Topic: Written Consent

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 re: Allergan, Inc. Stockholder Litigation, C.A. No. 9609-CB (Del. Ch. November 7, 2014) (Bouchard, C.)

By David Bernstein and Meredith Laitner

On November 7, 2014, Chancellor Bouchard denied the plaintiffs’ requests for summary judgment in In re: Allergan, Inc. Stockholder Litigation.  This ruling comes amid an acrimonious proxy fight in which a company owned by Valeant and Pershing Square are seeking to remove six of the nine members of the Allergan Board and request that the Board engage in good faith discussions with Valeant with regard to a Valeant proposal to merge with Allergan that will come to a head at a special stockholder meeting scheduled for December 18, 2014.

The charter and bylaw provisions challenged by the plaintiffs permitted holders of 25% of Allergan’s stock to call a special meeting or act by stockholder consent, but not with regard to any matter that is identical or substantially similar to one presented at a stockholder meeting held during the previous year (a so-called “Similar Items” provision).  In a Supplemental Proxy Statement, Allergan had stated that this would permit stockholders to remove directors, but not to replace them by written consent at a meeting called by stockholders if an election had occurred within the past year.  The plaintiffs asked for a declaratory judgment that the Similar Items provisions would not prevent the stockholders from, at a special meeting, both removing the entire Board and electing a new Board so long as the new directors had not been up for election during the preceding year.

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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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