June 23, 2008
No Stay for The Weary: <i>Corporate Governance Obligations Continue in Bankruptcy</i>
Coauthored by Stephen B. Brauerman
The Delaware Court of Chancery recently emphasized that issues of corporate governance remain the purview of the state of incorporation, notwithstanding the filing of a bankruptcy petition and the accompanying automatic stay, which ordinarily acts to halt proceedings against the debtor. Most significant about the court’s opinion in Fogel v. U.S. Energy Systems, 2008 WL 151857 (Del. Ch.) is not that it retained jurisdiction over corporate governance issues following a bankruptcy petition, but rather, the ease with which the court reached its decision. Notably, the court took just one day to issue its opinion and did so without allowing the Bankruptcy Court the opportunity first to consider whether a shareholder could continue to seek relief from the Court of Chancery in an action to compel the company to hold an annual meeting. Given this period of economic uncertainty and the recent increase in bankruptcy filings, this decision should make clear that companies cannot hide behind the Bankruptcy Code’s automatic stay to avoid corporate governance obligations.
On Dec. 13, 2007, Chancellor Chandler issued a post-trial memorandum opinion directing U.S. Energy Systems, Inc. (“U.S. Energy”) to hold a shareholder meeting. In its opinion, the court determined that Asher Fogel had not been terminated as U.S. Energy’s Chief Executive Officer when Mr. Fogel exercised the right conferred on the Chief Executive Officer in the company’s bylaws to call a special meeting and, therefore, the exercise of this power by Mr. Fogel was valid and effective. Concerned that the company would take steps to evade the court’s ruling, Mr. Fogel filed a motion requesting that the court order the company to hold the shareholder meeting on Jan. 7, 2008. After the parties briefed the motion, but before the court could rule on it, the company filed for bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York on Jan. 9, 2008.
Relying on § 362 of the Bankruptcy Code, the company argued that the Court of Chancery could not schedule the shareholder meeting it had previously ordered because the automatic stay acts to prohibit all proceedings against the debtor outside the bankruptcy. In response, Mr. Fogel attempted, albeit unsuccessfully, to fit the scheduling of the shareholders meeting into the ministerial act exception to the automatic stay and argued that corporate governance obligations survive the filing of a bankruptcy petition. The company argued that should the court agree with Mr. Fogel that corporate governance obligations survive notwithstanding the bankruptcy, the Bankruptcy Court, and not the Court of Chancery, should properly determine the propriety of scheduling the shareholders meeting after the filing of a bankruptcy petition.
Although Chancellor Chandler noted that setting a date for the shareholder meeting requires the exercise of judicial discretion beyond a mere clerical act rendering the ministerial act exception to the automatic stay inapplicable, nevertheless he found that the automatic stay does not prevent the court from scheduling a shareholder meeting under the facts and circumstances of this case. More notably, Chancellor Chandler refused to defer to the Bankruptcy Court before issuing his decision. As the court explained, “This Court, the Delaware Supreme Court, and federal bankruptcy courts have held that corporate governance does not cease when a company files a petition under Chapter 11 and that issues of corporate governance are best left to the courts of the state of incorporation.” In supporting his decision, Chancellor Chandler noted that the Second Circuit Court of Appeals has already “implicitly approved” the “well-settled rule that the right to [apply to a Delaware court] to compel a sha
The Delaware Court of Chancery recently emphasized that issues of corporate governance remain the purview of the state of incorporation, notwithstanding the filing of a bankruptcy petition and the accompanying automatic stay, which ordinarily acts to halt proceedings against the debtor. Most significant about the court’s opinion in Fogel v. U.S. Energy Systems, 2008 WL 151857 (Del. Ch.) is not that it retained jurisdiction over corporate governance issues following a bankruptcy petition, but rather, the ease with which the court reached its decision. Notably, the court took just one day to issue its opinion and did so without allowing the Bankruptcy Court the opportunity first to consider whether a shareholder could continue to seek relief from the Court of Chancery in an action to compel the company to hold an annual meeting. Given this period of economic uncertainty and the recent increase in bankruptcy filings, this decision should make clear that companies cannot hide behind the Bankruptcy Code’s automatic stay to avoid corporate governance obligations.
THE FOGEL CASE
On Dec. 13, 2007, Chancellor Chandler issued a post-trial memorandum opinion directing U.S. Energy Systems, Inc. (“U.S. Energy”) to hold a shareholder meeting. In its opinion, the court determined that Asher Fogel had not been terminated as U.S. Energy’s Chief Executive Officer when Mr. Fogel exercised the right conferred on the Chief Executive Officer in the company’s bylaws to call a special meeting and, therefore, the exercise of this power by Mr. Fogel was valid and effective. Concerned that the company would take steps to evade the court’s ruling, Mr. Fogel filed a motion requesting that the court order the company to hold the shareholder meeting on Jan. 7, 2008. After the parties briefed the motion, but before the court could rule on it, the company filed for bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York on Jan. 9, 2008.
Relying on § 362 of the Bankruptcy Code, the company argued that the Court of Chancery could not schedule the shareholder meeting it had previously ordered because the automatic stay acts to prohibit all proceedings against the debtor outside the bankruptcy. In response, Mr. Fogel attempted, albeit unsuccessfully, to fit the scheduling of the shareholders meeting into the ministerial act exception to the automatic stay and argued that corporate governance obligations survive the filing of a bankruptcy petition. The company argued that should the court agree with Mr. Fogel that corporate governance obligations survive notwithstanding the bankruptcy, the Bankruptcy Court, and not the Court of Chancery, should properly determine the propriety of scheduling the shareholders meeting after the filing of a bankruptcy petition.
Although Chancellor Chandler noted that setting a date for the shareholder meeting requires the exercise of judicial discretion beyond a mere clerical act rendering the ministerial act exception to the automatic stay inapplicable, nevertheless he found that the automatic stay does not prevent the court from scheduling a shareholder meeting under the facts and circumstances of this case. More notably, Chancellor Chandler refused to defer to the Bankruptcy Court before issuing his decision. As the court explained, “This Court, the Delaware Supreme Court, and federal bankruptcy courts have held that corporate governance does not cease when a company files a petition under Chapter 11 and that issues of corporate governance are best left to the courts of the state of incorporation.” In supporting his decision, Chancellor Chandler noted that the Second Circuit Court of Appeals has already “implicitly approved” the “well-settled rule that the right to [apply to a Delaware court] to compel a sha