Pirates Of Cape Cod
The Delaware Court of Chancery issued an 122 page opinion in litigation over the booty recovered from a pirate ship that sank over 300 years ago
The plaintiff is a sophisticated business consultant, the former director of a publicly traded corporation, and stockholder of Maritime Explorations, Inc. (“MEI”). MEI holds significant rights in the only identified pirate shipwreck ever discovered—the Whydah Galley—and has worked to excavate the wreckage with varying levels of success.
The plaintiff brings this action to challenge (1) specific incidents of alleged fiduciary misconduct by MEI’s two directors (the defendants) over the past three decades and (2) an allegedly unfair 2018 merger (the “Merger”) that the defendants caused MEI to enter and for which the plaintiff seeks rescission.
Despite being on inquiry notice of his potential non-Merger claims many years prior, the plaintiff did not act. And for 23 years, while roosting atop his claims, the plaintiff continued his slumber. In that time, the defendants have become severely prejudiced in their ability to mount a defense. Indeed, among other things, two individuals who would have been key witnesses died. This includes one of the two defendants in this action. Likewise, a flood destroyed many of MEI’s documents and records several years before the plaintiff initiated this action.
It would undermine the equitable principles embodied in the doctrine of laches to find for the plaintiff on the claims challenging acts that took place decades ago. Among other things, those principles are concerned with the natural decay of evidence over time and a defendant’s ability to mount a defense with available evidence. That is, with the passage of time comes the increasing risk that evidence that may have once been available to prove a defendant’s case has succumbed to the destructive forces of nature. Indeed, under circumstances like these, such delayed claims pose a substantial risk of unjust outcomes. There is a serious risk that a defendant will be held liable either because he bears the burden of proof and can no longer obtain exonerating evidence or, more perniciously, because only the evidence damning him was, by chance alone, not the subject of decay. Delaware law thus compels me to reject the plaintiff’s delayed claims.
The plaintiff awoke to raise these claims only after learning that the defendants caused MEI to merge with an entity the defendants owned. The defendants undertook the Merger in anticipation of a significant payout and their belief they were close to uncovering the “mother [l]ode.” Lacking any semblance of fair process and no reasonable metric for evaluating the fairness of the price, the defendants used the Merger to grant themselves additional equity and to extract rights to a substantially greater share of the Whydah assets, all to the detriment of the minority stockholders. Under the facts presented here, the plaintiff prevails on this timely Merger claim, and rescission is the appropriate remedy.
The prize
[Defendant] Clifford is an explorer. His exploration—specifically of the Whydah Galley pirate ship—has led to this litigation. The Whydah sank off the coast of Cape Cod in 1717 while under the command of the pirate Sam Bellamy. Aboard, so it is rumored, were chests of money and treasure from at least 53 other vessels the Whydah’s crew had robbed. The Whydah lay on the ocean floor for over 250 years until 1982, when Clifford discovered debris off the coast of Massachusetts while operating his company Maritime Underwater Surveys, Inc. (“MUS”). Believing the debris to be from the Whydah’s wreckage, Clifford, through MUS, initiated and succeeded in a federal admiralty action in which he sought sole title to the Whydah. In May 1983, while the admiralty litigation was ongoing, Clifford formed MEI to facilitate his excavation of the Whydah wreckage.
After forming MEI, Clifford and MUS assigned their rights in the Whydah to MEI. Then, Clifford sought equity financing through MEI to fund the Whydah’s costly excavation. As a result of these efforts, MEI raised over $1 million in financing through two private placements between 1983 and 1986. In addition to the stock issued through the private placements, MEI also issued stock to compensate those involved in its excavation and business operations. MEI continued this practice for many years. These individuals—the participants in the private placements and those MEI compensated with stock for their services—are MEI’s minority stockholders.
Since its inception, MEI has recovered roughly 15,000 coins. Although Defendants “haven’t found the mother lode yet,” the coins they have recovered remain the “world’s only pirate treasure.” Along with the coins, Defendants have recovered many other artifacts, including cannons, guns, and the Whydah’s bell.
A falling out among the present litigants
Clifford testified under oath to events that took place in a meeting at the Harvard Club. Clifford asserts that, in addition to making “anti-Semitic comments” at the meeting, Buddenhagen “exposed himself at the table, stood up and said, ‘Meet OneEyed Willy.’” These events were followed promptly by WPLP’s letter to Defendants asking that they remove Buddenhagen from the Management Committee. Defendants acquiesced.
Buddenhagen vociferously denies Clifford’s allegations and asserts they are entirely false.
The Chancellor
To be clear, I am unable to determine with any remote degree of confidence what happened at the Harvard Club three decades ago. At this point, I have only the testimony of two individuals who are, to put it mildly, quite adverse to each other and interested in the outcome of this litigation.
The litigation
On January 9, 2019, Buddenhagen made a books and record demand pursuant to Delaware General Corporation Law (“DGCL”) Section 220. On April 4, 2019, Buddenhagen commenced this action. On April 18, 2020, Lazier passed away, after which the Court granted Plaintiff’s motion to substitute the Estate of Robert T. Lazier as a party.
Trial took place after another Vice Chancellor rejected a settlement agreement.
The present action centers around two issues. The first deals with whether Defendants breached their fiduciary duties by engaging in the Buyout, the events involving HS and AEI, and Defendants’ other non-Merger acts. The second asks whether the Merger was both validly approved and entirely fair.
To the former, Plaintiff argues that over the past 30 years Defendants have breached their duty of loyalty to MEI by, among other things, usurping MEI’s corporate opportunities, diverting and converting corporate funds and assets, and engaging in rampant self-dealing. In response, Defendants advance a laches defense, which, they argue, bars Plaintiff “from challenging the hornets’ nest of decades[-]old occurrences in connection with this litigation.”
No one can deny that Defendants faced tremendous prejudice from Plaintiff’s delay in bringing this action. Textbook examples of laches prejudice—including the destruction of records through floods and the death of multiple key witnesses—make it very clear that, if evidence existed that could prove Defendants’ conduct over the prior decades was proper, Defendants have been severely prejudiced in their ability to produce it. It is also clear that Plaintiff was on inquiry notice of the alleged breaches many years before initiating this action. Accordingly, principles of equity, which manifest themselves through the doctrine of laches, compel me to conclude that Plaintiff is time-barred from asserting its non-Merger claims.
As to the second issue, Plaintiff argues a majority of MEI’s common stock did not approve the Merger because Defendants did not hold the requisite percentage of MEI stock. Next, Plaintiff attacks the Merger’s fairness. Defendants raise three responses to fairness. First, Dr. Margolin’s assessment suggests the transaction was fair; second, they relied on Bergman’s belief the Merger consideration was fair; and third, they subjectively believed the Merger consideration was fair. As I explain below, none of Defendants’ arguments as to fairness prevail.
Captain Samuel Bellamy (c. 23 February 1689 – 26 April 1717), later known as “Black Sam” Bellamy, was an English sailor turned pirate during the early 18th century. He is best known as the wealthiest pirate in recorded history, and one of the faces of the Golden Age of Piracy. Though his known career as a pirate captain lasted little more than a year, he and his crew captured at least 53 ships.
Called “Black Sam” in Cape Cod folklore because he eschewed the fashionable powdered wig in favor of tying back his long black hair with a simple band, Bellamy became known for his mercy and generosity toward those he captured on his raids. This reputation earned him another nickname, the “Prince of Pirates”. He likened himself to Robin Hood, with his crew calling themselves “Robin Hood’s Men”
(Mike Frisch)