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Keyser, et. al. v. Curtis, et. al., C.A. No. 7109-VCN, 2012 (Del. Ch. July 31, 2012)

July 31, 2012

In this memorandum opinion, the Court of Chancery declared, pursuant to 8 Del. C. § 225, that a written consent dated December 13, 2011 (the “2011 Written Consent”) was valid and effective in electing Plaintiffs to the board of directors (the “Board”) of Ark Financial Services, Inc. (“Ark” or the “Company”).  In doing so, the Court held that Plaintiffs owned all of the stock they purported to own and that the December 2010 issuance of Ark super-voting stock by Ark’s then-sole Board member to himself was invalid.

Plaintiff Robert Keyser and Defendant Al Poliak had founded Ark, a holding company for Dawson James Securities, Inc. (“Dawson James”), an investment-banking firm, in 2002.  The two originally served together on the Board.  Keyser resigned from his positions with both Ark and Dawson James in December 2009.  At that time, Poliak became the sole member of the Board.  In December 2010, with the support of certain creditors (the “Creditors”), Keyser attempted to return to the Company and replace Poliak on the Board.  To prevent Keyser and his allies from electing new directors, Poliak created shares of a new series of super-voting preferred stock and issued 25,000 shares of those shares to himself for a penny per share (the “Series B Issuance”).  These shares, if valid, would have given Poliak an overwhelming majority of the votes to be cast in any matter for which Ark’s stockholders were entitled to vote.  Extended settlement discussions ensued, resulting in, among other things, a settlement agreement, governed by Florida law, providing for Keyser to sell his Ark shares to the Company.  Ark failed to repurchase those shares, however.  In November 2011, Poliak resigned from the Board to comply with a FINRA settlement, and Defendants Curtis, Shek, and Hands were elected to the Board.  In December 2011 Plaintiffs and other stockholders executed the 2011 Written Consent to remove Defendants Curtis, Shek, and Hands from the Board and to elect Plaintiffs Keyser, Salvator, and Shalk as directors.

In its analysis, the Court considered the validity of the Series B Issuance.  Poliak testified that he caused Ark to issue the Series B shares to prevent Keyser and his allies from electing a new Board, which, the Court observed, suggested his actions should be subject to review under the standard set forth in Blasius Industries, Inc. v. Atlas Corp.  Because the Series B Issuance was a self-dealing transaction, however, the Court ultimately concluded that it was “subject to entire fairness review, but that that review should be informed by the fact that Poliak’s admitted objective in causing Ark to undertake the Series B Issuance was to diminish common stockholder voting power in a contest for Board control.”

Defendants contended that Poliak caused the Series B Issuance because (i) Ark had not performed well under Keyser’s leadership and, thus, Poliak thought that if he and the other Plaintiffs gained control, the Company would suffer even greater financial distress; and (ii) Poliak feared that if Keyser gained control of Ark, then he might make decisions which sacrificed the best interests of Ark for either his own best interests or the best interests of the Creditors.  The Court found that, even if the Defendants sincerely held those beliefs, they still could not show that the Series B Issuance was entirely fair.  With regard to fair dealing, the Court accepted Poliak’s testimony that if he was going to prevent Keyser and his allies from removing him as the sole director, he had to act fast, but found Defendants had not shown that Poliak was entitled to prevent his own removal.  With regard to fair price, Poliak had paid $250 for a controlling interest in Ark and for the immediate right to cause the shares to be redeemed by the Company for $25,000.  The Court rejected Defendants argument that, because Ark had been insolvent, the Series B stock was worthless at the time of its issuance.  It found that control of even an insolvent corporation is worth something as there is always a chance that it will become solvent.  Moreover, the Court found that even if Ark had no money, it was unfair for Poliak to pay $250 for an option to demand $25,000 from Ark in the event it became profitable.  Defendants thus failed to show that the Series B Issuance was entirely fair and, therefore, the Court held that the issuance was invalid.

Defendants also raised a number of equitable defenses, but the Court found that none barred Plaintiffs from challenging the Series B Issuance.  Accordingly, the Court held that the 2011 Written Consent, which elected Plaintiffs to the Board and removed Defendants Shek, Hands, and Curtis, was valid and effective.

The full opinion is available here