Archive: August 7, 2014

Zutrau v. Jansing, C.A. No. 7457-VCP (Del. Ch. July 31, 2014) (Parsons, V.C.)

By David Bernstein and Meredith Laitner

On July 31, 2014, the Delaware Chancery Court issued its decision in Zutrau v. Jansing, C.A. No. 7457-VCP (Del. Ch. July 31, 2014) (Parsons, V.C.), requiring the parties to recalculate the payment to which the plaintiff was entitled because her 22% minority interest in a Delaware corporation was squeezed out through a reverse split that reduced her holding to less than one full share.  The plaintiff in this case, a former employee of Ice Systems, Inc., brought a derivative suit in which she challenged numerous business decisions made by Ice Systems after her employment terminated and challenged  compensation and expense reimbursement payments made to the CEO, who was also the 78% stockholder and the sole director.   The plaintiff also (a) asked the Court to set aside the reverse split on the ground that it was made for the improper purpose of depriving her of the ability to bring a derivative suit, or alternatively (b) to increase the sum to which she was entitled as a result of the cancellation of her 22% interest through the reverse split.

The Court did not decide whether the plaintiff no longer had standing to sue derivatively because she was  no longer a stockholder when she commenced the suit, because the defendant acknowledged that if Ice Systems would have been entitled to recover sums if the plaintiff had been able to sue derivatively, the corporation’s right to recover those sums would increase the amount to which the plaintiff is entitled because of the cancellation of her stock interest, and therefore, the outcome of her suit would be the same whether or not she was permitted to sue derivatively.

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In re Jenzabar, Inc. Derivative Litig., Civil Action No. 4521-VCG (July 30, 2014) (Vice Chancellor Glasscock)

By David Bernstein and Priya Chadha

In In re Jenzabar, Inc. Derivative Litig., Vice Chancellor Sam Glasscock III held that a terminated trust that has not yet distributed to its beneficiaries shares of a corporation, cannot bring a derivative suit on behalf of the corporation. It “can take only those actions related to preserving its assets for purposes of distribution and wind-up, together with those actions for which the trust instrument specifies.”

The Gregory M. Raiff 2000 Trust (the “Trust”) was established in 2000.  The terms of the Trust Instrument held that it was to terminate in 2002 and distribute all of its assets to another trust.  However, the Trust assets, which included shares of Jenzabar, were never actually distributed after the Trust terminated in 2002.  After the trustee filed this derivative action on behalf of the Trust in 2013, Jenzabar filed a motion to dismiss the derivative suit, arguing that the Trust lacked the capacity to sue because it had terminated.  The Plaintiff countered that because the Trust had never distributed its assets, it still had the capacity to bring a derivative suit due to the fact that it still held Jenzabar stock.

Vice Chancellor Glasscock rejected this argument.  He said that Massachusetts law, which governed the Trust, restricted the powers of a trustee of a terminated trust to what’s necessary to “preserve the trust property while winding up the trust and delivering any trust property to the beneficiary.”  He said that post termination, the only litigation in which the Trust could engage was defensive action necessary to preserve its assets, pursuing litigation was not encompassed within the Trust’s limited powers and thus, it lacked the capacity to pursue the derivative action.

InReJenzabar

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