LAMB, Vice Chancellor.
On August 22, 2003, the Delaware Supreme Court remanded this matter with a request for an explanation whether the holding of this court's decision now on appeal (the "Opinion") "turned on the view that Stirling [the plaintiff-appellant] attempted to evade federal securities laws and whether Stirling is correct that no one argued [that point] below. . . ." This is my report on those questions.
Clabault v. Caribbean Select, Inc., 805 A.2d 913 (Del.Ch. 2002).
Question 1
The complaint in this matter sought relief pursuant to Section 211(c) of the Delaware General Corporation Law. As explained in the Opinion, the plaintiff satisfied the statutory elements constituting its prima facie case. Nevertheless, in the exercise of its discretion, this court refused the relief requested for the following reason:
Id. at 918.
[H]ere the record reveals that the order sought from this court is necessary to the success of Stirling's plan to circumvent important registration and disclosure elements of the federal securities laws. At least on this record, the court is unwilling to exercise its discretion to assist in the execution of a plan to achieve that result. Notwithstanding [Ms. Sally] Fonner's assurance about her ambition to clean up a "scum business, " this court is unwilling to use its powers to assist Stirling to profit by the sale of regulatory avoidance.
Thus, it is fair to say that the Court's ruling "turned on a view that Stirling attempted to evade federal securities laws."
Question 2
It is not true, however, that this conclusion came as a surprise to either Stirling or its counsel. On the contrary, it is perplexing that the appellants are able to even make such an argument on appeal since a principal focus of the proceedings in this court was the interplay between the plaintiffs' planned activities, Delaware corporation law, and the registration requirements of the federal securities laws.
To put the matter in context, this case and the three related cases on appeal were filed within a few days of each other and were presented to me in chambers as routine matters for entry of a final order without a hearing. Several things gave me pause. First, in five years as a Vice Chancellor, I had never seen an application of this sort. Second, I noticed from the assignment sheets that a large number of similar sounding actions were filed more or less simultaneously, four of which were assigned to me. Third, after reviewing all four of those files, it was apparent that those cases were all filed on behalf of the same entity, Stirling Corporate Services, LLC, and all presented the same idiosyncratic fact pattern. Finally, although none of the papers filed in support of the application disclosed Stirling's ultimate purpose in seeking relief under Section 211(c), I was able to discern that its purpose in seeking stockholder meetings was to use these long-defunct corporations as vehicles for other, privately held corporations to "go public" through "reverse mergers" without the need to comply with the usual array of federal regulations designed to protect public investors.
This action is one of four similar petitions, all brought by plaintiff Stirling, as a beneficial owner of common stock, in conjunction with the record stockholder from whom Stirling acquired its beneficial ownership. The other thee actions are as follows: Talley v. Hitech Eng'g Co., C.A. No. 19658 (filed May 31, 2002), appeal pending No. 518, 2002 (Del.); Lang v. Engineered Sys. Dev. Corp., C.A. No. 19681 (filed June 4, 2002), appeal pending No. 516, 2002 (Del.); and Shaw v. Stochastic Models, Inc., C.A. No. 19682 (filed June 4, 2002), appeal pending No. 517, 2002 (Del.).
As described in the opinion, each of the four defendant corporations was a Delaware corporation that had once had a publicly traded class of common stock, had become bankrupt many years earlier, and had become void either for failure to pay its franchise taxes or for failure to appoint a successor registered agent. 805 A.2d at 914, n. 1.
These issues caused me to contact plaintiffs' counsel, Craig B. Smith, Esq., who informed me that one of the other members of this court had recently signed exactly the same type of order without a hearing and urged that as precedent. I told him that I would not sign the order without a better understanding of the regulatory issues involved and that the other member of the court had done so only because he assumed from the manner in which the application was presented that the issues were routine. I agreed to hold a hearing for the purpose of taking testimony, and held that hearing on June 18, 2002.
At the beginning of the June 18 hearing, I specifically expressed my interest in hearing testimony about the interplay between the planned "reverse merger" and the federal securities regulatory process. I also stated my skepticism "at the idea of taking defunct companies . . . and using them as vehicles for other nonpublic companies . . . taking on the attributes of publicly-traded companies." I went on to emphasize at the outset my concern that a proceeding under Section 211(c) "not be an instrument of engaging in activity that is frowned upon by the SEC or by other federal securities regulators, to permit people who are shareholders in . . . private companies access to public securities markets without going through the normal registration process."
Tr. of June 18, 2002 Hearing, at 6.
Id. at 7.
Because there was no one at the hearing to oppose the application, it fell to the court to ask the witnesses questions. In order to develop a record, I asked a number of questions relating to the regulatory issues already identified. At the end of the hearing, I again expressed my concerns about the purpose for which the plaintiffs were seeking relief under Section 211(c). For example, I stated my concern that, when the "reverse merger" ultimately was done, it would be "done in a way that permits people who own securities that are privately held to sell them in the market to unsuspecting people on the basis of inadequate information." I also specifically invited Mr. Smith to furnish the court with additional information about the SEC's approach to these matters.
Id. at 68.
Stirling's post hearing memorandum contains a section entitled "The Regulatory Environment, " but it added little to the mix of information developed at the hearing. In the end, as already noted, I was satisfied that the Section 211(c) order Stirling sought was "necessary to the success of Stirling's plan to circumvent important registration and disclosure elements of the federal securities laws." For that reason, I refused to exercise my discretion in favor of granting the relief sought.
805 A.2d at 918.
As the foregoing should amply demonstrate, it is surprising to me that Stirling could suggest that it was taken by surprise by the conclusions reached in my opinion. It may be literally true that "no one argued below . . . that Stirling's plans were a scheme to evade" the federal securities laws. But this is only true in the sense that Stirling was the only party to appear before the court and, thus, the only party to make arguments. Nevertheless, Stirling was fully aware that the court was concerned that Stirling was engaged in just such an evasive scheme and that the Court was wary of using its powers to aid in the accomplishment of that end. Only after affording Stirling a hearing and the opportunity to make post-hearing submissions, did the court conclude that its concerns were well founded and deny the relief sought.