Manichaean Capital v. Exela Tech: DE courts rule on “reverse veil piercing” claims

Q2 2021 Quarterly Corporate / M&A Decisions update series

In Manichaean Capital, LLC v. Exela Tech., Inc. (C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021)), the Court of Chancery ruled as a matter of first impression in Delaware that plaintiffs could pursue “reverse veil piercing” claims against the subsidiaries of a corporate defendant accused of abusing the corporate form to avoid paying an appraisal judgment from the Delaware courts. The court acknowledged that reverse veil piercing claims, which seek to hold subsidiaries liable for conduct by corporate parents, would not be appropriate in all cases, and established a multi-part test for considering whether a case rose to the level required to permit reverse veil piercing claims to proceed. The court did not rule on whether controllers, rather than third parties, could also bring reverse veil piercing claims, leaving that issue for another day.

Exela Technologies acquired SourceHOV Holdings in a merger in July 2017. Manichaean Capital and other SourceHOV Holdings equity holders (Plaintiffs) exercised their right to a statutory appraisal in September 2017. The court appraised the value of their shares at over US$57 million collectively, which was significantly above the consideration they would have received in the merger, and entered a final judgment in their favor in March 2020, which was affirmed by the Delaware Supreme Court. In July 2020, they obtained a charging order against SourceHOV Holding’s membership interest in its subsidiaries. To the extent that Exela, as a parent of SourceHOV Holdings, sought to receive distributions from SourceHOV Holdings subsidiaries, any money that flowed through SourceHOV Holdings had to first be paid to plaintiffs as judgment creditors.

In January 2020, “mere weeks” before the court’s decision in the appraisal action, Exela, through its subsidiaries, entered into a US$160 million accounts receivable securitization facility (the A/R Facility). Exela created two entities to facilitate the transaction. Thirteen of the SourceHOV subsidiaries sold their accounts receivable to the first entity, Exela Holdco LLC. Then, Exela Holdco sold those receivables to the second created entity, Exela Receivables I LLC. Exela Receivables I then pledged the receivables as collateral for loans and letters of credit. This A/R Facility permitted value once held by the SourceHOV subsidiaries to instead be held by Exela’s indirect subsidiary, diverting the funds around SourceHOV Holdings directly to Exela.

The plaintiffs, confronted with the circumstance where the appraisal judgment debtor could not or would not pay, brought an action in Delaware Court of Chancery to hold Exela and its affiliated entities accountable for the appraisal judgment under three theories. First, they sought to pierce the corporate veil upwards to reach Exela, SourceHOV Holding’s corporate parent. Second, they sought to pierce the corporate veil downwards via “reverse-veil piercing” to reach SourceHOV Holding’s solvent subsidiaries, so plaintiffs could enforce their charging order against these entities. Third, the plaintiffs argued the court should determine that Exela was unjustly enriched and order it to pay restitution to the plaintiffs. The defendants moved to dismiss under Court of Chancery Rule 12(b)(6).

The court held that under a traditional veil piercing analysis, the complaint sufficiently alleged that Exela engaged in the A/R facility for the purpose of leaving SourceHOV unable to satisfy the appraisal judgment, and declined to dismiss plaintiffs’ veil piercing claims against Exela.

Turning to the plaintiffs’ request to hold SourceHOV Holding’s subsidiaries liable through reverse veil piercing, the court stated that this appeared to be a question of first impression in Delaware. Looking to decisions of the state courts of Virginia and Colorado, and to the Fourth Circuit’s prior interpretation of Delaware law, the court held that outsider reverse veil piercing claims were viable in Delaware in “exceptional circumstances” and established a two part test. First, courts should consider the factors Delaware courts use in a traditional veil-piercing analysis, including whether the company was adequately capitalized and whether corporate formalities were observed. Second, the court should ask whether the owner is utilizing the corporate form to perpetuate a fraud or injustice, and identified eight factors courts should analyze.

Applying that test, the court found that the reverse veil-piercing claims could proceed, including because of the absence of apparent innocent shareholders or creditors who would be harmed by reverse veil-piercing, and the court’s finding there was a reasonable inference that Exela and SourceHOV Holding’s subsidiaries had engaged in a scheme to ensure Exela retained the value of the plaintiff’s pre-merger SourceHOV Holding equity. Further, there was no other remedy that existed in law or equity against SourceHOV Holdings or its subsidiaries that would remedy the harm. Finally, the court noted that the § 18-703(d), the charging order statute, did not prevent the court from expanding the entities against whom a charging order could be enforced.

Having so held, the court rejected the plaintiffs’ alternative claim for unjust enrichment, finding that it was not viable because the charging order statute provided that “a charging order is the exclusive remedy” for a judgment creditor, and that plaintiffs could not bypass the statute by seeking other legal or equitable remedies.



Authored by Ryan M. Philp, David R. Michaeli, and Jason Chohonis.

Jon Talotta
Global Co-Lead
Northern Virginia
William Regan
New York
David Michaeli
New York


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