In the context of a statutory appraisal judgment, the Delaware Court of Chancery recently adopted outsider reverse veil-piercing into Delaware law. Manichaean Cap., LLC v. Exela Techs., Inc., 2021 WL 2104857 (Del. Ch. May 25, 2021). In a case of first impression, Vice Chancellor Slights acknowledged the risk “that reverse veil-piercing may be used as a blunt instrument to harm innocent parties, and to disrupt the expectations of arms-length bargaining,” but on balance deemed these risks acceptable, concluding that “the recognition of risks creates an opportunity to manage them . . .” Id. at *11.
Plaintiffs, former stockholders of SourceHOV Holdings and dissenters in a merger with Exela, sought to enforce an unpaid statutory appraisal judgment against Exela after its merger with SourceHOV Holdings. Id. at *1. Plaintiffs alleged that Exela and its subsidiaries had fraudulently bypassed funds away from SourceHOV Holdings, which Exela knew would be subject to a future judgment, rendering the subsidiary insolvent and denying Plaintiffs the value of their shares. Id. at *2. Plaintiffs, as outside creditors, set forth to enforce the judgment upward on Exela, so that Exela was unable to “seize Plaintiff’s property without paying for it.” Id. at *4.
The Court of Chancery’s analysis differentiated between outsider and insider veil-piercing and indicated that only the outsider version was being endorsed by the decision. Id. Outsider veil-piercing refers to “[a]n outside third party, frequently a creditor, urg[ing] a court to render a company liable on a judgment against its member.” Id. As a threshold issue, outsider veil-piercing applies “only in the most ‘exceptional circumstances’” and if those circumstances are present, the presence of “alter ego” factors are then considered. Id. at *12. These factors, none of which are dispositive, include but are not limited to “insolvency, undercapitalization, [and] commingling of corporate and personal funds.” Id. If “alter ego” factors are sufficiently present, the final step of the analysis is to consider “whether the owner is utilizing the corporate form to perpetuate fraud or an injustice.” Id. If fraud or injustice is found, then the last step of the analysis is satisfied and piercing the veil is deemed to be appropriate. Id.
Vice Chancellor Slights’ ruling was made in a decision denying a motion to dismiss Plaintiffs’ veil-piercing claim and in doing so, endorsed outsider reverse veil-piercing as a new doctrine available under Delaware law. Id. at 17.
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