Lawyers who practice in the Delaware Court of Chancery probably can recite the shorthand rule that, for most claims, the Court of Chancery will decide whether a claim is filed too late by application of the statute of limitations by analogy. In application, however, the rule is not quite that simple, nor is it applied consistently. In Kraft v. WisdomTree Investments, C.A. No. 10816-CB (Del. Ch. Aug. 3, 2016), the Court of Chancery waded through the murk to bring some clarity to the analysis.
In Kraft, the plaintiff sought to challenge the issuance of shares in 2000 to the defendant in exchange for the defendant's agreement to provide print and online advertising services to Tradeworx Inc. Shortly after issuance of the shares, WisdomTree disclosed that it was having financial difficulty and sold or discontinued certain of the print magazines in which it had agreed to provide advertising for Tradeworx.
In 2015, the plaintiff filed an action against WisdomTree seeking a declaration that the Tradeworx shares issued to WisdomTree in 2000 were void because they were issued in exchange for future services. At the time the shares were issued, the Delaware Constitution and Section 152 of the Delaware General Corporation Law did not permit a company to issue stock in exchange for future services, although those provisions have been amended. WisdomTree moved to dismiss on two grounds: the complaint is time-barred because it was filed almost 15 years after issuance of the shares, and the agreement to provide advertising constituted a valid form of consideration for shares under the law as it existed in 2000. Because the Court of Chancery decided the motion on the time-bar issue, it did not address the validity of the consideration.
In its time-bar argument, WisdomTree argued that the complaint was time-barred based on application of the statute of limitations because the declaratory relief sought—interpretation of a statute and analogous constitutional provision—was a purely legal claim. WisdomTree argued that even if Kraft sought an equitable remedy, the statute of limitations would apply by analogy and bar the claim, or if the statute of limitations did not apply at all, the complaint would be barred by laches.
Before determining which theory applied to the claim in the complaint, the court examined Delaware precedent applying a time-bar in three types of cases: legal claims seeking legal relief; equitable claims seeking equitable relief; and matters involving legal and equitable elements. In its analysis, the court admitted that the prior precedent offered no clear rule or doctrine to apply, but distilled the analysis to the following principles:
• If a plaintiff brings a legal claim seeking legal relief in the Court of Chancery, the statute of limitations (and its tolling doctrines) logically should apply strictly and laches should not apply. Otherwise, one may be able to circumvent the statutory time-bar that would have applied to the same claim if it had been brought in a court of law. Under the precedents of O'Brien v. IAC/Interactive, (Del. Ch. Aug. 14, 2009), aff'd, 26 A.3d 174 (Del. 2011), and Levey v. Brownstone Asset Management, 76 A.3d 764 (Del. 2013), however, extraordinary circumstances may provide an exception to the strict application of statutes of limitations for purely legal matters, separate and apart from the application of tolling doctrines.
• If a plaintiff brings an equitable claim seeking equitable relief, the case falls under the court's exclusive equity jurisdiction. In this case, the doctrine of laches applies and any applicable statute of limitations would apply only by analogy, although the court tends to afford great weight to the analogous statutory period, if one exists, and may bar a claim without further laches analysis if that period has been exceeded and the court does not consider it equitable to do so.
• When an equitable claim seeks legal relief or a legal claim seeks equitable relief, the court will also apply the statute of limitations by analogy, but with at least as much and perhaps more presumptive force given its quasi-legal status, and will bar claims outside the limitations period absent tolling or extraordinary circumstances.
The Court of Chancery then determined that the theory of Kraft's claim—a declaratory judgment regarding compliance with a statute—was legal. The relief sought, however, was equitable, as Kraft essentially sought an order canceling the shares issued to WisdomTree. As a legal claim that sought equitable relief, Kraft's claim fell into the third category of the court's analysis. Thus, the court held that the statute of limitations applies by analogy. The claim was not filed until 12 years after the statute of limitations passed. Kraft did not argue that any tolling doctrine applied. The court also found that no extraordinary circumstances were present to justify departing from application of the analogous statute of limitations. For these reasons, the court dismissed the claim.
The Court of Chancery's opinion in Kraft provides a helpful framework for addressing time-bar questions in the Court of Chancery. Space limitations prohibit recounting the deep dive the court took to formulate the three principles described above, but is highly recommended for anyone seeking further background on time-bar rulings and the court's jurisdiction. Hopefully with the guidance in Kraft, the court can bring clarity to an area of the law that lacked it.