Chancery Orders Accounting for Payments to Former Director and CEO Affiliate; Rejects Most Breach of Fiduciary Duty Claims
By: Remsen Kinne and Pouya Ahmadi
In Avande, Inc. v. Shawn Evans, C.A. No. 2018-0203-AGB (Del. Ch. Aug. 13, 2019), the Court of Chancery rejected most of the claims brought by Avande, Inc. (“Avande”) against Avande’s former director and chief executive officer (“CEO”) Shawn Evans (“Evans”) other than a claim for breach of fiduciary duty for engaging in self-interested transactions, authorizing improper expenditures and failure to maintain appropriate documentation of expenditures. The Court awarded Avande only $21,817.70 of the more than $5.3 million in damages sought to recover from Evans. The Court held that DC Risk Solutions, Inc. (“DC Risk”), an affiliate of Evans that provided Avande insurance broker services and bookkeeping services, would be liable as an aider and abettor for any damages that are assessed as a result of the accounting ordered by the Court as to payments made to DC Risk.
Avande’s stockholders removed founding stockholder Evans as a director following a board deadlock caused by the death of Avandel’s owner and a court action to compel an annual meeting of stockholders which had not been held in 13 months due to Evans’ unwillingness to participate resulting in a lack of a quorum. Evans was not reelected as a director and Avande terminated Evans as CEO following disagreements among Evans, Avande’s board, and other Avande management caused, in part, as a result of Avande’s financial difficulties. Evans and Evans’ wife brought suit against Avande to enforce an approximately $170,000 loan by Evans and Evans’s wife to Avande. Evans encouraged Avande’s creditors to take action against Avande in an effort to cause Avande’s involuntary bankruptcy, and invited Avande personnel to leave Avande in order to join Evans in a new venture. After terminating Evans, Avande conducted an internal investigation of Evans’s actions due to concerns about his spending habits and uncovered a number of suspect transactions.
Avande filed suit for breach of fiduciary duty, aiding and abetting, disgorgement, declaratory relief, tortious interference with contract and/or business relations, defamation and/or trade libel, and conversion against the following defendants: Evans, DC Risk; and Avandel, Inc. (“Avandel”), a company owned by another Avande officer, director, and founding stockholder, that provided information technology and software development services company to Avande.
The Court held in favor of Evans regarding most of Avande’s breach of fiduciary duty claims. The Court rejected Evans’ assertion that Avande’s claims should be equitably barred under “unclean hands” doctrine due to offensive conduct by Avande. Evans based this assertion on an Avande officer’s email statement to the effect that the officer wanted Evans to fail because of Evans’ own incompetence. This statement was an act of bad management, the Court decided, but was not sufficiently offensive to establish unclean hands on the part of Avande.
The Court determined that Evans was exculpated by Avande’s certificate of incorporation from liability for breaches of the fiduciary duty of care as a director. Avande waived its right to claim that Evans breached the duty of care as an officer, the Court determined further, because Avande did not raise that claim in its opening brief.
The Court addressed Avande’s allegations that Evans breached Evans’ duty of loyalty by improperly approving approximately $5.4 million in Avande expenditures that constituted engaging in self-dealing transactions, acting in bad faith, and committing waste. With respect to approximately $4.7 million of the $5.4 million in expenditures approved by Evans, the Court determined that Avande failed to meet Avande’s burden of proof based on substantial evidence that the Avande expenditures were self-dealing transactions. Within this approximately $4.7 million amount, the Court found, Avande identified only one de minimis expenditure as a transaction that appeared to have personally benefited Evans. The Court found that Evans did not have sole authority or control over Avande’s finances, that many of these expenditures within this amount would have had a legitimate business purpose, and that Avande did not prove the expenditures constituted waste. The Court ruled that Avande did not satisfy that element of proof required to establish that Evans breached the duty of loyalty with respect to the expenditures and declined to shift to Evans as fiduciary the burden of demonstrating the fairness of these expenditures within this amount.
The Court held that with respect to three Avande expenditures approved by Evans that were payments to services providers, Evans acted in bad faith in breach of Evans’ duty of loyalty because Evans knew that the payments caused Avande to violate the law by not complying with U.S. federal tax reporting requirements. In addition, the Court held that Evans stood on both sides of a $3,500 motor scooter purchase by Avande from a company owned by Evans, making that a self-interested transaction with respect to which Evans had the burden to prove and failed to prove entire fairness, in breach of Evans’ duty of loyalty. As damages for these breaches the Court awarded Avande approximately $21,000 plus interest.
The Court also held that approximately $236,000 in Avande payments to DC Risk approved by Evans were self-interested transactions with respect to Evans due to his ownership of DC Risk, requiring Evans to prove the entire fairness of the transactions. Evans asserted that Avande knew about these payments and knew that Evans owned DC Risk and that these were therefore entirely fair. Evans did not prove this, the Court decided, since the payments records and related information including DC Risk invoices were both untimely and incomplete. To determine to what extent, if any, these transactions payments were unfair to Avande the Court ordered an accounting to examine Avande’s payments to DC Risk. DC Risk, the Court ruled, would be jointly liable with Evans as an aider and abettor for any damages assessed as a result of the accounting.
The Court rejected Avande’s damages claim for disgorgement of half of all of Evans’s compensation as Avande’s CEO, worth approximately $446,000, finding that Avande presented no evidence that any of Evans’ misconduct increased his salary. Avande claimed that Evans spent over half of his time on his other business ventures while employed by Avande and therefore should liable for half of all payments he received as compensation. The Court, however, found this argument meritless, citing that the operating agreement of the Delaware limited liability company from which Avande previously converted to a Delaware corporation expressly permitted its managers to engage in other business ventures and this practice was permitted to continue after the conversion. Avande was aware of Evans’s involvement with DC Risk but never complained to Evans about this involvement, the Court found.
The Court further entered judgment for Evans on Avande’s claims for declaratory relief, tortious interference with contract and/or business relations, defamation and/or trade libel, and conversion because Avande waived these claims by not briefing them during post-trial briefing. Avande voluntarily dismissed its aiding and abetting claim against Avandel.
The Court awarded Avande damages of approximately $21,000 plus interest, ordered an accounting with respect to approximately $236,000 in payments made by Avande to DC Risk, and on all other claims entered judgment in favor of the defendants.