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PECO Holdings Corp. v. Weil

Court of Chancery of Delaware

October 31, 2013

PECO Holdings Corp.
v.
Weil, et al

John G. Harris, Esquire Berger Harris

Rick S. Miller, Esquire Ferry, Joseph & Pearce, P.A.

Dear Counsel:

Defendants' motion to stay presents the Court with a factual situation that can be resolved through a McWane analysis, which calls for a stay of this action. Although the Plaintiff deploys a variety of arguments, the Court concludes that Defendants have convincingly argued that the McWane doctrine applies, and, therefore, it grants Defendants' motion to stay.

I. BACKGROUND

Plaintiff PECO Holdings Corp. ("PECO") was formed in May 2005 to acquire Process Equipment Company of Tipp City ("Process Equipment"), a manufacturer of specialty machinery with operations in Tipp City, Ohio.[1] As of July 2011, Process Equipment apparently had debt obligations of $9.7 million and began considering a course of action to extinguish its debt. One particular transaction was contemplated to retire this debt, but Defendant Robert Weil ("Weil"), Process Equipment's Chief Executive Officer ("CEO") and a member of the Board of Directors of PECO, refused to participate. Weil was soon thereafter terminated as CEO and removed from the Board.

Weil initially brought suit in a New York state court in August 2011 (the "New York Action") in connection with his termination. In October 2011, Weil filed a lawsuit in an Ohio state court (the "Ohio Action") alleging breaches of contract and fiduciary duty against Process Equipment, PECO, and at least one natural person associated with the entities.

On October 25, 2011, apparently as part of a transaction intended to retire Process Equipment's debt, [2] PECO merged through a short-form merger into a subsidiary of New PECO Holdings Corp., Inc., a Delaware corporation ("New PECO") pursuant to 8 Del. C. § 253. PECO was the surviving corporation, and it became a wholly-owned subsidiary of New PECO.

On December 9, 2011, Weil filed an amended complaint in the Ohio Action to include an additional plaintiff, a former manager of Process Equipment, Defendant James Zahora ("Zahora"). This amended complaint included challenges to the value Weil and Zahora received for certain PECO shares they owned pursuant to the short-form merger, as well as allegations related to Weil's termination.

As a result of discovery in the New York Action, it became clear that Weil intended to challenge the consideration he received in the short-form merger. Weil apparently later withdrew that challenge from the New York Action in February or March of 2013, but indicated that he intended to bring these claims elsewhere. PECO filed this action against Weil and Zahora (the "Defendants") in April 2013 (the "Delaware Action"). PECO seeks a declaratory judgment from this Court that Defendants' sole recourse for challenging the value received for shares as a result of the short-form merger is to pursue an appraisal action in the Delaware Court of Chancery.[3]

II. CONTENTIONS

The Defendants argue that the facts of this case fall within the bounds of a straightforward McWane analysis because the Ohio Action is first-filed, the issues and parties in the Ohio dispute and the Delaware dispute are the same, and the Ohio court is capable of providing prompt and complete justice. PECO did not argue that McWane factors favor it. Instead, it makes several arguments on the merits that the McWane doctrine is inapplicable. PECO also argues that it has energetically moved for summary judgment in prior actions involving Weil and that policies of judicial comity would not be violated if the Court declined to stay the Delaware Action.

III. ANALYSIS

A Delaware court's grant of a stay in favor of a first-filed foreign action is not a matter of right, but is instead within the sound discretion of the court.[4]Where parties agree through a forum selection clause to litigate in a particular jurisdiction, Delaware law generally honors such agreements.[5] If the parties have not agreed upon a specified jurisdiction, Delaware courts follow the McWane doctrine which generally favors granting a stay in the Delaware proceeding in favor of the foreign action where "there is a prior action ...


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