DANIEL KLEINBERG, TOMER HERZOG, SATURN PARTNERS LIMITED PARTNERSHIP II, and RAKIA INFRASTRUCTURES LTD., Plaintiffs,
REFAEL AHARON, BOAZ COHEN, and BARUCH DILL, Defendants, and APPLIED CLEANTECH, INC., a Delaware Corporation, Nominal Defendant.
Submitted: January 27, 2017
P. Newell, Lauren P. DeLuca, CONNOLLY GALLAGHER LLP,
Wilmington, Delaware; Amnon Shiboleth, Charles B. Manuel,
Jr., Daniel S. Goldstein, Daniel J. Friedman, SHIBOLETH LLP,
New York, New York. Counsel for Plaintiffs Daniel Kleinberg,
Tomer Herzog, Saturn Partners Limited Partnership II, and
Rakia Infrastructures Ltd.
Aharon, pro se.
Cohen, pro se.
Dill, pro se.
LASTER, Vice Chancellor
voting agreement binds the stockholders of Applied Cleantech,
Inc. (the "Company"). The stockholders committed to
a board of directors with six seats. The agreement gives
defendant Refael Aharon, who is the founder and CEO of the
Company, the practical ability to fill three seats.
Aharon only filled two seats. In summer 2016, Aharon feared
that a 3-2 majority had formed against him, so he filled his
third seat with his brother-in-law. During a meeting on
August 22, 2016, the board split 3-3 on a series of critical
plaintiffs sought a custodian to break the board-level
deadlock. This post-trial decision grants their request.
took place on January 26-27, 2017. Aharon and two other
witnesses testified live. Aharon proceeded pro se,
and he frequently attempted to make affirmative statements
when questioning other witnesses. The defendants agreed to
treat Aharon's affirmative statements as part of his
testimony. They also agreed that the record encompassed both
the exhibits presented at trial and materials Aharon
previously filed with the court. The following facts were
proven by a preponderance of the evidence.
The Company's Origins
is a brilliant scientist and inventor who holds a doctorate
from the Weizmann Institute of Science in Rehovot, Israel.
Approximately a decade ago, Aharon perceived that urban
sewage contained harvestable resources, ranging from
cellulose that could be used in recycled paper products to
particles of precious metals like gold, silver, and bronze.
See Dkt. 9, App. 1; Tr. 10-11 (Lafferty); Tr. 261-62
(Aharon). Aharon raised start-up capital from angel
investors, including defendant Baruch Dill, and formed an
Israeli company called SePage Ltd. He registered patents on
his sewage-processing technology and developed a prototype
for a machine that extracted cellulose from sewage.
See Dkt. 9 at 2; Tr. 261 (Aharon).
2007, Aharon turned to Saturn Partners, a venture capital
firm based in Boston, Massachusetts. Saturn liked the
sewage-processing technology and agreed to invest $2.5
million. In May 2007, to facilitate the investment, the
parties formed the Company as a Delaware corporation. They
caused the Company to formed a wholly owned Israeli
subsidiary, called Applied Cleantech (Israel) Ltd., to serve
as the operating entity. To avoid confusion, this decision
refers to the Israeli company as the "Subsidiary."
return for its investment, Saturn received shares of Series A
preferred stock in the Company. The shares originally
represented approximately 25% of the equity, but they carried
additional preferences that included anti-dilution
adjustments and the right to vote on an as-converted basis.
Because of problems with the Company's books and records,
it is not clear how much of the equity or voting power Saturn
parties also entered into an initial version of the voting
agreement that contemplated a five-member board. It gave
Aharon the right to appoint one director, the investors in
SePage the right to appoint two directors, and Saturn the
right to appoint two directors. As a practical matter, Aharon
appointed the two SePage directors. PTO ¶ 3. He made
himself a director and filled another seat with Dill. The
third seat remained vacant.
filed its seats with two of its partners: Jeff McCormick and
Ed Lafferty. McCormick had sponsored the investment within
Saturn. Lafferty joined in a secondary, monitoring role. Tr.
The Company's Efforts At
the Saturn investment, the Company tried to commercialize its
sewer-processing technology. By all accounts, the technology
was revolutionary, and it regularly attracted the interest of
potential partners. Media accounts praised the technology and
hailed Aharon as an international expert on water issues.
See, e.g., Dkt. 9, Apps. 1-3.
Aharon's success as an inventor did not translate into
success as a businessman. Although the trial did not focus in
detail on the Company's early efforts, it appears that by
2010, the Company had used up the capital it obtained from
Saturn. Around this time, Lafferty told Aharon that Saturn
had written off its investment in the Company. Tr. 79
(Lafferty). He also told Aharon that Saturn was likely to be
less involved in the Company's affairs going forward.
See Dkt. 9 at 27.
the Company alive, Aharon raised approximately $1.5 million
from family and friends. See id. at 5; Tr. 269
(Aharon). The funds kept the Company going until 2013, when
Aharon needed more capital. In March, Aharon and his wife
sold their home and invested the proceeds in the Company.
Dkt. 9 at 27; Tr. 269 (Aharon).
2013, the Company gained a new lease on life when plaintiffs
Daniel Kleinberg and Tomer Herzog invested approximately $2.5
million in the Company. Tr. 269 (Aharon). Kleinberg and
Herzog had founded a technology company in 2002, which they
sold for $115 million in 2011. Tr. 169-70 (Kleinberg). That
transaction is the subject of unrelated litigation in this
court. See Tr. 251-57 (Aharon & Kleinberg); Dkt.
9, App. 25.
return for their investment, Kleinberg and Herzog received
Series B preferred stock representing approximately 35% of
the Company's equity. The voting agreement was amended to
provide for a board with six seats. See PX 22 (the
"Voting Agreement"). Kleinberg and Herzog each
received the right to fill a seat, and they appointed
themselves. Aharon retained the right to fill a seat, and he
continued to serve. The investors in SePage continued to have
the right to fill two seats, and Aharon continued to have the
practical ability to fill them. PTO ¶ 3; Tr. 16
(Lafferty). Dill continued to serve, and the other seat
remained vacant. Saturn's appointment rights were reduced
from two directors to one, and Lafferty continued as
Saturn's lone representative. See PX 22; Tr. 80
the proceeds from Kleinberg and Herzog's investment,
Aharon ramped up the Company's efforts to commercialize
its products. For working capital, he secured a revolving
line of credit from Bank Mizrahi, one of the largest banks in
Israel. The Subsidiary was the borrower, and Aharon
personally guaranteed the line. Tr. 270 (Aharon).
2014, the Company appeared to be on the verge of success. It
pursued pilot projects with an impressive list of potential
partners, including Waterschap Aa en Maas, a
government-sponsored utility in Holland; Scottish Water, a
government-sponsored utility in Scotland; and Veolia, a major
international water company headquartered in France.
See Tr. 270, 277-79 (Aharon).
Company needed additional funds to pursue these projects. In
February 2014, the Subsidiary obtained a loan of
approximately $800, 000 from Bank Mizrahi. The Subsidiary
only received the loan because Aharon, Kleinberg, Herzog, and
non-party Assaf Morag (who appears to be a friend of
Herzog's) provided personal guarantees.
April 2014, the Company entered into an agreement to sell one
of its sewage-processing machines, but the deal required
seller financing. Aharon shopped for a loan at an interest
rate of 15%, but no bank would lend to the Company at that
rate. Kleinberg agreed to fund the loan at the rate Aharon
wanted. See Tr. 203-04 (Kleinberg).
October 2014, the Company needed still more cash. With
further support from Kleinberg and Herzog, the Company raised
approximately $2.5 million.
none of the pilot projects led to a long-term contract. The
parties disagree vehemently about the reasons for the
Company's lack of success. Aharon blames external
factors, such as the conservative nature of decision makers
in the water industry, their resistance to new technology,
and their preferences for local businesses. Tr. 264-65, 267
(Aharon). The plaintiffs blame Aharon's lack of business
acumen, combative nature, and poor interpersonal skills.
See Tr. 163-67 (Aharon & Lafferty).
Kleinberg And Herzog Lose Confidence In
Kleinberg and Herzog initially invested in the Company, they
discussed with Aharon the need to bring in an experienced CEO
who could take the Company to the next level. Aharon appeared
supportive as long as the timing was right. Tr. 171, 207
Company's difficulties during 2014 caused Kleinberg and
Herzog to believe that the time had come to bring in a new
CEO. During 2015, Kleinberg and Herzog introduced potential
candidates to the Company. Aharon resisted their efforts. Tr.
171-73, 208-14 (Kleinberg). For his part, Aharon felt
betrayed. He believed that Kleinberg and Herzog were
attacking him personally and that they had become obsessed
with replacing him. See Dkt. 9 at 7; Tr. 80-81
(Aharon & Lafferty); Tr. 271-72 (Aharon).
2015, with the Company running out of money and no new
sources of financing available, Aharon terminated all of the
employees except himself. Using money that he borrowed
personally and his own retirement savings, he paid the
severance obligations that he believed the Company owed its
employees. See Dkt. 9 at 7; Tr. 272 (Aharon).
The Bioform Opportunity
the Company on the brink of failure, an opportunity emerged
that had real promise. Two years earlier, in 2013,
representatives of a Canadian entity known as Canadian Sewage
Mining Corporation had visited Aharon in Israel. The
discussions led to a pilot project in Canada. Towards the end
of 2015, Aharon and Gary McLoed, who was serving as the lead
representative for Canadian Sewage Mining, worked out the
terms of a joint venture to manufacture and distribute
sewage-processing machines in North America. Tr. 273, 301
basic idea was for the two companies to form a new entity
called BioForm Manufacturing Inc. The Company would license
its technology to the new entity, which would manufacture the
Company's sewage-processing machines. In return, the
Company would receive 10% of the equity in the new entity.
Canadian Sewage Mining would rename itself as Bioform Sewage
Mining and enter into a sales and distribution agreement with
the manufacturing entity and the Company. Under the
distribution agreement, the Company would receive royalties
when its machines were sold. The distinction between the
manufacturing entity and the selling entity are not critical
to this decision, which refers to both collectively as
asked Lafferty to help him on the Bioform deal. With the
prospect of a solution to the Company's problems on the
horizon, Lafferty became more involved. He conducted due
diligence on the Canadian firm and its proposal, and he
concluded that both were legitimate. He supported Aharon in
working with Bioform's principals, primarily McLoed, and
he tried to mollify Kleinberg and Herzog, who continued to
press for a new CEO. See Tr. 77-78, 80 (Lafferty).
December 2015, Aharon presented the board with a Non-Binding
Memorandum of Understanding for the Bioform deal. Dkt. 9,
App. 16 (the "Non-Binding MOU"). It outlined the
terms of the partnership and established a timetable for
drafting definitive documents. The Non-Binding MOU
contemplated that Aharon would relocate to Canada in March
2016 and would devote 85% of his time to working with Bioform
for a period of two years. It also contemplated that
Aharon's family would follow him to Canada later in 2016.
Aharon told the board that Bioform wanted him in Canada to
help with transitioning the technology and starting up the
manufacturing process. Tr. 20 (Lafferty). During a meeting in
December 2015, the five-member board voted unanimously to
approve the Non-Binding MOU. See DX 2.
Aharon was the Company's sole negotiator for purposes of
preparing the definitive documents. By February 2016, after
two trips to Canada and extensive discussions, Aharon had
what he believed was an executable set of agreements. He
emailed the Company's other directors a package of
documents and asked them to respond by email with their
and Herzog did not believe they knew enough about the Bioform
deal to approve the agreements. They felt they had not
received any meaningful information about the transaction
since December 2015, and they refused to approve the
agreements without a board meeting. Tr. 215-17 (Kleinberg).
They also continued to believe that the Company needed a new
CEO. Tr. 206-07 (Kleinberg). Lafferty disagreed. He was
convinced that the Company needed to focus on the Bioform
deal, and he believed that Aharon was critical to making that
transaction work. He also believed that once the deal was in
place, Aharon naturally would assume a greater role with
Bioform, making it easier to bring in a new CEO for the
Company. See Dkt. 9, Apps. 10 & 20; Tr. 61
(Lafferty); Tr. 219-21 (Kleinberg).
February 22, 2016, the board met to consider the Bioform
agreements. Herzog was not present. He tried to deputize
Morag in his place, and Morag purported to act as a director
at the meeting. Tr. 65 (Lafferty). As a matter of Delaware
law, a director cannot act by proxy. In re Acadia
Dairies, Inc., 135 A. 846, 847 (Del. Ch. 1927) (Wolcott,
C.). This decision therefore ignores Morag's
the Bioform transaction initially was presented, Kleinberg
opposed it. After discussion, Kleinberg agreed to abstain.
Lafferty, Dill, and Aharon voted in favor. The minutes
recounted these events. See PX 5.
the February 2016 meeting, Aharon sent a copy of the minutes
to Bioform to satisfy the Company's representation that
the transaction was duly authorized. Tr. 67 (Lafferty). But
Bioform was concerned about the lack of a unanimous vote. Two
other Bioform representatives, Sean Ross and Jean Navert,
reached out to Lafferty. They raised a host of concerns and
sought improved terms in light of what they perceived to be
greater uncertainty about the deal. See Tr. 74-76
(Lafferty); Tr. 274 ...