In the latest installment of a long-running dispute, Vice Chancellor J. Travis Laster recently issued a memorandum opinion denying a motion to dismiss and granting a partial motion for summary judgment in expedited proceedings pursuant to Section 225 of the Delaware General Corporation Law in Hawk Investment Holdings v. Stream TV Networks, C.A. No. 2022-0930-JTL (Del. Ch. Nov. 29, 2022). As discussed below, one of the defendants’ primary challenges to the plaintiff’s claims was their argument that Hawk, a secured creditor of Stream TV, was not a real party in interest, and therefore was without standing to bring this action seeking court-confirmation of its actions (taken pursuant to a series of interrelated lending documents and pledge agreements) in voting the equity of Stream TV to elect a sole member to the board of directors of Stream TV’s subsidiary, Technowave Media, Inc. Stream TV also moved for dismissal pursuant to Delaware Court of Chancery Rule 12(b)(6), asserting several theories including disputing that the loan agreements with Hawk were valid or whether a default had occurred such that Hawk would have had the contractual right to vote the equity of Stream TV to elect a director to Technowave’s board. Hawk countered by arguing that such matters had been resolved against Stream TV in prior proceedings.

Proceedings under Section 225 seeking to obtain a ruling on the correct composition of a corporate board are considered summary in nature, and therefore early dispositive motions are typically disfavored. Here, however, the court recognized “the scope of the case would expand dramatically if the parties litigated the validity of the loan documents and the existence of defaults …” and set an early hearing on dispositive motions. The court’s ruling was issued just over a month after the initial filing of the litigation. This note focuses on the court’s discussion and rulings on the defendants’ arguments that Hawk was not a real party in interest, and therefore was without standing to prosecute this matter, and the court’s holding that “any party with statutory standing [pursuant to Section 225] can litigate the validity and exercise of voting rights, even if they are not the party that exercised or would benefit from a favorable determination.”

The question of whether Hawk was the real party in interest to bring the action flowed from Stream TV’s arguments that Hawk, as a secured creditor, had entered into certain assignment and pledge agreements that transferred its contractual rights upon a default to vote Stream TV’s shares to elect a director at the subsidiary, Technowave, to another entity, SeeCubic, Inc.—an entity that would not have had statutory standing to pursue the Section 225 litigation. The Court of Chancery began its analysis with Court of Chancery Rule 17(a)’s requirement that “every action shall be prosecuted in the name of the real party in interest.”

As the court noted, this “real-party-in-interest requirement has particular relevance when there has been an assignment of a claim” given the historical rule at common law that an assignee did not hold legal title to a claim to prosecute. Rule 17(a)’s real-party-in-interest requirement “developed in large part to modify this restrictive rule.” The court then applied a three-part test to determine the effect of an assignment on a party’s right to pursue claims: “the court must examine what has been assigned to determine who holds the right to assert the claim,” “the court must evaluate whether a valid assignment has been made,” and “the court must look to whether there has been a complete or partial assignment of the claim.”

The court found that Stream TV’s arguments against Hawk failed the first element of this test. This was because Stream TV had conceded that Hawk “had statutory standing as a stockholder of Stream to pursue this Section 225 proceeding,” and therefore, Hawk satisfied Rule 17(a)’s permission that “a party authorized by statute may sue in that person’s own name without joining the party for whose benefit the action is brought.” The court’s precise ruling on this point hinges on this case-specific concession by Stream TV. As noted in a footnote: “Without this concession, there could be debate about whether a stockholder of a parent corporation would have standing under Section 225 to litigate a dispute over title to office at the parent corporation’s wholly owned subsidiary.”

For practitioners, the court’s broader discussion of who may prosecute actions pursuant to Section 225—particularly creditors—is likely the key takeaway from this decision. As the court notes, Section 225(a) provides: “Upon application of any stockholder or director, or any officer whose title to office is contested, the Court of Chancery may hear and determine the validity of any election, appointment, removal or resignation of any director or officer of any corporation, and the right of any person to continue to hold such office … .” Under that statutory scheme, “the plaintiff in a Section 225 action does not have to be the party that exercised the voting power or other authority necessary to achieve the election, appointment, removal, or resignation of the director” and that “any stockholder or any director can bring the Section 225 action, as can any officer whose title to office is contested.”

This broad grant of statutory standing in Section 225 creates a “logical regime” because it recognizes that all stockholders of an entity (given their economic interest) and all directors (given their fiduciary duties) “have a tangible interest in avoiding the potentially paralytic effect upon the enterprise of disputes that call into question the legitimacy of those who would act in its behalf.” Thus, the court held that “Delaware has a substantial policy interest in ensuring that Section 225 is available to serve that purpose” and that Section 225’s standing provisions ensure that “any party with statutory standing can litigate the validity of the exercise of voting rights, even if they are not the party that exercised the voting rights or would benefit from a favorable determination.”

Richard L. Renck, a partner at Duane Morris, litigates matters in both the state and federal courts in Delaware. His practice focuses on complex corporate and commercial litigation with a particular emphasis on corporate governance disputes and statutory actions arising under the Delaware General Corporation Law.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.