Oracle Partners, L.P. v. Biolase, Inc., C.A. No. 9438-VCN (Del. Ch. May 21, 2014), aff’d, C.A. No. 270, 2014 (Del. June 12, 2014)
By Jamie Bruce and Ryan Drzemiecki
In his May 21, 2014 opinion in Oracle Partners, L.P. v. Biolase, Inc., C.A. No. 9438-VCN (Del. Ch. May 21, 2014), Vice Chancellor Noble addressed the issue of what was said, and the legal effect of the statements made, during a telephonic meeting (the “Meeting”) of the board of directors of Biolase, Inc. (“Biolase”) on Friday, February 28, 2014.
Prior to the Meeting, Biolase had six directors. On the Monday following the meeting, Biolase issued a press release stating that two of the directors — Alexander Arrow, M.D. (“Arrow”) and Samuel Low, D.D.S. (“Low”) — had resigned from the board and two new directors — Paul Clark (“Clark”) and Jeffrey Nugent (“Nugent”) — had been appointed in their place. In a contradictory Form 8-K filing with the Securities and Exchange Commission (“SEC”) three days later, which included the press release as an exhibit, the Company disclosed only that Clark and Nugent had been appointed to the board, which had apparently increased to eight members.
Shortly thereafter, Oracle Partners, L.P. (“Oracle”), a Biolase stockholder, brought an action in the Delaware Chancery Court (the “Chancery Court”) pursuant to 8 Del. C. § 225 to determine the proper composition of the board. The original directors excluding Arrow and Low (the “Undisputed Directors”) were not at issue. Oracle sought a declaration that the board consisted of the Undisputed Directors plus Clark and Nugent. Biolase, on the other hand, sought a declaration that the Undisputed Directors were the only members of the board. Biolase also asserted counterclaims against Oracle for fraud and negligent misrepresentation.
This dispute arose out of a series of events that culminated in the Meeting. During the summer of 2013, Oracle, a strategic investment firm solely within the health care industry, became interested in Biolase, a medical device manufacturer focused in the dental industry. After negotiations to invest in Biolase stalled, Oracle began purchasing Biolase’s stock, ultimately disclosing that it beneficially owned 11.4% of Biolase’s stock in December 2013. Following this accumulation of Biolase’s stock, Larry Feinberg, managing member of Oracle’s general partner, testified that he sought to effect corporate governance changes at Biolase in the beginning of 2014.
Seeking financing, Federico Pignatelli, the chairman and CEO of Biolase, reached out to Mr. Feinberg in February 2014 to see if Oracle would be interested in making a $5 million investment in Biolase. As this investment would have brought Oracle’s ownership over Biolase’s poison pill threshold, the board, upon Mr. Pignatelli’s recommendation, raised the threshold, and Oracle then invested approximately $5 million in Biolase through a private placement, which, with other small public market purchases, brought its then current ownership to 16.4%.
In the time running up to the Meeting, after discussing various candidates, Mr. Pignatelli and Mr. Feinberg agreed to a plan to appoint Clark and Nugent to the board. To make room on the board, Mr. Pignatelli decided to remove Arrow and Low, and he informed them of his wishes on February 27, the day before the Meeting. Reluctant at first, Arrow eventually verbally agreed to resign the next morning. Low, however, testified that he told Mr. Pignatelli that he would consider resigning “if it was in the best interests of the company.” At the meeting, Arrow initially tried to avoid resigning, but eventually succumbed to Mr. Pignatelli’s demand that he follow through on the “hand shake deal” to resign and testified that he said, “[o]kay, I agree, I go along with that.” The Chancery Court found that, with those words, Arrow believed he had verbally resigned from the board. With regard to Low, while the agenda provided that he would resign, he never spoke during the meeting. Later in the day after the Meeting, Low resigned via an email that he sent to Biolase’s General Counsel.
The Chancery Court stated that Delaware law generally permits directors to resign verbally unless a corporation’s governing documents provide differently. Biolase’s bylaws provide, in relevant part, that “[a]ny director…may resign at any time upon written notice to the Board…” Seizing upon “may” as the operative word, the Chancery Court concluded that “Biolase’s bylaws permit, but do not require, a director to resign in writing. Thus, by necessary implication, a Biolase director may also resign verbally.” Going further, the Chancery Court made the factual determination by a preponderance of the evidence that Arrow did indeed resign at the Meeting because, although he did not say the magic words “I resign,” the objective manifestations of his words and actions at the meeting had the effect that he resigned. On the other hand, because Low never spoke at the Meeting, the Chancery Court concluded that he did not “sufficiently manifest his intent to resign” until after the meeting when he sent the resignation email. Thus, the vacancy created by his resignation could not have been filled by the directors’ vote at the Meeting, and the Biolase board currently had one vacancy.
After determining that only one vacancy existed during the Meeting when the Biolase board unanimously voted to appoint two new directors, the Chancery Court looked to the “practical realities of the situation” to determine whether Nugent or Clark was appointed to the board during the Meeting. Since the draft Meeting minutes reflected, in the following order, that Low and Arrow would be resigning and that Nugent and Clark were appointed to the board, the Chancery Court, under a parallel reading of the minutes, concluded that, “after Arrow verbally resigned during the Meeting, the Biolase board duly appointed Clark to that vacancy.” Thus, the Chancery Court held that Biolase’s board of directors is currently composed of the Undisputed Directors and Clark.
Finally, the Chancery Court addressed Biolase’s counterclaims for fraud and negligent misrepresentation, in which Biolase alleged that Oracle (i) failed to disclose that it was seeking to oust Mr. Pignatelli as CEO; and (ii) failed to disclose that it had agreed with Clark and Nugent that, were they to become directors, they would fire Mr. Pignatelli as soon as possible. The Chancery Court noted that, from the start of their relationship, Oracle (through Mr. Feinberg) informed Biolase (represented by Mr. Pignatelli) that it wanted (i) to add independent directors and (ii) assuming the reconstructed board agreed, to improve Biolase’s management. The Chancery Court further noted that no evidence of an agreement between Oracle (through Mr. Feinberg) and Clark or Nugent existed. Thus, because Oracle did not make any false statements or omissions, the Chancery Court dismissed Biolase’s counterclaims.