HLSP Holdings Corp. v. Fortune Management
The Delaware Supreme Court held in HLSP Holdings Corp. v. Fortune Management Inc., No. 374, 2009, 2010 WL 528470 (Del. Feb. 15, 2010), that shareholders of a corporation, not the corporation itself, suffered any injury caused by Fortune Management Inc. ("Fortune"), when Fortune failed to timely register stock it agreed to transfer to HLSP Holdings Corp. ("HLSP") shareholders pursuant to a merger agreement. Accordingly, the Supreme Court rejected HLSP's breach of contract claim and affirmed the Superior Court's grant of summary judgment in favor of Fortune. The Delaware Supreme Court confirmed that such a claim must be brought by the shareholders and not the corporation.
HLSP Holdings Corp. v. Fortune Management
HLSP, a dissolved Puerto Rico corporation, was a private equity management firm with five stockholders. Fortune is a Delaware corporation with its principal place of business in Zug, Switzerland. On July 7, 2005, Fortune and HLSP entered into a merger agreement under which HLSP agreed to transfer its private equity assets to a newly formed Fortune subsidiary in exchange for 33,584,600 shares of Fortune common stock ("Fortune Stock"). The parties agreed that this exchange would be a Type-C tax-free reorganization under section 368(a)(1)(c) of the Internal Revenue Code of 1986, and section 1112(g)(1)(C) of the Puerto Rico Internal Revenue Code of 1994. The parties further agreed that promptly following the closing date, HLSP would proceed to liquidate and distribute the shares of Fortune Stock to its shareholders in exchange for their shares of HLSP.
On or about September 5, 2005, Fortune transferred the Fortune Stock to HLSP's account; however, the shares were not registered and made freely tradable until at least August 24, 2007. As a result of this delay, HLSP filed suit against Fortune in Delaware Superior Court, alleging that Fortune breached the merger agreement when it did not register the Fortune Stock in a reasonable amount of time after the July 7, 2005, closing date. During the Superior Court proceedings, Fortune moved for summary judgment alleging that HLSP, a dissolved corporation, was not injured by the alleged breach of contract, and that only the individual shareholders of HLSP could bring such a claim. The Superior Court granted Fortune's motion for summary judgment, and the Supreme Court heard the case on appeal.
The Supreme Court affirmed the decision of the Superior Court. The Supreme Court determined that Fortune's failure to make the stock freely tradable and to register the stock promptly could only have caused injury to the stockholders who received the unregistered and unmarketable Fortune Stock. The court reasoned that HLSP "served merely as a conduit for what in fact became an in kind distribution of Fortune stock to others." As a result, the Delaware Supreme Court found HLSP did not have standing because HLSP had suffered no direct injury as a result of Fortune's registration delay.
This article is presented for informational purposes only and is not intended to constitute legal advice.
