Thursday, August 4, 2022

Their Unorthodox Litigation

A marriage that was not all that it appeared to be is the subject of a Delaware Court of Chancery opinion

Fashion designer Julia Haart and telecom billionaire Silvio Scaglia have a carefully curated public image supporting both their business partnership and their marriage. They met through work at a luxury fashion brand, and married in a lavish ceremony. Scaglia brought his new wife into the leadership of one of his businesses, a major model management company. Haart and Scaglia present as though they own and run that business as equals. In their free time, the couple maintains a glamorous lifestyle. They host friends and family in their sprawling Tribeca penthouse. They drive matching Bentleys. And television cameras follow their every move for Haart’s Netflix reality series, My Unorthodox Life. But their public image differs from their formal business arrangement. That tension is the central issue in this case.

Behind the cameras and bright lights is a pair of Delaware entities. The first is the holding company for the modeling business, Elite World Group, LLC (“EWG”). The second is the couple’s umbrella company, Freedom Holding, Inc. (“Freedom”), which holds EWG and the couple’s other personal and business investments. Haart and Scaglia are co-owners of Freedom; Haart was an EWG director and its CEO; and this opinion assumes Haart was a Freedom director. To the public, Haart and Scaglia presented a united front, telling potential investors, other third parties, and tax authorities that they owned Freedom equally. But behind
the scenes, Freedom’s internal documents told a different story.

Scaglia formed Freedom and initially held all one hundred shares of its common stock. In December 2018, anticipating his marriage to Haart, Scaglia caused Freedom to issue him 123,665 preferred shares of Freedom stock. After the couple married in June 2019, Scaglia transferred Haart fifty of Freedom’s common shares, but did not mention or transfer any preferred shares. In March 2020, Haart learned about the preferred shares, and demanded that the two be equal partners. In response, Scaglia executed a stock power, transferring 61,832, or 49.9995957%, of the preferred shares to Haart. Scaglia thus maintained a one-share voting advantage over Haart. Haart discovered this discrepancy as the couple’s marriage deteriorated, but continued to insist she was an equal owner.

In the final moments of their marriage, Scaglia used his control over Freedom to oust Haart from her positions at Freedom and EWG; a majority of EWG’s board, including Scaglia, also removed her from her positions at EWG. Haart argues that because she is an equal owner of all classes of Freedom stock, Scaglia could not unilaterally remove her from her Freedom directorship, Freedom is deadlocked, and neither Freedom nor EWG’s board could remove her from her EWG roles. She brings declaratory judgment claims to resolve who controls Freedom and EWG under 8 Del. C. § 225 and 6 Del. C. § 18-110, a claim to dissolve Freedom under 8 Del. C. § 226, and a breach of fiduciary duty claim. Scaglia brought reciprocal counterclaims for declaratory judgments.

This post-trial opinion on the declaratory judgment and dissolution claims finds that Haart does not own half of Freedom’s preferred shares, and so is not entitled to relief under any of her theories. Despite the appearance of an equal partnership, the evidence reveals that Haart never owned an equal stake of Freedom’s preferred stock. For the reasons that follow, judgment is entered for Scaglia on all those counts.

(Mike Frisch)

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