COURT OF CHANCERY APPLIES POLITICAL QUESTION DOCTRINE IN DEFERRING TO U.S. PRESIDENT’S RECOGNITION OF VENEZUELAN PRESIDENT AND HOLDS THAT EXTRA-TERRITORIAL EFFECTS DO NOT PRECLUDE APPLICATION OF THE ACT OF STATE DOCTRINE

By: CJ Voss and Teresa Teng

In Jiménez v. Palacios et al., C.A. No. 2019-0490-KSJM (Del. Ch. Aug. 2, 2019), the Delaware Court of Chancery accepted as binding the U.S. President’s recognition of a foreign government and upheld the validity of that government’s appointments to the board of directors of a state-owned oil company. In turn, the state-owned oil company could validly appoint the board of directors of its Delaware subsidiaries. However, the court determined that the consents appointing the boards of directors of the Delaware subsidiaries were not appropriately considered on a motion for judgment on the pleadings and granted the plaintiffs the opportunity to identify facts in dispute foreclosing summary judgment in favor of the defendants. 

Venezuela has the largest proven oil reserves in the world and is the sole stockholder of Petróleos de Venezuela, S.A., a state-owned oil company (“PDVSA”). PDVSA directly and indirectly owns three subsidiaries incorporated in Delaware. The President of Venezuela has the power to appoint the board of directors of PDVSA.

In the 2018 Venezuelan Presidential elections, amid economic turmoil and a humanitarian crisis, incumbent Nicolás Maduro disqualified opposition parties from participating in the election and declared himself the winner. In January 2019, after Maduro’s swearing in, the National Assembly of Venezuela declared his presidency illegitimate and instead appointed Juan Guaidó as the interim President in accordance with the Venezuelan constitution. On that day, the U.S. President officially recognized the Guaidó government, and declared the Maduro regime illegitimate.

In February 2019, the Guaidó-appointed managing board of PDVSA took action by written consent to elect a new board of its direct Delaware subsidiary, which then took action by written consent to elect a new board of its direct Delaware subsidiary which in turn appointed the board of that entity’s direct Delaware subsidiary. The members of the Delaware boards of directors under the Maduro regime then filed a complaint against the newly appointed boards of directors, claiming the Maduro-appointed directors comprised the rightful directors of the Delaware subsidiaries. The defendants, the Guaidó-appointed directors, then counterclaimed, and both parties cross-moved for judgment on the pleadings.

The court’s analysis turned on three disputes: (1) the identity of the rightful President of Venezuela, (2) whether the Guaidó government appropriately reconstituted the boards of PDVSA and the Delaware subsidiaries and (3) who constituted the rightful boards of directors of the Delaware subsidiaries of PDVSA.

To the first dispute, the court applied the political question doctrine which provides that recognizing a foreign sovereign is a function exclusively of the executive branch and is non-justiciable. On the basis of the U.S. President’s statement in January 2019 officially recognizing the Guaidó government, the court stated it was bound by such determination and that Guaidó was the recognized President of Venezuela.

On the second question of whether the boards of PDVSA and the Delaware subsidiaries were properly reconstituted, the court applied the act of state doctrine which presumes the validity of official acts of a foreign sovereign when performed within its own territory. As the Guaidó government’s appointment of the PDVSA board constituted an official act of a recognized sovereign within its territory, the court noted that it must accept such action as valid. With respect to the prong of the act of state doctrine requiring that acts be performed within the foreign sovereign’s territory, and acknowledging that the dispute between the parties concerned the validity of the boards of Delaware corporations, the court noted that the official act of the Venezuelan government was appointment of the PDVSA board, and that “[t]he knock-on effects of that act which took place outside of Venezuela do not render the original act extraterritorial.” As a result, the further appointment of boards of directors outside of Venezuela did not preclude application of the act of state doctrine.

The court stated that its decision did not answer the third question of who constituted the boards of the three Delaware subsidiaries, as the written consents appointing the boards of directors were attached to the defendants’ briefings rather than to their counterclaims. As a result, the court could not consider the written consents and as the defendants presented documents outside the pleadings in support of their motion, the court treated the defendants’ motion for judgment on the pleadings as a motion for summary judgment. The plaintiffs had not pointed to any deficiencies in the written consents, and the court gave the plaintiffs 10 days from the decision to submit an affidavit to identify disputed facts foreclosing summary judgment in favor of the defendants.

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