareholder exercised actual control “notwithstanding its 43.3 percent
minority shareholder interest.” 638 A.2d at 1115 (emphasis added). The board
in that case was considering both the renewal of management contracts and a
proposed merger. See id. at 1114-15. In each case, the minority shareholder
prevailed—“not because the [independent directors] decided in the exercise of
their own business judgment that [its] position was correct,” but because they
felt powerless in the face of its opposition. See id. Indeed, one of the
shareholder’s appointed directors told the other board members, “You must
listen to us. We are 43 [sic] percent owner. You have to do what we tell you.”
Id. at 1114. One of the independent directors testified that that statement
“scared [the independent directors] to death.” Id. Based on that evidence, the
Delaware Supreme Court affirmed the Chancery Court’s finding of actual
control. Id. at 1115.
Likewise, the Chancery Court found that a 40% shareholder was a
controlling shareholder in In re Cysive, Inc. Shareholders Litigation, 836 A.2d
531, 535, 552-53 (Del. Ch. 2003)—a case characterized by the Chancery Court
as “its most aggressive finding that a minority blockholder was a controlling
19
Case: 18-60093 Document: 00514512729 Page: 20 Date Filed: 06/14/2018
No. 18-60093
stockholder,” In re Morton’s Rest. Grp., 74 A.3d at 665. In addition to his
sizeable minority stake, the shareholder there was the company’s founder,
chief executive officer, and chairman. In re Cysive, Inc., 836 A.2d at 552. “He
[was], by admission, involved in all aspects of the company’s business . . . .” Id.Moreover, several of his family members occupied high-level positions within
the company. Id. The shareholder’s “day-to-day managerial supremacy”
distinguished the case from cases in which the Chancery Court had found that
holders of even larger blocks of shares were not controlling shareholders. Id.(citing In re W. Nat’l Corp., 2000 WL 710192, at *6).
Despite Boketo’s sizeable stake in FSNA, FSNA has pointed to no
evidence that Boketo exercises actual control. FSNA cites Boketo’s
appointment of two of its five directors as evidence of control. But the
appointment of a minority of directors—without more—is insufficient to
demonstrate actual control. Cf. In re Morton’s Rest. Grp., 74 A.3d at 665(finding that shareholder’s 27.7% stake and control of two of ten board
members, “without more, does not establish actual domination of the board”).
FSNA has offered no evidence that, despite its minority board representation,
Boketo’s influence was so pervasive that it would qualify as a controlling
shareholder under Delaware law. See Corwin, 125 A.3d at 307; Kahn, 638 A.2d
at 1114-15; In re KKR Fin. Holdings, 101 A.3d at 992-93; In re Morton’s Rest.
Grp., 74 A.3d at 665.
FSNA also claims that Boketo exercises actual control by virtue of its
ability to prevent a voluntary bankruptcy filing by exercising its voting rights
as a 100% preferred shareholder. But what matters is the dominating
shareholder’s actual exercise of control, not just the theoretical possibility that
it might do so. See Kahn, 638 A.2d at 1114; In re Primedia Inc., 910 A.2d at
257; Solomon, 747 A.2d at 1117 n.61. FSNA has not alleged domination of its
day-to-day management. Instead, it claims only that Boketo seeks to exercise
20
Case: 18-60093 Document: 00514512729 Page: 21 Date Filed: 06/14/2018
No. 18-60093
its veto right, which is enough to show control in FSNA’s view. But the
assertion is self-refuting. Boketo never did manage to exercise its right to vote
one way or the other. FSNA’s board never put the matter to a vote; instead, it
simply adopted a resolution to file for bankruptcy without the shareholders’
consent. A controlling shareholder’s command of the board must be “so potent
that independent directors . . . cannot freely exercise their judgment, fearing
retribution.” In re Morton’s Rest. Grp., 74 A.3d at 665 (alteration in original)
(quoting In re PNB Holding Co., 2006 WL 2403999, at *9).
Such was not the case here. The FSNA board’s apparent ability and
willingness to act without Boketo’s consent undercuts the case for control.
Boketo’s inability to prevent the board from authorizing the filing—despite its
right to do so—disproves the existence of the type of “potent voting power and
management control” necessary to impose fiduciary obligations on a minority
shareholder. The mere existence of the right to control is not enough; Boketo
must have actually exercised it. See Kahn, 638 A.2d at 1114; In re Primedia
Inc., 910 A.2d at 257; Solomon, 747 A.2d at 1117 n.61. Nor does Boketo’s
intervention in the bankruptcy proceedings bolster the case for control. Indeed,
the very fact that Boketo had to resort to filing a motion to dismiss the
bankruptcy petition—an action hotly contested by FSNA in the bankruptcy
proceedings and on appeal—only emphasizes its inability to control FSNA. To
reuse a phrase: if Boketo is a controlling shareholder of FSNA, then the tail is
wagging the dog.
2.
Even assuming Boketo were a controlling shareholder, there is a more
fundamental defect in FSNA’s argument. The proper remedy for a breach of
fiduciary duty claim is not to allow a corporation to disregard its charter and
declare bankruptcy without shareholder consent. Absent a properly authorized
petition, the bankruptcy court has no “power . . . to shift the management of a
21
Case: 18-60093 Document: 00514512729 Page: 22 Date Filed: 06/14/2018
No. 18-60093
corporation from one group to another, to settle intracorporate disputes, and
to adjust intracorporate claims.” Price, 324 U.S. at 106.
In Price, the debtor defaulted on its bonds and then struck a deal with
its bondholders. Id. at 101. To placate them, it placed over 50% of its stock in
a voting trust controlled by the bondholders. Id. The bondholders then
controlled the company and elected its directors. Id. A majority of the
shareholders tried to file a voluntary petition on the debtor’s behalf. Id. at 102.
The shareholders claimed that the voting trust was illegal and had expired by
its own terms anyway. Id. They also claimed that the directors were unlawfully
elected and had violated their fiduciary duties, thereby transferring to the
shareholders the right to control the company. Id. at 104. The court
acknowledged that the shareholders “may have [had] a meritorious case for
relief.” Id. at 107. But bankruptcy proceedings were not the appropriate venue
to seek a remedy for their grievances. See id. at 106-07. Their remedy, if any,
was under state law. See id. at 107.
Because we have already concluded that Boketo would not qualify as a
controlling shareholder under Delaware law, we need not (and do not) decide
whether it breached a fiduciary duty. Even if it had, the proper remedy is not
to deny an otherwise meritorious motion to dismiss the bankruptcy petition.
Instead, to the extent that Boketo breached any fiduciary duty owed as a
controlling shareholder, FSNA must seek its remedy under state law.
VI.
For the foregoing reasons, we AFFIRM.
22