Monday, October 26, 2015

Court of Chancery ‘Clean Up’ of Sloppy Corporate Acts Passes Muster

By Matthew Garza, J.D.

Chief Justice Leo Strine put to rest a dispute over the makeup of the board of two closely related technology companies after finding that the Delaware Chancery Court properly used new “clean up” provisions in the Delaware General Corporation Law (DGCL) to validate improperly issued stock (In re Numoda Corporation, October 22, 2015, Strine, L.)

The case involved three siblings, John Boris, Ann Boris, and Mary Schaheen, who founded and controlled Numoda Corp. and Numoda Technologies, Inc. Summarizing the dispute, the court said John and Ann challenged the Court of Chancery’s determination that John and Ann collectively owned 37.51 percent of Numoda Corp’s voting stock and Mary owned 37.08 percent. With fellow appellees, Mary held a combined 58.88 percent of the voting power and used that power to remove John and Ann from the board. John and Ann also challenged the Court of Chancery’s refusal to issue relief spinning off Numoda Corp. from Numoda Tech.

DGCL. Section 204 provides that no defective corporate act or putative stock is void or voidable solely as a result of a failure of authorization and permits the court to determine the validity of any corporate act or transaction and any stock, rights, or options. Section 205 allows the court to declare a defective corporate act effective as of the time of the act, if validated by the court, and to “make such other orders regarding such matters as it deems proper under the circumstances.”

The court said these two sections of the DGCL, effective April 1, 2014, give the court broad authority to address technical defects that compromise the validity of corporate actions. “As for the Kafkaesque argument that once the Court of Chancery’s determination cured the failure in board authorization, then it could not make sure the shares went to the parties who were supposed to receive them because the issuances fell out of the definition of ‘defective corporate act,’ we reject this interpretation of §§204 and 205,” said Chief Justice Strine.

The court said the case was complex, but the issues on appeal were simple. The Court of Chancery grounded its determinations that the board had intended to grant stock to particular individuals in documents authored by John and Ann themselves. “Sections 204 and 205 were adopted in part to address situations that had arisen in prior cases, which are analogous to this one, where parties who are complicit in failing to comply with the DGCL‘s requirements refuse to participate in the validation of their own past intended actions because they have come to have personal reasons to wish to disclaim their prior promises and actions,” said the court.

Because John and Ann were responsible for not adhering to corporate formalities and because they acquiesced in stock grants they now dispute, they are poorly positioned to argue that the past informal grants were invalid, wrote the Chief Justice.

The case is No. 121, 2015.