Miller v. MSX-IBS Holding, Inc.: Preferred Stock Redemption Unavailable When a Corporation Lacks a Surplus of Assets

In Miller v. MSX-IBS Holding Inc., No. 09-CV-15046, 2012 WL 458486 (E.D. Mich. Feb. 13, 2012), the United States District Court for the Eastern District of Michigan granted the defendants’ motion for summary judgment.  Specifically, it held that when a corporation has no surplus of assets, it cannot redeem a shareholder’s preferred stock. 

This was the third lawsuit filed by Trustees of the Kyung Ae Bae Trust (“Trust”) seeking to compel defendants MSX International (“International”) and/or MSX-IBS Holding, Inc. (“IBS”) to redeem preferred stock owned by the Trust.  Trustee Ralph Miller (“Miller”) originally received the stock from International during his employment there and, after being terminated, he transferred it to the Trust.  Pursuant to a settlement agreement from the first lawsuit, International was required to redeem the Trust’s stock by December 31, 2008, if it was legally able to do so.  Subsequently, International had to restructure due to crippling debt, and lenders required that International transfer its stock to a holding company.  IBS is a Delaware holding company with International as its subsidiary; its only asset is International’s stock.  On December 19, 2008, the IBS Board (“Board”) determined that the Trust’s shares could not be redeemed before the end of the fiscal year because International owed millions of dollars in debt. 

Delaware law prohibits corporations from redeeming stock “when the capital of the corporation is impaired or when such purchase or redemption would cause any impairment of the capital of the corporation.”  Capital impairment exists “if the funds used in the repurchase exceed the amount of the corporation’s ‘surplus,’ defined by 8 Del. C. § 154 to mean the excess of net assets over the par value of the corporation’s issued stock.”  When assessing whether to redeem stock, a plaintiff has the burden of proving that a board of directors “acted in bad faith, relied on unreliable methods and data, or made determinations so far off the mark as to constitute actual or constructive fraud.”

The Trust argued that the Board should have considered only IBS’s financial status rather than the consolidated financial statements of both International and IBS.  It further argued that IBS itself was able to redeem the shares because its balance sheets showed assets exceeding liabilities.  The court, however, held that the Board must consider the liabilities of both IBS and International, especially considering that IBS’s sole asset was International stock.  It also held that the plaintiffs did not provide sufficient legal authority to show that the Board acted improperly.  Rather, whether the Board had considered the consolidated financial information of International and IBS was “key to the analysis,” and the Board meeting minutes indicated that it had considered all of the factors required by law.  As a result, the court granted the Board’s motion for summary judgment. 

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