In a recent action brought under Section 225 of the DGCL, the Delaware Court of Chancery validated a written consent removing Defendants Long Deng and Mark Fang from iFresh, Inc.’s (“iFresh”) Board of Directors and appointing new directors in their stead. A summary of the decision can be found here. Defendants filed an appeal with the Delaware Supreme Court and then sought a stay pending that appeal, which the Court of Chancery has now denied in Dengrong Zhou v. Long Deng and Mark Fang, C.A. No. 2021-0026-JRS (Del. Ch. May 23, 2022).
The Court’s analysis followed the factors laid out in Kirpat, Inc. v. Del. Alcoholic Beverage Control Comm’n, 741 A.2d 356 (Del. 1998): (i) preliminary assessment on the movant’s likelihood of appellate success; (ii) whether the movant will suffer irreparable harm without a stay; (iii) whether another interested party would suffer substantial harm with a stay; and (iv) whether a stay serves the public interest. Because Delaware law supports granting a stay if factors (ii) through (iv) weigh in favor of one, Vice Chancellor Slights began his analysis there.
Under Kirpat factor (ii), Defendants argued that a change in iFresh’s Board of Directors would risk unauthorized Board action and, thus, irreparable harm. Yet the Court of Chancery found that loss of board control alone does not constitute irreparable harm—a party must identify injury other than strict compliance with the Court’s Order, and Defendants had not done so here. Under Kirpat factor (iii), Defendants argued the stay would be brief and unharmful to other parties, but could negatively affect iFresh’s relationship with its commercial lender. Vice Chancellor Slights found this argument equally unpersuasive—Defendants had not surrendered their Board positions for over a year following the written consent, and further delay was unnecessary. The Court also noted that the lender was perfectly capable of protecting itself from a change in Board control through negotiation of favorable forbearance terms. Lastly, in consideration of Kirpat factor (iv), the Court decidedly found that control of a company’s Board of Directors is a predominantly private interest, not public, and any public interest would nonetheless be countered by Delaware’s interest in quickly executing on actions brought under Section 225.
Only after finding that Kirpat factors (ii) through (iv) weigh in favor of a stay must a court analyze the likelihood of the movant’s success on appeal. While that was not the case here, the Court of Chancery still found that the Defendants had not offered serious legal questions for review by the Delaware Supreme Court. Specifically, the Court noted that its Section 225 Opinion “did not break new legal ground or extend settled law.” Id. at par. 9. In light of each Kirpat factor, Vice Chancellor Slights denied Defendants’ motion for a stay.
Key Takeaway: This opinion holds that loss of board control alone does not constitute irreparable harm and likewise does not support a stay of a Section 225 order pending appeal. Similarly, the constitution of a company’s Board of Directors is a predominantly private issue and likely does not affect public interest such that a stay would be granted. Therefore, if a party seeks a stay pending a Section 225 appeal, it will need to articulate an injury outside of strict compliance with the Order it wants stayed.
Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.