Reverse Veil-Piercing Deployed for Dissenting Shareholders

• Author: Kelso L. Anderson
• Pages: 4-5

Published in Litigation News Volume 47, Number 1, Fall 2021. © 2021 by the Ameri can Bar Association. Re produced with per mission. All rights re served. This info rmation or any porti on thereof may not be c opied or disseminated in any f orm or

by any means or stored in an el ectronic database or r etrieval system w ithout the expre ss written cons ent of the American Bar A ssociation.

dissented to a merger

of SourceHOV and

its many LLC sub-

sidiaries i nto the

defendant Exela

Technologies, th rough

which SourceHOV bec ame

a wholly owned subsid iary

of Exela.

As dissent ing shareholders,

the plaintif fs exercised their

right to statutor y appraisal

of the value of their share s in

SourceHOV. They obtained

a $57 million appraisa l judg-

ment—several million more

than the defenda nts had offered

the plaintif fs for their shares in the

In an issue of rst

impression, the

Delaware Cour t of

Chancery ha s recognized

the equitable doct rine of reverse

veil-piercing as a potent ial remedy in

cases in which a n acquiring company

attempts to use its subsid iaries to avoid

paying disse nting shareholders follow-

ing a merger. The opposite of

traditional veil-piercing—

which involves cre ditors

reaching up the corp orate

chain to hold a parent lia-

ble for actions of its af li-

ates or subsidiaries— reverse

veil-piercing impos es liability on

a business organ ization for the

actions of its owners. A BA

Litigation Section leaders

opine that the case do es not

reect a trend but u rge practi-

tioners to be mindf ul of reverse

veil-piercing in a pos t-merger

context.

The Parties, the Merger,

and Statutory

Appraisal

In Manichean

Capital , LLC v. Exela

Technologies, Inc., the

plaintiffs—two corpora-

tions, one limited liability

company (LLC), and two

individual s—were equity

shareholders of defen-

dant Source HOV

Holdings. The

plaintiffs had

merger. To procure

full payment for their

shares, the plaintiffs

obtained a char g-

ing order requiring

SourceHOV to pay

the judgment before any

funds could be t ransferred

to acquirer Exela. But

SourceHOV did not have

assets. The plaintiffs

sought to hold Exela, as

acquirer and parent , and its

afliated entities accountable

for the appraisal judg-

ment on a theory of out-

sider reverse veil-piercing

based on alleged

abuse of corpo -

rate form.

Exela’s Alleged

Disregard of

Corporate Form

Mere weeks before the Delawa re

Court of Chanc ery issued the appraisal

judgment, Exela, ac ting through its

subsidiaries, c reated two new enti-

ties to receive capital d istributions

from SourceHOV’s subsidia ries.

Pursuant to a purc hase and sale agree-

ment, Source HOV’s subsidiarie s sold

their accounts re ceivable to one of

the new entities. T he second entity

would acquire th e accounts receiv-

able and pledge them as collate ral for

loans and letter s of credit, absorbing

funds that would ot herwise ow up to

SourceHOV. Exela served as the g uar-

antor for all moneys borrowed u nder

this arrang ement and was the servicer

on the loan and secu rity agreement.

Shareholder Rights Sacred

The plaintif fs alleged Exela had fun-

neled assets th rough its subsidiaries to

render SourceHOV judgment-proof a nd

urged the cour t to pierce the corporate

© Getty Image s

4 | S ECTION OF LITIGATION

By Kelso L. Anderson,

Litigation News

Associate Editor

Reverse

Veil-Piercing

Deployed for

Dissenting

Shareholders