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Chancery Court Grants Summary Judgment for Dissolution of Corporation owned 50% by Two Stockholders Where Judicial Admissions Establish Prerequisites for Intervention

In Benjamin Feldman v. YIDL Trust, C.A. No. 2017-0253-AGB (Del. Ch. November 7, 2017), plaintiff Benjamin Feldman brought a motion for summary judgment under Court of Chancery Rule 56 for dissolution of a jointly-held Delaware corporation pursuant to 8 Del. C. § 273. The Delaware Court of Chancery granted the motion, holding that YIDL Trust made voluntary and knowing concessions of fact during the judicial proceedings that conclusively established the prerequisites for a judicial order of dissolution under Section 273.

This case arises out of a dispute amongst family members regarding the use and disposition of a boat, named the M/V Nervous Wreck (the “Boat”), which is the sole asset of a Delaware corporation, Royston, Inc. (the “Company”). Howard and Roberta Feldman (the “Feldmans”) are the grandparents of Benjamin Feldman (“Benjamin”). The Feldmans formed the Company in 1995, and are the trustees of YIDL Trust (the “Trust”), which the Feldmans established in 2012 to be the record owner of the Company. In 2016, the Trust transferred 50% of the Company’s stock to Benjamin in consideration for maintenance costs Benjamin had incurred, in the amount of approximately $45,000. Howard Feldman (“Howard”) and Benjamin were the Company’s only directors and officers.

On April 4, 2017, Benjamin filed a petition to dissolve the Company, and the Trust opposed. After the Trust’s counsel withdrew in December 2017, the Trust began to represent itself in the proceedings pro se. In December 2017, Benjamin moved for summary judgment and requested appointment of an independent receiver to oversee disposal of the Boat and dissolution of the Company. The Trust opposed, arguing that disputes about ownership of the Company’s shares and distribution of the proceeds on wind-up of the Company should pre-empt any dissolution order.

The Court granted the motion to dismiss because judicial admissions by the Trust unequivocally established the minimum standards for dissolution of a joint-venture pursuant to Section 273. Section 273 provides a mechanism for dissolving a corporation comprising two 50% stockholders when one owner wishes to discontinue the joint venture and the parties cannot agree on a plan of dissolution together. The pre-requisites for a judicial order of dissolution pursuant to Section 273 are (1) two 50% stockholders that (2) are engaged in a joint venture, about which (3) they are unable to agree on whether to discontinue business or how to dispose of its assets. When these criteria are met, the Court’s discretion is limited to determining whether a bona fide inability to agree exists between the owners of the joint venture, that is, whether the request for judicial intervention was made in bad faith.

The Court found that the filings established indisputably that Benjamin and the Trust were engaged in joint venture (ownership of the Boat), which Benjamin wished to discontinue and about which Benjamin and the Trust were unable to agree on disposition. The only open question was Benjamin’s 50% ownership of the Company. The Trust argued that Benjamin was not a legitimate owner of the Company’s stock because Benjamin allegedly used deception to acquire his inheritance early. The Trust argued Benjamin was intended to receive Company stock only after the Feldmans’ deaths. The Company’s minute book and filings by the Trust, however, told a different story. Not only did contemporaneous corporate records (including a stock certificate signed by Howard) corroborate Benjamin’s ownership, but also the Trust admitted in its answer during the proceedings both that the Trust had transferred a 50% ownership to Benjamin, and that Benjamin was a 50% owner of the Company.

Although the Court viewed the Trust’s admissions viewed leniently because of its pro se status, the Trust made the statements concerning Benjamin’s ownership of the Company while being represented by counsel. The Court ruled these concessions by the Trust amounted to judicial admissions, providing conclusive and binding evidence against the Trust. Finding no evidence of bad faith, the Court held that dissolution of the Company was warranted pursuant to Section 273 because there was no genuine dispute as to Benjamin’s ownership of 50% of the Company’s stock. The matter was directed to an independent receiver to prepare a plan of dissolution, including reimbursement for the disputed expenses, subject to approval by the Court.

Copyright 2022 K & L GatesNational Law Review, Volume VIII, Number 87
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About this Author

Christopher H Cunningham, corporate law, transactional law, Seattle, Washington, K L Gates, public finance
Partner

Chris Cunningham is a partner with over 20 years of experience in corporate and transactional law. He has substantial experience in domestic and international mergers and acquisitions, the representation of start–up organizations and emerging growth companies, software and video game companies, and capital markets. In the area of capital markets, Chris’ practice includes private and public offerings of equity and debt securities of U.S. and international issuers, with an emphasis on transactions involving clients based in Asia.

Professional/...

206-370-7639
William Smith, KL Gates Law Firm, Venture Capital Attorney
Associate

Will Smith is an associate in the firm’s Seattle office.

206-370-5795
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