Smollar v. Potarazu, C.A. No. 10287-VCN (November 19, 2014) (Noble, V.C.)

By Lauren Garraux and Lisa Stark

In Smollar v. Potarazu, the Court of Chancery denied a stockholder’s request to expedite proceedings and to appoint a temporary receiver in connection with a challenge to an alleged impeding sale of VitalSpring Technologies, Inc. (“VitalSpring”) to an unidentified third-party.  Plaintiff Marvin Smollar, a VitalSpring stockholder, filed the complaint against defendant Sreedhar V. Potarazu (“Defendant”), VitalSpring’s chief executive officer and sole director, following Defendant’s announcement that VitalSpring would be sold pending approval by the Federal Trade Commission.  According to Defendant, the sale — which was projected to be completed around October 19, 2014 — was ultimately delayed pending further FTC guidance.

In his complaint, Plaintiff sought to enjoin the sale until VitalSpring released audited financial statements pursuant to an agreement with its stockholders and held an annual meeting of stockholders.  VitalSpring apparently had not held an annual meeting of stockholders for several years contrary to Delaware law.  According to Plaintiff, Defendant’s failure to hold annual meetings, to release audited financials and general lack of corporate transparency called into question the veracity of Defendant’s claims that a buyer for VitalSpring existed.

Plaintiff also filed a Motion to Expedite (the “Motion”), so that his claims would be heard before the alleged sale was completed, and sought to have a temporary receiver appointed to ensure that VitalSpring released audited financial statements and held an annual meeting.  Vice Chancellor Noble denied Plaintiff’s Motion.

First, the Court explained that Plaintiff failed to show that VitalSpring stockholders would suffer “imminent and non-speculative harm” absent expedited judicial intervention, as is required to obtain expedition.  According to the Court, Plaintiff’s allegations of harm were “too speculative and remote to support expedition” — the Court had no detail of the transaction which Plaintiff sought to enjoin, the sale had not been publicly announced and there was no indication of when the sale might close.  The Court similarly rejected Plaintiff’s claim that delay in adjudicating his claims might compromise his ability to collect on any judgment obtained against Defendant , holding that Plaintiff’s suspicion that Defendant was engaging in nefarious activities did not warrant expedition.

Second, the Court denied Plaintiff’s request that a temporary receiver be appointed, noting that Defendant represented to the Court, and provided some concrete evidence, that VitalSpring would hold a stockholders meeting on January 9, 2015. The Court further explained that there was no basis to conclude that the sale would be announced and close before stockholders received information on the buyer, the price and the process undertaken by Defendant, rendering Plaintiff’s request premature.


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