In the recent decision of Kleinberg v. Aharon, C.A. No. 12719-VCL (Del. Ch. Feb. 3, 2017), the Court of Chancery appointed a custodian over a Delaware corporation under Section 226 of the Delaware General Corporation Law (“DGCL”) to break deadlock. A voting agreement allowed for 6 board seats, 3 of which were controlled by Defendant Refeal Aharon, the founder and CEO of Applied Cleantech, Inc. (“Applied Cleantech” or the “Company”). Aharon had traditionally appointed only 2 directors, but fearing that a 3-2 majority had formed against him, he appointed a 3rd director, which caused a 3-3 split on various issues at a meeting.
Under Section 226(a)(2), the court may appoint a custodian when:
The business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division[.]
Notably, the custodian was appointed with limited powers. In this regard, the Court cited to case law stating that the appointment of a custodian is not mandatory. Accordingly, the Court appointed a custodian “with the power to vote as a seventh director and the authority to take additional steps to resolve the deadlock.”
For a prior post on a demand for the appointment of a custodian of a Delaware corporation, click here.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at email@example.com.