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

March 22, 2017

In this memorandum opinion, the Court of Chancery granted defendant’s motion for summary judgment and held that plaintiff’s claims were barred pursuant to a mutual release between the corporation for which plaintiff was appointed as receiver and defendant, who was the former President, Treasurer, Director of Business Development, and Secretary of the corporation.

In 2012, Southern China Livestock, Inc. (the “Company”) was approached by two private equity firms based in China that were interested in investing in the Company and taking it public in China. The private equity firms were concerned with certain outstanding “management shares” of the Company, and the Company retained Alan Lewis to assist it in reacquiring the management shares. Lewis knew that defendant Shu Kaneko, who had resigned from the Company, maintained relationships with the holders of the management shares. Kaneko agreed to assist Lewis in acquiring the management shares. Kaneko later informed Lewis that he and the other stockholders wanted a liability waiver in light of the fact that they had been accused of misappropriating funds. Lewis, on behalf of the Company, and Kaneko signed a general release of claims (the “Release”), which the board of directors of the Company later approved, ratified, and confirmed in July 2013. In July 2014, a receiver appointed on behalf of the Company (the “Receiver”) filed a claim against Kaneko alleging, among other things, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conversion, fraudulent transfer, unjust enrichment and corporate waste. Kaneko moved for summary judgment on the grounds that the claims were barred by the Release. In response, the Receiver argued that the Release should be disregarded several reasons: (a) because Kaneko’s control over the Company prevented it from entering into an arm-length agreement with him; (b) because the Release was not supported by valid consideration or was otherwise invalid because the Release was not translated into Chinese, did not have the Company’s seal affixed to it and Lewis did not include the Company’s chief executive officer in discussions with Kaneko regarding the Release; and (c) because Lewis lacked authority to enter into the Release on behalf of the Company.

The Court first found that there was no evidence that Kaneko controlled the Company at the time of the Release. The Court next held that a seal was not required and there was nothing to suggest that a lack of translation impacted the Release’s validity.  In addition, the Court found that the subsequent ratification of the Release by the Company’s board of directors, including its chief executive officer, was powerful, undisputed evidence that the board of directors understood the Release.

The Court then considered whether the Release was unsupported by consideration because there was no provision stating that Kaneko assisting in the return of the management shares was the consideration for the Company releasing its claims against him. The Court found that there was no requirement to state the consideration in such explicit terms and that the parties involved in the execution and negotiation of the Release knew its purpose and what each party was giving and getting in exchange for the Release. The Court further held that the consideration supporting the Release was not past consideration, especially in light of the fact that the Release was held in escrow until all mutual covenants were satisfied. Finally, the Court found that, even though the Company may have already been entitled to acquire the management shares, the Company’s failure to possess the shares prevented the commencement of negotiations with the private equity companies, and, therefore, Kaneko’s assistance in retrieving the shares constituted valuable consideration. 

The Court finally considered whether Lewis was authorized to negotiate and sign the release. The Court found that Lewis was authorized to do so because he entered into an agreement with the Company in which the parties agreed that Lewis would obtain the return of the management shares that did not specify the steps that Lewis was entitled to take to acquire the shares. In addition, Lewis presented the idea of working with Kaneko to the Company and explained to the Company why it should work with Kaneko to ensure the return of the shares. Furthermore, even if Lewis lacked such authority, the Company’s board of directors ratified the decision to enter into the Release. Thus, the Court granted summary judgment in favor of Kaneko on all claims asserted against him, though it stayed his request for mandatory indemnification until the entry of a final, non-appealable judgment and rejected his request that the Court shift fees as a result of alleged bad faith by the Receiver.

The full opinion is available here