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Prizm Group, Inc. v. Anderson, C.A. 4060-VCP (Del. Ch. May 10, 2010)

May 10, 2010

In this post-trial memorandum opinion, the Court of Chancery granted judgment in favor of the plaintiff corporation, Prizm Group, Inc., and declared defendant Mark Anderson’s shares of the corporation’s common stock void ab initio or voidable for failing to pay valid consideration. Determining that it need not decide whether the shares were void or, rather, voidable for the purpose of this case, the Court further held that the corporation’s board had properly cancelled the defendant’s shares.

In May 2004, Anderson purported to pay for a one-third equity interest in Prizm with an unsecured promissory note due, with interest, one year later. Under Section 152 of the Delaware General Corporation Law and Section 3, Article 9, of the Delaware Constitution in effect at that time (both have since been amended), an unsecured promissory note, by itself, was not valid consideration for shares in a Delaware corporation, and shares issued for such consideration would be either void or voidable at the election of the issuing corporation.

Anderson failed to pay any portion of the note. In April 2006, nearly eleven months after the note came due, Prizm formally requested payment, stating it needed the additional capital to satisfy outstanding debts. Anderson ignored the request. The Prizm board thereafter voted to cancel Anderson’s shares, providing him with notice of the action. Anderson never challenged the cancellation and instead held out to third parties that any challenge would be “a waste of time” and that he had no intention to challenge the cancellation. The Court found that, around the same time, Anderson, who had previously been both a Prizm officer and director, injured Prizm by misappropriating and releasing confidential company information to its industry competitors.

Despite Anderson’s actions, Prizm’s business thereafter improved and, in July 2008, it received an offer to sell the company for approximately $15 million. After more than two years, however, Anderson emerged from his silence and contacted the buyer, declaring himself a one-third shareholder of Prizm and asking to be kept apprised of the transaction’s developments. Halting all negotiations, the buyer demanded assurance from the company that Anderson would not sue following its acquisition of Prizm.

Prizm brought suit the next day, seeking a declaration that Anderson’s shares were void and properly cancelled by the board. In the alternative, Prizm requested that the Court cancel Anderson’s stock for failing to pay consideration and lack of any equitable basis to prevent cancellation. Following established law that, as of the time Anderson purported to acquire his stock, an unsecured promissory note was not valid consideration, the Court held that the stock was either void ab initio or voidable at the election of the company. The Court further held that, regardless whether the stock was void or voidable in the first instance, the Prizm board properly exercised its right to cancel the shares and, therefore, as of no later than the date of that cancellation, Anderson was not a Prizm stockholder

The full opinion is available here