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Boris v. Schaheen

Court of Chancery of Delaware

December 2, 2013

John A. Boris and Ann S. Boris, Plaintiffs,
v.
Mary S. Schaheen, Defendant, and Numoda Technologies, Inc., a Delaware Corporation, and Numoda Corporation, Inc., a Delaware Corporation, Nominal Defendants.

Date Submitted: July 1, 2013

Richard P. Rollo, Esquire, Kevin M. Gallagher, Esquire, and J. Scott Pritchard, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Plaintiffs.

Kathleen M. Miller, Esquire and Robert K. Beste, III, Esquire of Smith, Katzenstein & Jenkins LLP, Wilmington, Delaware, Attorneys for Defendant.

MEMORANDUM OPINION

NOBLE, Vice Chancellor

I. INTRODUCTION

This action is to determine the validity of two stockholder written consents to remove the serving directors from, and elect new persons to, the boards of two Delaware corporations. The validity of these acts depends, in large part, on whether the corporations' past directors followed the formal requirements of the Delaware General Corporation Law (the "DGCL") when issuing stock.

Plaintiffs John Boris ("John") and Ann Boris ("Ann")[1] filed this action pursuant to 8 Del. C. § 225 against Defendant Mary Schaheen ("Mary") and Nominal Defendants Numoda Technologies, Inc. ("Numoda Tech.") and Numoda Corporation ("Numoda Corp."). On November 9, 2012, John and Ann acted by written consent under 8 Del. C. § 228 as purported majority stockholders to remove Mary from, and elect themselves to, the boards of Numoda Corp. (the "NC Written Consent") and Numoda Tech (the "NT Written Consent").[2] With this lawsuit, John and Ann have requested the Court to confirm these acts were valid.[3]

This post-trial memorandum opinion presents the Court's factual findings and legal conclusions. For the reasons set forth below, the Court concludes that John and Ann own a majority of the validly issued voting stock of Numoda Corp. and thus validly removed Mary and elected themselves as directors by the NC Written Consent. The Court also concludes that John and Ann do not own a majority of the validly issued stock of Numoda Tech. and thus did not remove Mary or elect themselves as directors by the NT Written Consent.

II. THE PARTIES

Numoda Corp. and Numoda Tech. are Delaware corporations based in Philadelphia, Pennsylvania. They provide technology and other services to companies in the biotechnology and pharmaceutical industries.[4] The two corporations are closely related; indeed, they are "in the same location and share systems and services."[5] Their initial boards of directors were also commingled: John, Ann, and Mary were the directors of Numoda Corp. upon its incorporation in May 2000[6] and Numoda Tech. upon its incorporation in December 2000.[7] Numoda Tech. was intended to be a subsidiary of Numoda Corp. until January 1, 2005, when its common stock was purportedly distributed pro rata to the parent's stockholders.[8]

John, Ann, and Mary are siblings.[9] Numoda Corp. was their family business: Ann, considered the founder, contributed several patents and invested the proceeds from the sale of personal assets; John invested money earned from his law practice; and Mary brought her business and management expertise. [10] Over the years, they have held various positions at Numoda Corp.: John has been Secretary and General Counsel; Ann has been Secretary and Chief Operating Officer; and Mary has been Chief Executive Officer ("CEO") and President.[11]They have generally held similar positions at Numoda Tech.[12]

As of June 2000, [13] the siblings were all Numoda Corp. stockholders: John held 1, 266, 667 shares; Ann held 5, 100, 000 shares; and Mary held 3, 333, 333 shares. [14] The current amount of Numoda Corp. stock owned by John, Ann, and Mary is in dispute. Also in dispute is whether any of the siblings are, or ever were, Numoda Tech. stockholders.

A. Numoda Corp.

1. The Corporate Governance System

Numoda Corp., not unlike some family-operated companies, had an informal corporate governance system. The directors gave no proper board meeting notice, held no proper board meetings, and recorded no proper board minutes.[15] The directors took no proper votes, [16] and their votes were typically not reflected in any written instruments. Although the directors acted informally, the corporation's governing documents contemplated a formal corporate governance system. More specifically, Numoda Corp.'s Secretary was charged with responsibility for giving notice for board and stockholder meetings and for recording the meetings of the directors "in a book to be kept for that purpose."[17] But, John could not remember if he ever gave notice about a board meeting as Secretary, and he testified that he did not record the minutes of any Numoda Corp. board meetings. [18]

One of John's other responsibilities as Numoda Corp.'s Secretary was to manage the company's stock book (the "NC Stock Book").[19] The NC Stock Book contains the corporation's governing and other important documents.[20] Included in this collection is Numoda Corp.'s original, official stock ledger (the "NC Stock Ledger") that lists, in John's handwriting, the stock issued by holder, date of issue, stock certificate number, and number of shares.[21]

2. Initial Stockholders of Numoda Corp.

Numoda Corp.'s initial certificate of incorporation authorized twenty million shares of common stock and four million shares of preferred stock.[22] As of June 2000, the NC Stock Ledger reflected six stockholders:

• Certificate 1: Philip Gerbino ("Gerbino"), 2, 500 shares.
• Certificate 2: Barry Unger ("Unger"), 2, 500 shares.
• Certificate 3: Ann, 5, 100, 000 shares.
• Certificate 4: Mary, 3, 333, 333 shares.
• Certificate 5: John, 1, 266, 667 shares.
• Certificate 6: Meyer Rothbart ("Rothbart"), 300, 000 shares.[23]

But, the NC Stock Ledger is, as John and Ann conceded, inaccurate and incomplete, although the parties disagree on the extent. The initial stock issued to John, Ann, and Mary was validly issued.[24] The parties believe Gerbino, Unger, and Rothbart are not stockholders[25] and that PIDC Penn Venture Fund ("PIDC") is a current voting stockholder.[26] PIDC was allegedly issued 1, 016, 950 shares of voting stock in November 2008 as reflected by Certificate 23.[27] Because John and Ann would hold a majority of the stock listed on the NC Stock Ledger regardless of whether any combination of Gerbino, Unger, Rothbart, and PIDC was issued valid stock, the Court need not resolve those questions.[28] Whether the NC Stock Ledger is otherwise inaccurate and incomplete, as Mary argues, is a question the Court must answer.

By a May 2000 unanimous written consent, the Numoda Corp. directors resolved that "all shares shall be uncertificated and stock certificates shall not be issued to stockholders except upon request."[29] After the initial stock issue in 2000, none of John, Ann, or Mary requested or was issued a stock certificate for subsequently issued stock.[30] In late 2001, Numoda Corp. amended its charter to increase the number of authorized shares to twenty-five million shares of common stock and ten million shares of preferred stock.[31]

3. The Informal System for Issuing Stock

The Numoda Corp. board sought to issue stock within its informal process for making decisions. The directors would informally meet and informally vote on the stock to be issued "in terms of percentage ownership." That is, they would agree on who should own what percent of the company, leaving it "up to Ann and John [Dill] to do the calculations that translated that percentage ownership into the amount of shares issued."[32] This process was employed to issue stock in 2004 and 2006, but the NC Stock Ledger contains no subsequent entries that might reflect an additional stock issue.[33] Instead, according to Mary, Numoda Corp. would document these purported stock issues "on the Excel stock ledger that John Dill was tasked with updating as issuances were approved" (the "NC Spreadsheets").[34]Then, the board would review and approve the NC Spreadsheets.[35]

Of the few documents in the NC Stock Book, none is a written instrument-namely, a board resolution or a unanimous written consent—evidencing board approval of a Numoda Corp. stock issue. Likewise, no written instrument or board meeting minutes show that the board intended for the NC Spreadsheets to replace the NC Stock Ledger—or that the board even approved what the NC Spreadsheets listed.

4. Stock Issued in 2004

For several years, Numoda Corp. was financed both by a lending institution through a line of credit and by individuals, typically employees, who loaned money to the company, deferred their compensation, or did both. John, Ann, and Mary were among this group, [36] as was Patrick Keenan ("Keenan"), an investor who loaned approximately $500, 000 to Numoda Corp.[37]

In 2004, after its institutional lender declined to renew the credit line, the company needed to find another lender. To improve Numoda Corp.'s balance sheet with an eye toward receiving better financing terms, the Numoda Corp. directors informally decided to exchange some of the debt held by John, Ann, Mary, and Keenan for stock. Mary contends that the board agreed to and approved these stock issues at an informal meeting.[38]

Circumstantial evidence shows how much stock was issued. The NC Spreadsheets reflect that John was issued 1, 546, 238 shares; Ann was issued 4, 645, 500 shares; Mary was issued 1, 380, 720 shares; and Keenan was issued 1, 005, 000 shares.[39] Mary does not contest that, after adding these shares to those on the NC Stock Ledger, John and Ann would still be the majority stockholders of Numoda Corp. As further evidence of the number of shares issued, Mary points to the unsigned minutes of a Numoda Corp. annual stockholders meeting, dated June 5, 2006.[40] That document also shows John and Ann with a majority: John is listed as a holder of 3, 045, 561 shares; Ann of 9, 745, 500 shares; Mary of 5, 109, 053 shares; and Keenan of 1, 005, 000 shares. These numbers on the unsigned minutes, however, are not the sum of only the NC Stock Ledger figures and the stock issued in 2004. The numbers on the minutes reflect an additional 400, 000 shares for Mary and 232, 656 shares for John.

5. John Resigns from the Numoda Corp. Board

John resigned from the Numoda Corp. board by no later than April 2006. He testified that he resigned sometime in 2006, but Mary suggested the resignation may have been in 2004 or 2006.[41] It is clear that John was no longer a director as of April 21, 2006, the date when he did not execute, in his capacity as a director, a unanimous written consent of the board.[42] When John resigned as a director, he also resigned as Secretary, and Ann generally assumed that position.[43]

6. The Charter Amendment for Two Classes of Common Stock

Ann and Mary were once again working to improve Numoda Corp.'s balance sheet during 2006. This time, they began to effect a recapitalization by exchanging outstanding convertible loans held by various investors, including both friends and institutions, for stock. They did not want to issue voting stock; they wanted to issue non-voting stock.[44] Thus, a charter amendment was required.

In an April 21, 2006, unanimous written consent, the Numoda Corp. board resolved to amend the corporation's charter to allow for two classes of common stock: Class A non-voting common stock ("Class A Non-Voting Stock") and Class B voting common stock ("Class B Voting Stock"). All common stock issued before May 12, 2006—including the shares listed on the NC Stock Ledger and those issued in 2004—would become Class B Voting Stock.[45] All stock issued after May 12, 2006, not designated by class would presumptively be Class A Non-Voting Stock.[46]

It would be more than a year before the charter amendment became effective when it was filed with the Delaware Secretary of State on December 27, 2007.[47]Then, because of apparent difficulty with interest calculations, it took several months to execute the conversion; the convertible loan holders were issued certificates from July 2008 through December 2008.[48]

7. Stock Issued to Jack Houriet, a Numoda Corp. Employee, in 2006

Jack Houriet ("Houriet"), the Chief Technology Officer of Numoda Corp., had invested money in the company, deferred his compensation, and also been granted stock options.[49] By 2006, he had been negotiating with the board for some time about becoming a stockholder. After Houriet rejected an offer of 10% ownership with certain contingencies, [50] the board apparently offered to him 15% stock ownership on a fully diluted basis with no contingencies in exchange for the debt, deferred compensation, and stock options. Houriet accepted.[51] Both Mary and Houriet contend that he was to receive voting stock, the only authorized class of common stock at the time.[52]

By Mary's recollection, Ann and she, as Numoda Corp.'s board, approved this issue in July 2006.[53] Ann offered contradicting testimony. Not only did she assert that Houriet was not issued Numoda Corp. stock in July 2006, but she also could not recall ever participating in any meeting during which the granting of 15% stock ownership to him was discussed.[54] The approval was informal, not in a written instrument. Stock was not issued to Houriet in 2006 because the actual number of shares to be issued still had to be calculated.[55]

Making Houriet the holder of 15% of Numoda Corp.'s stock would dilute the stock ownership percentages of others. Mary had refused to be diluted since she had already been diluted by the 2004 issue. She testified that Ann offered to facilitate the issue to Houriet by returning a portion of her own Numoda Corp. stock to the company.[56] The give-back was contemplated by a draft Memorandum of Agreement dated December 2007 and a related Stockholders Agreement, although these documents were not executed.[57]

Again, Ann disagreed with this account, maintaining that she never returned any stock. For example, she described the agreements as "not finalized, " and, when shown a 2009 email sent from her Numoda Corp. account to Keenan that references "a 'giveback' of stock I made many years ago, " she ...


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