PARSONS, Vice Chancellor.
In this action under 8 Del. C. §§ 205 and 225, I am asked to determine the outcome of an annual election of directors based on my resolution of various disputes over whether certain shares of stock were issued validly or lacked consideration. One
The plaintiff company's Section 205 claim raises a novel issue of law: whether that statute permits an enumerated party to petition this Court to declare invalid and defective any corporate act or stock. I conduct an exercise of statutory interpretation and answer that question in the negative. The plaintiff director-stockholder, on the other hand, also raises a traditional Section 225 challenge, which I resolve in favor of the defendants and the intervenor. In doing so, I find that some of the plaintiffs' arguments are waived or time-barred.
I presided over a two-day trial. This Opinion contains my post-trial findings of fact and conclusions of law as to the plaintiffs' Section 205 and 225 claims. For the reasons stated herein, I conclude that none of the grounds advanced by the plaintiffs provide a sufficient basis to grant them the requested relief. Thus, I hold that the defendant directors were elected validly and are entitled to the declaratory relief they seek.
Plaintiff Genelux Corporation (the "Company") is a privately held, clinical stage biopharmaceutical company incorporated in Delaware and headquartered in San Diego, California, with additional operations in Germany. Intervenor, Dr. Aladar Szalay, along with Dr. Douglas Will and Dr. John Thomas (together, the "Founders"), founded Genelux around 2001. In early 2014, certain stockholders and directors, including Thomas and Plaintiff Dr. Ron Simus, engaged George Vandeman, a seasoned corporate attorney, to devise in secret a succession plan to terminate Szalay's employment with Genelux. On May 2, 2014, at a regular meeting of the Board of Directors, then consisting of Szalay, Simus, Thomas, James Tyree, and Defendant Dr. Albert Roeder, the Board voted, with Roeder abstaining, to appoint Bill Parrott and Peter Kroll to fill two vacant positions with immediate effect.
The Company's Annual Meeting took place on August 15, 2014, during which, among other things, the stockholders voted to elect certain candidates to the Company's Board. The holders of the Founders' Shares, voting alone, are entitled to elect two members of the Company's Board. Szalay, purporting to hold 3 million, or two-thirds, of the outstanding Founders' Shares, voted to elect Roeder and Defendant Byron Georgiou. On the same day as the Company's Annual Meeting, Genelux filed its original petition in this Court seeking, pursuant to Section 205 of the Delaware General Corporation Law ("DGCL"), a declaration that the Disputed Shares are invalid. On August 20, 2014, Genelux filed its Amended Complaint, the operative complaint in this case, adding Simus as a plaintiff and a Section 225 claim for a declaration that the elections of Roeder and Georgiou were invalid because Szalay only held 1.5 million Founders' Shares.
To resolve Szalay's contested ownership of the Disputed Shares, this Opinion examines the history of Genelux. Genelux originated from the combined efforts of Szalay, Will, and Thomas to commercialize certain of Szalay's scientific discoveries. The parties dispute, however, several of the events and agreements surrounding the Company's formation and initial capitalization. In the Company's first year or so, Will acted unilaterally as the sole director and held Board meetings, appointed officers, entered into employment and credit agreements, and issued preferred and common stock. But, almost immediately, a dispute arose between the Founders regarding Will's management and stock ownership, which led the Company and certain stockholders to file separate lawsuits against Will and his wife in California (the "Wills Dispute") and later settle those disputes (the "Wills Settlement") in a way that resulted in the Wills' departure from the Company. During the following several years, Szalay attempted repeatedly to recover the Disputed Shares, maintaining that, in contravention of the Founders' agreement under which Szalay and Will each were to get 3 million and Thomas was to get 1.5 million Founders' Shares, Will had given the Disputed Shares to his wife.
A. The Parties and Relevant Non-Parties
Will incorporated Genelux on September 4, 2001, served initially as its sole director, Chairman, and President, and controlled 4.5 million Founders' Shares until November 2003.
Thomas, who co-founded Genelux, served as its initial CFO, holds 1.5 million Founders' Shares, and is a director of the Company. He is the Dean of the Business School at La Sierra University, the sister campus of Loma Linda.
Szalay, the third of Genelux's co-founders, is the acknowledged holder of 1.5 million Founders' Shares and 11 million shares of common stock and the Company's former Chairman, CEO, President, and CSO. Szalay received his Ph.D. in biochemistry from Martin Luther University in Halle, East Germany, in connection with the Hungarian National Academy of Sciences, in 1971. He is currently a professor at the University of Wurzburg in Bavaria, Germany, and a faculty member in radiation oncology at the University of California, San Diego Cancer Center.
Simus, the first Series B Preferred stockholder, invested in Genelux in 2002 and became a director in 2003. At that time, Simus was a practicing orthodontist, but, in 2007, he joined the Company full-time as a vice president working in investor relations and fundraising. The same counsel representing the Company in this case, Latham & Watkins LLP ("Latham") and Richards, Layton & Finger, P.A. ("RLF"), are representing Plaintiff Simus, and the Company is paying or will pay for all of the attorneys' fees Simus incurs in connection with prosecuting his Section 225 claim.
Vandeman was a corporate attorney at Latham for twenty-nine years and later worked as General Counsel of Amgen for several years. He is currently vice chairman of Genelux's Board. Vandeman first became acquainted with Genelux in 2009 when he led the Company's negotiations with Abbott Laboratories for its potential $25 million investment. Vandeman left the Company while those negotiations still were ongoing. He returned to Genelux at the request of certain stockholders in 2014 to devise and implement a plan to remove Szalay from power at the Company.
Zindrick, who is an attorney, worked for Dow Chemical Company and Amgen for many years and is currently Genelux's CEO. Zindrick first became acquainted with Genelux in 2009 when he was hired as a consultant. He succeeded Vandeman in leading the negotiations with Abbott on
Roeder and Georgiou are named as Defendants because Szalay purported to elect them as directors at the August 15, 2014 Annual Meeting. Whether Szalay owns lawfully the shares necessary to have elected Roeder and Georgiou is the subject of this lawsuit. Where relevant, I refer to Defendants Roeder and Georgiou and Intervenor Szalay collectively as "Defendants."
In connection with Genelux's August 15, 2014 Annual Meeting, Szalay purported to elect Roeder and Georgiou by voting 3 million Founders' Shares. Evaluating Plaintiffs' challenge to whether Szalay owns validly the 1.5 million Disputed Shares requires reviewing a number of disputed facts surrounding Genelux's formation. Szalay and Will provide differing accounts of who founded Genelux and when, and the documentary record appears incomplete. Because Szalay has claimed entitlement to the Disputed Shares since Genelux's inception and the Founders formed Genelux to commercialize Szalay's life work, I first discuss his career to put Genelux's formation in context.
1. Genelux's origins
In the late 1970s, after studying modern genetic engineering at the California Institute of Technology for several years, Szalay joined the newly established Boyce Thompson Institute at Cornell University as an associate researcher and adjunct professor in microbiology and biochemistry. At Cornell, Szalay and his team achieved a breakthrough in genetic engineering that received global recognition. As a result, numerous companies, including Crown Zellerbach, DuPont, and Kodak, invited Szalay to be an advisor and give lectures. Szalay continued researching genetic pathways and ultimately was able to transfer light-emitting genes from ocean organisms into bacteria and viruses. Genelux later took its name from this cell-illuminating technology: "Gene-," for genetic material, and "lux," for luminescence or the sign of light.
The University of Alberta in Edmonton, Canada, awarded Szalay with an endowed chair for medicine, science, and agriculture in 1988. While at the University of Alberta, Szalay became acquainted with Will when Will interviewed Szalay for an opening at Loma Linda. Loma Linda made Szalay a tenured professor in microbiology, molecular genetics, and biochemistry in the medical school and the Director of the Center for Molecular and Gene Therapy, which he developed into one of the largest research units at the university. Will left Loma Linda shortly after Szalay arrived.
Szalay described his work in the gene therapy center at Loma Linda as "start[ing] this field from scratch."
Around this time, Szalay also became a distinguished professor at the University of Wurzburg. When Loma Linda declined to patent his discovery, Szalay caused a
Szalay instigated Will's eventual incorporation of Genelux when Szalay contacted Will about Szalay's work at Loma Linda.
Beyond a basic agreement to commercialize Szalay's work, the parties dispute the details and legal effect of the Founders' discussions that led to the Company's formation. Szalay testified that he talked to Will about managing the Company in Szalay's absence and handling the various formalities and business basics and that he reached out to Thomas, who was head of the business school, because Szalay had no experience in business or in leading a company.
The exact timing and details of the Founders' early discussions regarding Genelux's formation are unclear. Nonetheless, I find Thomas's and Szalay's testimony on this matter more credible than Will's. Additionally, as discussed infra, the parties' subsequent conduct is more consistent with Thomas's and Szalay's testimony and the evidentiary record and tends to discredit Will's description of what occurred. Thus, I conclude that Szalay has demonstrated by a preponderance of the evidence that the Founders did reach some form of agreement in principle under which they would be the Company's initial three directors and Szalay, Will, and Thomas would receive 3 million, 3 million, and 1.5 million Founders' Shares, respectively.
2. Will acts unilaterally as Genelux's sole director
Will caused Genelux to be incorporated
During 2002, Will continued to act unilaterally as Genelux's sole director. Genelux hired its first scientist on July 1, 2002.
In the meantime, Will put Genelux's operations into motion by executing, or causing Genelux to execute, a number of organizational documents and contracts. On or about August 1, 2002, Genelux and Thomas executed a Credit Agreement requiring Thomas to extend to the Company a $50,000 line of credit and pay $1,500 cash in consideration for 1.5 million Founders' Shares, i.e., Series A Preferred shares.
Effective August 5, 2002, Genelux and Szalay executed an Asset Purchase Agreement, which the Board, i.e., Will, authorized
Effective September 1, the Board authorized by unanimous written consent the Company's offering memorandum for the sale of Series B Preferred stock at a price of $1 per share, which included a capitalization table reflecting that Szalay owned 11 million shares of common stock and 3 million Founders' Shares, Thomas owned 1.5 million Founders' Shares, and "Trusts f.b.o. Jason and Andrea Will" owned 3 million Founders' Shares.
On September 12, 2002, Will sought to correct a mistake he apparently had made regarding Szalay's Asset Purchase Agreement.
These statements, however, contain several discrepancies and inconsistencies. For example, there is no stock certificate or entry on the stock transfer ledger reflecting that Szalay received initially only 10,550,000 shares of common stock. Furthermore, Szalay already held the 11 million shares of common stock as shown in the Offering Memorandum and stock transfer ledger. Based on these discrepancies and inconsistencies, I find that Will's actions were inconsistent with the Founders' agreement regarding the allocation of Founders' Shares. This conclusion is confirmed by the events discussed infra.
Finally, Genelux filed its First Amended and Restated Certificate of Incorporation with the Delaware Secretary of State on September 17, 2002. Precise meeting dates are unclear, but an email exchange in mid-January 2003 between Thomas and Will indicates that the Board had met twice by that time.
Only after Will provided Thomas with the requested documents did Thomas learn that Will had given Will's wife 1.5 million Founders' Shares in violation of the Founders' agreement to allocate 3 million, 3 million, and 1.5 million Founders' Shares to Will, Szalay, and Thomas, respectively.
3. The Wills Dispute and Settlement
The Founders disagree as to the exact reasons for the dispute leading to Will's
First, Will wrote a letter to Szalay on Genelux letterhead dated April 23, 2003 announcing his resignation as CEO and Board member effective May 1, 2003.
In Will's resignation letter, he described his efforts to value independently and sell the Company's assets.
The Company filed the California Complaint on June 18, 2003, accusing Will of secretly issuing 1.5 million Founders' Shares—and ceding control of the Company—to his wife for nominal consideration, secretly entering into an employment contract with himself on terms detrimental and damaging to Genelux and its stockholders, and secretly employing his wife for a starting salary of $75,000 per year.
Finally, on February 16, 2004, Thomas created a chronology of activities related to Genelux as he understood them for whoever succeeded him as CFO.
Both actions against the Wills, one filed by Genelux and the other by Simus and the Series B Preferred stockholders, were settled on November 20, 2003. Pursuant to the Wills Settlement, all shares of stock held by the Wills, including 4.5 million shares of Series A Preferred stock, were transferred to Genelux, and the named plaintiffs from both actions released all claims against the Wills.
4. Szalay pursues his claim to the Disputed Shares
Szalay again raised his claim to the Disputed Shares at a meeting of the Company's strategic planning committee on November 20, 2004.
On or about December 11, 2005, Genelux issued to Szalay 1.5 million shares of common
At a December 18, 2009 Board meeting attended by Szalay, Simus, Thomas, Zindrick, and others, upon a motion duly made and seconded, the Board approved unanimously (that is, including Simus, a Plaintiff in this case) certain recitals and resolutions, drafted by Latham—i.e., counsel for both Plaintiffs in this case—that were attached to the minutes as Appendix A, under the heading "Stock Plans."
The second subsection explains that, pursuant to the 2005 Plan, a committee consisting of Szalay, Roeder, and Simus had been formed to administer the plan. On March 1, 2005, the committee met and approved the grant, among others, of 1.5 million restricted shares to Szalay.
Because Szalay received shares of common stock in 2005, he later pursued converting those shares to Founders' Shares. On February 27, 2007, according to meeting minutes prepared by Dr. Shahrokh Shabahang, a vote approving the replacement of the 1.5 million shares of common stock that Szalay received in December 2005 with the Disputed Shares took place by motion made by Simus during a Special Meeting of the Board. Plaintiffs challenge the validity of the Board vote. The minutes state: "The final item on the agenda was the incorrect handling of Dr. Szalay's 1.5M Series A [Founders' Shares] which were not returned to him following removal of the previous CEO and later compensated for by allocation of 1.5M common shares."
Szalay next attempted to satisfy his claim to the Disputed Shares in 2009. On April 24, 2009, Szalay sent a letter to Genelux stockholders requesting their response and action by written consent on certain items, including the "[c]orrection of shares allocated in error to Aladar Szalay as Common Stock rather than as Series A Preferred Stock," and the adoption of a proposed Fifth Amended and Restated Certificate of Incorporation, in the form of an Action by Written Consent of the Stockholders of Genelux Corporation dated April 24, 2009.
5. The Abbott Negotiations and 2009 Issuance
Sometime in 2009, Genelux began negotiating with Abbott regarding a potential $25 million investment in Genelux and retained Latham in connection with that investment.
During the December 18, 2009 Board meeting discussed supra, the Board apparently acted without knowledge that their efforts to adopt the Fifth Amended Certificate in May were ineffective. The Board purported to adopt a resolution, drafted by Latham, that, in part, stated that the Board had determined that 1.5 million shares of common stock previously "were issued in error to Aladar Szalay in lieu of" 1.5 million Founders' Shares and that "in recognition of the previous error the Board deems it advisable and in the best interests of the Company to issue [1.5 million Founders' Shares] to Aladar Szalay in consideration for the cancellation of [1.5 million shares of common stock in issue] currently held by Aladar Szalay."
Genelux's corporate counsel, Cheston Larson of Latham, attended the December 18 meeting along with Szalay, Thomas, Simus, and Zindrick and, after Thomas informed him that the prior certificate had never been amended, Larson advised Zindrick that he should not file the Sixth Amended Certificate purportedly approved at the meeting before resolving the dispute between Szalay and Thomas regarding the Founders' Shares. Larson explained that increasing the authorized Founders' Shares from 3 million to 4.5 million required the approval of a majority of the outstanding Founders' Shares.
Genelux and Abbott entered into the Series I Preferred Stock Purchase Agreement in January 2010.
C. Procedural History
On August 15, 2014, Genelux filed its Verified Petition for Relief pursuant to 8 Del. C. § 205 to invalidate the 1.5 million Disputed Shares "improperly issued" to Szalay. The Company alleged that, in 2005, Szalay issued to himself 1.5 million shares of common stock that the Company later purported to convert to 1.5 million Founders' Shares in 2009. The Company also alleged that, for most of the time that Szalay held the positions of CEO, President, and Chairman of the Board, and up to May 2, 2014, the majority of the Board consisted of Genelux employees, subject, by virtue of their employment, to manipulation and control by Szalay. Thus, according to the Petition, the Company did not discover Szalay's wrongdoing until the Board was reconstituted and became fully independent following Szalay's removal in May 2014 and conducted a comprehensive review of Genelux's financials and operations.
On August 20, 2014, Genelux filed a Verified Amended Petition for Relief Pursuant to 8 Del. C. § 205 and Complaint Pursuant to 8 Del. C. § 225 (the "Complaint"), adding Simus as a Plaintiff and a Section 225 claim against Roeder and Georgiou. Simus verified the Complaint in his individual capacity and on behalf of Genelux. This amended Complaint is substantially similar to the original, but adds facts surrounding the August 15, 2014 Annual Meeting at which Szalay purported to vote his Disputed Shares in favor of Roeder and Georgiou, whose Board seats Simus and Genelux contest.
Plaintiffs filed a motion to expedite on August 22, 2014, which I granted on October 7, 2014. I set a two-day trial for December 2014.
Szalay moved to intervene on October 31, 2014. After granting that motion on
On December 23, 2014, Defendants filed a Motion to Dismiss Plaintiffs' Verified Amended Complaint with Prejudice Pursuant to Court of Chancery Rule 41(b), for Sanctions and for Immediate Suspension of These Proceedings and Postponement of the Trial Date Pending Resolution of this Motion, arguing that Simus had filed a false verification as to the Complaint. In particular, Simus's verification stated, "I have read the foregoing Verified Amended Petition for Relief Pursuant to 8 Del. C. § 205 and Complaint Pursuant to 8 Del. C. § 225 and know the contents thereof." At his deposition, however, Simus admitted that he had not read the Complaint and disclaimed knowledge of core facts alleged therein.
On February 5, 2015, I rescheduled trial in this matter for April 7-8, 2015. That same day, however, Szalay filed a separate complaint seeking indemnification and advancement from Genelux (the "Advancement Action") and moved to expedite those proceedings. Genelux both opposed the motion to expedite and moved to consolidate the Advancement Action with this case on February 18. Szalay opposed consolidation and, on February 26, 2015, filed a motion for summary judgment on his advancement claim. Genelux promptly opposed that motion.
On March 4, 2015, Defendants moved to compel access to Simus's laptop computer so they could have it examined by a forensic expert to confirm whether Simus had opened and read the Complaint as he claimed. In opposing that motion, Plaintiffs' counsel reported that Simus had discarded his laptop and would not be able to produce it. On March 19, Defendants responded by effectively renewing their Rule 41(b) motion to dismiss based on a claim of spoliation, which Plaintiffs opposed.
On April 2, 2015, I ordered, among other things, that Plaintiffs pay up to $10,000 of the reasonable attorneys' fees and expenses Defendants incurred in connection with their December 23 motion to dismiss based on Simus's alleged filing of a false verification.
Also on April 2, 2015, I granted in part Genelux's motion to consolidate this action
I presided over a trial of this matter from April 7 to April 8, 2015. After the parties filed their post-trial briefs, I heard argument on June 24. This Opinion constitutes my post-trial findings of fact and conclusions of law in this matter.
Having considered the briefing submitted by the parties on Szalay's motion for summary judgment in the Advancement Action and the evidence adduced at the trial of this action, I have determined that no oral argument is necessary on that motion. Accordingly, I am entering concurrent with this Opinion a Letter Opinion on the summary judgment motion and a separate order setting forth the procedure for seeking payment of advancement in the Advancement Action.
D. Parties' Contentions
Plaintiffs seek a declaration pursuant to 8 Del. C. § 205 that the purported issuance of 1.5 million shares of common stock to Szalay in 2005 was invalid and, therefore, that the purported conversion of these shares into Founders' Shares in 2007 and 2009 were void. Also, Plaintiff Simus seeks a declaration pursuant to 8 Del. C. § 225 that neither Roeder nor Georgiou was validly elected as a director of Genelux at the August 15 Annual Meeting. In support, Plaintiffs argue that the Disputed Shares are invalid because: (1) their issuance in 2009 lacked consideration; (2) the 2009 issuance lacked consideration because the shares of common stock that Genelux purported to convert were themselves invalid; and (3) the shares of common stock purportedly issued to Szalay in 2005 were neither authorized by the Board nor paid for by Szalay. Plaintiffs further deny that Szalay ever had a legitimate claim to the Disputed Shares and argue that, even if he did, the Wills Settlement extinguished any such claim. Finally, Plaintiffs contend that, to the extent the 2009 Issuance was valid, this Court should invalidate it because Szalay accomplished the 2009 Issuance by fraud or misrepresentation.
In opposition to the relief Plaintiffs seek, Defendants argue that Plaintiffs' Section 205 claim fails to state a claim as a matter of law, or, in the alternative, that Plaintiffs' invocation of Section 205 under the circumstances here should be barred on equitable principles. Defendants also assert various affirmative defenses, averring that the statute of limitations and one or more of the equitable doctrines of estoppel, acquiescence, and laches bar Plaintiffs' challenges to the validity of Szalay's ownership of the Disputed Shares, and that Plaintiffs failed to allege or establish facts demonstrating any fraudulent concealment that would warrant tolling the applicable statute of limitations. Plaintiffs respond that barring their claims on any of these grounds would be inequitable and inappropriate because neither Simus nor any other director had knowledge of the material facts underlying the acts at issue until, at the earliest, June 2014.
Defendants also contend that I should dismiss this case with prejudice because Plaintiffs have compromised the integrity of these proceedings in various ways. In particular, Defendants argue that Genelux's recruitment of Simus to serve as Plaintiff on the Section 225 claim violates Sections 225(a) and (b) or is otherwise inequitable, Simus's false verification and subsequent spoliation of evidence warrant
Finally, in their post-trial briefing, Plaintiffs raised for the first time a technical challenge to the validity and effectiveness of the 2009 Issuance, arguing that the Court should invalidate this issuance as defective because the Company failed to satisfy the notice requirements of its Fourth Amended Certificate, which notice Section 228(e) of the DGCL requires. Defendants oppose this argument on two grounds. First, Defendants contend that Plaintiffs waived this argument by failing to raise it in their pleadings, interrogatory answers, pretrial order, or pretrial brief. Instead, Defendants asserted this technical deficiency for the first time in their post-trial brief. Second, Defendants argue that the alleged failure of notice does not make the act void, but rather only unenforceable until notice is actually given, which condition was satisfied when Plaintiffs noticed the August 15, 2014 Annual Meeting.
A. Preliminary Matters of Law and Equity
A threshold issue in this case is whether Plaintiffs may use 8 Del. C. § 205 to invalidate defective corporate acts. Also, Defendants assert that Plaintiffs' use of Section 205 is inequitable under the circumstances here. I organize my analysis of these issues as follows. First, I determine whether Section 205 permits Plaintiffs to challenge the validity or effectiveness of the 2005 and 2009 Issuances. Second, I discuss whether Plaintiffs can use Section 205 to grant itself standing, in effect, under Section 225.
1. Plaintiffs cannot use Section 205 to invalidate defective corporate acts
When the Court "is faced with a novel question of statutory construction, as here, [it] `must seek to ascertain and give effect to the intention of the Legislature as expressed in the Statute itself.'"
Effective April 1, 2014, Section 205 confers on the Court of Chancery exclusive jurisdiction to hear a petition brought by a corporation or other enumerated party to "determine the validity of" or to "ratify" a corporate act or stock that, but for the statute, would otherwise be considered defective and incurable.
Section 205(b) proceeds to list several categories of relief that this Court is authorized to issue under the statute. The relevant provisions cast the relief in the affirmative:
Finally, in addition to setting out certain notice requirements, among other things, Section 205(d) provides a non-exclusive, non-mandatory list of factors the Court may consider in connection with a petition under Section 205, all of which are focused on the validation (not invalidation) of stock:
Plaintiffs argue that, because Section 205(a)(4) authorizes this Court, "upon application by the corporation," to "[d]etermine the validity of any corporate act or transaction and any stock, rights or options to acquire stock," it is inherent within that grant of power to "determine the validity" of "any stock" that the Court would have the ability to render a judgment that the stock subject to such a determination is invalid. Defendants disagree, arguing that viewing that phrase in a vacuum ignores the overall structure of the statute, which makes clear that the relief available under Section 205 is the validation of presumed defective and otherwise incurable acts (which the Court can then grant or deny), not the invalidation of acts presumed for years by a company or a stockholder to be valid. Defendants contend further that, because Section 205 has no relevant statute of limitations,
When I read Section 205(a)(4) in isolation, as Plaintiffs insist I do, the statute appears to enable Plaintiffs to petition this Court to determine the validity of any corporate act or transaction and any stock, rather than only defective corporate acts or transactions and defective stock. When read both as a whole and together with Section 204, however, Section 205 also appears to provide enumerated plaintiffs and the Court with a mechanism to eliminate
The authors of a respected treatise on Delaware corporation law and practice noted succinctly that Sections 204 and 205 "bring clarity to an often confusing area of Delaware law[, i.e.,] which [defective] corporate actions are voidable (and, therefore, may be capable of ratification) and which corporate actions are void (and, therefore, may be incapable of ratification)."
Contributing to this "confusion" were the decisions in STAAR Surgical Co. v. Waggoner
The legislative synopsis of House Bill 127, which became new Sections 204 and 205, itself states that the new statutes were enacted in response to and for the purpose of abrogating the decisions in STAAR Surgical and Blades so as to avoid their draconian effects.
Section 205 was intended to be a remedial statute designed, in conjunction with Section 204, to cure otherwise incurable defective corporate acts, not a statute to be used to launch a challenge to stock issuances on grounds already available through the assertion of plenary-type claims based on alleged breaches of fiduciary duty or common law fraud or a Section 225 action, if the stock had been voted.
Several provisions in Section 205 support this conclusion. For example, Section 205(d) identifies several factors that the Court of Chancery may take into account when resolving matters pursuant to Subsections (a) and (b).
2. Genelux cannot use Section 205 to grant itself standing under Section 225
To the extent Section 205 might be construed to permit a corporate plaintiff to petition this Court to invalidate a defective corporate act, I also question whether it was equitable here for Genelux to have pursued relief under both Sections 205 and 225 in the same action. Section 205 expressly grants a corporate plaintiff standing to seek relief under that statute.
Defendants argue that Genelux's recruitment of Simus to serve as Plaintiff in the Section 225 claim violates Sections 225(a) and (b).
There is a good possibility, however, that Simus is a shill for Genelux, who the Company pushed forward to pursue the Section 225 claim on its behalf. Simus is an accomplished individual in his own right, and I understand from his testimony that he has invested a significant portion of his life as a Genelux stockholder and director, but it does not appear that Simus is paying for this litigation out of his own pocket. His Board seat is not subject to dispute. And, Plaintiffs admit that, although Simus does not have an engagement letter with any of the lawyers in this action, Genelux is paying all of the necessary legal fees and expenses. Furthermore, as discussed above, Simus filed carelessly (or worse) a sworn verification stating that he read the Complaint, but later admitted that he had not read the whole thing and disclaimed knowledge of many of its core facts. Then, when Defendants sought production of his laptop computer to verify that he had, in fact, read it, he admitted to having disposed of the computer after this litigation began and after a litigation hold had been disseminated. Simus also admitted that Vandeman selected him to be the Plaintiff in the Section 225 action and at one point acknowledged that Genelux was driving this litigation. For all of these reasons, Simus's actions in this case are troubling, but they do not warrant, in my mind, further sanctions, let alone the draconian penalty of a dismissal.
In any event, the parties agree that the facts underlying both the Section 205 and 225 claims are the same. I also recognize that Section 205 is a new statute whose contours are not well understood and give deference to the fact that the record in this case is fairly robust and the parties already have incurred the time and expense of litigating it. Thus, I decline to dismiss either claim on the basis of Genelux's allegedly inequitable conduct.
B. Legal Standard
Plaintiffs have the burden of proving each element, including damages, of each of their causes of action against each Defendant by a preponderance of the evidence.
C. Plaintiffs' § 205 Claim
I held above that Section 205 does not permit Plaintiffs to petition this Court to invalidate either the 2005 or 2009 Issuance. Because Section 205 is a relatively new statute, I also dismiss Plaintiffs' Section 205 claim on two alternative grounds. First, Plaintiffs failed to prove the 2005 Issuance was defective. Second, because Plaintiffs did not raise their technical challenge to the 2009 Issuance under Section 205 until after trial, I deem that argument waived. I discuss the 2009 Issuance here and the 2005 Issuance below in connection with Simus's Section 225 claim.
Plaintiffs argued for the first time in their post-trial opening brief that this Court should invalidate and declare defective the stock Szalay received in the 2009 Issuance on technical grounds. In support, Plaintiffs argue that the 2009 Issuance is defective because the Company failed to satisfy the notice requirements prescribed in the Fourth Amended Certificate to comply with Section 228(e). For the reasons that follow, I find this argument waived because Plaintiffs failed to provide timely notice of it.
Plaintiffs did not challenge the technical validity of the 2009 Issuance until their post-trial opening brief.
Defendants responded in their answering brief that no such notice was required. Quoting Section 228(e), Defendants argued that, because the Company obtained the unanimous written consent of Thomas and Szalay, its only Series A Preferred stockholders, and no other stockholder vote was required, no additional notice was necessary. As Plaintiffs pointed out in their reply brief, however, Defendants were mistaken.
As stated above, Section 228(e) requires that where an action is taken by written consent of the stockholders, "notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to" non-consenting stockholders.
Plaintiffs waived this argument. It is settled Delaware law that a party waives an argument by not including it in its brief.
Finally, I consider it important that, had Plaintiffs put Defendants on notice of this argument in a timely manner, Defendants could have taken actions to meet it more effectively than they could post-trial. For example, Defendants might have used Plaintiffs' new argument to strengthen their motion to disqualify counsel. In addition, Defendants conceivably could have counter-petitioned this Court under Section 205 to validate the 2009 Issuance, which the parties admittedly considered technically valid and effective since its execution more than five years ago. Plaintiffs' delay made that impossible and thereby prejudiced Defendants and effectively limited this Court's inquiry to the Section 225 issues. Therefore, I conclude that Plaintiffs waived their challenge to the technical validity of the 2009 Issuance.
D. Simus's § 225 Claim
Under the rubric of Section 225, Simus contends that Szalay did not have the right to vote 3 million Founders' Shares at the August 15, 2014 Annual Meeting, asserting instead that Szalay only had the right to vote 1.5 million Founders' Shares because the 2009 Issuance was invalid. Simus raises four challenges to the validity of the
1. Simus failed to prove the 2005 Issuance was invalid
On or about December 11, 2005, Genelux issued to Szalay 1.5 million shares of common stock. Plaintiffs dispute the validity of this issuance on the grounds that there is no writing evidencing that the Board authorized it. Szalay conceded at argument that the issuance apparently is defective.
As discussed in greater detail above, the Board took steps in December 2009 to clarify its books and records in connection with the Abbott Deal. With the assistance of Latham, who is representing Plaintiffs in this action, the Board approved unanimously the adoption of the 2005 Stock Plan, which the Board adopted originally on January 10, 2005 and the stockholders approved on September 21, 2005. References to the 2005 Stock Plan appear elsewhere in the record. For example, in an amendment to a private placement memorandum dated February 7, 2005, Genelux disclosed, among other things, that the Board adopted the 2005 Stock Plan on January 10, 2005, and that the committee administering the plan could award common stock for consideration or no consideration to attract and retain employees, non-employee directors, and consultants.
It is difficult to square these documents with Plaintiffs' argument that "[t]here are no documents showing, or even suggesting, that the board ever attempted to issue or otherwise authorized the issuance of 1.5 million shares of common stock to Dr. Szalay in December 2005."
I decline to do so for two reasons related to the December 18 Resolutions. First, the December 18, 2009 minutes state that the Board confirmed that the Board had authorized previously a written instrument governing the issuance of restricted stock awards and a committee to administer that plan and that the committee had issued 1.5 million shares of common stock to Szalay pursuant to the plan. Several documents in the record corroborate that such an authorization occurred. Far from there being "no written instrument documenting board authorization of the  issuance," the record includes at least this written instrument, a Board resolution, documenting such authorization and references several others "suggesting" that the Board authorized that issuance in 2005, including documents that describe the very written instrument—i.e., the 2005 Stock Plan—authorizing the 2005 Issuance. Because neither the 2005 Stock Plan itself nor minutes of the January 10, 2005 Board meeting are in the record, the evidence on this issue is not unequivocal. Based on my review of the record, however, I find that Simus failed to prove by a preponderance of the evidence that the Board never approved the 2005 Issuance and that no written instrument evidences that issuance.
Second, to the extent that the December 18 Resolutions failed to ratify the 2005 Issuance, the related minutes prove unequivocally that both Genelux and Simus were on notice as of that date that Szalay might possess 1.5 million shares of common stock to which he was not entitled. Simus cannot disclaim such knowledge because the December 18 Resolutions state that he was on the committee that approved the grant of 1.5 million shares of common stock to Szalay on March 1, 2005.
2. The Wills Settlement did not extinguish Szalay's claim to the Disputed Shares
Next, Simus argues that the Wills Settlement constitutes a release of any claim Szalay may have had to restore his Disputed Shares or, in the alternative, that Szalay never had a valid claim to the Disputed Shares in the first place. Defendants protest that Plaintiffs failed to mention the Wills Settlement as a basis for invalidating the Disputed Shares in their interrogatory responses
Genelux asserted the claims in the California Complaint against the Wills. Series B Preferred stockholders (the "Series B Plaintiffs") also asserted claims against the Wills in another action in California. Genelux, Thomas, Szalay, and the Series B Plaintiffs (the "Genelux Parties") entered
The mutual releases, however, do not include claims by Szalay against Genelux and thus do not foreclose Szalay from seeking additional Founders' Shares from the Company. Besides, it was the Company that issued the shares in the first place, the Company that sued the Wills to remedy the Wills' wrongful acts, and the Company that finally issued the Founders' Shares to Szalay in 2009. For Plaintiffs to prevail on their argument that the Wills Settlement extinguished Szalay's claim to the Disputed Shares, Plaintiffs would have to prove that, by virtue of the Wills Settlement, Szalay released claims he had against the Company for Disputed Shares. The facts, however, are to the contrary: the Wills returned their Founders' Shares to the Company; the Company allowed the Wills to keep other payments they had received from the Company; the Wills and Genelux Parties executed broad mutual releases in each others' favor; and, most importantly, the Wills Agreement, by its terms, released only claims by the Genelux Parties against the Wills Parties and claims by the Wills Parties against the Genelux Parties. Although Szalay signed the Wills Settlement, Plaintiffs adduced no evidence that he ever was adverse to the Company in connection with the Disputed Claims or released any claims that he had or might have had against the Company. Even Sundberg, who represented Genelux in connection with the Wills Settlement, testified (albeit equivocally) that the release would not preclude Szalay from seeking additional Founders' Shares from Genelux.
Furthermore, Simus failed to carry his burden to prove that Szalay never had a valid claim to the Disputed Shares in the first place. As discussed above, even though the exact timing and details of the Founders' early discussions regarding Genelux's formation are unclear, the testimony of Thomas and Szalay regarding the Founders' agreements largely were consistent with each other, more credible than Will's, and supported, to a certain extent, by contemporaneous documentation. Hence, I find that the evidence shows that
The parties dispute vigorously whether Will breached any agreement the Founders had reached by "fluffing off" 1.5 million Founders' Shares to his wife or whether Szalay had relinquished his claim to those shares by refusing to sign the credit agreement Will presented to him. To resolve these issues, the parties invite me to make determinations of witness credibility and findings of fact on an incomplete record in an effort to construe the terms of an oral agreement made twelve or thirteen years ago. I conclude, however, that to resolve the issues before me in this action under Section 225, I need not determine the precise terms of the Founders' oral agreement, or even if there definitively was an enforceable Founders' agreement. Rather, the question is whether Szalay had a colorable claim against Genelux to receive an additional 1.5 million shares of Series A Preferred stock under the alleged Founders' agreement and whether that claim survived as of the time of the 2009 Issuance. I answer both those questions in the affirmative.
Had Szalay pursued his claim against Genelux in a court of law, Szalay would have had the burden of proving the terms of an enforceable contract, a breach of that contract, and damages. That claim and its concomitant burden of proof, however, is precisely what Szalay offered and considered satisfied when Genelux issued him the Disputed Shares.
3. The 2009 Issuance was supported by valid consideration
Simus argues that the 2009 Issuance is defective because it was not supported by valid consideration. I found above that Szalay provided the Company with two alternative forms of consideration in exchange for the Disputed Shares: the shares of common stock he received in the 2005 Issuance and the release, in effect, of his claim to additional Founders' Shares. First, the Company cancelled the 1.5 million shares of common stock that Szalay received in the 2005 Issuance in exchange for the Disputed Shares. Second, the Action by Written Consent indicates that the actions regarding the issuance as Series A Preferred Stock to Szalay was taken to correct a previous error.
4. Plaintiffs failed to prove Szalay accomplished the 2009 Issuance by fraud
Finally, Plaintiffs argue that, because Thomas's decision to sign the written consent authorizing the 2009 Issuance was based on Szalay's deceit and misrepresentation, this Court should find that Szalay never validly held the Disputed Shares and thus did not have the right to vote them in the August 15, 2014 Annual Meeting. In response, Defendants argue that the only ambiguity in the record was created by the testimony of Plaintiffs' witnesses and that none of the demands and false claims they allege Szalay made are supported by the weight of the evidence.
According to Plaintiffs, Szalay accomplished the 2009 Issuance through a fraudulent scheme by creating a cloud of misinformation regarding Abbott's purported insistence on the conversion of 1.5 million of Szalay's shares of common stock into 1.5 million Founders' Shares. There is no dispute that such a conversion required Thomas's consent, but Thomas recently had voted against Szalay's "correction and reissuance scheme." The Company claims that Szalay falsely informed Thomas and the Board that the Abbott Deal was contingent upon the correction of his Preferred Stock holdings and it was Szalay's false representation that resulted in his securing Thomas's written consent and the Board vote at the December 2009 Board meeting. But, Zindrick testified that Szalay told him that Szalay would block the Abbott Deal if his Founders' Shares were not "corrected,"
Plaintiffs allege that Szalay conveyed these conflicting messages intentionally because Zindrick, as the lead negotiator for the Abbott Deal, would have known Abbott was not conditioning the deal on Szalay getting his Founders' Shares, but Thomas and Simus were not close enough to the negotiations to know Szalay was lying.
Defendants argue, however, that there is nothing reflected in the minutes of the December 18, 2009 Board meeting regarding Szalay's alleged misrepresentation
Defendants also emphasize the lack of documentary evidence in the record supporting Plaintiffs' position. I agree that the documentary evidence is informative. By October 19, 2009, Larson had recognized during capitalization diligence that the Company's earlier efforts to authorize the Fifth Amended Certificate were ineffective.
In another email to Szalay on December 15, 2009, three days before the December 18 meeting, Zindrick stated:
Then, on December 17, Zindrick asked Larson whether he could confirm the Board's previous vote on the Founders' Shares, which Szalay thought was earlier in the year.
On December 20, 2009, Larson recommended to Zindrick that "[e]ither Dr. Szalay can convince Thomas to approve, or we should drop the authorized Series A to 3 million [in the Fifth Amended Certificate]."
Based on the conflicting testimony and limited documentary record on this issue, I must consider issues of credibility. I begin by noting that none of the witnesses are disinterested third parties. Each of Simus, Thomas, and Zindrick either was involved in the secret plot to remove Szalay from the Board that led to this action to invalidate Szalay's Disputed Shares or the 2009 Issuance of the Disputed Shares that purported to dilute Thomas's percentage of Founders' Shares. Szalay's self-interest is equally plain. With the exception of Simus, the relevant witnesses were generally competent and credible. I did not find credible, however, Simus's testimony that Szalay told Simus that Abbott, not Szalay, was insisting on the conversion of Szalay's Founders' Shares; therefore, I disregard that testimony.
Having considered the parties' conflicting narratives and the evidence of record, I find the relevant facts to be as follows. Genelux worked with Latham earlier in 2009 to adopt the Fifth Amended Certificate and authorize an increase of the Founders' Shares to 4.5 million to satisfy Szalay's outstanding claim. Thomas voted against this authorization, but Murphy mistakenly recorded that the measure had passed. Latham continued representing Genelux on the Abbott Deal through the year and conducted capitalization diligence, which resulted in Latham drafting the resolutions discussed at the December 18, 2009 Board meeting. Thomas, the dean of a business school and long-time investor, acknowledged under oath that Abbott's interest in clearing up any uncertainty in Genelux's capitalization table was
In summary, I do not find the conduct of the relevant parties in attempting to close the Abbott Deal, and least of all Thomas or Szalay, the two remaining founders of the Company, to be problematic. Instead, I find that, at worst, the parties misunderstood or miscommunicated the necessary steps for successfully closing Genelux's single largest investment to that date. For example, Latham had an interest in following through on its earlier attempt to adopt the Fifth Amended Certificate, Szalay could have miscommunicated Abbott's interest in cleaning up Genelux's capitalization table as being an interest in satisfying his claim to the Disputed Shares, and Thomas likely felt pressure from all sides to make sure the deal closed regardless of who said what.
For all of these reasons, I find that the evidence does not support Plaintiffs' claim that Szalay accomplished the 2009 Issuance by fraud, deceit, misrepresentation, or otherwise. Accordingly, I conclude that, as of August 15, 2014, Szalay did have the right to vote all 3 million Founders' Shares that he purported to own. I further find that Szalay voted properly all of those shares in favor of Roeder and Georgiou. Because a majority of the Founders' Shares voting as a separate class were cast in favor of electing Roeder and Georgiou, I conclude that those two Defendants have the right to occupy the Board seats in dispute in this action under Section 225.
Finally, although I have reached my conclusion on this issue based on Plaintiffs' failure to carry their burden of proof, that conclusion is strengthened by the fact that, even if Plaintiffs had satisfied their burden here, Plaintiffs' argument that the Founders' Shares Szalay received in the 2009 Issuance are invalid is time-barred. Under Delaware law, if a fiduciary breaches his or her disclosure obligations in connection with soliciting stockholders' votes or consents, and the Court finds that such breaches "inequitably tainted the election process," that could be grounds for setting aside otherwise valid votes or consents.
E. Defendants' Claims for Sanctions
Defendants argue that I should sanction Plaintiffs based on Simus's false verification and failure to preserve evidence, the conflicts of interest faced by Plaintiffs' counsel, the introduction of evidence contradicted by prior judicial admissions, and the filing of pleadings that contradict witness testimony and documents. I have reviewed all of these arguments. I previously ordered sanctions for Plaintiffs' actions regarding the false verification and failure to preserve evidence and decline to impose additional sanctions for those actions here. I also denied Defendants' motion to disqualify Latham and RLF based on alleged conflicts. As discussed above, I took judicial notice of what Defendants argue is a "prior judicial admission" without adopting it as a conclusive judicial admission or granting it the effect of judicial estoppel. That is, I relied on the fact that the statements were made by Genelux in papers filed in court and consider that relevant evidence of what Genelux and its Board knew and the positions they took in or around 2003. But, the evidence does not indicate that any court made a decision in reliance on those statements. Therefore, I have not admitted them for the truth of the matter asserted. I also considered Defendants' allegations that Plaintiffs' pleadings contradicted their witnesses' testimony and documents they placed in evidence.
On the whole, however, I conclude that Plaintiffs' conduct does not rise to the level of egregiousness necessary to grant Defendants' request for sanctions, especially in light of the fact that Defendants have prevailed on the merits of this action and, in my view, were not materially prejudiced by the actions they challenge. As a result, I deny Defendants' request for an award of attorneys' fees or the imposition of additional sanctions.
For the foregoing reasons, Plaintiffs' request for relief pursuant to 8 Del. C. § 205 (Count I) and 8 Del. C. § 225 (Count II) are denied and those counts will be dismissed. Szalay is entitled to a declaratory judgment that he was entitled to vote 3 million Founders' Shares at the August 15, 2014 Annual Meeting, which shares constituted a majority of outstanding shares voted in favor of electing Roeder and Georgiou. Accordingly, Roeder and Georgiou are entitled to a declaratory judgment that they are both validly elected directors of Genelux effective August 15, 2014. In all other respects, the requests for relief of both Plaintiffs and Defendants are denied.
An implementing order accompanies this Opinion.
IT IS HEREBY ORDERED, ADJUDGED, and DECREED, this 22nd day of October, 2015, for the reasons stated in the Court's Opinion (the "Opinion") of today's date, that:
1. Defined terms have the meaning set forth in the Opinion.
2. Judgment is entered in favor of Defendants such that:
3. In all other respects, Defendants' requests for relief, including their requests for attorneys' fees and expenses and additional sanctions, are denied.
4. All of Plaintiffs' claims are dismissed with prejudice.
5. Plaintiffs' request for attorneys' fees and expenses is denied.
6. As the prevailing party, Defendants are entitled to their costs under Court of Chancery Rule 54(d).