If you are a shareholder of a deadlocked Delaware corporation, and the company is immobilized by such dissension, then a remedy exists for you under Delaware law.  This post will address those circumstances in which the Court will appoint a custodian or a receiver over a corporation.

What Mechanism Can Shareholders Use To Appoint a Custodian or Receiver of a Corporation for Deadlock or Other Reasons?

Section 226 of the DGCL authorizes any stockholder to petition the Court of Chancery to appoint a custodian to manage the affairs of the corporation when the corporation is deadlocked. Alternatively, Section 226 can be utilized in the event that the corporation has abandoned its business and failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. However, appointment of receivers of an insolvent corporation is generally made under Section 291 of the DGCL, given its broader and more permissive provisions.

Under What Circumstances Will the Court Appoint a Custodian or Receiver of a Corporation Under Section 226?

• The stockholders are so divided they cannot elect successors.

• The business of the corporation is suffering orthreatened with irreparable injury because the directors are so divided that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division.

• The corporation has abandoned its business and failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.

What Must Be Shown To Obtain a Custodian When There Is a Shareholder Deadlock?

It must be shown that the stockholders cannot reach a consensus as to those individuals who are to manage the day-to-day affairs of the corporation.

What Must Be Shown To Obtain a Custodian When There Is Director Deadlock?

• The corporation must be suffering or threatened with irreparable injury.

• The injury must result from the inability of the board to muster sufficient votes to take action as a result of the division of opinion.

• The deadlock of the board must not be one that can be terminated by action of the shareholders of the corporation.

Who Can Be Appointed as a Custodian of a Corporation?

A judicial custodian should be impartial, and therefore he or she must not be a stockholder or a creditor of the corporation or any of its subsidiaries or affiliated companies. He or she should have a proven business and executive background suited in particular to the corporation’s primary field of business.

What Is the Scope of the Power of the Custodian?

The custodian is empowered to:

• take charge of the corporate assets, estate, effects, business and affairs;

• collect the outstanding debts, claims and property belonging to the corporation;

• prosecute and defend, in the name of the corporation, all claims or suits; and

• do all other acts that are necessary and proper.

However, the powers given to the custodian will be limited and exercised only insofar as the goals of fairness and justice require.

What Is the Process for Appointment of a Receiver of an Insolvent Corporation Under Section 291 of the DGCL?

Under Section 291, whenever a corporation is insolvent, any creditor or stockholder of a corporation may petition the Court of Chancery to appoint one or more persons to be receivers of the corporation.

What Are the Functions of a Receiver of an Insolvent Corporation Under Section 291 of the DGCL?

• Take charge of the corporation’s assets, estate, effects, business and affairs;

• Collect the outstanding debts, claims and property due and belonging to the corporation;

• Prosecute and defend, in the name of the corporation or otherwise, all claims or suits, to appoint an agent or agents under them; and

• Do all other acts that might be done by the corporation and be necessary or proper.

Carl D. Neff is a lawyer 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 cneff@foxrothschild.com.