Date Submitted: September 25, 2014
Richard P. Rollo, Esquire, Kevin M. Gallagher, Esquire, and Sarah A. Clark, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Numoda Corporation, John A. Boris, and Ann S. Boris.
Kathleen M. Miller, Esquire and Robert K. Beste III, Esquire of Smith, Katzenstein & Jenkins LLP, Wilmington, Delaware, Attorneys for Numoda Technologies, Inc., Numoda Capital Innovations LLC, Mary S. Schaheen, Patrick J. Keenan, and John W. Houriet, Jr.
NOBLE, Vice Chancellor
This is a dispute about the capital structures of two corporations following the Court's decision in a related action that, incidentally, could not recognize several purported stock issuances by the corporations due to lack of compliance with corporate formalities. Resolution requires the Court to answer questions about its newly conferred powers under 8 Del. C. § 205. The Court sets forth its findings of fact and conclusions of law in this post-trial memorandum opinion. For the reasons below, the Court grants retroactive effect to only the interests in stock for which the moving parties have provided sufficient evidence of a corporate act for the Court to confirm fairly and with reasonable certainty. The Court also resolves disputes about the parties' interests in the two corporations.
It is clear that the parties had a general understanding of the two corporations' capital structures and operated with that understanding for years; it is not clear whether that understanding has legal significance. To the extent that the Court has recounted the events that form the basis of this action in Boris v. Schaheen (the "225 Action"),  it will state the facts in summary fashion here.
A. The Parties
Ann S. Boris ("Ann"), John A. Boris ("John"), and Mary S. Schaheen ("Mary") are siblings who served as the initial directors of Numoda Corporation ("Numoda Corp.") and Numoda Technologies, Inc. ("Numoda Tech."),  formed in June 2000 and December 2000, respectively. Numoda Corp. validly issued 5, 100, 000 shares of voting stock to Ann; 1, 266, 667 shares to John; and 3, 333, 333 shares to Mary on June 28, 2000. Numoda Tech. was thought to be Numoda Corp.'s subsidiary upon formation. Ann, John, and Mary have held various positions in Numoda Corp. and Numoda Tech., although Ann and John have served as directors of Numoda Corp., and Mary as a director of Numoda Tech., since the 225 Action. John W. Houriet, Jr. ("Houriet") was the Chief Technology Officer of Numoda Corp. and has served as president and a director of Numoda Tech. since at least January 2014. Patrick J. Keenan ("Keenan") performed legal work for the corporations and currently serves as chief counsel and a director of Numoda Capital Innovations LLC ("Numoda Capital"). For convenience, the Court sometimes refers to Ann, John, and Numoda Corp. as the "Numoda Corp. Parties, " and Mary, Houriet, Keenan, and Numoda Tech. as the "Numoda Tech. Parties."
B. The Disputed Capital Structures
The Numoda Corp. and Numoda Tech. boards used informal processes to carry out purported corporate acts, such as issuing stock. Communications ranging from tax filings to text messages show that the parties believed that, as of December 2008, Numoda Corp. had the following capital structure:
|| No. Voting Shares |
|| 3, 045, 561 |
|| 7, 745, 500 |
|| 10, 839, 053 |
|| 1, 035, 000 |
|| 5, 100, 000 |
| PIDC Penn Venture Fund ("PIDC")
|| 1, 018, 950 |
The parties also assumed that there was a spin-off of Numoda Tech. that distributed stock to the shareholders of Numoda Corp., effective January 2005, and that Numoda Tech. had a capital structure mirroring that of Numoda Corp.However, there are no entries in Numoda Tech.'s stock ledger, and no stock certificates have been issued.
The parties now contest several acts that they had assumed valid before the 225 Action. First, Keenan was granted 30, 000 shares of Numoda Corp. voting stock in late 2002 in exchange for a $15, 000 investment. Second, in April 2004, the Numoda Corp. board agreed to issue stock to Ann, John, Mary, and Keenan, in exchange for certain obligations, in order to help Numoda Corp. improve its balance sheet and obtain a credit facility (the "2004 Exchange Stock"). Third, Mary was granted 400, 000 shares on a date before the anticipated spin-off of Numoda Tech. Fourth, the board approved granting Houriet a 15% interest in Numoda Corp. "on a fully diluted basis with no contingencies in exchange for . . . debt, deferred compensation, and stock options." Ann facilitated this grant, fifth, by returning 2, 000, 000 of her own voting shares to Numoda Corp. Sixth, because she had worked without compensation for several years (and Houriet's stock would dilute her ownership), Mary was granted 5, 725, 000 shares of Numoda Corp. voting stock to restore her to her original one-third ownership. Finally, the parties assumed that changes to Numoda Tech.'s capital structure mirrored changes to Numoda Corp.'s after a January 1, 2005, spin-off-at least with respect to the number of shares held by Numoda Corp.'s voting shareholders.
The factual record offers varying degrees of support for the above, as the companies' boards had a default policy of not issuing stock certificates and used informal processes. Generally speaking, board meetings did not involve prior notice, minutes, or other features familiar to our corporation law. However, the directors "were together[, ] . . . understood what role [they] were in, what was the goal of meeting together and . . . what contexts [they] were addressing in those meetings." Votes were taken after making proposals, finding areas of agreement and disagreement, collecting additional information and seeking clarification as necessary, and calling for final agreements and disagreements. It is through these steps that the boards allegedly approved, and directed, stock issuances-the corporate acts the Court is asked to validate.
Given the lack of formality, the evidence that these contested acts occurred largely exists in the form of testimony, documents prepared by independent contractor John Dill ("Dill"),  and representations by agents of the corporations (such as tax filings) not formally adopted by the board. For example, Keenan testified to his grant of stock,  which also finds support in spreadsheets Dill prepared and the corporate records associated with (incomplete) stock certificate number seven. The Numoda Tech. Parties have testified about the 2004 Exchange Stock,  which has initial support in Dill's documents and unsigned minutes of a Numoda Corp. annual stockholders meeting held in 2006.
Mary's claims to additional shares also find support in the record,  although there has been confusion about the exact dates and numbers involved. Specifically, the Numoda Tech. Parties' opening post-trial brief states that Mary received 400, 000 shares before the anticipated spin-off; Mary asks for validation of 400, 000 shares effective December 31, 2004; one spreadsheet lists 395, 000 shares dated June 28, 2000; unsigned board minutes incorporate 395, 000 shares; and Mary testified that "this 400, 000, as I understand it, rolled up right into the one-third percentage number of shares that were finally calculated and recorded . . . in 2008" when asked about whether the issuance was ever authorized. By contrast, Mary identified a board meeting (or board meetings) in July of 2006 (supported by the alleged approval of Houriet's shares occurring in the same time frame), when she and Ann, as the Numoda Corp. and Numoda Tech. boards, agreed to issue her 5, 725, 000 shares in each corporation. Based on this and other representations, Keenan claims, he decided to pledge personal assets for a loan to Numoda Corp.
In addition to verbal representations that the boards issued his stock, Houriet received a signed stock certificate, indicating a grant of Numoda Corp. non-voting stock, on September 18, 2009. Keenan was asked to prepare the certificate and believed it was for voting stock. He testified that he filled out the certificate in "kind of a ten-minute process" and did not realize the certificate was for non-voting stock until the litigation. There is evidence that at the time of the alleged agreement to issue Houriet's stock, around July 2006, Numoda Corp. was only authorized to issue voting stock,  and the directors thought that Houriet "deserved to have . . . voting stock." Houriet testified that this ownership interest was critical to his decision to remain with the Numoda entities.
Evidence of Ann's giveback includes testimony,  the documents discussed in the 225 Action, and a January 16, 2009, email to Keenan, in which Ann wrote of "a 'giveback' of stock [she] made many years ago . . . in order to allocate ownership to you." Ann contests the significance of this email, as well as the conclusion that she effected a giveback.
Finally, although the Court found in the 225 Action that Numoda Tech. had not validly issued any stock, testimony from both sides supports the conclusion that the capital structures of Numoda Tech. and Numoda Corp. were intended to be mirror images after a spin-off. A document filed with the Internal Revenue Service states that "Numoda [Corp.] formed a wholly-owned subsidiary named Numoda [Tech.]" on December 18, 2000,  and an unofficial stock transfer ledger shows an initial distribution of 100, 000 shares of Numoda Tech. stock to Numoda Corp. on December 8, 2000. Both documents assume a subsequent spinoff.Numoda Corp. and Numoda Tech. amended their certificates of incorporation in 2006 to increase the number of authorized shares from 25, 000, 000 to 50, 000, 000.The companies maintained a close relationship. They shared board members, and there has been testimony that the companies' board meetings were held simultaneously-or perhaps "consecutively."
It bears repeating that Dill's records and other related account representations may offer a consistent and roughly contemporaneous picture of the parties' working understanding,  yet there are many reasons to question their accuracy. The Numoda Corp. Parties emphasize that the records Dill created were "not necessarily based on actual physical pieces of paper . . . but rather [his] understanding of the intent of the parties as explained or represented or described to [him]." In December 2007, Dill even sent himself an email noting, "Challenge: how to up MS%." The Numoda Corp. Parties also question the reliability of the tax filings and other representations they made over the years.
C. The Litigation and Purported Ratification
Ann and John filed the 225 Action in December 2012,  which resulted in a finding that Ann and John were the directors of Numoda Corp. and that Mary was the sole director of Numoda Tech. In reaching those conclusions, the Court decided that stock not formally issued pursuant to a written instrument had not been issued as a matter of law. Therefore, Ann and John held a majority of Numoda Corp.'s voting stock, and Numoda Tech. had not issued any stock. The Court also cautioned that "[n]othing should prevent a purported stockholder of either Numoda Corp. or Numoda Tech., upon learning that certain stock has been found void because it was not issued pursuant to a written instrument, from asserting rather obvious claims against Numoda Corp. or Numoda Tech."
Shortly thereafter, Numoda Corp. filed a complaint against Numoda Tech. and Numoda Capital, primarily seeking to compel Numoda Tech. to issue its shares to Numoda Corp. Numoda Tech. filed an answer and counterclaim and third-party complaint against Ann and John. Mary, Houriet, and Keenan subsequently filed a complaint seeking stock consistent with their understanding of the corporations' capital structures or damages under a number of theories. The Numoda Tech. Parties later filed amended and supplemental complaints seeking relief under 8 Del. C. § 205. The Court consolidated these actions. Mary also appealed the Court's post-trial opinion and order in the 225 Action to the Supreme Court. The Supreme Court stayed the appeal pending this decision. In doing so, the Supreme Court wrote that this Court "may exercise its discretion to consolidate [the 225 Action] and [the pending action]" because of the possibility that the outcome in this action could "moot all the issues before [the Supreme Court]."
In the meantime, on January 31, 2014, the Numoda Corp. board "unanimously ratified" issuances of 30, 000 shares of Numoda Corp. voting stock to Keenan; the 2004 Exchange Stock; and 5, 100, 000 shares of Numoda Corp. non-voting stock to Houriet, among other issuances (the "January Ratification"). The board was motivated ...