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Kraft v. WisdomTree Investments, Inc., C.A. No. 10816-CB (Del. Ch. Aug. 3, 2016) (Bouchard, C.)

August 3, 2016

In this opinion, Chancellor Bouchard dismissed a stockholder’s complaint seeking to invalidate a share issuance to another stockholder on the basis that the applicable statute of limitations applied by analogy to bar the complaint, which was filed approximately 15 years after the challenged share issuance and 12 years after the expiration of the statutory limitations period. In conducting this analysis, the Chancellor noted that the case law on the application of statutory limitations periods in the Court of Chancery has generated less than clear precedents.  The Chancellor therefore attempted to provide clarity on the topic by summarizing those precedents and outlining guiding principles on the subject.

The plaintiff, Harold Kraft, was the trustee of a trust that purchased preferred stock in Tradeworx, Inc. (the “Company”) in November 2000 (“Kraft” refers to both Mr. Kraft and the trust).  Kraft initiated an action in 2015 against WisdomTree Investments, Inc. (“WisdomTree”), seeking a declaration that shares of the Company’s common stock issued to WisdomTree approximately fifteen years earlier in May 2000 were invalid.  Kraft’s theory was that WisdomTree received the stock in exchange for services to be provided in the future, which (at that time) was a prohibited form of consideration under the Delaware General Corporation Law (the “DGCL”) and the Delaware Constitution.  (Those provisions have since been amended to permit share issuances for that form of consideration.

WisdomTree moved to dismiss Kraft’s complaint on the basis that Kraft’s claim, which was filed almost 15 years after the challenged share issuance, was time-barred.  WisdomTree argued that Kraft’s claim for declaratory relief based on the interpretation of the DGCL and a parallel constitutional provision presented a purely legal claim and, accordingly, that the claim was time-barred under a strict application of the applicable three-year statute of limitations.  WisdomTree argued alternatively that, even if Kraft’s claim sought an equitable remedy, the statutory limitations period still applied by analogy to bar the claim and, further still, even if the limitations period did not apply, laches would operate to bar the claim.  Kraft argued in response that he was not aware “until recently” of the stock purchase agreement executed by WisdomTree and the Company or that WisdomTree claimed to own a substantial majority of the Company’s stock.  The Court noted, however, that the complaint did not allege, and Kraft did not argue, that he was unaware of WisdomTree’s original share ownership when Kraft made its initial investment in the Company in November 2000.

Before analyzing whether Kraft’s claim was time-barred, the Court noted that this “seemingly routine question[ was] not so easily answered” because the mixture of equitable and legal matters falling within the Court’s subject matter jurisdiction complicated the analysis. The Court also noted that the case law on these issues did not chart a clear course.  Accordingly, prefatory to its analysis of Kraft’s claim, the Court first examined and summarized the case law in three different contexts implicating statutory limitations periods in order to establish a guiding legal framework for its analysis.

With respect to legal claims seeking legal relief in Chancery, Chancellor Bouchard stated that the case law provided that the statute of limitations (and its tolling doctrines) should apply strictly and laches should not apply. However, the Court noted that extraordinary circumstances could provide exceptions to the strict application of limitations periods for purely legal matters, separate and apart from tolling doctrines.

With respect to equitable claims seeking equitable relief, the Court noted that the case law provided that the equitable doctrine of laches applied to such cases and any applicable statute of limitations would apply only by analogy, although the Court will often afford great weight to such statutory limitations periods.

With respect to equitable claims seeking legal relief or legal claims seeking equitable relief, the Court stated that the case law generally stood for the proposition that, given such claims’ quasi-legal status, statutory limitations periods would apply by analogy with presumptive force to bar such claims outside the limitations period absent tolling or extraordinary circumstances.

With that framework in place, the Court proceeded to analyze Kraft’s claim. Kraft’s claim that WisdomTree’s shares were invalid based on the DGCL and the Delaware Constitution found no basis in equitable principles and therefore was purely legal in nature.  With respect to Kraft’s requested remedy of a declaratory judgment, the Court looked to the underlying subject matter and determined that it was functionally a request to cancel shares, which is an equitable remedy.

The Court stated that a three-year statute of limitations applied by analogy through the doctrine of laches to Kraft’s legal claim seeking equitable relief. The Court noted that Kraft had not advanced any tolling arguments and that, given that Kraft had exceeded the statute of limitations by almost 12 years, this case did not present the type of extraordinary circumstances that would excuse a failure to comply with the governing limitations period.  For these reasons, the Court ruled that Kraft’s claim was barred by laches and accordingly granted WisdomTree’s motion to dismiss the complaint.

The full opinion is available here