Palisades Growth Capital II, L.P. v. Bäcker, No. 2019-0931-JRS (Del. Ch. Mar. 26, 2020) (Slights, V.C.)
In this memorandum opinion, the Court of Chancery voided all actions taken at a board of directors meeting as a matter of equity. In so ruling, the Court invalidated a former CEO’s attempt at a boardroom coup d'état, even though the actions taken by the CEO did not violate any applicable governance documents.
Defendant Alex Bäcker (“Bäcker”), founder and CEO of QLess, Inc. (“QLess”), held one of two common stock board seats at QLess, along with his father, Ricardo Bäcker (“Ricardo”). The company’s certificate of incorporation permitted each of plaintiff Palisades Growth Capital II, L.P. (“Palisades”), as majority owner of QLess’s Series A Preferred Stock, and non-party Altos Hybrid 2 L.P. (“Altos”), as majority owner of QLess’s Series A-1 Preferred Stock, to appoint one director to the board. Palisades’s designee was Jeff Anderson (“Anderson”), and Altos’s designee was Hodong Nam (“Nam”). Pursuant to a Voting Agreement, the fifth board seat was occupied by an independent director, Ivan Markman (“Markman”). The Voting Agreement also required the board to create a new CEO director seat to be filled by Bäcker’s replacement in the event of Bäcker’s termination.
On June 8, 2019, the board voted to remove Bäcker as CEO following a special committee investigation that found Bäcker “retaliated against employees, made demeaning comments or used demeaning language, and made comments about (or to) women that were offensive.” On September 7, 2019, the board hired Kevin Grauman (“Grauman”) as QLess’s new CEO. Bäcker initially supported the hire, but the relationship between Bäcker and Grauman soon became strained. Shortly thereafter, Nam resigned his position on the board. Altos decided that Paul D’Addario (“D’Addario”), a partner at Palisades, would replace Nam as Altos’s designee. QLess counsel erroneously advised Altos that board action would be required to fill the vacancy created by Nam’s resignation, even though QLess’s certification of incorporation gave Altos the exclusive right to fill its Series A-1 Director seat by vote or written consent in lieu of a meeting. Relying on this bad advice, Altos took no further action to elect D’Addario, waiting instead on the next board meeting.
Bäcker requested that the Board convene a meeting on November 15, 2019. As the parties were scheduling this meeting, Anderson realized Grauman, as the new CEO, was not on the email thread and inquired as to why he was not included. Bäcker responded, “Kevin [Grauman] is on the thread, assuming [the board] now includes him, which I requested it does.” On November 11, Grauman circulated proposed resolutions for the meeting. The resolutions included, among other items, replacing Nam on the board with D’Addario and confirming Grauman’s role as the CEO director. Neither Bäcker nor Ricardo objected to these agenda items.
On November 14, the day before the meeting, Markman unexpectedly resigned his position as independent director after a phone call with Bäcker that led Markman to believe Bäcker would try to reinstate himself as CEO. Believing that Markman’s resignation allowed him to make the case that he enjoyed a 2-1 majority on the board, Bäcker leapt into action. Bäcker circulated alternate proposed resolutions to Ricardo and to non-party Patricia Cuestra (“Cuestra”), whom he planned to appoint to fill his vacant common director seat at the next day’s meeting.
Indeed, Bäcker announced at the outset of the November 15 meeting that he held a 2-1 board majority and then demanded that Grauman and D’Addario disconnect from the call since they were not members of the board. Grauman left the meeting, but D’Addario refused. With Ricardo’s support, Bäcker then fired Grauman as CEO, appointed himself to replace Grauman as CEO and fill the CEO director seat, appointed himself as CFO, ratified a new employment agreement for himself, appointed Cuestra to fill Bäcker’s now vacant common director seat, and amended QLess’s bylaws to provide for a quorum of three when the board is comprised of six members. This concerted action was undertaken over Anderson’s dissenting vote and D’Addario’s objection.
Palisades filed its Complaint five days later, seeking an order under 8 Del. C. § 225 declaring that D’Addario was validly appointed to the board before the November 15 meeting, thereby rendering any action taken at that meeting a nullity. Palisades specifically argued that an October 28, 2019 email from Altos’s general counsel requesting QLess to take action to facilitate stockholder consent of D’Addario’s appointment constituted a “vote” to place D’Addario on the board, or that if the email was not a vote, it was a written consent. The Complaint also alleged a breach of the Voting Agreement for failure to confirm Grauman to the CEO director seat. In the alternative to its statutory and contractual arguments, Plaintiff urged the Court to exercise its equitable powers to invalidate the actions taken at the contested meeting.
According to Defendants, at the conclusion of the November 15 meeting, the board was comprised of Ricardo and Cuestra as common directors, Bäcker as CEO director, and Anderson as the Series A director—the Series A-1 and independent director seats were, and remain, vacant.
First, the Court held that the October 28 email sent by Altos’s general counsel did not constitute a stockholder vote under the certificate of incorporation or under applicable law. The Court explained that the DGCL is clear that stockholders vote at meetings. The Court further held that the October 28 email was not a written consent because the email requested that QLess draft the stockholder consent, and because, under 8 Del. C. § 228, electronic transmissions “still must [set] forth the action so taken by the stockholder giving the consent.” The October 28 email did not comply with those formalities because it did not set forth the action so taken; it merely expressed a request that certain action be taken.
Second, the Court did not decide whether the board appointed Grauman as a Director prior to the November 15 meeting. The Court recognized that a majority of the board believed Grauman had been appointed before the meeting, but the Court also acknowledged that under QLess’s bylaws, a formal executed unanimous written consent would have been required for a valid appointment.
Finally, the Court held that all the actions taken at the November 15 meeting were void as a matter of equity. The Court explained that while Bäcker took no steps to interfere with Altos’s right to elect its board designee, he deceived the other QLess directors into attending the November 15 meeting on the belief that Bäcker and Ricardo would honor the Voting Agreement by appointing Grauman to the vacant CEO director seat. The Court explained that if Bäcker had merely sat silent and benefited from the misinformation given to Altos by counsel, then the Court would have no basis to invoke equity. However, as the Court explained, Bäcker affirmatively misrepresented that he wanted Grauman on the board, and that he assumed Grauman had already joined the board. Moreover, after making such representations to the board, Bäcker changed his position and planned his ambush. If Anderson had known Bäcker was going to make these moves at the meeting, Anderson would have refused to participate, defeating a quorum. Ultimately, the Court held that because Grauman should have been appointed to the CEO director seat before or at the meeting and because Anderson’s presence at the meeting was secured under deliberately false pretenses, the actions taken at the meeting must be voided as a matter of equity. Thus, the Court determined the QLess board comprises Bäcker and Ricardo as common directors and Anderson as the Series A Director. D’Addario was not appointed to the board. The Series A-1 Director, independent director and CEO director seats remain vacant, and Grauman remains QLess’s CEO.