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Sinchareonkul v. Fahnemann, C.A. No. 10543-VCL (Del. Ch. Jan. 22, 2015) (Laster, V.C.)

January 22, 2015

In this memorandum opinion, the Court of Chancery denied the plaintiff’s motion for an expedited preliminary injunction hearing to be held prior to February 10, 2015, but found that good cause existed for an expedited two-day trial on the merits in approximately 90-120 days.  In connection with its ruling, the Court found that plaintiff had colorable claims that two of the bylaws of Sempermed USA, Inc. (“SUSA”), which provided for the election of a chairman of the board and for the chairman to have a tie breaking vote, were invalid because they conflicted with the General Corporation Law of the State of Delaware (the “DGCL”), and that a board resolution was invalid because it was passed in reliance on those bylaws. However, the Court ruled that there was not a sufficient threat of irreparable harm to justify an expedited preliminary injunction hearing.

The plaintiff is a director of SUSA, a joint venture between Semperit Technische Produkte Gesellschaft m. b. H. (“Semperit”), Sri Trang Argo-Industry Public Co., Ltd. (“Sri Trang”) and Siam Sempermed Corporation Limited (“Siam Sempermed”).  Semperit, Sri Trang, and Siam Sempermed entered into a Joint Venture Agreement (“JVA”), which contemplated that SUSA would have an eight-member board of directors, evenly split between nominees of Semperit and Sri Trang. To avoid deadlock, the JVA provides that the chairman would be elected from one of the Semperit directors and would have a tiebreaking vote.  Although similar deadlock provisions appear in SUSA’s bylaws, no such provisions are contained in SUSA’s certificate of incorporation.  The JVA also states that the terms of the JVA would control over SUSA’s certificate of incorporation and that if a conflict arises between them, the certificate of incorporation would be amended accordingly. The JVA also provides for mandatory arbitration in the event of a dispute between the parties.

On January 13, 2015, the SUSA board of directors met to vote on a resolution relating to an adjustment to a royalty payment payable to Semperit (“Royalty Resolution”). The Semperit directors voted in favor of the Royalty Resolution and the Sri Trang directors voted against it. The chairman of the board cast a tiebreaking vote in favor of the Royalty Resolution. The next day, the plaintiff filed suit, seeking a declaratory judgment that (i): the bylaw providing the chairman the tiebreaking vote is invalid, (ii) the bylaw governing the chairman election is invalid, and (iii) that the Royalty Resolution is void because its adoption depended on the validity of invalid bylaws.

On January 19, 2015, the Semperit directors noticed a meeting of the SUSA board for February 10, 2015, at which the board will consider amending the certificate of incorporation to include the chairman election and tiebreaking vote provisions. The resolution proposing the adoption of the amendment calls for a stockholder meeting on the amendment to be held on February 27, 2015. The Semperit directors argue that if the Sri Trang directors do not vote in favor of the amendment, or if Sri Trang votes against it at the stockholder meeting, then a dispute that requires arbitration under the JVA will exist.

As a threshold matter, the Court of Chancery held that the plaintiff had standing to file the action because, assuming the facts the plaintiff alleged in his complaint were true, the plaintiff was injured when the Semperit directors exercised greater voting power than they were lawfully entitled. The Court then analyzed the plaintiff’s three claims for declaratory judgment. Because the plaintiff asked for an expedited hearing on a preliminary injunction, the Court analyzed the claims under a two-part test: (i) if the plaintiff articulated a colorable claim and (ii) if the plaintiff has shown “a sufficient possibility of a threatened irreparable injury” that would justify an expedited hearing. The Court held that though the plaintiff had a colorable claim, there was not a sufficient threat of irreparable harm.

In order for bylaws to be valid, they cannot be inconsistent with the certificate of incorporation or any other provision of the DGCL. The DGCL permits the certificate of incorporation of a corporation to provide for the right of the holders of a particular class or series of stock to elect directors and for directors to have differential voting powers. Because the DGCL does not authorize provisions granting similar rights in the bylaws, SUSA’s bylaws conflict with the DGCL.  Therefore, the plaintiff has a colorable claim that the SUSA bylaws governing the election of the chairman and the tiebreaking vote are void. The plaintiff also has a colorable claim that the Royalty Resolution is void because it was adopted pursuant to invalid bylaws.

Though the plaintiff articulated a colorable claim, the Court found that the threat irreparable harm was not great enough to justify an expedited hearing on a preliminary injunction. The proposed amendment to the certificate of incorporation could only go into effect if it received approval from the SUSA board on February 10th and the SUSA stockholders on February 27th. If Sri Trang votes against the amendment, the parties would need to go to arbitration, which is unlikely to be completed within a few weeks. Therefore, it is unlikely that the chairman casting a tiebreaking vote on February 10th would cause irreparable harm. In addition, any harm regarding the plaintiff’s directorial rights being violated in connection with the passing of the Royalty Resolution has already occurred, and any harm that may occur from the payment of royalties can be remedied by money damages. The Court therefore ruled that a two-day trial on the merits within the next 90-120 days, rather than an expedited hearing on a preliminary injunction, is appropriate. 

The full opinion is available here