KFC National Counsel and Advertising Cooperative, Inc. v. KFC Corp.,C.A. No. 5191-VCS (Del. Ch. Jan. 31, 2011) (Strine, V. C.)

In this post-trial opinion interpreting ambiguous terms of a certificate of incorporation, Vice Chancellor Strine considered extrinsic evidence of the parties’ negotiations over the certificate’s language and course of dealing, and applied the interpretive principle disfavoring disfranchisement, to hold that the certificate of incorporation did not grant the defendant the right to veto certain corporate acts approved by the corporation’s governing body.

Plaintiff KFC National Counsel and Advertising Cooperative, Inc. (“NCAC”) is a non-stock Delaware corporation formed to direct and deploy advertising funds raised by KFC franchisees to promote the Kentucky Fried Chicken brand. NCAC’s governing body is a committee (the “Committee”) composed of thirteen franchisee representatives and four representatives of defendant KFC Corp. (“KFCC”). The franchisees and KFCC disputed their respective authority under NCAC’s certificate of incorporation to direct Kentucky Fried Chicken’s national advertising strategy, and this impasse led to the current litigation.  The franchisees claimed that the committee may consider recommendations from any of its members, and that those recommendations can be approved and implemented by a majority vote of the Committee. KFCC claimed the certificate granted it a veto over any recommendation to the Committee not made by KFCC.

The court applied standard rules of contract interpretation to determine, without reference to extrinsic evidence, whether the certificate’s language may reasonably be read to have two or more meanings. The court found that neither party’s interpretation of the provisions in question was unreasonable, and thus determined that the certificate was ambiguous. Because, however, the certificate was the product of bilateral negotiation between the franchisees and KFCC, the court declined to apply the “full force” of the rule that ambiguities should be resolved in favor of franchise rights without reference to parol evidence, although also stated that “ambiguous drafting plus ambiguous parol evidence should not support disenfranchisement, even in the bilateral negotiating context.”

To resolve the certificate’s ambiguity, the court considered extrinsic evidence, but placed the burden on KFCC “to demonstrate by clear evidence that the Committee’s authority to govern the NCAC was constrained in the manner KFCC advocates.” The court reviewed the course of dealings between the franchisees and KFCC before NCAC was incorporated; the circumstances and negotiations that produced the NCAC certificate; and the parties’ course of performance under the certificate. The court held that the franchisees‘ reading of the certificate was the more reasonable, and that the certificate did not grant KFCC a veto right over recommendations approved by a majority of the Committee.

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