COX v. CRAWFORD-EMERY, 3202-VCN (Del.Ch. 11-30-2007)

Cox v. Crawford-Emery, et al.

C.A. No. 3202-VCN.Court of Chancery of Delaware.Date Submitted: October 18, 2007.
November 30, 2007.

James G. McMillan, III, Esquire Montgomery, McCracken, Walker
Rhoads, LLP, Wilmington, DE.

JOHN W. NOBLE, Vice Chancellor.

Dear Mr. McMillan:

Plaintiff Allen Victor Cox brought this action to obtain certain declaratory and injunctive relief and the appointment of a custodian pursuant to 8 Del. C. § 226 for Nominal Defendant Horse Power Ltd., a Delaware corporation (the “Company” or “Horse Power”).

The present controversy stems from Horse Power’s ownership of th Shangri- La, its primary asset, an 82-foot charter yacht moored on the southern coast of

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Turkey.[1] Cox and Defendants David Crawford-Emery and Diane Phillips are Horse Power’s only shareholders and directors. Cox resides aboard the vessel in Mugla, Turkey and has a 50% equity interest in the Company; Crawford-Emery and Phillips reside in Ryton, England and together own the other 50% of the Company.[2] To date, the Defendants have not appeared in this action.[3]

Before the Court is the Plaintiff’s Motion for Preliminary Injunction by which Cox seeks to preclude the Defendants from causing the Company to enter into administration or liquidation, from taking any action varying the terms of his service as a director or employee of the Company, and from taking any steps to diminish his equity interest in the Company.

* * *
According to the Complaint, Horse Power was formed in April of 2003 as a joint venture between Cox and Tayfun Asyali, a resident of Turkey. The

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Company’s certificate of incorporation authorizes 1500 shares of stock;[4] initially, Cox and Asyali each received 750 shares. In the fall of 2005, Asyali sold his shares in Horse Power to the Defendants. As a result of that transfer, on October 11, 2005, Cox and the Defendants entered into a series of agreements which were drafted in England and executed by Cox in Turkey.[5]

One of the agreements the parties executed was the Shareholders’ Agreement, which provides for the Defendants’ registration as shareholders and allocates 750 shares to Cox, 735 to Crawford-Emery, and 15 to Phillips.[6] It also names the three as the Company’s directors.[7] The agreement establishes, among other things, that Cox is captain of the vessel and responsible for its routine business; that Crawford-Emery and Phillips are responsible for marketing; that the shareholders are to exercise their rights so that the Company will not make any material change to the nature of its business or dispose of any capital assets without unanimous shareholder consent; and that the agreement is to be governed by English law, with the parties submitting to the non-exclusive jurisdiction of English courts.[8]

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Cox and Crawford-Emery also executed an option agreement (the “Option Agreement”)[9] and a vessel option agreement (the “Vessel Option”).[10] In the Option Agreement, Cox granted Crawford-Emery the right to purchase his equity interest in the Company at a price to be determined by a surveyor.[11] This option is exercisable beginning November 1, 2011.[12] In the Vessel Option, Cox granted Crawford-Emery the right to acquire 32 shares in the Shangri-La, an interest identified as representing a 50% equity stake in the vessel, again at price to be determined by a surveyor’s valuation.[13] The Vessel Option vested November 1, 2006 and expires October 31, 2016.[14]

The Defendants’ United Kingdom counsel, Paul Dutton, sent Cox a letter regarding the state of affairs within Horse Power on March 20, 2007.[15] In the letter, Dutton described an “untenable,” “irrevocable breakdown” in the working relationship between Cox and the Defendants. Dutton expressed his clients’ concern

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that the Shangri-La, after having been registered in Horse Power’s name in Delaware, also remained on the registry in Jersey, a British Crown dependency. Additionally, Dutton advised Cox that there were two potential options for resolving the parties’ deadlock: either (1) Crawford-Emery would exercise the “Option Agreements” or (2) the Defendants would seek liquidation or administration of the Company in England by virtue of the fact that they were substantial creditors of the Company. In closing, Dutton asked Cox to elect either the first or second option within 10 days.

Writing to Cox again on May 3, 2007, Dutton indicated that the Defendants, not having received a response from Cox, had elected to proceed with both courses of action, pursuing the appointment of administrators in accordance with option 2, as well as exercising the “option to purchase both [Cox’s] shares in the Company and the Vessel pursuant to the Option Agreement dated 11 October 2005” as outlined in option 1.[16] An unsigned “Notice of appointment of an administrator by

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company or director(s)” form was enclosed.[17] Dutton sent Cox an identical letter on May 9, 2007.[18]

Although discussions ensued between Cox’s counsel and the Defendants’ counsel in England, no agreement was reached. Dutton apparently sent emails in May, June, and July to Cox’s counsel. Cox’s counsel sent Dutton an email on August 3, 2007; Dutton did not reply.

Cox filed the original Complaint on September 4, 2007, and his counsel sent a copy to Dutton by email. On September 14, 2007, Cox’s counsel advised Dutton by email that Cox would seek expedited proceedings in Delaware and asked the Defendants to identify their Delaware counsel. There was no response. On September 17, 2007, Cox filed a Motion for Preliminary Injunction and Motion for Expedited Proceedings, again providing Dutton with copies via email. This time Dutton responded, acknowledging receipt of the prior emails and indicating that he was awaiting instructions from his clients. On September 21, 2007, Dutton replied that he had been instructed not to accept service or appear in the matter. The Court

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heard oral argument on the Plaintiff’s Motion for Preliminary Injunction on October 18, 2007. The Defendants did not appear.

* * *
Cox contends that the Defendants have threatened to seize control of the Company improperly through the Option Agreement and the Vessel Option and to use the English courts, through their status as creditors, to force the sale of the Shangri-La and the Company’s liquidation. Cox urges that these actions warrant a preliminary injunction.

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A party seeking interim injunctive relief must satisfy a familiar, exacting standard, namely, “the moving party must demonstrate a reasonable probability of success on the merits, that absent injunctive relief irreparable harm will occur, and that the harm the moving party will suffer if the requested relief is denied outweighs the harm the opponents will suffer if relief is granted.”[19] A motion seeking interim injunctive relief asks a court to take a step that is properly labeled “extraordinary.”[20] A preliminary injunction order requires a court to make a preliminary determination

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of a case’s merits prior to a final adjudication. The reason for departing from the usual rule that a decision on the merits must occur only in a rigorous merits-based procedural setting is that necessity mandates such a departure.[21] Necessity in this context refers to the prevention of irreparable harm. Without necessity, without the risk of irreparable harm, “a preliminary adjudication would have the characteristics of an advisory opinion.”[22] Where there is no threat of imminent, irreparable harm, preliminary adjudication of the merits would prove an “unnecessary academic exercise.”[23]

Assuming the facts to be as pled in the Complaint and drawing reasonable inferences in the Plaintiff’s favor, the Court concludes that Cox has failed to show the requisite threat of irreparable harm. Although the Court acknowledges that a reasonable person in Cox’s position might be uneasy or anxious, that is not the standard supporting the extraordinary relief accomplished by a preliminary injunction. Indeed, “[r]elief will not be granted merely to allay the fears or apprehension of the plaintiff where there is no showing or reasonable ground for believing that the defendant is about to commit the wrongs complained of or where

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it appears that he is without the opportunity or intention of so doing.”[24] As noted above, a preliminary injunction will be ordered only where the Court is persuaded that equity demands relief to avoid a serious injury that will likely occur before a final disposition on the merits can be made.[25]

In this case, Cox has not presented facts warranting interim injunctive relief. Dutton’s letters from March and May, advising Cox of the Defendants’ intentions to place the Company into administration and to exercise the “Option Agreements,” do not constitute sufficient threats of irreparable harm. Indeed, Dutton’s actions are fairly viewed simply as lawyer posturing. If acted upon, the Defendants’ stated plan to place the Company into administration in England by filing a “Notice of appointment of an administrator by company or director(s)” form would likely not create the specter of irremediable harm because Cox could challenge the appointment of an administrator in the English courts. Moreover, to date, no evidence has been adduced suggesting that the Defendants have actually filed for administration: the forms appended as exhibits to the Amended Complaint are concededly unsigned. As to the option agreements, there is no reason to think that

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Cox could not challenge their allegedly improper exercise if and when that potentiality can be shown to be likely to occur.

* * *
Because the Plaintiff has failed to demonstrate a sufficient threat of irreparable harm, his Motion for Preliminary Injunction is denied.[26]

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IT IS SO ORDERED.

[1] For current purposes, the Court assumes that th Shangri-La is owned by Horse Power, despite some apparent disagreement among the parties concerning its registration. See Pl.’s Am. Compl. Ex. F (hereinafter “Dutton Letter, March 20, 2007”); see infra text accompanying note 15.

[2] Crawford-Emery owns 49% of the Company, with Phillips owning the remaining 1%. Pl.’s Am. Compl. ¶¶ 2, 6-7; Pl.’s Am. Compl. Ex. C, at Schedule 1 (hereinafter “Shareholders’ Agreement”). For convenience, Crawford-Emery and Phillips are collectively referred to as the “Defendants.”

[3] Presumably, the Defendants doubt that this Court has personal jurisdiction.

[4] Pl.’s Am. Compl. Ex. B (the certificate).

[5] Pl.’s Am. Compl. ¶ 15.

[6] Shareholders’ Agreement §§ 1.1, 3.1, Schedule 1.

[7] Id. § 3.1.

[8] Shareholders’ Agreement §§ 4.2-4.3, 7.1, 17.9.

[9] Pl.’s Am. Compl. Ex. D.

[10] Id. Ex. E.

[11] Option Agreement §§ 1-2.

[12] Id. § 1.1.

[13] Vessel Option §§ 1-2. Although beyond the Court’s decision today, Cox contests the validity of the Vessel Option.

[14] Id. § 1.1.

[15] Dutton Letter, March 20, 2007.

[16] Pl.’s Am. Compl. Ex. G, at May 3, 2007 Letter. Because the Option Agreement is not exercisable until late 2011, and Cox argues that the Vessel Option is not valid, Cox contends that their “purported” exercise would be improper. These questions are not currently before the Court.

[17] Id. Ex. G, at Notice of appointment of an administrator by company or director(s) Form (hereinafter “Administration Form”). Because the Administration Form can be executed by a director, a party’s execution and filing of this form could have important personal jurisdiction ramifications. See infra note 26.

[18] Id. Ex. G, at May 9, 2007 Letter.

[19] Hollinger Inc. v. Hollinger Int’l, Inc., 858 A.2d 342, 371 (Del. Ch. 2004) (citation and quotation omitted).

[20] See Frazer v. Worldwide Energy Corp., 1987 WL 8739, at *5 (Del. Ch. Feb. 19, 1987).

[21] Id.

[22] Id.

[23] Id.

[24] State v. Del. State Educ. Ass’n, 326 A.2d 868, 876 (Del. 1974).

[25] See id.

[26] The Court also has some doubt about its personal jurisdiction over the Defendants based on the allegations of the Complaint. The Defendants reside in the United Kingdom. There is no evidence even suggesting that they have ever visited this venue. The Shareholders’ Agreement, the Option Agreement, and the Vessel Agreement were all drafted in the United Kingdom where the Defendants presumably executed them. Further, the Shareholders’ Agreement is to be governed by English law according to the parties’ agreement. Given these facts, it appears Delaware’s Long-Arm Statute, 10 Del. C. § 3104, is not implicated. Moreover, Delaware’s Director Consent Statute, 10 Del. C. § 3114, does not confer jurisdiction on this Court due to a party’s mere status as a director; rather, Section 3114 provides for implied consent to personal jurisdiction in controversies alleging “violation of a duty in [the directorial] capacity.” Cox’s concern that Crawford-Emery will improperly purport to exercise the Option Agreement and the Vessel Option does not implicate Crawford-Emery’s duties as a director since those agreements memorialize understandings between two of the Company’s shareholders — Cox and Crawford-Emery — as shareholders, not as directors. As to Cox’s allegation that the Defendants intend to press their claims as creditors against the Company, a creditor does not lose his rights as a creditor solely because he is also a shareholder, even a controlling shareholder, or a director. See Odyssey P’ners, L.P. v. Fleming Cos., 1996 WL 422377, at *3-*4 (Del.Ch. July 24, 1996). Of course, Delaware law does not countenance a director’s misuse of his fiduciary position for his benefit as a creditor. See id. at *4. Fiduciary duties, including the duty of loyalty, attach, of course, to directors who are creditors. See id. at *3-*4. Loyalty demands “that any power over the corporation held in a fiduciary capacity may be exercised only for the purpose of advancing collective/corporate welfare.”Id. The duty of loyalty, however, does not require self-sacrifice:

More particularly, it does not necessarily impress its special limitation on legal powers held by one otherwise under a fiduciary duty, when such collateral legal powers do not derive from the circumstances or conditions giving rise to the fiduciary obligation in the first instance. Thus one who may be both a creditor and a fiduciary . . . does not by reason of that status alone have special limitations imposed upon the exercise of his or her creditor rights.

Id. In Odyssey Partners, the Court recognized that some facts must exist apart from the fiduciary’s exercise of his rights as a creditor, and those facts must constitute a breach of fiduciary duty. Id. at *4. Although Cox has submitted evidence that Crawford-Emery has identified as a tactical option his ability to cause the Company to enter into administration by using his capacity as a director to file the Administration Form in order to press his claims as a creditor, a potentially self-interested action, to date he has not done so. It should also be noted that, between the first mention of this option and the hearing on the instant motion, almost seven months elapsed with no reported implementation of Defendants’ proposed course of conduct.

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