In H&N Management Group, Inc. & Aff Cos Frozen Money Purchase Plan v. Robert M. Couch et al., No. 12847-VCMR (Del. Ch. Ct. August 1, 2017), the Court of Chancery denied defendants’ motion to dismiss and held that plaintiffs sufficiently alleged a reason to doubt that the board of AGNC Investment Corp (the “Company”) was adequately informed when approving (i) subsequent renewals of a management agreement between the Company and American Capital Mortgage Management, LLC (the “Manager”) as well as (ii) the acquisition of the Manager for a price of $562 million.
In In Re Appraisal of PetSmart, Inc., C.A. No. 10782-VCS (Del. Ch. May 26, 2017), the Delaware Court of Chancery confirmed in a statutory appraisal proceeding that the fair value of the shares of common stock of PetSmart, Inc. (“PetSmart” or the “Respondent”) at the time of its going-private merger transaction was the deal price of $83 per share. The Court reached this conclusion after thoroughly examining and ultimately rejecting the use of the discounted cash flow (“DCF”) analysis to determine fair value as proposed by a group of plaintiff former stockholders of PetSmart (the “Petitioners”).
In Nguyen v. View, Inc. (C.A. No. 11138-VCS (Del Ch. June 6, 2017), the Delaware Chancery Court denied defendant View Inc.’s (“View”) motion to dismiss a suit brought by its Paul Nguyen, a majority common stockholder of View, seeking a declaration in accordance with 8 Del. C. § 205, that View’s attempts to validate invalid rounds of financing were improper. The Court held that a stockholder’s rejection of a corporation’s proposal and a decision to proceed with a deliberately unauthorized corporate act does not qualify as a “defective corporate act” that can subsequently be ratified under 8 Del. C. § 204.
In Nguyen, Paul Nguyen was the founder of View.—a corporation that sold windows with manually- and electronically-adjustable lighting properties—and served as both its President and Chairman of its Board. In 2007, View entered into a preferred stock financing round with two venture capital funds (the “Series A Financing”). Under the Series A Financing agreement, Nguyen would step down as the company’s CEO, but would still retain seventy percent of View’s outstanding common stock. The parties also drafted a new voting agreement that altered View’s governance structure. This agreement established a five-person Board of Directors, composed of two seats controlled by each venture fund and one controlled by Nguyen. View then filed an Amended and Restated Certificate of Incorporation that provided the venture funds with the rights to veto or approve many of View’s corporate acts. It also provided Nguyen with the protection of a class vote provision that any amendment to the certificate of incorporation changing the rights of the common stock and any changes to the voting agreement relating to Nguyen’s ability to approve changes to the size of the board of directors and to fill a seat on the board must be approved by a majority of the common stock outstanding.
In 2009, following the appointment of a new CEO, View terminated Nguyen’s employment and began maneuvering to push him out of leadership on its Board. Nguyen, however, asserted that his status as majority common stockholder meant that his removal violated both the certificate of incorporation and the voting agreement. View and Nguyen took their dispute to mediation and eventually came to a settlement agreement that included a stockholder consent signed by Nguyen that would allow the company to pursue new financing agreements (the “Series B Financing”). The Series B Financing as proposed would eliminate Nguyen’s rights to approve any amendments to the certificate of incorporation or voting agreement, his position as Chairman, and his ability to fill a Board seat. The settlement agreement, however, contained a seven-day rescission period for either party. After further review of the Series B Financing, Nguyen objected to the change to his rights as a stockholder and sent a notice of rescission of the settlement agreement and the stockholder consent to View within the seven-day window. View, however, had already closed the Series B Financing before the rescission window elapsed. Nguyen filed suit to challenge the validity of the Series B financing, and the parties agreed to submit the matter to arbitration. During arbitration, View entered into subsequent financing rounds, raising over $500 million. Eventually, the arbitrator ruled that Nguyen had validly rescinded the settlement agreement and stockholder consent. As a result, the Series B Financing and subsequent financing rounds became void and invalid.
Because View’s reformed capital structure hinged on the Series B Financing, the Series A Financing stockholders pursued alternative methods to ratify the financing. They converted their preferred shares to common stock to displace Nguyen as the majority common stockholder; subsequently, they ratified the Series B financing the arbitrator ruled to be invalid, replaced the existing voting agreement with a new one that created an eleven-member Board, and removed Nguyen from the Board. View later discovered that it had ratified these amendments improperly and corrected its ratifications. Nguyen filed suit under 8 Del. C. § 205, alleging that the ratifications View adopted were improper. View subsequently filed a motion to dismiss, stating that Nguyen had not pled facts that could support his § 205 claim.
The court denied View’s motion to dismiss. The court first qualified that in order to determine whether View’s ratifications were proper under Section 204, it would need to determine whether the acts needing ratification qualified as “defective corporate acts” under Section 204. In examining Section 204, the court concluded that View’s amendments did not qualify as “defective corporate acts.” The court noted that Section 204 provides that any “defective corporate acts that a corporation purports to ratify must be within the corporation’s power ‘at the time such act[s] [were] purportedly taken.’” (emphasis in original). Therefore, the court reasoned that because View’s voting agreement and certificate of incorporation required the majority stockholder’s consent to make any corporate actions valid as a matter of law, Nguyen’s refusal to give his consent undercut the legitimacy of the corporation’s ratifications. The court explained that “[t]he reason the Series B Financing was declared void was not that View failed to comply with the Delaware General Corporation Law or its own governance documents in securing the stockholders’ approval of the transaction; the transaction was void because the majority common stockholder deliberately rejected it.” (emphasis added). The court distinguished a stockholder’s “rejection” of a corporate proposal from a mere “failure” of authorization, and held that allowing ratification of the former is not contemplated by Section 204.
View alternatively argued that Nguyen’s refusal to consent did not prevent the Series A holders from later converting their shares to common stock and ratifying the Series B Financing since they could have done so at the time. The court rejected this position, finding that it would undermine the power of a stockholder’s “no” vote. Finally, the court stated that Section 204 could not be used as a “license to cure just any defect” nor “to ‘backdate’ an act that did occur but that the corporation wishes had occurred as of an earlier date.” Therefore, View could not use Section 204 to backdate its conversion of preferred stock to common stock and avoid Nguyen’s consent for ratification of the Series B financing.
The court subsequently denied View’s motion for a reargument under Court of Chancery Rule 59(f).
In Thomas McKenna, et al., v. David Singer, et al., C.A. No. 11371-VCMR (Del. Ch. July 31, 2017), the Delaware Court of Chancery relied on the doctrine of unclean hands to rule against the McKennas, a father and son team of would-be energy conversion financiers, who brought a claim for breach of fiduciary duties against their business partners, Daniel and David Singer, for alleged misappropriation of a corporate opportunity. The Singers were brothers and co-owned of an energy distribution business conducted through their companies, Singer Energy Group, LLC (“SEG”) and Robison Energy, LLC (“Robison Energy”). The Singers and McKennas formed two entities together, Robison Energy Fund, LLC (“REF”) and Green Energy Companies, LLC (“GEC”), with the intent of using REF and GEC to create a new financing business that would assist in capitalizing the Singers’ existing businesses and would act as an underwriting arm for loans to customers that wanted to finance energy conversion projects performed by Robison Energy. These business and financing plans failed and the Singers turned instead to Westport Capital Partners (“Westport”) for a financing deal in which the McKennas, REF and GEC were ultimately not involved. The McKennas then sued the Singers on the theory that the Singers misappropriated an opportunity that belonged to REF and GEC. The Court found that the McKennas had misrepresented their previous financing work, and such misrepresentations had been integral in inducing the Singers to enter into a business relationship with the McKennas. As such, the McKennas could not now “seek to enforce the fiduciary duties that attached in part because of their misrepresentations.” The Court also considered on the merits the McKennas’ misappropriation claim and determined that it also failed because the opportunity with Westport never belonged to REF and GEC and was an opportunity solely for Robison Energy.
In Williams v. Ji, C.A. No. 12729-VCMR (Del. Ch. June 28, 2017), the Delaware Court of Chancery denied Defendants’ motion to dismiss, holding that the option and warrant grants and voting agreements in question were subject to entire fairness and that the Defendant directors had not carried their burden at that stage. The Defendants also moved to stay in favor of an earlier filed case in the Court, but the motion was denied as moot because the earlier filed case had settled.
By order dated August 4, 2017, Vice Chancellor Slights dismissed the complaint seeking to enforce non-compete and non-solicitation provisions in a stockholders’ agreement in EBP Lifestyle Brands Holdings, Inc. v. Boulbain, C.A. No. 2017-0269-JRS (Del. Ch. Aug. 4, 2017), finding that the Delaware Chancery Court lacked personal jurisdiction over the defendant. Specifically, the Court held that defendant’s execution of a stockholders’ agreement governed by Delaware law and concerning a Delaware corporation was insufficient to satisfy the statutory and constitutional requirements to establish personal jurisdiction over an individual not resident or transacting business in Delaware.
In Beach to Bay Real Estate Center LLC et al. v. Beach to Bay Realtors Inc. et al., Civil Action No. 10007-VCG (Del. Ch. July 10, 2017), the Delaware Court of Chancery granted in part the defendants’ motion to dismiss because the plaintiffs’ alleged only conclusory facts in support of their claims for breach of fiduciary duty and constructive trust. The court also dismissed the plaintiffs’ claim for breach of implied contract based on an oral LLC operating agreement, a theory of recovery that was in tension with the sole written document proffered by the plaintiffs and the plaintiffs’ own allegations about the parties’ obligations to the LLC.