Chancery Holds Unresponsive Chinese Tech Co. In Contempt
By Matt Chiappardi
Law360, Wilmington (March 6, 2017, 6:36 PM EST) -- A Delaware Chancery judge found Artificial Life Inc. in contempt Monday for failing to respond to an investor's books and records demand, and appointed a receiver for the technology investment company that is organized in the First State, but operates in China and Hong Kong.
After a brief hearing in Wilmington during which representatives for Artificial Life did not show up, Vice Chancellor Joseph R. Slights III said he would enter the contempt order and allowed Moscow-based investor and asset manager Arbat Capital to sell its stock for a fair-market value of $4.88 per share if it wished.
Counsel for Arbat declined to comment after the hearing.
Arbat holds about 6.2 million shares of Artificial Life stock, which would yield around $30.3 million for the asset manager if it decided to sell all of its units, according to court records.
The issue stems from a books and records demand Arbat lodged in the Chancery Court a year ago, arguing Artificial Life hadn't revealed its financial information since 2011.
The suit received no formal response and summonses delivered to Artificial Life's registered agent were returned with the statement, "representation services were discontinued and all process sent to the last known address was returned as undeliverable."
No responses from Artificial Life to the books and record demand were found on the Chancery Court docket, and Arbat attorney Stephen B. Brauerman of Bayard PA told Law360 the company had not responded to its request.
An email to Artificial Life sent Monday was not returned.
The issue has become a familiar one in the Chancery and other courts across the country. A company, usually operating in China, incorporates in the United States, holds an initial public offering or a debt offering, and then effectively goes dark, leaving investors with no recourse to recover their money.
Vice Chancellor Slights' order also awards Arbat its legal fees associated with its contempt motion, but collecting that money may be difficult.
Artificial Life operates in China where there is no direct mechanism to compel compliance with U.S. court orders, but there have been several success stories, such as a case involving China-based ZST Digital Networks Inc. in 2012.
In that case, a special receiver targeted the company through a web of international affiliates that ultimately reached its parent in Hong Kong, which was taken over and ordered remedies for its investors.
The $4.88-per-share fair value of Artificial Life stock comes from a declaration provided by accountant Steven Seiden of The Seiden Group.
According to his declaration, Seiden used a methodology that included historical financial information, comparable companies in the region and sector, and recent media reports to put together an estimate of the company's value.
Seiden said that Artificial Life's book value in 2011 was $60.3 million, and said value estimate was a conservative one.
"[Artificial Life] appears to be a viable and active company with significant assets that continues to generate income and boast of its future potential growth," the declaration states.
Arbat is represented by Stephen B. Brauerman and Sara E. Bussiere of Bayard PA.
Counsel information for Artificial Life was not available.
The case is Arbat Capital Group Ltd. v. Artificial Life Inc., case number 12132, in the Delaware Court of Chancery.
--Additional reporting by Jody Godoy. Editing by Orlando Lorenzo.