Microsoft Corp. v. Vadem, Ltd., et al., C.A. No. 6940-VCP (Del. Ch. Apr. 27, 2012) (Parsons, V.C.)

In this memorandum opinion, the Court of Chancery reinforced the internal affairs doctrine while dismissing a complaint brought by Microsoft Corporation in connection with the restructuring of Vadem, Ltd., a computer technology company formed under the laws of the British Virgin Islands.  In so doing, the Court interpreted as a matter of first impression in Delaware and in the British Virgin Islands an aspect of the BVI Business Companies Act of 2004.

The underlying dispute involved a restructuring of Vadem, Ltd. in late 1999 that led to the transfer of its assets into four different operating companies.  One group of assets included valuable patents that were transferred for nominal consideration to Amphus, Inc. (“Amphus”), a now-dissolved Delaware corporation, following misrepresentations made by Vadem, Ltd.’s CEO, Henry Fung, also a 20% stockholder of Amphus.  The day following the transfer, Amphus sold the same patents to another company for much larger consideration.  The Vadem, Ltd. board of directors accomplished the transfer of the company’s assets without a vote of the shareholders, in violation of the company’s Memorandum of Association.  Shareholders, including Microsoft Corporation (“Microsoft”), were only informed of the transfer after the fact, when they were asked to approve a subsequent merger of Vadem, Ltd. into a holding company, Vadem LLC.  During related patent litigation in 2010, Microsoft allegedly discovered the true value of the patents and filed derivative and direct claims against Vadem, Ltd., Amphus, and other parties involved in the transfer.

Defendants moved to dismiss all of the claims, arguing that (1) Microsoft lacked standing under BVI law to bring derivative claims for breach of fiduciary duty on behalf of Vadem, Ltd., and also lacked standing to bring its direct claims for breach of contract, (2) the Court lacked personal jurisdiction over all defendants but Amphus, and (3) Microsoft’s claims were barred by laches.  With regard to the first defense, the Court held that Microsoft had standing for its direct claims, but not for its derivative claims, as the internal affairs doctrine required application of the BVI Business Companies Act of 2004, which in turn required Microsoft to seek and obtain leave from the High Court of the BVI before filing a derivative complaint.  However, the Court found good cause to dismiss Microsoft’s derivative claims without prejudice, as Microsoft raised the novel argument that the BVI statute did not apply to conduct occurring prior to 2004—a matter of first impression in both Delaware and the BVI.  Although the Court disagreed, it found Microsoft’s argument “not unreasonable” and that a dismissal with prejudice would be “unduly harsh.”

Next, the Court found jurisdiction over Vadem, Ltd. under Section 3104(c)(1) of the Delaware Long-Arm Statute.  The incorporation of Amphus in Delaware was deemed an “integral component of the total transaction to which [Microsoft’s] cause of action relates,” specifically, the transfer of the patents from Vadem, Ltd. to Amphus without a shareholder vote.

Finally, having found standing and personal jurisdiction for Microsoft’s direct claims, the Court nevertheless held that those claims were time-barred.  Vadem, Ltd.’s unauthorized transfer occurred in 2000, and the relevant statute of limitations and analogous laches period expired in 2003.  Microsoft argued that the period was tolled under the theories of equitable tolling and fraudulent concealment, but the Court was not convinced.  Even though Microsoft became aware of the true value of the patents in 2010, its claims stemmed not from the inadequate compensation it received from the transfer, but rather the allegation that substantially all of Vadem, Ltd’s assets were transferred without a vote of its shareholders.  That conduct indisputably occurred and was known about back in 2000.

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