Topic: Director Removal

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.”

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Chancery Court Allows Complaint Alleging Waste of Corporate Assets to Move Forward to Discovery as a Result of Extreme Facts

By Annette Becker and Rashida Stevens

In R.A. Feuer on behalf of CBS Corporation v. Sumner M. Redstone (C.A. No. 12575-CB (Del. Ch. April 19, 2018)), R. A. Feuer (“Plaintiff”), a stockholder of CBS Corporation (“CBS”) brought a derivative suit against the directors of CBS Corporation (“Board”) alleging corporate waste, bad faith, and unjust enrichment for compensation in excess of $13 million dollars paid to Sumner Redstone, the controlling stockholder, former executive chairman and chairman emeritus of CBS (“Redstone”).  The payments were made under an extreme set of circumstances that resulted in the claims partially surviving a Rule 23.1 motion to dismiss for failure to make a pre-suit demand on the board and a 12(b)(6) motion to dismiss for failure to state a claim upon which relief could be granted. Read More

Chancery Court Enters Declaratory Judgments in Favor of Plaintiff and Finds that Defendant’s Actions Justify Sanctions

By: Scott E. Waxman and Stephanie S. Liu

In Ensing v. Ensing, C.A. No. 12591-VCS (March. 6, 2017), Vice Chancellor Slights entered declaratory judgments in favor of the plaintiff, concluding that the defendant’s actions were null and void as a matter of law. A husband and wife, Dr. Hans Ensing (“Hans”) and Sara Ensing (“Sara”) own and operate a winery and boutique hotel in Italy. The businesses operate indirectly through two Delaware limited liability companies. Prior to the events leading up to this litigation, Sara was a manager and member of one of the entities and, through that entity, was manager of the other. Hans was neither a member nor manager of either entity. When Hans purported to remove Sara and appoint himself as manager of one of the two entities and then engaged in a series of transactions to divest Sara of her interests in the winery and hotel, Sara initiated this action.

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CHANCERY COURT ISSUES DECLARATORY JUDGMENT REGARDING BOARD AND MEMBER ACTIONS TAKEN IN CONTRAVENTION OF CORPORATION’S BYLAWS

By: Susan A. Apel & Rachel Cheasty Sanders

In Rainbow Mountain, Inc. v. Terry Begeman, C.A. No. 10221-VCMR (Del. Ch. March 23, 2017), the Delaware Court of Chancery issued a declaratory judgment on cross-motions for summary judgment regarding whether pro se defendant, Terry Begeman, was properly removed as a director, member, and officer of plaintiff nonstock corporation Rainbow Mountain, Inc. (“Rainbow Mountain” or the “corporation”).  Based on uncontroverted facts, the Court determined that Terry[1] had been properly removed as Secretary, but retained his position as Senior Vice-President, director and member.  Under the bylaws, as a “Regular Member” of Rainbow Mountain, Terry had the right to occupy the corporation’s land.

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Chancery Court Holds Bylaw Permitting Stockholder Removal of Officers Invalid in Continuing Fight over the Composition of the Board of Directors of Westech Capital Corp.

By Annette Becker and Porter Sesnon

In Gorman, IV v. Salamone, Halder and Westech Capital Corp. (“Westech”), the Delaware Chancery Court, in ruling on a motion to dismiss, issued another status quo order to temporarily fix the composition of the board of Westech while the ongoing dispute over control of Westech played out.

Plaintiff John Gorman (“Gorman”) a Westech stockholder and board member brought the Section 225 action based on two developments while a prior Section 225 temporarily designating three directors and keeping the CEO was on appeal before the Delaware Supreme Court.

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Supreme Court Partially Reverses Chancery Decision Interpreting Common Voting Agreement Provisions

By Holly Vance and Porter Sesnon

In Salamone, Dura, and Halder v. Gorman, IV, the Supreme Court of Delaware (the “Court”) partially affirmed and partially reversed a Chancery Court decision determining the composition of the board of directors (the “Board”) of Westech Capital Corporation (“Westech”).  The dispute centered on the interpretation of a Voting Agreement entered into by Westech and the purchasers of Westech’s Series A Preferred Stock in 2011.

The Voting Agreement provisions at issue were Sections 1.2(b) and 1.2(c), each of which set forth the process for designating certain individuals to serve on the Board.  Section 1.2(b) provides for one director to be designated “by the majority of the holders of the Series A Preferred Stock . . . .”  Section 1.2(c) provides two individuals to be designated “by the Key Holders . . . .”  The dispute revolved around the removal by John J. Gorman, IV (“Gorman”), Westech’s majority stockholder, of a current director nominated pursuant to Section 1.2(c) and the election of two new directors, one pursuant to Section 1.2(b) and another pursuant to Section 1.2(c).

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Gassis v. Corkery, C.A. No. 8868-VCG (Del. Ch. May 28, 2014)

By Joanna Diakos and Mark Hammes

In Gassis v. Corkery, Civil Action No. 8868, Bishop Macram Max Gassis challenged his removal as Chairman of the Board and as a director of the Bishop Gassis Sudan Relief Fund, Inc., a Delaware charitable nonstock corporation (the “Fund”) dedicated to helping the people of southern Sudan. The Bishop also challenged the previous removal of two directors from the Fund’s board and the elections of two directors who replaced them.

Bishop Gassis’ removal at a 2013 board meeting came after years of friction with other board members, who contended that the Bishop was difficult to work with, negatively interacted with the Fund’s beneficiaries in Sudan, spent extravagantly on travels, invested in suspicious projects, and acted as though he had a personal interest in the Fund’s assets. These board members further argued that a provision of the Fund’s bylaws providing that the Bishop “shall serve [as Chairman of the Board] until his retirement or resignation” required him to be removed from the board upon his retirement as a Catholic Bishop, which was to occur on his seventy-fifth birthday on September 21, 2013.

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Oracle Partners, L.P. v. Biolase, Inc., C.A. No. 9438-VCN (Del. Ch. May 21, 2014), aff’d, C.A. No. 270, 2014 (Del. June 12, 2014)

By Jamie Bruce and Ryan Drzemiecki

In his May 21, 2014 opinion in Oracle Partners, L.P. v. Biolase, Inc., C.A. No. 9438-VCN (Del. Ch. May 21, 2014), Vice Chancellor Noble addressed the issue of what was said, and the legal effect of the statements made, during a telephonic meeting (the “Meeting”) of the board of directors of Biolase, Inc. (“Biolase”) on Friday, February 28, 2014.

Prior to the Meeting, Biolase had six directors.  On the Monday following the meeting, Biolase issued a press release stating that two of the directors — Alexander Arrow, M.D. (“Arrow”) and Samuel Low, D.D.S. (“Low”) — had resigned from the board and two new directors — Paul Clark (“Clark”) and Jeffrey Nugent (“Nugent”) — had been appointed in their place.  In a contradictory Form 8-K filing with the Securities and Exchange Commission (“SEC”) three days later, which included the press release as an exhibit, the Company disclosed only that Clark and Nugent had been appointed to the board, which had apparently increased to eight members.

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Flaa v. Montano, Civil Action No. 9146-VCG (February 24, 2014) (Glasscock, V.C.)

By Ashley Galston

In this opinion, Vice Chancellor Glasscock considered Defendants’ motion to dismiss on ripeness grounds in a DGCL Section 225 action. In 2013, certain stockholders of CardioVascular BioTherapeutics, Inc. (the “Company”) executed written consents purporting to remove the Defendant directors, including Daniel Montano, from the Company’s board of directors. A Status Quo Order, typical in a Section 225 action, put in place an interim board, of which Daniel Montano and the other individual Defendant directors were not members. The written consent was found to be invalid, the Plaintiff appealed, and the parties agreed to maintain the interim board pending appeal. However, before the Supreme Court heard the appeal, certain stockholders initiated a second written consent action, again, seeking to remove the Defendant directors. The Plaintiff then filed this Section 225 action seeking to confirm the second written consent. The Defendants moved to dismiss the second action for “lack of ripeness and other grounds”.

Section 225 provides that “upon application of any stockholder or director, or any officer whose title to office is contested, the Court of Chancery may hear and determine the validity of any election, appointment, removal or resignation of any director or officer of any corporation, and the right of any person to hold or continue to hold such office….” 8 Del. C. § 225(a). V.C. Glasscock noted that “the statute imposes no explicit requirement that a director must hold office before this Court may determine her right to a seat.” And, further, he held that “even under a quo warranto analysis, the action is ripe…as Montano and the other Defendants remained on the de jure board.” Therefore, V.C. Glasscock found that the action was ripe. V.C. Glasscock declined to address the question raised by the Defendants of the “procedural efficacy of a written consent purporting to remove a director who is not a member of an interim board created by a status quo order.” V.C. Glasscock invited the Defendants to make that argument, along with other procedural challenges they raised in this motion, at a future evidentiary hearing related to the effectiveness of the second written consent.

Flaa v. Montano

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