CertiSign Holding, Inc. v. Sergio Kulikovsky, C.A. No. 12055-VCS (Del. Ch. June 7, 2018)
In this post-trial memorandum opinion, the Court awarded damages for a “quintessential” breach of the fiduciary duty of loyalty, and held that judicial validation under 8 Del. C. § 205 was not available to overcome a failure to issue stock options in accordance with 8 Del. C. § 157 or a failure to reduce a contract to writing as required by the statute of frauds (6 Del. C. § 2714(a)).
In 2012, after CertiSign Holding, Inc. (“CertiSign”) learned of technical defects in the issuance of nearly all its capital stock, CertiSign and its stockholders, with the assistance of counsel, formulated a series of steps to rectify the defects in its capital structure (the “Self-Help Steps”). Sergio Kulikovsky was a CertiSign director and his approval of the Self-Help Steps (in his capacity as a director) was necessary because he was one of three original CertiSign directors and other subsequently elected directors had been elected by holders of invalid stock. CertiSign and all its stockholders and directors (including Kulikovsky) agreed that the capitalization defects needed to be rectified, but at the last minute, Kulikovsky refused to execute director consents necessary to implement the Self-Help Steps unless he received personal financial benefits aimed at, among other things, securing a permanent board seat and forcing a CertiSign stockholder to distribute CertiSign stock it owned to Kulikovsky.
Because Kulikovsky refused to sign the necessary consents to effectuate the Self-Help Steps, the Company filed a petition pursuant to Section 205 of the Delaware General Corporation Law, seeking judicial validation of the defective stock. Kulikovsky intervened and filed a counter-petition, requesting that the Court also validate stock options he claimed CertiSign had granted to him and validate CertiSign’s purported assumption of a debt owed to Kulikovsky by a CertiSign subsidiary. CertiSign moved for partial judgment on the pleadings regarding the defective stock, which motion the Court granted. See In re CertiSign Hldg., Inc. 2015 WL 5136226 (Del. Ch.). CertiSign then initiated a breach of fiduciary duty action against Kulikovsky; the parties agreed that Kulikovsky’s pending counterclaims from the Section 205 action would be asserted as counterclaims in the breach of fiduciary duty action.
The Court noted that Kulikovsky admitted at trial that his refusal to sign the director consents “was motivated by a desire to secure for himself a permanent CertiSign board seat” and other personal benefits, and that “Kulikovsky was well aware that his refusal to sign the Self-Help documents … jeopardized the well-being of CertiSign and its stockholders for the sake of personal advantage and satisfaction.” The Court found that such admissions overwhelmed Kulikovsky’s proffered defenses, and held that Kulikovsky’s conduct was “the quintessential breach of the duty of loyalty.” The Court awarded CertiSign damages in the amount of the “legal fees and expenses incurred by CertiSign in connection with its efforts to remedy its defective capitalization and board issues.”
The Court also rejected Kulikovsky’s counterclaims for judicial validation under Section 205 of purported option grants and CertiSign’s purported assumption of a debt owed to Kulikovsky.
The Court held that the evidence failed to satisfy the “basic requirements” for a corporation to create and issue stock options under Section 157, and also failed to establish the existence of a defective corporate act that could be judicially validated under Section 205. To the contrary, the evidence showed persistent uncertainty about the purported options’ exercise price, quantity issued, dates granted, and recipients. The absence of such “definite, material terms” demonstrated that although CertiSign directors had discussed option grants, there was no defective corporate act for the Court to consider validating under Section 205.
The Court also found insufficient evidence of an enforceable contract for CertiSign to assume the debt owed by a CertiSign subsidiary to Kulikovsky. For example, the Court observed that because the statute of frauds applies to debt assumption agreements, Kulikovsky was required to produce a signed writing memorializing the terms of the assumption, and that Kulikovsky failed to do so. Accordingly, the Court declined to “employ Section 205 to force a debt assumption upon CertiSign to which the necessary parties never agreed.”