Corporate Action by Written Consent

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

Feb 22 2018

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.

Are Partial Written Stockholder Consents Between Annual Meetings Sufficient to Fill Board Vacancies? Chancellor Bouchard’s Ruling in Elite Horse Investments Ltd. v. T3 Motion, Inc. Suggests “Yes”

Mar 09 2015

By Michelle Repp and Lauren Garraux

Ruling of Chancellor Andre Bouchard suggests that partial written stockholder consents between annual meetings may be sufficient to fill board vacancies and calls into question stockholder written consents not dated by hand.

Elite Horse Investments Ltd. (“Elite”) is a stockholder of T3 Motion, Inc. (“T3”), a Delaware corporation. T3’s bylaws provide for a seven-member Board of Directors. As of December 26, 2014, T3’s board had four vacancies, with the other three directorships occupied by T3’s CEO, William Tsumpes (“Tsumpes”), and two other individuals (collectively, the “Existing Directors”). On December 26, 2014 and January 20, 2015, Elite and other stockholders of T3 delivered to T3 two written consents relating to the composition of T3’s board, as follows: (i) on December 26, 2014, Elite and seven other stockholders holding more than 65% of the outstanding shares delivered a signed stockholder written consent dated December 17, 2014 (the “First Consent”) pursuant to which they filled the four vacancies with new directors (the “New Directors”); and (iii) on January 20, 2015, Elite and six other stockholders holding no less than 58% of the outstanding shares delivered a signed stockholder written consent dated January 15, 2015 that ratified and retook the actions reflected in the First Consent and removed Tsumpes and one of the other Existing Directors from T3’s Board (the “Second Consent”) (collectively, the “Consents”).

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

Feb 25 2014

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

Catagory:Corporate Action by Written Consent