The Court of Chancery’s memorandum opinion in Eluv Holdings (BVI) Ltd. v. Dotomi, LLC awarded a defendant company summary judgment on plaintiffs’ claim for declaratory judgment regarding their purported ownership of defendant’s stock.  According to the Court, plaintiffs’ claim that they exercised an option for shares in 2004, and did not discover that the exercise was invalid until 2011, was contradicted by the evidence and time-barred under the doctrine of laches.

The underlying dispute involved whether plaintiffs validly executed an option to purchase defendant’s stock that plaintiffs had received as compensation for services performed from 2000 to 2003.  The option was granted to plaintiffs’ company, Eluv Holdings (BVI) Ltd. (“Eluv”), an entity organized under the laws of the British Virgin Islands, which held the option in trust for plaintiffs.   Plaintiffs argued that the option was executed in 2004, and that they were entitled to compensation received in a 2011 merger involving defendant company.  After defendant denied that such option was ever properly executed, plaintiffs filed an action for a declaratory judgment in late 2011.  In the parties’ cross motions for summary judgment, plaintiffs argued they were entitled to compensation, while defendant contended that plaintiffs’ claims were barred by the doctrine of laches.  Specifically, defendant argued that the three-year statute of limitations for breach of contract claims applied by analogy, and that plaintiffs’ claims accrued no later than 2005, thus expiring in 2008.  In response, plaintiffs argued that a traditional laches analysis applied because their claims were not analogous to a breach of contract claim, that their claims were tolled until 2011 even under a statute of limitations analysis, and that defendant was equitably estopped from asserting a defense of laches.

The Court agreed with defendant that the three-year statute of limitations period applied, as plaintiffs’ action to enforce the option agreement was sufficiently analogous to a breach of contract claim.  The Court noted that the only difference was that plaintiffs sought an equitable remedy through a declaratory judgment that plaintiffs were the owner of shares, as opposed to a claim for damages, which is enforced in a court of law.

The next question addressed when plaintiffs’ cause of action arose.  Defendant argued that the cause of action arose in June 2005, when the parties had their last communication regarding plaintiffs’ allegedly improper attempt to exercise the option.  Plaintiffs, on the other hand, claimed that it was not until August 2011 that they learned defendant refused to recognize them as shareholders.  The Court held that the burden was on plaintiffs to demonstrate that they reasonably believed defendant recognized them as shareholders from July 2004, when plaintiffs claimed they exercised the option, to August 2011.  The evidence, however, showed that defendant’s stock ledgers during the period listed Eluv as an option holder, rather than a shareholder, and plaintiffs did not possess stock certificates that would suggest otherwise.  Additionally, emails between the parties from 2004 and 2005, even when construed in a light most favorable to plaintiffs, evidenced that defendant did not believe plaintiffs had effectively exercised the option.  Thus, plaintiffs were on notice that defendant did not consider them shareholders, and their cause of action began to accrue no later than June 2005.

Plaintiffs argued that even if a three-year statute of limitations period applied, the period was tolled until 2011 due to defendant’s conduct, which allegedly misled plaintiffs into thinking the options had been exercised, and that the only issue was whether the underlying shares could be transferred directly to plaintiffs as opposed to Eluv.  As with plaintiffs’ argument regarding when the cause of action arose, however, the Court held that “[t]he evidence overwhelmingly demonstrates that a reasonable person would have been on notice in 2005 that, at least from [defendant’s] perspective, more was required to exercise the Option.”  In addition to plaintiffs’ emails, and the lack of stock certificates or other shareholder information in their possession, the Court noted that plaintiffs never paid the par value price to exercise the options, as required under Delaware law.  Moreover, when plaintiffs attempted to exercise the option on behalf of Eluv in 2004, the company was no longer a registered company in the British Virgin Islands, and consequently did not have legal authority to assert its rights under the option agreement.  Furthermore, the Court noted the relative ease with which plaintiffs could have discovered their injury, such as through an email to defendant asking for confirmation of the option’s exercise, as well as plaintiffs’ apparent motivation not to pursue the option until 2011 after it acquired value from the merger.

Finally, the Court held that even if a traditional laches analysis applied, plaintiffs’ claims would be time-barred.  The evidence demonstrated that plaintiffs had knowledge of their claim in 2005, unreasonably delayed six years (twice the analogous limitations period) in bringing the action, and that the delay caused defendant prejudice.  Specifically, the Court noted that defendant had already paid the merger consideration to its shareholders, that memories had faded regarding the option agreement and related communications, and that the defendant had gone through several significant corporate changes since it entered into the agreement.  Although plaintiffs argued that defendant was equitably estopped from asserting a laches defense, the same body of evidence rebutted that claim, as plaintiffs had the means to discover the truth of the facts in question and could have chosen not to rely on defendant’s alleged misrepresentations.

The full opinion is available here.