Paul Nguyen v. View, Inc., C.A. No. 11138 (Del. Ch. June 6, 2017) (Slights, V.C.)
In this memorandum opinion, the Court of Chancery ruled, as a matter of first impression, that a corporate act which a majority of stockholders entitled to vote deliberately declined to authorize, but that the corporation nevertheless determined to pursue, was not a defective corporate act subject to ratification under 8 Del C. § 204 (“Section 204”). In so holding, the Court distinguished defective corporate acts, which can be ratified pursuant to Section 204, from unauthorized corporate acts, which cannot.
In the fall of 2009, View, Inc. (“View” or the “Company”) sought the consent of its stockholders to pursue a round of Series B preferred stock financing. At the time, View’s founder and former CEO Paul Nguyen (“Nguyen”) owned approximately 70% of the Company’s common stock. In connection with the round of Series B financing, View also sought Nguyen’s consent related to the Second Amended Restated Certificate of Incorporate and the then-operative Voting Agreement which would drastically diminish his rights as a stockholder. Throughout this process, Nguyen was pursuing claims against the Company related to his termination in early 2009. As part of a broader resolution of his claims against View related to his termination, Nguyen signed a settlement agreement (the “Settlement Agreement”) that included Nguyen’s consent to the Series B financing. The Settlement Agreement also contained a provision that allowed either party to rescind it within seven days of its execution. During this seven day revocation period and unbeknownst to Nguyen, View proceeded to close the Series B financing.
After further examining the transaction documents related to the Series B financing, Nguyen served a notice of rescission on the Company within the seven day revocation period, thereby rescinding his consent to the Series B financing. The parties proceed to arbitration regarding the validity of the revocation. While the arbitration was pending, View closed Series C through Series F financing. The Arbiter subsequently ruled that Nguyen had properly revoked the Settlement Agreement, including his consent to the Series B financing thereby rendering the Series B financing invalid and void.
In an attempt to turn back the clock, View undertook several steps to validate the Series B through Series F financing. Holders of Series A preferred stock converted their shares to common stock. This conversion displaced Nguyen as the majority stockholder and also cancelled the Voting Agreement. With these changes, View filed two certificates of correction, pursuant to Section 204, that purported to ratify the invalid Series B financing and subsequent financing rounds. Nguyen then filed a Complaint pursuant to 8 Del. C. § 205 (“Section 205”) arguing that View’s attempts to ratify the financing rounds were improper. View moved to dismiss the Complaint.
In denying the motion to dismiss, the Court held that the ratifications did not fall into the definition of “defective corporate act” pursuant to Section 204. In order to fall within the remedial purposes of Section 204, a ratification must be directed towards acts that “at the time such act[s] [were] purportedly taken[,] would have been within the power of a corporation . . . but [were] void or voidable due to a failure of authorization.” At the time of these purported acts, the Company needed to get the consent of the majority common stockholder, Nguyen. Since Nguyen withdrew his consent within the revocation period, the Company did not have the power to take these actions and accordingly could not enjoy the remedial benefits of Section 204. In addition, the Court distinguished “failure of authorization” from a “no” vote by the majority of stockholders entitled to vote. The Series B financing was not void because of a failure to comply with the DGCL or its own governance documents, which would fall within the purview of Section 204, but rather because a majority of the stockholder entitled to vote rejected it.
The Court also rejected View’s argument that the Court should ratify the Series B financing because View had the right to convert the Series A preferred stock to common stock prior to the Series B financing and therefore should view this conversion as occurring prior to the Series B financing. In what it called an “alternative version of history,” the Court held that Section 204 cannot be used to authorize an act that was never taken but that the corporation now wishes had occurred or to backdate an act that did occur but that the corporation wished had occurred as of an earlier date. Nor did the Court find any Court of Chancery or Delaware Supreme Court decision that has applied Sections 204 or 205 to alter the outcome of a stockholder vote. Accordingly, the Court denied View’s motion to dismiss.