When applicable, former D&Os of Delaware corporations will rely upon a release from the company to shield liability against class action or derivative lawsuits filed thereafter. The recent decision of Seiden v. Kaneko, C.A. No. 9861-VCS (Del. Ch. Mar. 23, 2017) is an interesting read on the effectiveness of such a release.
The action was pursued by a receiver appointed to a Delaware holding corporation, Southern China Livestock, Inc. (“SCLI” or “the Company”), which owned a non-public, China-based operating company. After accepting capital infused from U.S. based investors, the Company “went dark”, leaving the investors to find ways to recover their investment. The Company’s former president, Shu Kaneko, was located in the United States, and a receiver was appointed to recover amounts that Kaneko had allegedly diverted from the company accounts.
After Kaneko resigned from the Company but prior to the initiation of this litigation, the Company gave him a general release of claims (the “Release”) in exchange for his commitment to assist the Company in taking certain steps to firm up its capital structure in anticipation of a potential sale of the Company to a private equity firm. Kaneko moved for summary judgment on the ground that the receiver’s claims are barred by the Release.
The receiver argued that the release fails for lack of consideration, for three reasons: (a) the Release should be disregarded because Kaneko’s control over SCLI prevented SCLI from entering into an arm-length agreement with him; (b) the Release was not supported by valid consideration; and (c) the individual who controlled the Company lacked authority to enter into the Release on behalf of the Company.
The Court disagreed with each of these reasons. The Court found that no evidence existed that Kaneko controlled SCLI at the time of the Release. The Court also found that the Release was legally valid. Finally, the Court rejected the assertion that the individual who controlled the Company lacked authority to enter into the Release. Accordingly, the Court found that the Release is binding and enforceable and that it releases Kaneko from all claims asserted against him in this litigation.
[UPDATE: On December 15, 2017, the Delaware Supreme Court entered an order affirming the Court of Chancery’s decision.]
This decision demonstrates the risks that investors take when they invest money into a foreign country in which collecting upon a judgment is difficult. Here, the investors likely spent significant sums of money first to obtain the appointment of a receiver, and then to fund the present litigation. As a result of the Release, the plaintiffs may be left with little or no recourse in practice. Thus, investors must take appropriate safeguards to protect their investment.