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After Failed Acquisition, Court Finds Distribution Rights of Shareholders of “Blank Check Company” Governed by Trust Agreement

In Ruffalo v. TransTech Serboce Partners, Inc. C.A. No. 5039-VCP (Del. Ch. Aug. 23, 2010), read opinion here, the Court of Chancery addressed the novel question of what rights public shareholders of a “blank check company” have when the company distributes its assets in dissolution after having failed to use the proceeds of its initial public offering (“IPO”) to make an acquisition. The Court granted in part and denied in part a motion to dismiss based on Rules 23.1, 12(b)(6), and 9, and based on the terms of a settlement agreement.


Plaintiffs James Ruffalo, Paul Poole, and Opportunity Partners, L.P. are shareholders of Defendant TransTech Service Partners, Inc. TransTech is a “blank check company,” which the SEC defines as a “development stage company” established for engaging in some sort of business combination with an unidentified operating business.

TransTech created a Trust Fund to hold the net proceeds of its IPO (more than $40 million which equaled $7.88 per share) which proceeds could be distributed only upon the consummation of a business combination, or if a business combination did not occur within a year and a half to two years (depending on various factors) from the date of the IPO. TransTech’s ability to access the IPO proceeds was governed by its Charter, Registration Statement, and Trust Agreement.

From November 2008 to May 2009, TransTech attempted to effectuate two mergers, but ultimately abandoned both. Following an action to compel a shareholders meeting, TransTech held such a meeting where the IPO Shareholders voted to dissolve TransTech and receive a distribution of $7.88 per share. In the dissolution, TransTech spent $800,000 from the Trust Fund for working capital expenditures. It also spent interest it had earned on the proceeds of the IPO and it intended to spend tax refunds.

After the IPO shareholders voted to dissolve Trans Tech, plaintiffs filed suit alleging that, among other things, defendants violated section 2(b) of the Trust Agreement which imposed a cap of $800,000 on distributions from the Trust Fund. In particular, plaintiffs alleged: (1) breach of corporate charter; (2) breach of constructive trust; (3) fraud; and (4) conversion. Plaintiffs also sought an accounting, a return of tax refunds, and a distribution of those refunds. TransTech moved to dismiss the Complaint under Court of Chancery Rules 9(b), 12(b)(6), and 23.1, and on the basis of a prior settlement with Opportunity Partners.

Derivative or Direct Claim and the Motion to Dismiss

Defendants asserted that the complaint was derivative in nature because plaintiffs sought a return of money lost by virtue of their ownership in the company. Therefore, defendants asserted that the action should be dismissed because plaintiffs did not make a demand on the TransTech Board or allege demand futility.

The Court disagreed with the defendants finding that the claims based on the plaintiffs’ contractual rights as shareholders – “which exist separately from any right of the corporation” – are direct claims. The Charter distinguished plaintiffs’ rights to the Trust Fund’s interest as IPO shareholders from TransTech’s rights as the company. In addition, plaintiffs’ rights were distinct from the rights of other shareholders, as the plaintiffs were a select set of shareholders who were entitled to funds in the Trust Fund. Because plaintiffs’ claims were direct, no demand was required, and defendants’ motion under Rule 23.1 was denied.

Contract Interpretation of Operational Documents

The Court focused its analysis in large part on the operating documents (the Court cites at length large portions of those documents at pages 6-14 of the opinion). Under the Trust Agreement (which was the principal document for determining TransTech’s right to receive distributions from the Trust Fund), the Court strictly construed section 2(b)’s $800,000 cap as limited to TransTech’s pursuit of business combinations, and not to distributions made in connection with the dissolution. In doing so, it construed the provisions of section 2 of the Trust Agreement independently of each other.

The Court determined that section 2(a) pertained to TransTech’s tax obligations, allowing TransTech to receive distributions from the Trust Fund in order to pay its tax obligations. Section 2(b), on the other hand, pertained to Trans Tech’s pursuit of business combinations, allowing TransTech to tap into the Trust Fund for working capital expenditures while it pursued combinations. The section 2(b) distributions were limited to the extent interest or dividends earned on the property in the Trust Fund could not exceed $800,000. Unlike the prior sections, section 2(c) strictly pertained to distributions made pursuant to dissolution, with no reference to section 2(b). Unlike section 2(b), section 2(c) was void of any such limitations. Thus the lack of a cap for section 2(c) is consistent with the mandates of the Delaware General Corporation Law, which “suggests that no cap could apply to payments that TransTech was required to make to satisfy the claims of creditors while it was in the process of dissolving.”

The Court also noted that its analysis was supported by TransTech’s Registration Statement. There, TransTech acknowledged that in dissolution, the IPO Shareholders would be entitled to the contents of the Trust Fund “after payment of claims and obligations of the company.” As the Court reasoned, this “indicates that the payment of monies in the Trust Fund to TransTech’s creditors in connection with its dissolution and liquidation was potentially in addition to, rather than included in, the $800,000 that could be distributed to fund TransTech’s working capital requirements.” Accordingly, Plaintiff was incorrect in asserting that TransTech could not receive distributions up to $800,000 regardless of the purpose for which the distributions are used.

This summary was prepared by Kevin F. Brady and Ryan P. Newell.

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