May 29, 2015 Practice Points

Delaware Bankruptcy Court Rules in In re SS Body Armor I, Inc.

By Marcos A. Ramos

The Delaware Bankruptcy Court recently determined that a shareholder’s right to move the Delaware Chancery Court to compel a shareholder meeting is not stayed by operation of the automatic stay, although the bankruptcy court retains the authority to enjoin the occurrence of the meeting (or any actions taken at such meeting) if the court concludes that there is “clear abuse,” as defined by the court to include delay and “real jeopardy” to the debtor’s ability to reorganized. In re SS Body Armor I, Inc., Case No. 10-11255 (Bankr. D. Del. Apr. 1, 2015) (CSS).

The movant filed for relief from the automatic stay to file and prosecute a proceeding before the Delaware Chancery Court to compel the debtor to hold an annual shareholder meeting.  Under Delaware’s General Corporations Law (DGCL 211(c)), the chancery court may summarily order a meeting to be held upon the application of any stockholder if the company fails to hold one within a period of 13 months. See Del. Code Ann. tit. 8, § 211(c) (West). The movant presented no evidence in support of its motion, instead relying on the (uncontested) fact that the debtor had not held a shareholder meeting in several years. The debtor acknowledged that it had not held a shareholder meeting but argued that the bankruptcy court should deny the motion because the movant wanted to frustrate the debtor’s reorganization plans and prospects.

The bankruptcy court principally relied on the Second Circuit’s Johns-Manville decision (Manville Corp. v. Equity Sec. Hldrs. Cmt. (In re Johns-Manville Corp.), 801 F.2d 60 (2d Cir. 1986)), the Delaware Chancery Court’s decision in U.S. Energy Systems (Fogel v. U.S. Energy Systems, Inc., 2008 WL 151857 (Del. Ch. Jan. 15, 2008)) and the Delaware District Court’s decision in In re Marvel Entm’t. (Official Bondholder Cmt. v. Chase Manhattan Bank (In re Marvel Entm’t Grp., Inc.), 209 B.R. 832 (D. Del. 1997)). According to the bankruptcy court, these authorities demonstrated that: (1) a shareholder’s right to move to compel a shareholder meeting continues after a bankruptcy filing; (2) the automatic stay provisions of the Bankruptcy Code generally are not implicated by a shareholder’s exercise of its governance rights; and (3) the bankruptcy court has the authority to enjoin the exercise or implementation of such rights if the court finds clear abuse, which includes delay or other threats to the debtor’s prospects for or ability to reorganize.

In light of these authorities, the court concluded that the automatic stay did not apply to stay the movant’s proposed action and granted the movant’s motion on that basis. While the court also noted that there appeared to be grounds on which the court could make a finding of clear abuse, it also determined that it could not issue an injunction because an injunction must be sought in an an adversary proceeding under Fed. R. Bankr. Proc. 7001(7).

Marcos A. Ramos – May 29, 2015