SEPTA v. Volgenau: 8 Delaware Code § 124 Empowers and Protects Corporations But Does Not Prevent Direct Claims Against Corporations’ Directors

In Southeastern Pennsylvania Transportation Authority v. Volgenau, C.A. No. 6354-VCN, 2012 WL 4038509 (Del. Ch. August 31, 2012), SRA International, Inc. and several members of its board (“SRA” or “Defendants”) moved  for judgment on the pleadings with respect to Count IV of the Complaint, alleging that  Southeastern Pennsylvania Transportation Authority(“SEPTA” or “Plaintiff”) could not challenge an alleged violation of the article of incorporation. 

SEPTA, a former stockholder of SRA, filed a direct complaint against SRA and several members of the board of directors with the purpose of preventing a merger with Providence Equity Partners, LLC.  The Delaware Court of Chancery granted Defendants’ motion in part and denied it in part.  After the merger was consummated, SEPTA abandoned its claim for injunctive relief.

SEPTA brought its claim as a “purported direct class action on behalf of itself and all other similarly situated former common stockholders of SRA.”  Count IV of the Complaint alleged that SRA violated its Certificate of Incorporation when it merged and did not distribute equal per share payments to each class of Common Stock shareholders, specifically benefitting SRA’s controller, Ernst Volgenau.  SEPTA argued that this act invalidated the merger and that SRA and the individual defendants breached their fiduciary duty of loyalty.

Defendants argued that  Delaware Code § 124 (“§ 124”), the ultra vires statute, procedurally barred Plaintiff’s claims as a matter of law.  Delaware’s General Assembly enacted § 124 with the intent to “prevent challenges to a corporation’s power to act” [emphasis in original].  The statute only allows claims for injunctive relief, derivative claims, or suits by the Attorney General to be filed against a corporation.  Therefore, Defendants argued that Plaintiff’s non-injunctive direct claim must be dismissed.

SEPTA asserted that the claim did not seek recovery under § 124 but for claims based upon breach of contract and breach of fiduciary duty.   SEPTA argued that SRA’s Certificate of Incorporation was a contract with provisions for equal distribution to all common stockholders and that Volgenau’s additional compensation during the merger constituted a breach of that contract.  Additionally, the individual SRA board members allegedly breached their fiduciary duties of loyalty and care when they approved a merger that violated the articles of incorporation. 

The court upheld the Defendants’ § 124 argument regarding the action against SRA as a corporation.  Finding that Plaintiff’s suit did not qualify as one of the three instances allowed by § 124, the court ruled that the Plaintiff could not challenge the validity of SRA’s merger as an ultra vires act.  However, the court ruled that § 124 does not bar a direct claim against the “persons who caused such action to occur.”  Therefore, the court allowed SEPTA to maintain its breach of fiduciary duty claim against the fiduciaries that approved the merger.

The primary materials for this case may be found on the DU Corporate Governance website.