COURT OF CHANCERY DECIDES MOTIONS TO DISMISS, MOTION FOR SUMMARY JUDGMENT, AND MOTION FOR JUDGMENT ON THE PLEADINGS WHEN PLAINTIFF SUES STOCKHOLDERS AND DIRECTORS OF THE COMPANY HE FOUNDED
By: David L. Forney and Rachel Cheasty Sanders
In Craig T. Bouchard v. Braidy Industries, Inc., et al., Case No. 2020-0097-KSJM (Del. Ch. Apr. 28, 2020), the Delaware Court of Chancery addressed various motions filed by both Plaintiff and Defendants, including Defendants’ motions to dismiss for lack of personal jurisdiction and failure to state a claim, Plaintiff’s motion for judgment on the pleadings regarding an individual defendant’s defense, and Plaintiff’s motion for summary judgment. Plaintiff Craig Bouchard filed suit against Defendants claiming breach of contract regarding a voting agreement to which Bouchard and each of Defendants are a party. The Court granted the motions to dismiss for lack of personal jurisdiction over Defendants. Further, the Court granted Plaintiff’s motion for judgment on the pleadings regarding the defense of unclean hands asserted by Defendant Braidy Industries, Inc. Lastly, the Court denied Plaintiff’s motion for summary judgment on his breach of contract claim, finding that the factual records needed further development.
This case revolves around Defendant Braidy Industries, Inc., a Delaware corporation (the “Company”). Defendants Preston, Porter, Price, Schuh, Commonwealth Seed Management, LLC, and Hannah Management LLC (collectively, the “Stockholder Defendants”), along with Plaintiff, are the stockholders of the Company. Defendants Preston, Porter, Price, and Schuh (collectively, the “Director Defendants”), along with Plaintiff, were members of the board of directors of the Company (the “Board”) at the time Plaintiff filed this case. In 2018, the parties entered into an Amended and Restated Voting Agreement (the “Voting Agreement”), which Stockholder Defendants signed only in their capacity as stockholders. Governing the composition of the Board, the Voting Agreement granted Plaintiff the right to appoint 6 “Founder Directors” and permitted any investor holding greater than 5 million shares of stock to appoint an additional “Lead Investor Director”. Additionally, the Voting Agreement required the stockholders to vote to remove any Founder Director upon Plaintiff’s request. In the event that any stockholder refused to vote in such way, the Voting Agreement authorized the Secretary to serve as proxy for the offending stockholder.
In early 2020, the Board voted to remove Plaintiff from his positions as Chief Executive Officer, Chairman of the Board, and Secretary of the Company on the basis that the Board no longer felt confident that Plaintiff would be a successful fundraiser for the Company and did not have a plan for the future regarding the Company’s financial issues. Plaintiff then invoked his rights under the Voting Agreement and requested the stockholders to remove Director Defendants from the Board. Stockholder Defendants refused this request causing Plaintiff to request the Company to cause the Secretary to vote by proxy for the stockholders to effect his removal request. The Company and the Secretary (now Defendant Preston) both refused to act. As a result, Plaintiff filed this lawsuit containing two counts against Defendants: Count I alleges Stockholder Defendants breached the provisions of the Voting Agreement requiring them to act in accordance with his request to remove Founder Directors; and Count II alleges the Company and Defendant Preston, as Secretary, breached the provisions of the Voting Agreement regarding the Secretary’s proxy to vote for those stockholders who refuse to comply with Plaintiff’s request. Stockholder Defendants then filed motions to dismiss for lack of personal jurisdiction, and Defendant Preston filed a motion to dismiss for failure to state a claim against him as Secretary of the Company. Plaintiff filed his motions for summary judgment on his breach of contract claim and for judgment on the pleadings regarding the Company’s asserted unclean hands defense, wherein the Company had cited a special committee comprised of Director Defendants that were investigating “red flags” concerning Plaintiff’s use of company funds and positing that the committee would likely reveal “self-dealing and other wrongful conduct” by Plaintiff.
On March 18, 2020, prior to the Court proceeding to hear the parties’ motions, at a special meeting of the Board, the Board approved a number of resolutions meant to moot Plaintiff’s breach of contract claims, including increasing the number of authorized shares and effecting a stock split through an amendment to the Company’s Certificate of Incorporation (the “Amendment”), increasing the number of board seats, and amending the bylaws to adjust what constituted a quorum of the Board. Director Defendants next submitted resignations as Founder Directors to be effective upon the effectiveness of the Amendment and the increased board size. Due to the stock split, certain stockholders now held over 5 million shares of common stock and were thus entitled to appoint Lead Investor Directors. The Defendant Directors, now conditionally resigned as Founder Directors, were appointed as 4 of the Lead Investor Directors.
First, the Court addressed Stockholder Defendants motion to dismiss for lack of personal jurisdiction. When faced with a motion to dismiss for lack of personal jurisdiction, the burden is on the plaintiff to show a basis for the court to exercise personal jurisdiction over the defendant. Additionally, the court must view the record in the light most favorable to the plaintiff. Personal jurisdiction is determined by Delaware courts using a two-pronged analysis. First, there must be a statute authorizing service of process. Second, the defendant must have certain minimum contacts with the state as to “not offend traditional notions of fair play and substantial justice.” However, a defendant can consent to personal jurisdiction, which eliminates the need for the two-step analysis. Here, Plaintiff failed to identify a statute that authorizes jurisdiction over Stockholder Defendants, instead claiming that the Voting Agreement provision regarding equitable remedies was a consent by the stockholders to Delaware jurisdiction. However, as the Court interpreted the pertinent provision of the Voting Agreement, it found that the stockholders consented only to certain equitable remedies and not to personal jurisdiction. Plaintiff then pointed to a letter sent to him by Defendant Price on behalf of all Director Defendants that stated “[w]e will remain as Directors absent an order from a Delaware Court determining that the provisions of the [Voting] Agreement upon which you are relying are, under these circumstances, valid and enforceable under the law of the state of Delaware and not a violation of the directors’ fiduciary duty to [Braidy] and its stockholders.” The Court found this language fell short of consent to personal jurisdiction and declined to find support for Plaintiff’s argument in his cited cases.
Second, the Court addressed Defendant Preston’s motion to dismiss, in his capacity as Secretary of the Company. In Preston’s case, Plaintiff relied on Section 3114(a) of Delaware law that broadly authorizes personal jurisdiction over nonresidents who are fiduciaries when claims involve their use of “corporate power”. Finding that whether Preston was using his corporate power turned on whether a claim had been stated against Preston as Secretary, the court collapsed the analyses into one. When deciding a motion to dismiss for failure to state a claim, the court must “accept all well-pleaded factual allegations in the complaint as true [and] draw all reasonable inferences in favor of the plaintiff.” The court must deny the motion “unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.” Preston argued that the Voting Agreement gave the Secretary authority to act, but did not bind him to do so. The Court agreed with his interpretation of the Voting Agreement, finding that there was no obligatory language requiring the Secretary to act. Rather, the obligations were placed on the Company. Thus, the Court granted Preston’s motion to dismiss for lack of personal jurisdiction because Preston’s corporate powers were not implicated and Section 3114(a) did not apply.
Third, the Court tackled Plaintiff’s motion for judgment on the pleadings regarding the Company’s defense of unclean hands. The court will grant a motion for judgment on the pleadings when “no material issue of fact exists.” The court must “view the facts pleaded and [reasonable] inferences to be drawn from such facts in a light most favorable to the non-moving party.” When a court applies the doctrine of the unclean hands defense, it refuses to accept requests for equitable relief when the plaintiff’s own actions “offend the very sense of equity to which he appeals.” However, the improper conduct must bear an “immediate and necessary relation” to the litigation at hand. Here, the Company cited Plaintiff’s alleged misuse of company funds as its basis for his unclean hands. However, Plaintiff is trying to enforce his contractual rights under the Voting Agreement. The Court found that Plaintiff’s conduct was not immediately and necessarily related to his breach of contract claims, because the assertion of unclean hands related to Plaintiff’s fiduciary duties as a director and officer of the Company and not his rights and obligations under the Voting Agreement. Thus, the Court granted Plaintiff’s motion for judgment on the pleadings. Lastly, the Court turned to Plaintiff’s motion for summary judgment. The grant of a motion for summary judgment is only appropriate when there exists “no genuine issue as to any material fact” and the evidence must be weighed by the court in a light most favorable to the non-moving party. Here, the Court determined that the case included many disputed facts and legal theories that would not be easily resolved on summary judgment. Instead, the Court found that further development of the facts was warranted and, thusly, denied Plaintiff’s motion for summary judgment.