Chancery Court Awards Damages for Breach of Fiduciary Duty Stemming from Director’s Refusal to Sign Self-Help Documents

By: C.J. Voss and Rich Minice

In CertiSign Holding, Inc. v. Sergio Kulikovsky, C.A. No. 12055-VCS, the Court found that Sergio Kulikovsky (“Kulikovsky”), a former director of CertiSign Holding, Inc. (“CertiSign”), had breached his fiduciary duty of loyalty to CertiSign by actively sabotaging corporate self-help efforts in a bid to advance his own personal objectives. The Court also denied Kulikovsky’s counterclaims for judicial validation of certain stock option grants and the assumption by CertiSign of a debt owed to Kulikovsky, and awarded Certisign damages in the amount of $390,455.20 for the “legal fees and expenses incurred by CertiSign in connection with its efforts to remedy its defective capitalization and board issues.”

In 2012, CertiSign discovered a technical flaw in most of its outstanding capital stock, raising the prospect that its directors had not been validly elected since 2005. With the assistance of counsel, CertiSign proposed a series of self-help measures to remedy the defect without judicial intervention. Kulikovsky, as one of two CertiSign directors elected both before and after the issuance of the defective stock, was asked to sign certain consents to remedy the technical flaw (the “Self-Help Measures”). Kulikovsky refused to sign the Self-Help Measures until CertiSign repaid him a personal debt (the “Debt”) and CertiSign’s controlling stockholder transferred to Kulikovsky certain shares of CertiSign stock.

In response, CertiSign sought validation of the defective stock under 8 Del. C. § 205. Kulikovsky intervened, seeking validation of certain stock option that he claimed CertiSign had granted to him and that CertiSign assume the Debt. The Court granted CertiSign’s motion for partial summary judgment for validation of CertiSign’s capital structure and entered an order validating the company’s outstanding stock.  CertiSign then initiated an action against Kulikovsky, alleging that he had breached his duty of loyalty by refusing to sign the Self-Help Measures. The parties consolidated Kulikovsky’s counterclaims into the action for breach of fiduciary duty. The Court then considered whether: (1) Kulikovsky breached his fiduciary duty; (2) CertiSign granted certain stock options to Kulikovsky; (3) CertiSign assumed the Debt; and (4) CertiSign should be awarded damages if Kulikovsky breached his duty. The Court held in favor of CertiSign on all claims.

The Court held that Kulikovsky breached his duty of loyalty to the corporation. The duty of loyalty requires a corporate officer or director to act “not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation.” Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). Kulikovsky knew his refusal to sign the Self-Help Measures injured CertiSign by perpetuating its defective board and potentially invalidating several years’ worth of CertiSign board action. Furthermore, Kulikovsky refused to sign the Self-Help Measures in order to further his own personal interest in guaranteeing a seat on CertiSign’s board and in being repaid the Debt. As stated by the court, Kulikovsky’s actions were a “quintessential breach of the duty of loyalty.”

The Court denied Kulikovsky’s counterclaim that CertiSign had granted stock options to him. An option plan must be formally adopted by the corporation and its terms must be specified in an “instrument.” 8 Del. C. § 157(b). The Court found that the board never adopted a resolution to issue options and evidence of the board’s intent to issue options presented by Kulikovsky lacked specificity as to basic material terms such as quantity, price, issuance date, and recipients. Finding no corporate act to validate, the Court denied Kulikovsky’s claim for validation under Section 205.

The Court also denied Kulikovsky’s counterclaim for validation that CertiSign had assumed the Debt because Kulikovsky did not establish the elements necessary to prove an enforceable contract. A valid contract to assume a debt must include specific and definite terms; the Court found that the financial documents offered by Kulikovsky to prove the terms of the agreement lacked the requisite specificity. Furthermore, under 6 Del. C. § 2714(a), Delaware’s statute of frauds, the assumption of a debt must be reduced to a writing. Kulikovsky failed to produce a signed writing which would satisfy the statute of frauds. Again, because no corporate act existed to validate, the Court denied Kulikovsky’s request for validation of the debt assumption agreement under Section 205.

CertiSign Holding, Inc., v. Sergio Kulikovsky memorandum opinion 180607

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