Court of Chancery Upholds Validity of General Release Between Company and Former President, Grants Summary Judgment in Former President’s Favor

By: David Forney and Tami Mack

In Seiden v. Kaneko, C.A. No 9861-VCS (Del. Ch. March 22, 2017), the Court of Chancery held that the general release that Southern China Livestock, Inc. (the “Company”) had entered into with former President Shu Kaneko (“Kaneko”) in exchange for Kaneko’s assistance in recovering certain Company shares was binding and enforceable.  Thus, the Court held that Kaneko had been released from all claims asserted against him by the Company’s receiver (the “Receiver”) and granted summary judgment in Kaneko’s favor.

The Company, experiencing issues with its U.S. investors, desired to provide an exit for such investors and attract Chinese private equity firms that would eventually take the Company public on the Chinese Main Board Exchange.  However, the private equity firms required, as a preliminary matter, that a large number of the Company’s issued and outstanding shares be returned to the Company.  The Company engaged Alan Lewis (“Lewis”) to assist with the reacquisition.

Lewis knew that Kaneko maintained relationships with all of the shareholders whose shares the Company hoped to reacquire, and reached out to Kaneko to inquire whether he would assist in securing the return of the shares.  Kaneko, knowing that he and others had been accused of misappropriating funds while employed by the Company, asserted that he had done nothing wrong and owed the Company nothing, but nonetheless agreed to assist.  In a subsequent conversation, Kaneko informed Lewis that he and all of the shareholders desired a liability waiver as a result of the misappropriation accusations.  Release agreements and transfer agreements were eventually executed and held in escrow until all signatures had been obtained.  Additionally, the Company’s board of directors executed a written consent five months later ratifying the agreements.

The transaction was not consummated and the Company eventually “went dark.”  The Receiver was eventually appointed and filed suit against Kaneko and others, alleging breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conversion, and fraudulent transfer, among other things.  Kaneko filed a motion to dismiss, which was granted in part, and subsequently answered the complaint and filed an indemnification action against the Company pursuant to Delaware law.  Kaneko then moved for summary judgment on all claims.

The Court first addressed the scope of the release, holding that it was a mutual release of liability with general release language, which was clearly intended to include the release of claims regarding Kaneko’s alleged wrongdoing in the instant case.  The Court then moved on to the validity of the release, which the Receiver opposed on several grounds: (1) that the release was invalid for lack of the Company seal, (2) that Kaneko’s control over the Company prevented the Company from being able to enter into an arms-length agreement with him, (3) that the release was invalid for lack of consideration, and (4) that Lewis had lacked the authority to enter into the release on the Company’s behalf.

The Court quickly dismissed the allegation that the release was invalid for lack of the Company seal because the seal was not required in order for the release to be valid, the Company did not always affix its seal to its documents, and because the full board of directors had subsequently ratified the release.

In regard to the allegation that Kaneko’s control over the Company prevented an arms-length transaction, the Court held that the Receiver had failed to allege that Kaneko maintained any control over the Company or its board of directors at the time the release was negotiated and executed.  The Court further held that the fact that Kaneko was the only individual who could facilitate the return of shares did not give him “control” over the Company such that the release would be invalidated.

In regard to the lack of consideration allegation, the Receiver first claimed that the Court ruling on the motion to dismiss had already determined that the release was invalid for lack of consideration. The Court of Chancery rejected this argument by pointing out that the Court had not made definitive findings of fact, but had drawn all reasonable inferences in the Receiver’s favor.  The Court moved on to hold that the undisputed evidence, such as holding all documents in escrow until each necessary agreement was obtained, showed that the return of the shares was the consideration for the release.  Additionally, the Court held that the fact that the shares should not have been transferred in the first place did not make the consideration “past consideration.”

Regarding the allegation that Lewis lacked authority to enter into the release, the Court held that, although Lewis’s contract did not expressly grant him the authority to enter into the release, the undisputed evidence showed that the Company had approved the release prior to execution.  The Court further held that even if Lewis had not had the authority to enter into the release at the time of its execution, the board’s subsequent approval of the release by written consent would have cured such a defect.

In addressing Kaneko’s indemnification claim against the Company, the Court stayed the claim until the entry of a final, non-appealable judgment.  Kaneko had also requested that the Court shift fees as a result of bad faith by the Receiver, claiming that the Receiver’s arguments against the release had no basis in fact.  The Court rejected this claim, holding that the Receiver pled facts based on the knowledge he had prior to discovery, most of which had survived a motion to dismiss. The Court went on to grant summary judgment in favor of Kaneko on all claims asserted against him, holding that the Company had validly released him from liability for all claims.

Seiden v. Kaneko, C.A. No 9861-VCS (Del. Ch. March 22, 2017)

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