Home -> Law Blog Directory -> Litigation Blogs -> Delaware Corporate and Commercial Litigation Blog

Litigation

: Delaware Corporate and Commercial Litigation Blog

Delaware Chancery Court Appoints Custodian for Deadlocked Corporation

By Francis G. X. Pileggi, Esq.

Miller v. Miller,  2009 Del. Ch. LEXIS 16 (Feb. 10, 2009). This Delaware Chancery Court opinion appointed a custodian (for a limited time and with limited authority),  for a corporation owned 50/50 by two brothers. The appointment was pursuant to Section 226 of the Delaware General Corporation Law (DGCL).

The same vice chancellor who authored this opinion issued a decision a few days earlier appointing a liquidating trustee for an LLC (as opposed to the corporation in this case), owned 50/50 by two doctors, pursuant to Section 18-803 of the LLC Act, in part because the 50/50 members could not agree on the winding-up of the entity after a dissolution. I highlighted that case on the blog here.

Both of these cases should be read in full by those corporate litigators who often deal with an impasse or contests for control  in a closely-held entity.

The court noted the its power of appointment under DGCL Section 226 was discretionary, but recognized that although the parties could pursue mediation on their own, the appointment of a custodian could serve in some sense as a "mediator in residence".

Although the court realized that a custodian would not solve all the stalemate-type problems experienced by the parties, and that liquidation was not a power granted to the custodian, some of the benefits of appointing a custodian would include:

• breaking any tie votes between the two directors (who were also the 50/50 shareholders), even if there was no apparent "irreparable operational disagreement".
• Although, the court emphasized that a deadlock alone is not per se sufficient to appoint a custodian, it was one of the factors present here that supported the decision.

The appointment  of the custodian was only for a limited duration of two years.The limited powers bestowed on the custodian appointed in this case included the following:

1. break deadlocks between directors;
2. resolve operational stalemates;
3. participate with the power of a director if one is unable to serve;
4. seek to resolve the impasse over the future of the company.

As in the related case mentioned above, the court encouraged the parties to stipulate to a particular person to be chosen for this neutral role, otherwise the court would decide who to select.

Full post as published by Delaware Corporate and Commercial Litigation Blog on February 22, 2009 (boomark / email).