Topic: Void/Voidable

Court of Chancery Declares LLC Agreement Unenforceable, Rescinds Employment Agreement, and Issues Sanctions Due to Member’s Fraud

By: Scott Waxman and Shane T. Devins

In Trascent Management Consulting, LLC v. George Bouri, C.A. No. 10915-VCMR (Del. Ch. Sept. 10, 2018), the Court of Chancery declared a limited liability company agreement unenforceable and rescinded a related employment agreement with the defendant, George Bouri, due to Bouri’s fraudulent and false statements that induced the plaintiff’s principal, Rakesh Kishan, to form Trascent Management Consulting, LLC (“Trascent”), and for Kishan and Trascent to enter into the LLC agreement and the employment agreement with Bouri. In addition, the Court awarded certain attorneys’ fees and costs to Trascent as sanctions for defendant’s continued fraudulent and false statements during the litigation proceedings. Read More

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 Holds That Stockholder Rejection of Corporate Proposals Are Not Defective Corporate Acts That Can Later Be Ratified

By: Annette Becker and Mark Hammes

In Nguyen v. View, Inc. (C.A. No. 11138-VCS (Del Ch. June 6, 2017), the Delaware Chancery Court denied defendant View Inc.’s (“View”) motion to dismiss a suit brought by its Paul Nguyen, a majority common stockholder of View, seeking a declaration in accordance with 8 Del. C. § 205, that View’s attempts to validate invalid rounds of financing were improper.  The Court held that a stockholder’s rejection of a corporation’s proposal and a decision to proceed with a deliberately unauthorized corporate act does not qualify as a “defective corporate act” that can subsequently be ratified under 8 Del. C. § 204.

In Nguyen, Paul Nguyen was the founder of View.—a corporation that sold windows with manually- and electronically-adjustable lighting properties—and served as both its President and Chairman of its Board.  In 2007, View entered into a preferred stock financing round with two venture capital funds (the “Series A Financing”).  Under the Series A Financing agreement, Nguyen would step down as the company’s CEO, but would still retain seventy percent of View’s outstanding common stock. The parties also drafted a new voting agreement that altered View’s governance structure. This agreement established a five-person Board of Directors, composed of two seats controlled by each venture fund and one controlled by Nguyen.  View then filed an Amended and Restated Certificate of Incorporation that provided the venture funds with the rights to veto or approve many of View’s corporate acts.  It also provided Nguyen with the protection of a class vote provision that any amendment to the certificate of incorporation changing the rights of the common stock and any changes to the voting agreement relating to Nguyen’s ability to approve changes to the size of the board of directors and to fill a seat on the board must be approved by a majority of the common stock outstanding.

In 2009, following the appointment of a new CEO, View terminated Nguyen’s employment and began maneuvering to push him out of leadership on its Board. Nguyen, however, asserted that his status as majority common stockholder meant that his removal violated both the certificate of incorporation and the voting agreement.  View and Nguyen took their dispute to mediation and eventually came to a settlement agreement that included a stockholder consent signed by Nguyen that would allow the company to pursue new financing agreements (the “Series B Financing”).  The Series B Financing as proposed would eliminate Nguyen’s rights to approve any amendments to the certificate of incorporation or voting agreement, his position as Chairman, and his ability to fill a Board seat. The settlement agreement, however, contained a seven-day rescission period for either party.  After further review of the Series B Financing, Nguyen objected to the change to his rights as a stockholder and sent a notice of rescission of the settlement agreement and the stockholder consent to View within the seven-day window.  View, however, had already closed the Series B Financing before the rescission window elapsed.  Nguyen filed suit to challenge the validity of the Series B financing, and the parties agreed to submit the matter to arbitration. During arbitration, View entered into subsequent financing rounds, raising over $500 million. Eventually, the arbitrator ruled that Nguyen had validly rescinded the settlement agreement and stockholder consent.  As a result, the Series B Financing and subsequent financing rounds became void and invalid.

Because View’s reformed capital structure hinged on the Series B Financing, the Series A Financing stockholders pursued alternative methods to ratify the financing.  They converted their preferred shares to common stock to displace Nguyen as the majority common stockholder; subsequently, they ratified the Series B financing the arbitrator ruled to be invalid, replaced the existing voting agreement with a new one that created an eleven-member Board, and removed Nguyen from the Board.  View later discovered that it had ratified these amendments improperly and corrected its ratifications.  Nguyen filed suit under 8 Del. C. § 205, alleging that the ratifications View adopted were improper.  View subsequently filed a motion to dismiss, stating that Nguyen had not pled facts that could support his § 205 claim.

The court denied View’s motion to dismiss.  The court first qualified that in order to determine whether View’s ratifications were proper under Section 204, it would need to determine whether the acts needing ratification qualified as “defective corporate acts” under Section 204.  In examining Section 204, the court concluded that View’s amendments did not qualify as “defective corporate acts.”  The court noted that Section 204 provides that any “defective corporate acts that a corporation purports to ratify must be within the corporation’s power ‘at the time such act[s] [were] purportedly taken.’” (emphasis in original).  Therefore, the court reasoned that because View’s voting agreement and certificate of incorporation required the majority stockholder’s consent to make any corporate actions valid as a matter of law, Nguyen’s refusal to give his consent undercut the legitimacy of the corporation’s ratifications.  The court explained that “[t]he reason the Series B Financing was declared void was not that View failed to comply with the Delaware General Corporation Law or its own governance documents in securing the stockholders’ approval of the transaction; the transaction was void because the majority common stockholder deliberately rejected it.” (emphasis added).  The court distinguished a stockholder’s “rejection” of a corporate proposal from a mere “failure” of authorization, and held that allowing ratification of the former is not contemplated by Section 204.

View alternatively argued that Nguyen’s refusal to consent did not prevent the Series A holders from later converting their shares to common stock and ratifying the Series B Financing since they could have done so at the time. The court rejected this position, finding that it would undermine the power of a stockholder’s “no” vote.  Finally, the court stated that Section 204 could not be used as a “license to cure just any defect” nor “to ‘backdate’ an act that did occur but that the corporation wishes had occurred as of an earlier date.” Therefore, View could not use Section 204 to backdate its conversion of preferred stock to common stock and avoid Nguyen’s consent for ratification of the Series B financing.

The court subsequently denied View’s motion for a reargument under Court of Chancery Rule 59(f).

Nguyen v. View, Inc., C.A. No. 11138-VCS (Del Ch. June 6, 2017)

In Related Actions, Chancery Court Orders Advancement of Expenses and Confirms that New DGCL Section 205 Provides Limited Authority for the Court to Invalidate Corporate Acts

By Lisa Stark and John Sun

In In re Genelux Corp., C.A. Nos. 10612, 10042-VCP (Del. Ch. Oct. 22, 2015), the Delaware Court of Chancery held that Dr. Aladar Szalay, a former director and officer of Genelux Corporation (“Genelux”), was entitled to advancement of his fees and expenses incurred as an intervenor in an action brought by Genelux to invalidate Szalay’s Genelux stock and the election of two Genelux directors (the “Section 205/225 Action”).  The Court also awarded Szalay his fees in prosecuting the advancement action.  In the Section 205/225 Action, the Court held that new Section 205 of the Delaware General Corporation Law (the “DGCL”) does not authorize the Court of Chancery to invalidate any defective corporate act, including putative stock, other than defective corporate acts ratified pursuant to Section 204 of the DGCL.  The Court also held that Szalay’s election of two Genelux directors based on the disputed stockholdings to be valid under Section 225 of the DGCL.

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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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Capano v. Capano, C.A. No. 8721-VCN (June 30, 2014)

By Eric Feldman and Sophia Lee Shin

Capano, et al. v. Capano, et al. is a consolidated case involving three brothers that came before the Delaware Court of Chancery, in which Joseph and Gerry Capano each filed a complaint against Louis Capano.

Facts

Louis, Joseph and their father, Louis Sr., were equal partners in a Delaware partnership, Capano Investments. Upon Louis Sr.’s death, the partnership structure changed such that Louis and his son controlled 48.5% of the partnership, Joseph and his son controlled 48.5%, and Gerry (as the beneficiary with voting control of CI Trust) controlled 3%. In 2000, the partnership was subsequently converted into a Delaware limited liability company, Capano Investments, LLC (“CI-LLC”), with the same membership and respective ownership interests as those of the partnership

In 2000, Louis and Gerry executed two documents that purportedly granted Louis an interest in CI Trust: (1) Gerry granted Louis the “Power to Direct”, an irrevocable proxy to direct CI Trust’s trustee (at the time, Daniel McCollom) to vote its interest in CI-LLC; and (2) Gerry granted Louis the “Option” to purchase Gerry’s interest in CI Trust, but only with the consent of CI Trust’s trustee, and at a purchase price of $100,000 and the forgiveness of a $100,000 advance. Both the Power to Direct and the Option were signed by Louis and Gerry and had “(SEAL)” printed next their signatures.

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