Delaware Court Orders Sale of Solvent Company’s Stock Despite Shareholder Objections

Delaware General Corporate Law § 226 (the “Custodian Statute”) bestows the Delaware Court of Chancery with the power to appoint a custodian for solvent companies and receivers for insolvent companies in certain circumstances. See 8 Del. C. § 226. Specifically, a custodian may be appointed where, inter alia, a company’s “stockholders are so divided that they have failed to elect successors to directors whose terms have expired”, and where the business is suffering or threatened with “irreparable injury because the directors are so divided respecting the management of affairs that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division.” 8 Del. C. § 226(a)(1), (2). Although a custodian appointed under § 226 shall “continue the business of the corporation and not . . . liquidate its affairs and distribute its assets,” the Chancery Court has wide discretion in how it addresses a deadlock, and may even authorize a custodian to sell a company. See id. The scope of the Chancery Court’s broad discretionary authority to address deadlocks under § 226 was addressed in a recent decision of the Delaware Supreme Court. See Shawe v. Elting, No. 423, 2016, 2017 WL 563963, at *1 (Del. Feb. 13, 2017). Some read that decision as expanding the power of the courts to order the sale of a solvent company’s stock over the objection of the company’s shareholders.

In response to the decision, legislation has been proposed that would restrict the Chancery Court’s ability to dissolve or sell a solvent company by requiring that “alternative remedies prove insufficient after three years”, or the “necessary parties stipulate to such a sale.” Proposed Delaware Senate Bill No. 53.  The purpose of the proposed legislation is to “ensure the continued fair and equitable treatment of corporations in Delaware” by addressing “deficien[cies] in providing fair and equitable remedies in specific regards to deadlock situations.”  Id.  The Delaware Corporate Law Section plans to oppose the bill. The full text of the case, Shawe v. Elting, can be accessed here.