In this memorandum opinion, the Court of Chancery held that plaintiff note holders waived their statutory right to seek appointment of a receiver for a debtor corporation where the notes they purchased were subject to clear language in a “No-Action Clause” of the governing indenture, which prohibited such action unless certain requirements were met. The Court recognized the “importance” of a receivership remedy for creditors and stockholders, but held that its value does not justify “the judicial setting aside of contractual curtailments of statutory causes of action entered into by sophisticated parties.”
Plaintiffs are note holders of Savient Pharmaceuticals, Inc. (“Savient” or the “Company”), whose principal asset is the worldwide ownership and license rights of the drug KRYSTEXXA. Believing that Savient’s continued investment in the drug was depleting its cash reserves to the harm of the Company’s creditors, plaintiffs filed suit seeking, among other things, declaratory relief that the Company was insolvent and the appointment of a receiver pursuant to Section 291 of the DGCL. Defendants moved to dismiss plaintiffs’ receivership claim for lack of standing because plaintiffs did not meet the pre-suit requirements of a No-Action Clause (“NAC”) in the indenture, which limited actions that may be brought against the Company by the note holders, including the appointment of a receiver. Specifically, defendants argued that plaintiffs did not make demand on the indenture trustee, and even if they had, there had not been an event of default triggering the note holders’ right to bring an action in the first place. Plaintiffs contended, however, that the indenture’s pre-suit requirements do not apply to statutory receivership actions, but only to those claims arising directly from a provision of the indenture. The Plaintiffs also argued that, even if statutory actions are covered by the NAC, the Company experienced an event of default, which rendered demand on the trustee futile due to the trustee’s purported dual obligations to Savient’s secured and unsecured note holders. The parties cross-moved for summary judgment on the issue of whether an event of default occurred.
The Court first held that the NAC does in fact apply to statutory receivership actions. Looking at the plain language of the indenture, the Court explained that the NAC is not limited to claims arising directly from a provision of the indenture, but rather applies to all actions available to a plaintiff by virtue of its status as a note holder. Plaintiffs argued that such a limitation should be void as a matter of public policy due to the importance of a creditor’s or stockholder’s right to seek a receivership. The Court disagreed, noting the sophistication of the parties and the fact that DGCL Section 291 (pertaining to statutory receiverships) permits, rather than mandates, the appointment of a receiver, and nothing in the statute suggests it cannot be waived contractually. Therefore, plaintiffs were required to satisfy the demand and other pre-suit requirements before bringing suit.
The Court further held that plaintiffs did not satisfy those pre-suit requirements, in part, because Savient had not experienced an event of default. Plaintiffs attempted to rely on a provision of the indenture providing that a receivership action left undismissed and unstayed for a period of 30 days triggers an event of default. While that provision, in isolation, supported plaintiffs’ argument, the Court instructed that the indenture must be read as a whole. Because plaintiffs’ statutory receivership claim was barred by another provision of the indenture, allowing the claim to succeed via the 30-day trigger contravened the intent of the parties and put plaintiffs in a better position than they would have been had they complied with the terms of the indenture. The Court thus granted defendants’ motion to dismiss plaintiffs’ receivership claim, as well as its motion for summary judgment seeking a declaration that an event of default did not occur.
The full opinion is available here.