By Potter Anderson & Corroon LLP From JDSupra

Darby Emerging Markets Fund, L.P. v. Ryan, C.A. No. 8381-VCP (Nov. 27, 2013) (Parsons, V.C.)

In this memorandum opinion, the Court denied defendants’ motion to dismiss for lack of subject matter jurisdiction and failure to state a claim, holding that, under the equitable cleanup doctrine, the Court had jurisdiction over a dispute relating to minority shareholder put rights and that plaintiff had adequately pled a claim for anticipatory breach of contract.

Plaintiff Darby Emerging Markets Fund, L.P. and defendants Gregory J. Ryan, Paulo de Brito, and BIH Limited were parties to a shareholders’ agreement that set forth the management structure of, and plaintiff’s minority shareholder rights in, a Cayman Islands entity known as Atlantica Hotels International, Ltd. (the “Company”).  The shareholders’ agreement provided that defendants would control the Company, while plaintiff could exercise a put right in the event of a “fundamental dispute” concerning the management, business, or strategic direction of the Company.  The Company’s articles of association conferred an identical put right on plaintiff.

After plans to sell the Company failed and defendants rejected plaintiff’s requests to discuss an immediate sale of the Company, plaintiff submitted a notice of dispute under the shareholders’ agreement and exercised its right to convene a meeting of the Company’s Board of Directors.  Although the Company ultimately agreed to begin an immediate sale process, plaintiff filed suit after the parties failed to reach a complete agreement on the structure and timing of a sale, as well as certain restrictions on plaintiff during the sale process.  In its complaint, plaintiff alleged that, by repudiating plaintiff’s put right and stating that they would not pay for plaintiff’s shares, defendants had breached the put right conferred by the shareholders’ agreement and the Company’s articles of association.

Almost immediately after plaintiff filed its complaint, one of the defendants, BIH Limited, filed a complaint in Delaware Superior Court requesting (1) a declaratory judgment that there was not a “fundamental dispute” that would entitle plaintiff to exercise its put right or, failing that, (2) an extension of the dispute resolution period 10 days from the date of the Court’s disposition of the case.  Plaintiff successfully moved to transfer BIH Limited’s complaint to the Court of Chancery on the grounds that the Superior Court lacked subject matter jurisdiction for the equitable relief sought in that action.  BIH Limited’s action was then consolidated with plaintiff’s prior-filed action.

Defendants, on the other hand, moved to dismiss plaintiff’s complaint, which motion was the subject of this opinion.  Defendants argued that the Court of Chancery lacked subject matter jurisdiction over plaintiff’s claims because (1) 8 Del. C. § 111, which confers jurisdiction on the Court of Chancery over matters regarding a corporation’s governance documents, does not extend to non-Delaware entities, and (2) plaintiff was not pursuing an equitable remedy, only a claim for anticipatory breach of contract.  Defendants moved to dismiss on the additional grounds that, because defendants had made no positive and unequivocal statement that they did not intend to perform their obligations with respect to plaintiffs’ put right, plaintiff had not adequately pled a claim for anticipatory breach of contract.  The Court denied defendants’ motion to dismiss in its entirety.

First, the Court considered plaintiff’s argument that, under 8 Del. C. § 111, the Court of Chancery has subject matter jurisdiction over all “corporations,” regardless of their place of incorporation.  Finding no authority supporting the application of the statute to non-Delaware entities like the Company, the Court questioned the reasonableness of plaintiff’s interpretation.  The Court further held that, even if plaintiff’s interpretation were reasonable, conflicting case law would render the statute ambiguous.  To resolve that ambiguity, the Court looked to the statute’s legislative history and found that that the statute was intended to be limited to Delaware corporations.

Next, the Court considered plaintiff’s argument that the Court had subject matter jurisdiction under the cleanup doctrine.  The Court found that because BIH Limited’s complaint, which requested equitable relief, had been consolidated with plaintiff’s complaint, the Court had jurisdiction over at least one claim in the case.  The Court reasoned that obtaining jurisdiction through the cleanup doctrine over the remaining claims, including plaintiff’s claims, was appropriate because plaintiff and BIH Limited had filed mirror-image complaints, their claims were closely intertwined and arose from an identical set of facts, and that failing to do so would undermine judicial efficiency and be contrary to the interests of justice.

Lastly, the Court denied defendants’ motion to dismiss for failure to state a claim for anticipatory breach of contract.  The Court found it reasonably conceivable that there was a “fundamental dispute” regarding the structure and timing of a sale such that plaintiff would be entitled to exercise its put right under the shareholders’ agreement and articles of association.  The Court further found that the facts in plaintiff’s complaint, as well as the relief requested in BIH Limited’s complaint, reflected defendants’ intention to not allow plaintiff to exercise its put right.  As a result, the Court held that plaintiff had pled a claim for anticipatory breach of contract.

The full opinion is available at: http://www.potteranderson.com/uploads/1183/doc/Darby_Emerging_Markets_Fund_v._Ryan_11_27_13.pdf

For more on this story go to:

http://www.jdsupra.com/legalnews/darby-emerging-markets-fund-lp-v-ry-65990/