In re Numoda Corp. S’holders Litig., C.A. No. 9163-VCN (Del. Ch. Jan. 30, 2015) (Noble, V.C.)
In this memorandum opinion, the Court of Chancery exercised its powers under 8 Del. C. § 205 to resolve various disputes regarding the capital structure of two corporations, Numoda Corporation (“Numoda Corp.”) and Numoda Technologies, Inc. (“Numoda Tech.”). The parties sought ratification of the following corporate acts: (1) the issuance of 30,000 shares of Numoda Corp. voting stock to director Patrick J. Keenan in 2002 (the “Keenan Issuance”); (2) the issuance of Numoda Corp. stock to four directors in 2004 (the “2004 Exchange Stock”); (3) the issuance of 400,000 shares of Numoda Corp. voting stock to director Mary Schaheen (the “First Schaheen Issuance”); (4) the issuance of 5,100,000 shares of Numoda Corp. voting stock to director John W. Houriet (the “Houriet Issuance”); (5) the issuance of 5,725,000 shares of Numoda Corp. voting stock to director Schaheen (the “Second Schaheen Issuance”); (6) the return of 2,000,000 shares of Numoda Corp. voting stock to Numoda Corp. by director Boris; and (7) the issuance of certain grants of Numoda Tech. stock to individual stockholders.
In January 2013, the Numoda Corp. board purported to ratify the Keenan Issuance, the 2004 Exchange Stock, and the Houriet Issuance pursuant to 8 Del. C. § 204 (the “January Ratification”). The Court held that, because the January Ratification occurred prior to the effective date of 8 Del. C. §§ 204 and 205, it failed to resolve the validity of the stock issuances.
The Court then addressed each disputed corporate act in turn. First, it ratified the Keenan Issuance and the 2004 Exchange Stock. The Court found that the January Ratification provided sufficient proof that these attempted issuances occurred, albeit defectively. In determining the validity of the issuances, the Court analyzed the factors specified in Section 205(d). For example, in validating the Keenan Issuance and the 2004 Exchange Stock, the Court relied on the fact that the parties had operated for years under the assumption that the issuances had been made and represented the capital structure as such to third parties. In addition, the Numoda Corp. board attempted to take official action to ratify the issuances and thus the issuances were not in dispute.
The Court declined to ratify the First Schaheen Issuance because Schaheen failed to provide evidence of the existence of a corporate act the Court could validate. As an alternative, Schaheen requested relief for breach of contract, unjust enrichment, promissory estoppel, intentional misrepresentation, and negligent misrepresentation. The Court concluded that Schaheen was not entitled to relief under any of these theories, and stated that if Section 205 does not support the grant of equitable relief, a claimant is unlikely to succeed on alternative equitable theories.
The Court then ratified the Houriet Issuance. In validating the shares, the Court was asked to determine whether the shares issued were voting or non-voting stock. The evidence reflected that during the negotiation for this issuance, Houriet believed that his interest would be qualitatively similar to that of the other directors. Keenan, who prepared Houriet’s certificate, stated that he intended to prepare a certificate for voting stock, and that the indication of non-voting stock was an error. In addition, an informal stock ledger, dated December 11, 2007, suggested that the share issuance had been approved by at least that date, which was prior to the time that Numoda Corp. was authorized to issue non-voting stock. The Court also found that the Section 205(d) factors favored ratification. The Numoda Corp. board acted as if the issuance was valid. In addition, Houriet would lose a substantial benefit if his stock was not validated. The Court stated that the discrepancy in the record between voting and non-voting status appeared to be attributable to a clerical error, and thus validated the issuance as voting stock.
Next, the Court ratified the Second Schaheen Issuance. The Court analyzed the Section 205(d) factors and found support for the issuance because, until the litigation, the Numoda Corp. parties had made representations demonstrating that they accepted the validity of the issuance. The Court found that Schaheen and Keenan relied on these representations and that Schaheen would be significantly injured if the Court failed to validate the issuance.
Next, the Court concluded that Boris had returned 2,000,000 shares to Numoda Corp. In reaching this conclusion, the Court relied on the fact that all of the parties conducted their business for years with the understanding that Boris had returned these shares, and made representations regarding the capital structure as such to third parties, including the State of Delaware.
The Court declined to validate the grants of Numoda Tech. stock to individual stockholders. The Court held that the uncertainty surrounding Numoda Tech.’s board meetings and the absence of any completed stock certificates suggested only that the two boards vaguely agreed that issuances would be effectuated at some point in the future. The Court held that, in these circumstances, the Section 205(d) factors did not weigh in favor of the Court validating the issuance.
Finally, the Court addressed whether unclean hands precludes Schaheen, Houriet, and Keenan from recovering in a court of equity. The Court held that, while all of the parties failed to follow basic corporate formalities, there was no indication that the parties acted with an improper intent that would outweigh the benefit of resolving the disputes over the various corporate defects on the merits.
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