In this memorandum opinion, the Court of Chancery dismissed without prejudice a petition seeking a declaration that board and stockholder ratification cured invalidly issued shares, because, in the absence of an actual controversy, the petition sought an impermissible advisory opinion.
In 2005, the petitioner’s predecessor (“Old Energy Group”) listed its shares on the over-the-counter market using the CUSIP number of another publicly registered, yet bankrupt, corporation. As a result, when Old Energy Group engaged in a reverse stock split, the Depository Trust & Clearing Company (“DTC”) erroneously delivered the shares previously issued by the bankrupt corporation to Old Energy’s transfer agent, which, in turn, erroneously issued shares of Old Energy Group to DTC. In 2008, the Securities and Exchange Commission (the “SEC”) suspended trading in Old Energy Group’s shares, alleging that Old Energy Group had engaged in “corporate hijacking” by usurping the identity of the bankrupt corporation.
Unable to access the public markets due to the SEC suspension, Old Energy Group merged with and into a Delaware corporation whose shares traded on the over-the-counter quotation board. The issued and outstanding shares of the post-merger corporation (“New Energy Group”) included shares derived from shares of the bankrupt corporation (the “Subject Shares”).
In 2010, due to uncertainty about the Subject Shares, DTC suspended trading and settlement services in New Energy Group’s shares. Subsequently, New Energy Group’s board of directors, acting by written consent, and two New Energy Group stockholders holding more than 96% of the voting power, also acting by written consent, resolved that the Subject Shares be recognized as freely transferable shares of New Energy Group’s outstanding common stock. New Energy Group, the petitioner in this action, sought a declaration pursuant to Section 225(b) of the General Corporation Law of the State of Delaware that the Subject Shares be recognized as part of the corporation’s tradable common stock.
The Court explained that Section 225(b), which authorizes a corporation to file a petition in the Court of Chancery to determine the result of a vote of stockholders, does not create a means by which a corporation can seek an advisory opinion from the Court. The Court stated that if New Energy Group had brought a breach of contract action against DTC for suspending trading in its shares, there would be a litigable controversy between parties whose interests are adverse. As New Energy Group sought a determination of whether the stockholder ratification validated the invalidly issued shares, and not a ruling on a contested vote, New Energy Group did not present an actual controversy sufficient to warrant adjudicating the dispute. In reaching its decision, the Court recognized that the General Assembly had recently amended Section 225(b) to grant corporations standing to bring petitions thereunder, but found that the amendment did not relax the requirement for an actual controversy warranting relief.
The Court also noted that it must “tread carefully” when granting equitable relief in derogation of established principles of corporate law, such as when asked to validate invalidly issued shares, and expressed concern that New Energy Group attempted to access the public markets without an initial public offering by “circumvent[ing] the regulatory protections provided by the federal securities laws.”
The full opinion is available here.