ROBERT STROUGO, on behalf of himself and all others similarly situated, Plaintiff,
AARON P. HOLLANDER, STANLEY J. HILL, JOSEPH J. LHOTA, ITSIK MAARAVI, and FIRST AVIATION SERVICES, INC., Defendants
Submitted March 11, 2015
Sidney S. Liebesman and Lisa Zwally Brown of MONTGOMERY MCCRACKEN WALKER & RHOADS, LLP, Wilmington, Delaware; Gustavo F. Bruckner and Alla Zayenchik of POMERANTZ LLP, New York, New York; Attorneys for Plaintiff.
Francis G.X. Pileggi, Gary W. Lipkin and Aimee M. Czachorowski of ECKERT SEAMANS CHERIN & MELLOTT, LLC; Attorneys for Defendants.
This action involves determining whether a Delaware corporation's non-reciprocal fee-shifting bylaw (the " Bylaw" ) applies to a former stockholder's challenge to the fairness of a 10,000-to-1 reverse stock split (the " Reverse Stock Split" ) that the corporation undertook at the behest of its Chief Executive Officer and controlling stockholder in order to take the company private.
On May 30, 2014, defendant First Aviation Services, Inc. (" First Aviation" or the " Company" ) completed the Reverse Stock Split, which had the effect of involuntarily cashing out the plaintiff. Four days later,
on June 3, 2014, the directors of First Aviation adopted the Bylaw. On June 14, 2014, the plaintiff initiated this action on behalf of himself and a class of former stockholders of the Company who similarly had been cashed out, alleging that the Reverse Stock Split was unfair.
The defendants, First Aviation and its directors, argue that the Bylaw is not only facially valid, but also enforceable here. According to the defendants, unless the plaintiff obtains " a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought," then the plaintiff (and presumably his counsel) will be liable for the defendants' legal fees incurred in this case. In addition to challenging the Reverse Stock Split, the plaintiff amended his complaint to challenge the Bylaw.
The question of whether the By law is facially valid under Delaware law is not presently before the Court. Rather, the plaintiff has moved for partial judgment on the pleadings that the Bylaw does not apply in this case because it was adopted after the Reverse Stock Split had been consummated.
In this opinion, I conclude based on principles of contract law that the Bylaw does not apply to this case because it was adopted after the plaintiff was cashed out of the Company by operation of the Reverse Stock Split. More specifically, I hold that changes made to the Company's bylaws after the plaintiff was cashed out are not binding on him for the same reason that a non-party to a contract is not bound by the terms of that contract. I also conclude that Section 109(b) of the Delaware General Corporation Law (the " DGCL" ) does not authorize the adoption of bylaws to regulate the rights or powers of former stockholders whose interests in the corporation already have been eliminated. Therefore, I grant the plaintiff's motion for partial judgment on the pleadings.
A. The Parties
Defendant First Aviation, a Delaware corporation based in Westport, Connecticut, provides repair, overhaul, and related services to the aviation industry. In 2007, First Aviation became a non-SEC reporting company. As of October 24, 2011, First Aviation's shares traded on the OTC U.S. Market stock exchange.
Defendants Aaron P. Hollander, Stanley J. Hill, Joseph J. Lhota, and Itsik Maaravi were the four directors of the Company (collectively, the " Board," and with First Aviation, the " Defendants" ) at all relevant times. Hollander was the Chairman of the Board and the Company's Chief Executive Officer. As of June 2013, individually and through two entities he controlled, Hollander owned approximately 45.5% of the Company's common equity and 64.5% of its Common A voting stock. Hollander " maintained control over the day to day operations of the Company and had managerial
Plaintiff Robert Strougo (" Plaintiff" ) was a stockholder of the Company at all relevant times until the consummation of the Reverse Stock Split. Plaintiff brings this putative class action individually and on behalf of all other First Aviation stockholders, excluding Defendants and their affiliates, who were " freezed out" in the Reverse Stock Split.
B. First Aviation Announces, and then Completes, the Reverse Stock Split
On May 16, 2014, the Company announced that it had established a Special Committee of the Board, consisting of Lhota and Hill, to analyze a potential reverse stock split transaction. That same day, the Company announced that the Board approved the Reverse Stock Split, which consisted of a 10,000-to-1 reverse stock split at a pre-split price of $8.40 per share. Both members of the Special Committee held enough First Aviation stock at the time to remain stockholders of the Company following the Reverse Stock Split.
On May 30, 2014, the Reverse Stock Split was completed. The effect of the Reverse Stock Split was to eliminate the interests of Plaintiff and the putative class and thereby make First Aviation a privately owned company. After the Reverse Stock Split, Hollander ...