Are Partial Written Stockholder Consents Between Annual Meetings Sufficient to Fill Board Vacancies? Chancellor Bouchard’s Ruling in Elite Horse Investments Ltd. v. T3 Motion, Inc. Suggests “Yes”

By Michelle Repp and Lauren Garraux

Ruling of Chancellor Andre Bouchard suggests that partial written stockholder consents between annual meetings may be sufficient to fill board vacancies and calls into question stockholder written consents not dated by hand.

Elite Horse Investments Ltd. (“Elite”) is a stockholder of T3 Motion, Inc. (“T3”), a Delaware corporation. T3’s bylaws provide for a seven-member Board of Directors. As of December 26, 2014, T3’s board had four vacancies, with the other three directorships occupied by T3’s CEO, William Tsumpes (“Tsumpes”), and two other individuals (collectively, the “Existing Directors”). On December 26, 2014 and January 20, 2015, Elite and other stockholders of T3 delivered to T3 two written consents relating to the composition of T3’s board, as follows: (i) on December 26, 2014, Elite and seven other stockholders holding more than 65% of the outstanding shares delivered a signed stockholder written consent dated December 17, 2014 (the “First Consent”) pursuant to which they filled the four vacancies with new directors (the “New Directors”); and (iii) on January 20, 2015, Elite and six other stockholders holding no less than 58% of the outstanding shares delivered a signed stockholder written consent dated January 15, 2015 that ratified and retook the actions reflected in the First Consent and removed Tsumpes and one of the other Existing Directors from T3’s Board (the “Second Consent”) (collectively, the “Consents”).

In addition, the New Directors and the one remaining Existing Director executed a unanimous written consent dated January 15 and 16, 2015 (delivered to T3 on January 20, 2015), in which those directors resolved to remove Tsumpes as CEO and to appoint a new CEO in his place (the “Director Consent”).

Elite originally initiated this action on January 16, 2015, seeking a declaratory judgment, pursuant to Section 225 of the Delaware General Corporation Law (the “DGCL”), that the New Directors were validly elected to T3’s board by the First Consent. The action followed an attempt by Tsumpes, on January 15, 2015, to contact the other two Existing Directors to schedule a board meeting to discuss certain actions that would have the potential effect of diluting the majority interest held by Elite and the other consenting stockholders. Tsumpes did not inform the New Directors of the proposed meeting.

Elite filed an amended complaint on January 21, 2015, in which it asserted two counts: (i) Count I for a declaratory judgment that the First Consent and the Second Consent were valid and effective, and (ii) Count II for declaratory judgment that the Director Consent was valid and effective. Elite also sought a temporary restraining order (“TRO”) to (i) prevent T3’s existing board from taking certain actions that would could cause irreparable harm to T3, and (ii) to maintain the status quo for T3 pending resolution of Elite’s Section 225 claim.

After hearing oral argument on Elite’s motion for a TRO on January 23, 2015, Chancellor Bouchard, ruling from the bench, determined that Elite had “very clearly” satisfied the three requirements for such relief — (i) a colorable claim on the merits; (ii) existence of imminent irreparable harm; and (iii) the balance of hardships in its favor — and granted Elite’s request.

As to the first requirement, Chancellor Bouchard determined that Elite had demonstrated a colorable claim on the merits, as well as reasonable probability of success on the merits (the higher standard for preliminary injunctive relief, which T3 argued was applicable to Elite’s request for relief). In doing so, the Chancellor declined to agree with three arguments raised by T3 relating to the validity and effectiveness of the Consents.

Significantly, the Chancellor preliminarily disagreed with, but did not render a final holding regarding, T3’s interpretation of Section 211(b) of the DGCL. Under T3’s interpretation, Section 211(b) requires that, in order for an action by less than unanimous stockholder written consent regarding election of directors to be valid, all directorships to which directors could be elected at an annual meeting must be vacant and must be filled by the action. T3 maintained that the First Consent was therefore invalid because it did not remove all of T3’s directors before filling the vacancies. Instead, Chancellor Bouchard reasoned that Section 211(b) applies when a stockholder written consent electing directors purports to be in lieu of an annual meeting, and does not apply to actions taken between annual meetings, as was the case with the Consents. The Chancellor also relied on Section 228 of the DGCL, which provides that any action that is required or permitted to be taken at an annual or special meeting may be taken by written consent of the stockholders. Because T3’s bylaws include almost identical language to that found in Section 228, Chancellor Bouchard determined that it is reasonably colorable and reasonably probable that Elite would be able to establish that stockholders may elect directors to fill vacancies at special meetings and, furthermore, may do so by written consent.

Chancellor Bouchard also declined to accept T3’s argument that the First Consent’s did not comply with Section 228(c)’s requirement that the signatures of the consenting stockholders be individually dated. The First Consent contained a typewritten date on the first page and the signature page referred to “the date first written above” (i.e., the date on the first page) as the execution date. Notably, the Chancellor acknowledged that T3 raised a “legitimate point” regarding the validity of the First Consent based on the language of Section 228(c) (which, according to Delaware caselaw, must be “strictly construed”), but ultimately concluded that the issue need not be resolved because the Second Consent — which ratified and retook the actions of the First Consent — complied with Section 228(c) because each signature was hand-dated. Therefore, Chancellor Bouchard ruled that Elite had stated a colorable claim, and one reasonably probable to win on the merits, as to the validity of the Second Consent.

Last, Chancellor Bouchard dismissed T3’s argument that the Consents were invalid because the consenting stockholders failed to comply with Section 228(e)’s requirement that prompt notice of any action taken by less than unanimous written consent be given to the stockholders who did not consent in writing and who would have been entitled to notice of the meeting of stockholders had the action been taken at a meeting. Specifically, T3 had not identified any authority interpreting this requirement to require notice within the time periods at issue (less than 30 days in the case of the First Consent and three days in the case of the Second Consent), and the Chancellor declined to make such a determination at the hearing, in part because he found that there was no prejudice to T3 or its stockholders from not having received notice.

As a result, the Chancellor determined that Elite had stated a colorable claim, as is required for entry of a TRO, and that, even if the higher standard for a preliminary injunction were to be applied, Elite had also satisfied that standard.

Regarding the second requirement for the relief requested by Elite, Chancellor Bouchard determined that Elite had demonstrated irreparable harm. According to the Chancellor, the uncertainty of the composition of T3’s board puts a cloud over how T3 manages itself, which is “plainly irreparable harm” in his view. In making this determination, Chancellor Bouchard noted a “sufficient and legitimate” risk that any material board action taken before the resolution of Elite’s lawsuit (which would likely determine the composition of a majority of T3’s Board) could irreparably harm the New Directors’ and T3’s interests, in the form of potential dilution of a controlling stockholder, a “highly significant act that may involve third parties and be impracticable to unwind later” if such actions are found to be wrongful.

Finally, as to the third element of a successful claim for a TRO, Chancellor Bouchard concluded that the threat of irreparable harm to T3’s stockholders (including the stockholders represented by Elite in this lawsuit) and T3 itself tilted the balance of hardships in favor of granting Elite’s request for a TRO.

In view of these findings, Chancellor Bouchard granted Elite’s motion for a TRO.

Elite vs T3

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