Topic: Corporate Formalities

Chancery Court Applies Contract Terms to Clarify Difference Between Void and Voidable Stock Issuances

By Jessica Pearlman and Jonathan Miner

Southpaw Credit Opportunity Master Fund, L.P. v. Roma Restaurant Holdings, Inc., C.A. No. 2017-0059-TMR (Del. Ch. Feb. 1, 2018) came before the Delaware Court of Chancery as a dispute over control of the board of directors of Roma Restaurant Holdings, Inc. (“Roma” or the “Company”). Plaintiffs were a stockholder group that had taken a majority position in Roma’s common stock. After learning of Plaintiffs’ majority position, the Roma board adopted a new equity compensation plan and issued sufficient shares of restricted stock to Roma employees to dilute Plaintiffs below a majority ownership position. Plaintiffs considered the dilutive restricted stock issuances as invalid for a number of reasons, including the Company’s failure to obtain contractually mandated stockholder agreement joinder documents from each recipient before issuance, and presented Roma with a written consent that removed two of Roma’s current directors (the “Defendant Directors”) and replaced them with Plaintiffs’ nominees. Roma contested the validity of Plaintiffs’ written consent and the case came before the Court under Section 225 of the Delaware General Corporation Law (DGCL) to determine the proper composition of Roma’s board of directors. Vice Chancellor Montgomery-Reeves found that the disputed restricted stock issuances were void and could not be counted toward a stockholder vote.

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Chancery Court Confirms Delaware’s Merger Statutes Inapplicable to Options

By Lisa Stark and Eric Jay

In Kurt Fox v. CDX Holdings, Inc. (f/k/a Caris Life Sciences, Inc.), C.A. No. 8031-VCL (Del. Ch. July 28, 2015), the Delaware Court of Chancery confirmed that Delaware’s merger statutes do not effect a statutory conversion of options at the effective time of a merger. Rather, the treatment of stock options in a merger is governed by the underlying stock option plan, which must be amended in connection with a merger if the treatment of options in the merger differs from the treatment contemplated by the plan. The Court also confirmed that a standard qualification in stock option plans, requiring a corporation’s board of directors to determine the fair market value of the option for purposes of cashing out the options, could not be satisfied by informal board action or a delegation to management or a third party.

This class action arose from a 2011 spin-off/merger transaction pursuant to which Miraca Holdings, Inc. (“Miraca”) acquired CDX Holdings, Inc. (formerly known as Caris Life Sciences, Inc.) (“Caris”) for $725 million (the “Merger”). Immediately prior to the Merger, Caris spun off two of its three subsidiaries to its stockholders (the “Spin-Off”). In the Merger, each share of Caris stock was converted into the right to receive $4.46 in cash. Each option was terminated with the right to receive the difference between $5.07 per share and the exercise price of the option, minus 8% of the total option proceeds, which were held back to fund an escrow account from which Miraca could satisfy indemnification claims brought post-closing.

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Court of Chancery Applies New DGCL § 205 to Determine Validity of Defective Corporate Acts

By Eric Freedman and Sophia Lee Shin

In In Re Numoda Corporation Shareholders Litigation, the Court of Chancery exercised its new powers under Delaware General Corporation Law (“DGCL”) § 205, which became effective as of April 1, 2014, to resolve various disputes regarding the capital structures of two related corporations that consistently failed to follow corporate formalities.

In In Re Numoda Corporation Shareholders Litigation, C.A. No. 9163-VCN (Del. Ch. January 30, 2015) (Noble, V.C.) (the “Numoda Shareholders Litigation Decision”), the Delaware Court of Chancery addressed a dispute concerning the capital structures of two corporations, Numoda Corporation (“Numoda Corp.”) and Numoda Technologies, Inc. (“Numoda Tech.”).  The Numoda Shareholders Litigation Decision came on the heels of a decision of the Court of Chancery in a prior related action, Bons v. Schaheen, 2013 WL 6331287 (Del. Ch. Dec. 2, 2013) (the “225 Action”), in which the Court of Chancery refused to recognize several purported stock issuances due to a failure to comply with corporate formalities.  Because DGCL § 204 (Ratification of defective corporate acts and stock) and DGCL § 205 (Proceedings regarding validity of defective corporate acts and stock) became effective on April 1, 2014, after the decision in the 225 Action, the Court in the Numoda Shareholders Litigation Decision used its new statutory powers to untangle the capital structures that had been the subject of the 225 Action.

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