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Nguyen v. View, Inc.

Court of Chancery of Delaware

June 6, 2017

PAUL NGUYEN, Plaintiff,
v.
VIEW, INC., a Delaware corporation, Defendant.

          Date Submitted: March 6, 2017

          Theodore A. Kittila, Esquire of Greenhill Law Group, LLC, Wilmington, Delaware, and Tan Dinh, Esquire of CrossPoint Law, Palo Alto, California, Attorneys for Plaintiff.

          R. Judson Scaggs, Jr., Esquire and Richard Li, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, Attorneys for Defendant.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor.

          In the fall of 2009, Defendant, View, Inc. ("View" or the "Company"), sought the consent of its stockholders to pursue a round of Series B preferred stock financing (the "Series B Financing") following a successful round of Series A preferred stock financing (the "Series A Financing") that had closed two years prior. Plaintiff, Paul Nguyen, View's founder and then-owner of approximately 70% of the Company's common stock, initially consented to the Series B Financing. Prior to the closing of the transaction, however, Nguyen purported to revoke his consent after determining that the restated governance documents related to the Series B Financing would dramatically diminish his rights as a stockholder. View contested Nguyen's right to revoke his consent and moved forward with the Series B Financing as if Nguyen had consented. Nguyen, in turn, pursued claims against the Company in binding arbitration, including a claim in which he sought declarations that his revocation of consent was valid and, therefore, the closing of the Series B Financing was "void and invalid."

         While the arbitration was pending, View closed several more rounds of financing (raising approximately $500 million). One must presume that View understood that if the arbitrator found in favor of Nguyen on the consent issue, then the later rounds of financing that rested on the Series B Financing would collapse when that block was removed from the tower of blocks that comprised the Company's preferred stock offerings. On December 18, 2015, the arbitrator ruled, inter alia, that Nguyen validly revoked his consent to the Series B Financing and that the closing of that round was "void and invalid." With that stroke of the pen, View's capital structure was turned upside down.

         In an attempt to turn back time in order to restore the Series B Financing, beginning in early 2016, View undertook a series of steps intended to ratify the various charter amendments and other corporate acts it had purportedly authorized in connection with the several rounds of financing that closed after the Series A Financing-beginning with the now-void Series B Financing--pursuant to 8 Del. C. § 204 ("Section 204"). As part of this process, View's two Series A preferred stockholders converted their shares to common stock as they were permitted to do pursuant to the operative governance documents relating to the Series A Financing. This conversion had the effect of stripping Nguyen of his voting protections and majority stockholder status, thereby rendering his consent to effect the Series B and subsequent rounds of financing no longer necessary.

         In his Amended Verified Complaint (the "Complaint"), Nguyen seeks a declaration from this Court pursuant to 8 Del. C. § 205 ("Section 205") that the Company's attempts to ratify the invalid rounds of financing were improper. View has moved to dismiss the Complaint on the ground that Nguyen has failed to plead facts that would support a reasonable inference that View's ratification was technically invalid or that it should be disregarded as a matter of equity under Section 205. The parties' competing positions, while stated in terms set forth in Section 205, fundamentally raise the issue of whether View's attempt to ratify the invalid Series B Financing (and subsequent rounds) comports with Section 204.

         For the reasons I explain below, Section 204 does not fit here because the Series B Financing was not a "defective corporate act" that is subject to ratification under Section 204. Rather, View's decision to proceed with the Series B Financing was an unauthorized corporate act--unauthorized because Nguyen has been deemed to have effectively revoked his consent to the transaction before it closed. View cannot invoke ratification to validate a deliberately unauthorized corporate act. The motion to dismiss must be denied.

         I. BACKGROUND

         In considering Defendant's motion to dismiss, I have drawn the facts from the well-pled allegations in the Complaint, documents integral to the Complaint and matters of which I may take judicial notice.[1] At the motion to dismiss stage of the proceedings, I presume that all well-pled factual allegations in the Complaint are true.[2]

         A. Parties and Relevant Non-Parties

         Plaintiff, Paul Nguyen, a resident of California, is the owner of 4, 537, 500 shares of the common stock of View. He is the Company's founder and former President, Chief Technology Officer, Chairman of the board of directors, and a former member of its board of directors. He was terminated from his management positions and removed from the Company's board of directors prior to the filing of this litigation.

         Defendant, View, is a Delaware closely-held corporation headquartered in Milpitas, California. View was incorporated on April 9, 2007, as Echromics, Inc. It changed its name to Soladigm, Inc. on October, 2, 2007, and then to View on November 8, 2012. View developed and now sells windows and commercial building glass that allows the light, heat, shade and glare properties of the glass to be controlled manually or electronically. This "switchable electrochromatic glass" is designed to reduce energy consumption and greenhouse gas emissions while improving comfort of living.

         B. Venture Capital Funds Invest in View

         In 2007, View accepted investments from venture capital funds Sigma Partners Ventures ("Sigma") and Kholsa Ventures ("KV"). The two firms agreed to invest in View based on a $5 million pre-money valuation, in what became the Series A Financing. After the closing of the Series A Financing, Mike Scobey was to take over the reins from Nguyen and become the new Chief Executive Officer of the Company.

         As a result of the Series A Financing, Sigma and KV collectively held 16, 666, 666 shares of Series A preferred stock, which represented 50% of View's equity on a fully-diluted basis and 62% of View's outstanding shares. After the Series A Financing, Nguyen held 7, 260, 000 shares (or approximately 70%) of the Company's outstanding common stock and Scobey and a third individual owned the remaining 30%. The Company's common stock collectively represented approximately 30% of the Company's equity on a fully-diluted basis. An additional 6, 666, 667 shares of common stock were reserved for an option pool for future grants to employees and consultants. Nine months after the initial close of the Series A Financing, Sigma and KV acquired another 4, 965, 242 Series A preferred shares, bringing their total ownership to 56% of View's equity on a fully-diluted basis and 68% of the shares outstanding.

         In connection with the Series A Financing, Nguyen and Scobey entered into a voting agreement with KV and Sigma. This agreement established the size and composition of View's board of directors (the "Board"), how each Board member would be selected, which stockholders would select the CEO and which stockholders would vote in Board elections. Through the voting agreement, KV and Sigma gained control of the corporate structure, composition of the Board, and selection of the CEO. Both Sigma and KV agreed that each would vote for the other's Board designee. The voting agreement also provided some protection to Nguyen, as "Founder, " by allowing him, inter alia, to name one member to the Board.

         View adopted an Amended and Restated Certificate of Incorporation to reflect the Series A Financing, which was filed on May 22, 2007, with the Delaware Secretary of State. This gave Sigma and KV approval and veto rights for many corporate acts, including any "decision to pay or declare dividends, redeem securities, amend the certificate of incorporation and bylaws, create new classes of stock, adjust the size of the Board, or authorize a merger or acquisition."[3] Under the new governance scheme in place after the close of the Series A Financing, View would have a five-person Board, with Sigma and KV controlling four seats and Nguyen in the fifth seat.[4] The scheme contemplated that Nguyen's "only elements of protection [would be] (a) a class vote provision under 8 Del. C. § 242(b)(2) [("Section 242(b)(2)")], [5] requiring that any amendment to the Company's certificate of incorporation changing the number of authorized shares of common stock, changing the par value of the common stock, or changing the rights or preferences of common stock be approved by holders of the majority of the common stock, and (b) the various rights under the [v]oting [a]greement relating to Nguyen's ability to approve changes to the size of the Board and to fill a seat on the Board, along with rights to information about the Company and its plans and actions."[6]

         C. View Terminates Nguyen and Engages in Further Financing Transactions

         In December 2008, Raul Mulpuri became the new CEO of View which, under a new voting agreement dated February 21, 2008 (the "Voting Agreement"), granted him a seat on the Board. After Mulpuri was installed, View began to exclude Nguyen from Board meetings and to prevent him from accessing Board materials and other information. Thereafter, on January 9, 2009, Nguyen was removed as Chief Technology Officer of the Company due to his alleged "inability to perform."[7] One month later, his employment with View was terminated entirely.[8] At the same time, he was removed as a member and Chairman of the Board.

          View took all actions to separate Nguyen from the Company without either a Board or stockholder vote. Under the operative Voting Agreement and certificate of incorporation, however, Nguyen was entitled to a seat on the Board due to his position as the holder of a majority of the common stock. Asserting this and other grounds, Nguyen challenged View's actions to remove him as a manager and member of the Board and threatened litigation. The parties agreed to mediate before Nguyen filed suit.

         On June 5, 2009, while the dispute over Nguyen's termination was pending, Sigma and KV caused View to amend its charter to authorize the issuance of convertible notes to Sigma and KV and to increase the number of authorized shares of common stock. Nguyen did not consent to these amendments, either as a Board member or the majority holder of common stock, as required by Section 242(b)(2). On August 27, 2009, View's charter was amended again so that it could issue further convertible notes to Sigma and KV and further increase the authorized number of shares of common stock. And again, Nguyen's approval was not sought or obtained for these amendments.

         The mediation between Nguyen and View regarding Nguyen's termination dispute was set to take place on September 18, 2009. A week prior to the scheduled mediation, View's attorneys informed Nguyen that View was working on a round of Series B Financing. View requested that Nguyen sign the various transaction documents related to the Series B Financing, including a stockholder consent to the Second Amended and Restated Certificate of Incorporation and a consent to change the terms of the then-operative Voting Agreement.

         The documents revealed that while the Series B Financing would provide needed capital for the Company, it would otherwise not be favorable to Nguyen. Specifically, "(a) holders of common stock would no longer have any right to appoint any Board members; (b) Nguyen's consent right to any amendment to the [] Voting Agreement would be eliminated; and (c) View would be filing with the Delaware Secretary of State the [Second Amended and Restated Certificate of Incorporation] into which View had slipped a waiver of 8 Del. C. § 242(b)(2)" that would eliminate Nguyen's right as the majority common stockholder to approve any amendments to the certificate of incorporation changing the number of authorized shares of common stock.[9] Notwithstanding these elements that View knew were not favorable to Nguyen, View pushed Nguyen to consent to this dramatically altered governance structure because it needed his vote to proceed with the transaction.

         At the mediation between View and Nguyen on September 18, 2009, Nguyen expressed his concern about the Series B Financing.

         Nevertheless, View insisted that Nguyen consent to the transaction as a component of any broader resolution of Nguyen's termination claims. Ultimately, View and Nguyen reached a settlement (the "Settlement Agreement") that included Nguyen's consent to the Series B Financing and related transaction documents. Importantly, however, the Settlement Agreement allowed that either party could rescind the Settlement Agreement within seven days of its execution.

         Following the mediation, Nguyen looked more closely at the transaction documents for the Series B Financing and realized that they would "(a) eliminate his class vote right in the Restated Certificate under 8 Del C. § 242(b)(2); (b) eliminate his approval right for any amendments under the Voting Agreement; (c) eliminate the right of the holders of common stock to elect any Board seat; and (d) eliminate his only Board seat together with his position as Chairman."[10] Nguyen believed that the effect of the Series B Financing on his interests in the Company, as reflected in the documents, was directly contrary to what had been represented to him at the mediation by the Company and its counsel. Accordingly, on September 24, 2009, before the seven-day revocation period expired, Nguyen served a notice of rescission of the Settlement Agreement on View, which included a rescission of his consent to the Series B Financing.

         Unbeknownst to Nguyen, View had already proceeded to close the Series B Financing while the seven-day revocation period was still open. If the Series B Financing was deemed to be properly executed, Nguyen's interest in the Company would have been reduced from 23% of the overall equity and 70% of the common stock to approximately 3% of the Company's overall equity without any effective voting protections. When Nguyen discovered that the transaction had closed without his consent, he was, to put it mildly, not pleased.

         D. Nguyen Initiates Litigation and the Parties Engage in Arbitration

         On or about January 11, 2010, Nguyen filed suit in California state court to challenge, among other things, his termination from View and the validity of the Series B Financing. Soon thereafter, the parties to that action agreed to have the dispute adjudicated in arbitration by JAMS (the "JAMS Arbitration"). Nguyen, over time, amended his petition in the JAMS Arbitration to include claims regarding the invalidity of subsequent charter amendments and related transactions, including the Series C through F financings that had been undertaken by View while the arbitration was pending. These later rounds raised over $500 million in additional investments.

         The respondents in the arbitration quickly moved to enforce the Settlement Agreement which, if successful, arguably would have nullified Nguyen's revocation of his consent to the Series B Financing. In January 2011, the arbitrator denied this motion and ruled that Nguyen had properly revoked the Settlement Agreement. The issue of whether the revocation of the Settlement Agreement amounted to revocation of Nguyen's consent to the Series B Financing remained undecided.

         On March 4, 2015, while the JAMS Arbitration was still pending, View filed two certificates of validation under Section 204, both of which sought to validate by ratification certain charter amendments that increased the authorized number of shares of stock (one filed December 17, 2009, the other filed March 8, 2012).[11]Nguyen responded on June 11, 2015, by filing this action under Section 205 to challenge View's attempt to correct its unauthorized amendments to its governance documents. Shortly after this action was filed, the parties stipulated to stay the action pending resolution by the JAMS arbitrator of the question of whether Nguyen had effectively revoked his consent to the Series B Financing.

         On December 18, 2015, the JAMS arbitrator issued his decision finding that Nguyen had properly revoked the Settlement Agreement, including his consent to the Series B Financing, thereby rendering the Series B Financing invalid and void.[12] This ruling effectively meant that all of the related transaction documents, including the Second Amended and Restated Certificate of Incorporation, were likewise invalid and void because Nguyen had not consented to them. Since each of the subsequent rounds of financing rested on the Series B Financing, the invalidation of the Series B effectively invalidated the Series C through Series F financings as well. The arbitrator's ruling also effectively reinstated the Voting Agreement from February 21, 2008, which provided that View's Board would be comprised of five members, one of whom Nguyen was entitled to designate.

         E. Holders of Preferred Stock Convert their Shares to Common Stock and Attempt to Validate the Series B through Series F Financings

         After the JAMS ruling essentially blew up View's extant capital structure, the holders of View's Series A preferred stock scrambled to set things straight. They began by converting their preferred shares to common stock in January or February 2016. This conversion displaced Nguyen as majority common stockholder and, by its terms, cancelled the Voting Agreement since there were now less than 1 million shares of Series A preferred stock outstanding.[13] With these changes in place, on February 26, 2016, View filed two certificates of correction and twenty-two certificates of validation with the Secretary of State, pursuant to Section 204, in which it purported to ratify various defective charter amendments and other corporate acts. Of particular relevance here, View purported to ratify the Series B Financing that the JAMS arbitrator had ruled was void and invalid, and built off of that to ratify all subsequent financing rounds View had undertaken throughout the pendency of the JAMS Arbitration.[14]

         Through the termination of the Voting Agreement, View reconstituted its Board from a five-member to an eleven-member Board, removing Nguyen from the Board in the process. Soon after implementing these steps, View discovered that there were irregularities with its Board composition which, in turn, undermined the validity of the attempted ratifications. Accordingly, in April 2016, View ratified and/or corrected its prior ratifications (collectively with the February ratifications, the "2016 Ratifications").

         F. Procedural Posture

         Nguyen filed his Amended Verified Complaint on May 10, 2016, in which he challenges the certificates of validation from 2016 under Section 205 and the validity of certain corporate acts and the transactions related thereto. He also seeks to compel arbitration of this dispute. On June 23, 2016, View moved to dismiss the Complaint for failure to state a claim under Court of Chancery Rule 12(b)(6). After the oral argument on the motion to dismiss, I permitted the parties to file supplemental submissions regarding the question of ...


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