By Mark S. Nelson, J.D.
The Canadian company Crystallex International Corporation will take a further step forward in its efforts to execute an international arbitration award against Petróleos de Venezuela, S.A. (PDVSA) now that the Chancery Court has issued a ruling that paves the way for PDVSA to reaffirm its ownership of PDV Holding, Inc. (PDVH), the company that holds the oil refiner CITGO, by requiring PDVH to replace a stock certificate that PDVSA said was lost, stolen, or destroyed. The lever for advancing the matter will be the posting by PDVSA of a largely token bond of $10,000 in order to obtain the new share certificate (Petróleos de Venezuela, S.A. v. PDV Holding, Inc., November 28, 2023, Fioravanti, P.).
The bond amount ruling arose from a complex set of events set in motion by Crystallex’s attempts to execute a $1.2 billion international arbitration award against the Bolivarian Republic of Venezuela and the state-owned PVDSA. The District Court for the District of Columbia confirmed the award. Crystallex then sought to attach shares of PDVH, which is owned by PDVSA, on the theory that PDVSA is the alter ego of Venezuela. The District Court for the District of Delaware and then the Third Circuit affirmed Crystallex’s right to pursue the two state-owned businesses.
The one wrinkle in the path of Crystallex’s goal was that PDVSA claimed to have only a photocopy of the original stock certificate indicating its ownership of PDVH, which meant PDVSA needed to have PDVH reissue the certificate. That part of the dispute landed in the Delaware Chancery Court because PDVH is a Delaware corporation.
Under 8 Del. C. § 168, a new stock certificate can be issued by a company if the owner of the certificate shows to the court’s satisfaction that the original certificate was lost, stolen, or destroyed. The court may compel the issuance of the new certificate if: (1) the corporation refused to issue the certificate; (2) the plaintiff is the lawful owner of the certificate that was in fact lost, stolen, or destroyed; and (3) the corporation has not demonstrated good cause not to issue the certificate.
These Delaware law requirements were easily met, according to the Vice Chancellor, who spent the bulk of the opinion mulling the bond issue. That was important because 8 Del. C. § 168 also states that the court must require the plaintiff seeking reissuance of a stock certificate to post a bond, which then serves as the cap on the re-issuing corporation’s liability for the share certificate.
PDVH had argued that a large bond was needed. Although PDVH proposed various amounts, its latest request was for at least a $1.2 billion bond. PDVSA never stated a specific amount, but PDVSA did tell the court that PDVH’s request was “excessively high.”
The court also looked to an amicus brief filed with the court by a group of creditors of PDVSA or Venezuela that urged the court to compel PDVH to reissue the stock certificate. Amici argued that PDVSA and PDVH had “aligned interests” such that a nominal bond amount would be appropriate.
The court’s analysis began with the conclusion that the court cannot waive the bond and security requirements, but that the court otherwise has discretion regarding the form and sufficiency of the bond. The court also noted that it would consider the fact that no one else had come forward with a claim to the certificate.
With respect to the potential interplay between 8 Del. C. § 168 and UCC Article 8, the court suggested that it was unlikely that a protected purchaser was quietly maintaining an interest in the certificate. That meant this possibility was “merely theoretical” and did not favor the imposition of a large bond.
Moreover, the court observed that there had been no request to register a transfer of shares on PDVH’s books and that Venezuela, or anyone else, seeking to pledge or transfer the certificate would violate sanctions imposed by the U.S.’s Office of Foreign Assets Control.
As a result, the court determined that a nominal, unsecured bond in the amount of $10,000 would be sufficient. PDVH was ordered to issue a replacement stock certificate to PDVSA once PDVSA has posted the bond.
The case is No. 2023-0778-PAF.