Atr-Kim Eng Financial Corp. v. Araneta

2006 WL 3783520 (Del.Ct.Ch. Dec. 21, 2006)

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Nature of the Case

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Facts

D contacted Ps for investment banking assistance on behalf of his LBC enterprise (The Philippines equivalent to Federal Express). D engaged Ps to search for capital and to prepare LBC for a public offering. Ps discovered an opportunity in “pre-need” insurance policies designed to cover expenses (such as educational and health costs) that buyers expected to face in the future. Ps offered to structure an investment in the Pre-Need Company as a joint enterprise with D. D agreed. Ps and D established a joint venture. The joint venture then bought a controlling interest in the Pre-Need Company, and as part of this transaction, Ps advanced $3.922 million on D's behalf. D pledged, in the Undertaking Agreement, to contribute the LBC Operating Companies along with his newly acquired interest in the Pre-Need Company to a new holding company and to issue to Ps a 10% minority interest in that entity. To protect P's investment in the LBC Operating Companies, the Undertaking Agreement granted Ps contractual protections, including the right to a seat on the board of directors of any holding company that D ultimately formed as well as a five-year put option, which, when exercised, required D to buy out Ps' interest at the higher of (i) the issue price of P's shares plus a premium of between 22% and 25% per year, or (ii) the adjusted book value of P's shares. To safeguard their joint investment in the Pre-Need Company, Ps and D executed a Stockholders Agreement which they attached to their Joint Venture Agreement (the “Stockholders Agreement”). The Stockholders Agreement evenly divided the eight (out of ten) board seats secured by Ps' and D's joint 80% interest in the Pre-Need Company, and unanimously appointed Topax Colayco, the residual 20% shareholder in the Pre-Need Company, to be its President and CEO. D incorporated the Delaware Holding Company and presented Ps with 3,000 of its shares (10%) while personally retaining control over the residual 27,000 shares (90%). D appointed and dominated the Delaware Holding Company's board of directors, which consisted of himself, defendant Berenguer (D's niece and the CFO of the LBC group of companies), and defendant Bonilla (the head of LBC's U.S. operations). P claims that D abused his position of control over the Delaware Holding Company and that D transferred the LBC Operating Companies from the Delaware Holding Company to his children for no consideration without notice to Ps and without following the process required by Delaware law. D merely claims never to have transferred ownership of the LBC Operating Companies to the Delaware Holding Company in the first place. D never says why Ps would have made a nearly $4 million payment to acquire 10% of an entity with no valuable assets. In November 2002 Ps sold its 50% interest in Professional Holdings, the corporation that owned 80% of the Pre-Need Company. After the Colayco Sale, D withheld information, effectively closed the lines of communication and eventually transferred all of the LBC Operating Companies out of the Delaware Holding Company. Ps discovered the misconduct when through its attorneys, sent a number of formal books and records demand letters to D on July 18, 2003. D ignored these letters. Ps filed an action under 8 Del. C. § 220 in this court on October 27, 2003. The documents eventually produced showed a de facto (and non-pro rata) liquidation of the Delaware Holding Company's assets and that D was attempting to escape responsibility for that act. Ps filed this lawsuit on June 3, 2004 alleging direct and derivative injuries caused by the removal of the LBC Operating Companies, which were valued at nearly $36 million, from the Delaware Holding Company between March and December 2003. Ps were sued by D in the Philippines. D sought relief, the annulment of the Undertaking Agreement and Joint Venture Agreements on the grounds that Ps fraudulently concealed the implications, risks and consequences involved in the acquisition of the Pre-Need Company. D lost his case in the Philippines decisively. The court found D “liable for the aggregate subscription or issue price of the [Delaware Holding Company] shares and the premium of 25% per annum.”