Chancery Court Finds that Its Broad Authority to Validate Defective Corporate Acts Could Conceivably Compel a Corporation to Sell $5 Million of Stock Without Board Authorization or a Written Agreement

By Shoshannah Katz and B. Ashby Hardesty, Jr.

Citing the Chancery Court’s broad discretionary authority to validate defective corporate acts, Vice Chancellor Noble denied a defendant corporation’s motion to dismiss, ruling that it was “reasonably conceivable” that a plaintiff hedge fund could successfully compel the corporation to sell to it approximately $5 million worth of stock, despite the board of directors’ failure to authorize the transaction or to memorialize it in writing.

On January 29, 2016, Vice Chancellor Noble issued an order in Knoll Capital Management L.P. v. Advaxis, Inc., C.A. No. 11417-VCN (Del. Ch. January 11, 2016), finding that it was “reasonably conceivable” that Knoll Capital Management L.P. (“KCM”) could succeed in compelling Advaxis, Inc. (“Advaxis”) to sell shares of Advaxis common stock to KCM. In doing so, Vice Chancellor Noble denied Advaxis’s motion to dismiss.

In November 2014, KCM and Advaxis orally agreed that KCM would purchase approximately 1.66 million shares of unregistered Advaxis common stock for $3 per share. A month thereafter, Advaxis issued these shares to another acquirer at $4.25 per share and refused to complete its transaction with KCM. By late June 2015, shares of Advaxis stock were trading for more than $30 per share. KCM filed suit against Advaxis in order to compel it to complete the transaction or pay damages.

Advaxis moved to dismiss KCM’s complaint, arguing that it failed to state a claim upon which relief could be granted. In its motion, Advaxis contended that the agreement between Advaxis and KCM was never approved by Advaxis’s board of directors and that the agreement was never memorialized in writing, both requirements for the transaction under Delaware law.

Vice Chancellor Noble addressed each of these points in turn. First, he found that KCM’s pleading that Advaxis’s board of directors authorized its CEO to enter into the transaction was, for purposes of the motion, a sufficient counter to Advaxis’s argument. Vice Chancellor Noble then considered whether a failure to satisfy the requirement of a writing was a “defective corporate act” that could be cured under Section 205 of the Delaware General Corporation Law (the “DGCL”). As defined in the DGCL, a “defective corporate act” includes “any act or transaction purportedly taken by or on behalf of the corporation that is, and at the time such act or transaction was purportedly taken would have been, within the power of the corporation…but is void or voidable due to a failure of authorization.” Citing Advaxis’s own arguments that being bound by the alleged agreement turned on a “failure of authorization”, Vice Chancellor Noble found that KCM’s claim conceivably fell within Section 205 of the DGCL. Vice Chancellor Noble also characterized recent legislation empowering Delaware courts to validate defective corporate acts as “broad in scope”. For these reasons, Vice Chancellor found that it was reasonably conceivable that KCM could obtain relief under Section 205. Accordingly, Vice Chancellor Noble denied Advaxis’s motion to dismiss.

Knoll Capital Management L.P. v. Advaxis, Inc., C.A. No. 11417-VCN (Del. Ch. January 11, 2016)