Topic: Receiver

CHANCERY COURT HOLDS BUSINESS STRATEGY DISPUTES MAY NOT BE RESOLVED BY APPOINTMENT OF A RECEIVER UNDER SECTION 291

By: Annette Becker and Rich Minice

In, In re: Geneius Biotechnology, Inc., C.A. No. 2017-0297-TMR (Del. Ch. Dec. 8, 2017), the Delaware Court of Chancery denied a minority stockholder’s petition for the appointment of a neutral third-party receiver under Section 291 of the Delaware General Corporation Law (“DGCL”) because the petitioner minority stockholder failed to prove, by clear and convincing evidence, that Geneius Biotechnology, Inc. (“Geneius”) was insolvent.  The court held that Section 291 actions are not to be used as a method of resolving business strategy disputes between stockholders and management.

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Chancery Court Defines De Novo Standard of Review for Appeals of Receiver’s Decisions Disallowing Claims

By: Jessica Pearlman and Will Smith

In B.E. Capital Management Fund LP v. Fund.Com Inc., C.A. No. 12843-VCL (Del. Ch. October 4, 2017), the Delaware Court of Chancery denied an appeal from a receiver’s decision disallowing a claim for breach of contract against a company in receivership. The Court held that the appropriate standard of review for an appeal of a receiver’s decision was de novo as to both law and facts, and in particular, that the Court had discretion to consider additional evidence not presented on record to the receiver. Applying this standard, the Court upheld the receiver’s decision, but on different grounds. The Court ruled that the breach of contract claim was time-barred by the doctrine of laches, not the contract’s choice-of-law provision, as choice-of-law provisions must expressly reference statutes of limitations to apply to statutes of limitations.

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Delaware Court of Chancery Reiterates Standard for Terminating a Receivership and Finds 10% Net Recovery Contingency for a Receiver Fee Reasonable under Delaware General Corporate Law

By Scott Waxman and Anthony L Yerry

In Jagodzinski v. Silicon Valley Innovation Company, LLC, Christian Jagodzinski, a unitholder in Silicon Valley Innovation Company, LLC (“SVIC”), fueled by personal disputes with Bram Portnoy, the receiver of SVIC, brought a motion to terminate the court-appointed receivership over SVIC or, alternatively, to reduce the receiver’s pay.  Setting aside the personal disputes between Portnoy and Jagodzinski, the Delaware Court of Chancery ruled that Jagodzinski failed to make a sufficient showing to justify terminating the receivership but held that the 10% contingency portion of Portnoy’s fees are to be based off of the net, instead of the gross, recovery of the receivership.

In 2000, Jagodzinski invested $1 million in SVIC, which was an incubator for other startup technology companies.  After about four years of allegedly successful investments, SVIC stopped sending reports to the equity holders.  Jagodzinski unsuccessfully attempted to contact SVIC and investigate the state of the company’s affairs.  Eventually on February 18, 2011, Jagodzinski initiated a books and records action against SVIC in the Delaware Court of Chancery.  The then manager of SVIC refused to cooperate with the court, and the court appointed Portnoy as a limited receiver of SVIC with the specific task of collecting the books and records of the SVIC.

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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.

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