Parfi Holding AB v. Mirror Image Internet, Inc., C.A. No. 18507-VCS (Del. Ch. Sept. 4, 2008) (Strine, V.C.)
The case was originally initiated in 2000 as a challenge by minority shareholders of Mirror Image Internet, Inc. (“Mirror Image”) to a series of transactions involving Mirror Image, its majority shareholder, Xcelera.com, Inc. (“Xcelera”), and certain individuals who served on the boards of both Mirror Image and Xcelera. The plaintiffs (of which only two—Parfi Holding AB(“Parfi”) and Plenteous Corp. (“Plenteous”)—remained parties to the instant action) asserted various individual and derivative claims relating to the transactions in the Court of Chancery(the “Delaware Action”). Prior to commencing the Delaware Action, the plaintiffs submitted certain contract claims to arbitration in Sweden based on the representations made by Xcelera under an underwriting agreement (the “Arbitration”). The defendants then moved to dismiss the Delaware Action pending completion of the Arbitration. Before the Court decided defendants’ motion, the Arbitration panel issued its ruling, holding in part for the plaintiffs and in part for Xcelera. The Court of Chancery dismissed plaintiffs’ claims in Delaware, but the Supreme Court reversed and remanded. Thereafter, in connection with the Arbitration, plaintiffs made a demand upon Xcelera for $569 million in damages, which Xcelera refused, and plaintiffs were then free under Swedish law to initiate the damages phase of the Arbitration. Defendants then moved the Court of Chancery to enjoin the resumption of the Arbitration, arguing that plaintiffs were seeking exactly the same damages in the Court of Chancery. The Court,however, noting that the Arbitration panel had already determined the merits of the claims before it, decided instead to stay the Delaware Action pending completion of the Arbitration.The evidence revealed, however, that because plaintiffs wanted to proceed in Chancery, did not believe that they would do as well in the Arbitration, and did not want to pay the costs of the Arbitration, they did very little to continue the damages phase of Arbitration. Fearing the prejudice that might result to the resolution of the Delaware case from plaintiffs’ delay in initiating the damages phase of the Arbitration, the Court ordered plaintiffs to provide a status report indicating whether the damages phase of the Arbitration had been convened. Plaintiffs indicated they would act to convene a panel on or before October 18, 2004, but did not follow through. Several months later, defendants moved to dismiss the Delaware Action for failure to prosecute and soon thereafter, plaintiffs moved to lift the stay. In plaintiffs’ motion, they stated that their financial situation rendered it impossible for plaintiffs to fund the Arbitration. Both the defendants and the Court were skeptical of plaintiffs’ representations and the Vice Chancellor ordered discovery into the question of whether the plaintiffs had engaged in sanction able delay or made misrepresentations to the Court relating to the failure to pursue the damages phase of the Arbitration. After plaintiffs initially failed to produce such discovery, the Court granted defendants’ motion to compel and the discovery revealed both that plaintiffs had misrepresented their reasons for not pursuing the damages phase of the Arbitration and that they lacked standing to pursue their claims.
The Court first addressed the issue of whether to dismiss the case based upon plaintiffs ’misleading statements to the Court. The Court noted that it may charge plaintiffs with prosecuting the matter with due diligence, even in light of the stay; otherwise the Court would face the prospect of trying a case after memories have faded and with greater potential for an unjust result. Therefore, plaintiffs’ failure to make a substantial effort to initiate the damages phase of the Arbitration despite their representations to the Court was problematic. Plaintiffs’ most problematic behavior, however, was their representations that it was impossible for plaintiffs to fund the damages phase of the Arbitration. The Court found those representations to be false.The Court, reiterating the importance of maintaining integrity in the litigation process by assuring that parties are candid with the courts, concluded that plaintiffs’ behavior was of the kind that warranted a sanction of dismissal.
The Court also addressed defendants’ motion to dismiss based upon plaintiffs’ lack of standing.To bring a derivative suit, plaintiffs must have owned their stock at the time of the actions complained of (i.e., contemporaneous ownership) and throughout the litigation (i.e., continuous ownership). With respect to Plenteous, the Court held that it failed the continuous ownership test because it was not currently a stockholder of Mirror Image as a result of a reverse stock split in November 2002. Since the limitations period to challenge that stock split had long passed, the Court refused to consider plaintiffs’ claim that it was a fraud designed to deprive stock holders of their right to sue derivatively. With respect to Parfi, the Court held that it failed both the contemporaneous and continuous ownership tests. Parfi did not own stock at the time of the challenged transactions and did not meet the narrow exception for parties that had their stock devolved upon them by operation of law. It also failed the continuous ownership test.Parfi had defaulted under an agreement with other stockholders and therefore had forfeited its rights to recovery in the Delaware Action and the Arbitration. Parfi had also sold one-half of its Mirror Image shares, only to later repurchase them. Recognizing policy considerations behind derivative suits and the Court’s ability to “fashion common law rules of standing to address novel problems,” the Court held that Parfi was an “empty plaintiff” (i.e., one with an ownership of shares, but without any economic interest in the corporation) once it divested itself of an economic interest in the litigation and lacked derivative standing.
The Court also agreed with defendants’ claim that plaintiffs were inadequate derivative plaintiffs because they were inadequate to serve stockholders in a fiduciary capacity as derivative plaintiffs. Plaintiffs had repeatedly misled the Court and delayed litigation. The only plaintiff with any remaining interest in Mirror Image owned only a small amount of stock. Thus, the Court found plaintiffs to be inadequate derivative plaintiffs.
Finally, the Court addressed defendants’ application for attorneys’ fees in connection with the motion to compel. The Court determined that defendants were not entitled to the full expenses they sought based upon the excessive number of hours spent by defendants’ New York counsel in drafting two briefs written in connection with the motion to compel. Nonetheless, because plaintiffs’ conduct necessitated the motion to compel, the Court only trimmed defendants’ requested fees by 25%.