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Almond v. Glenhill Advisors LLC.

Court of Chancery of Delaware

August 17, 2018

CHARLES ALMOND AS TRUSTEE FOR THE ALMOND FAMILY 2001 TRUST, ALMOND INVESTMENT FUND LLC, CHARLES ALMOND, and ANDREW FRANKLIN, Plaintiffs,
v.
GLENHILL ADVISORS LLC, GLENHILL CAPITAL LP, GLENHILL CAPITAL MANAGEMENT LLC, GLENHILL CONCENTRATED LONG MASTER FUND LLC, GLENHILL SPECIAL OPPORTUNITIES MASTER FUND LLC, JOHN EDELMAN, GLENN KREVLIN, JOHN MCPHEE, WILLIAM SWEEDLER, WINDSONG DB DWR II, LLC, WINDSONG DWR, LLC, WINDSONG BRANDS, LLC, HERMAN MILLER, INC. and HM CATALYST, INC., Defendants, and DESIGN WITHIN REACH, INC., Intervenor and Counterclaim-Petitioner.

          Date Submitted: May 31, 2018

          Peter B. Ladig of BAYARD, P.A., Wilmington, Delaware; David H. Wollmuth and Michael C. Ledley of WOLLMUTH MAHER & DEUTSCH LLP, New York, New York. Attorneys for Plaintiffs Charles Almond as Trustee for the Almond Family 2001 Trust, Almond Investment Fund LLC, and Charles Almond.

          Norman M. Monhait and P. Bradford deLeeuw of ROSENTHAL MONHAIT & GODDESS, P.A., Wilmington, Delaware; Scott J. Watnik of WILK AUSLANDER LLP, New York, New York; Thomas A. Brown of MOREA SCHWARTZ BRADHAM FRIEDMAN & BROWN LLP, New York, New York. Attorneys for Plaintiff Andrew Franklin.

          Andrew D. Cordo and F. Troupe Mickler IV of ASHBY & GEDDES, Wilmington, Delaware; Adrienne M. Ward and Brian Katz of OLSHAN FROME WOLOSKY LLP, New York, New York; John B. Horgan of ELLENOFF GROSSMAN & SCHOLE LLP, New York, New York. Attorneys for Glenhill Advisors LLC, Glenhill Capital LP, Glenhill Capital Management LLC, Glenhill Concentrated Long Master Fund LLC, Glenhill Special Opportunities Master Fund LLC, Glenn Krevlin, William Sweedler, Windsong DB DWR II, LLC, and Windsong DWR LLC.

          Douglas D. Herrmann of PEPPER HAMILTON LLP, Wilmington, Delaware; Paul B. Carberry, Joshua Weedman, and Erin Smith of WHITE & CASE LLP, New York, New York. Attorneys for John Edelman and John McPhee.

          Frederick B. Rosner, Scott J. Leonhardt, and Jason A. Gibson of THE ROSNER LAW GROUP LLC, Wilmington, Delaware; S. Preston Ricardo of Golenbock Eiseman Assor Bell & Peskoe LLP, New York, New York. Attorneys for Windsong Brands, LLC.

          John D. Hendershot, Susan M. Hannigan, and Brian F. Morris of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Bryan B. House of FOLEY & LARDNER LLP, Milwaukee, Wisconsin. Attorneys for Defendants, Counterclaim Petitioners Herman Miller Inc. and HM Catalyst, and Intervenor and Counterclaim Petitioner Design Within Reach, Inc.

          MEMORANDUM OPINION

          BOUCHARD, C.

         In July 2014, Herman Miller, Inc. acquired Design Within Reach, Inc. ("DWR" or the "Company"), a retailer of modern furniture, for approximately $170 million in a third-party merger transaction. The merger was the culmination of a dramatic turnaround of the Company that began in August 2009, when a group of funds known as Glenhill invested $15 million in the Company and became its controlling stockholder, holding a 92.8% equity interest. A new management team was put in place later that year, and the Company's fortunes improved steadily over the next few years.

         After the merger closed, two former stockholders filed suit against Glenhill and the Company's directors who oversaw its turnaround. Plaintiffs have never challenged the fairness of the merger consideration, which by all accounts was an outstanding result. Instead, plaintiffs' core strategy has been to secure a larger portion of the merger consideration for themselves by challenging transactions that occurred before the merger.

         In this post-trial decision, the court enters judgment in defendants' favor on all of plaintiffs' twelve claims for relief. Two rulings concerning two different categories of claims largely drive this result.

         The first category consists of claims relating to a 50-to-1 reverse stock split that the Company implemented in 2010 on both its common stock and its Series A preferred stock, which Glenhill had purchased in 2009. Unknown to anyone at the time, the reverse stock splits were implemented in a defective manner that had the effect of diluting the number of shares of common stock into which the Series A preferred stock could be converted by a factor of 2500-to-1, instead of the intended result of a 50-to-1 adjustment. This defect remained unknown in 2013, when the Series A preferred stock was converted into common stock, and in 2014, when the merger occurred.

         Over one year after the merger closed, plaintiffs amended their complaint after discovering the defect, adding Herman Miller as a party and asserting that the merger was void. This action prompted Herman Miller to ratify certain defective corporate acts under 8 Del. C. § 204 relating to the implementation of the reverse stock splits and the subsequent conversion of the Series A preferred stock, and to file a counterclaim asking the court to validate those acts under 8 Del. C. § 205. For the reasons explained below, all of the equitable considerations identified in Section 205 overwhelmingly favor judicial validation, which the court grants.

         The second category consists of claims challenging various transactions through which some or all of the Company's board members or their affiliates received additional equity in the Company before the merger. All of these claims are concededly derivative in nature and, thus, a threshold issue is whether plaintiffs' standing to maintain these claims was extinguished as a result of the merger.

         Plaintiffs advance a novel "control group" argument in an effort to fit these claims into the transactional paradigm our Supreme Court recognized in Gentile v. Rosette for "a species of corporate overpayment claim" that can be both derivative and direct when a transaction results in an improper transfer of economic value and voting power from the minority stockholders to the controlling stockholder.[1] That argument fails, however, because it is clear from the record that Glenhill was DWR's controlling stockholder by itself (and not as part of the group plaintiffs suggest) at all relevant times and that each of the challenged transactions did not increase-but actually reduced-its economic stake and voting power in the Company.

         Based on these two rulings, and for other reasons explained below with respect to plaintiffs' remaining claims, judgment will be entered in defendants' favor and against plaintiffs on all claims.

         I. BACKGROUND

         The facts recited in this opinion are my findings based on the testimony and documentary evidence submitted during a five-day trial held in November 2017. The record includes stipulations of fact in the Pre-Trial Stipulation and Order ("PTO"), over 500 trial exhibits, nine depositions, and the live testimony of eight fact and two expert witnesses.

         A. The Parties and Relevant Non-Parties

         Design Within Reach, Inc. is a Delaware corporation with its principal place of business in Stamford, Connecticut. It is in the business of selling modern design furnishings and accessories.[2] DWR was the surviving corporation of a merger with defendant HM Catalyst, Inc., a wholly-owned indirect subsidiary of defendant Herman Miller, Inc., that closed on July 28, 2014 (the "Merger").[3] Herman Miller is a Delaware corporation with its principal place of business in Zeeland, Michigan that produces office furniture, equipment, and home furnishings.[4]

         Plaintiffs were stockholders of DWR at the time of the Merger. Plaintiff Charles Almond, individually or through the Almond Investment Fund, LLC and the Almond Family 2001 Trust, owned approximately 9.6% of DWR common stock in August 2009, and continued to acquire additional DWR shares until July 2014.[5] The Almond plaintiffs tendered their shares for the Merger consideration on August 21, 2014.[6] Plaintiff Andrew Franklin owned DWR common stock in 2009 and sold approximately 25% of his shares after the Merger was consummated.[7] On August 25, 2014, Franklin tendered his remaining shares for the Merger consideration.[8]

         Defendants Glenhill Advisors, LLC, Glenhill Capital, L.P., Glenhill Capital Management, LLC, Glenhill Concentrated Long Master Fund, LLC (the "Glenhill Long Fund"), and Glenhill Special Opportunities Master Fund LLC (collectively, the "Glenhill Defendants") are part of a fund complex managed by defendant Glenn Krevlin.[9] Non-party Glenhill Capital Overseas Master Fund, L.P. (the "Glenhill Overseas Fund") is a limited partnership that primarily invests in equity markets and has an investor base of institutional investors, pension plans, foundations, individuals, and family offices.[10] The Glenhill Defendants and the Glenhill Overseas Fund are referred to collectively as "Glenhill."

         At all relevant times, Krevlin had sole investment and voting power over all DWR shares held by Glenhill.[11] Krevlin also was the largest investor in and the sole portfolio decision maker at all relevant times for the Glenhill Long Fund, which was an investment vehicle primarily for individuals.[12]

         Defendant Windsong Brands, LLC ("Windsong Brands") is an investment and restructuring company.[13] Defendant William Sweedler was the managing member of Windsong Brands at all relevant times.

         The individual defendants are Krevlin, Sweedler, John Edelman, and John McPhee. From January 2010 until the Merger, the period relevant to plaintiffs' claims, the Company's board of directors (the "Board") consisted of these four individuals (collectively, the "Director Defendants"), with Krevlin serving as Chairman of the Board.[14] Krevlin and Sweedler joined the Board in 2009.[15]Edelman and McPhee joined the Board in January 2010, when they were hired to serve as the Company's CEO and COO, respectively.[16]

         Defendants Windsong DWR, LLC ("Windsong I") and Windsong DB DWR II, LLC ("Windsong II") are special purpose vehicles that were formed in May 2010 and July 2012, respectively, for the purpose of investing in DWR.[17]

         B. Events Preceding the 2009 Transaction

         In 2004, DWR went public and listed its common stock on NASDAQ.[18] From 2005 to 2007, the Company's revenues grew, but it continued to operate at a loss.[19]On February 2, 2007, the Company entered into a Loan Guaranty and Security Agreement with Wells Fargo Retail Finance, LLC that provided the Company with a revolving credit line that was secured by substantially all of the Company's assets, except for certain intellectual property.[20] In 2008, with the collapse of the housing market, DWR's revenues dropped by $15 million, and the Company incurred $14.6 million in losses.[21]

         In May 2009, Wells Fargo informed the Company that it needed to make a capital infusion of $10 million to $15 million to maintain its line of credit.[22] On May 29, 2009, DWR sought a financial viability exception from NASDAQ to allow a contemplated transaction to close without stockholder approval.[23] After NASDAQ denied that request, DWR delisted its stock from NASDAQ effective July 16, 2009.[24] It is in this context that a special committee of the Board pursued a private placement with Glenhill, which held approximately 2.5 million shares or 17.2% of the Company's common stock and had no Board representation at the time.[25]

         C. The 2009 Transaction

         On July 20, 2009, DWR and Glenhill entered into a Securities Purchase Agreement pursuant to which Glenhill[26] acquired a 91.33% ownership stake in DWR for $15 million in the form of 15.4 million shares of DWR common stock for $0.15 per share and 1 million shares of Series A 9% Convertible Preferred Stock (the "Series A Preferred") for $12.69 per share (the "2009 Transaction").[27] The 2009 Transaction closed on August 3, 2009, at which point Glenhill became the Company's majority stockholder with a total equity ownership interest of 92.8%, including the shares it held before the 2009 Transaction.[28] The 2009 Transaction is not the subject of any challenge in this action.

         The terms of the Series A Preferred were governed by the Certificate of Designation of Preferences, Rights and Limitations of Series A 9% Convertible Preferred Stock of Design Within Reach, Inc. (the "Series A COD").[29] Four features of the Series A Preferred relevant to this case are its (i) voting rights; (ii) paid-in-kind dividend; (iii) conversion formula; and (iv) adjustment provision.

         Voting Rights. The Series A Preferred shares (i) had voting rights equal to the number of shares of common stock into which the Series A Preferred could convert, on an "as-converted" basis; and (ii) voted together with the common stock as one class on all matters.[30]

         PIK Dividend. Series A Preferred holders had the right to receive cumulative dividends at the rate of 9% per year, compounding annually to be paid-in-kind in the form of additional shares of Series A Preferred (the "PIK Dividend"), with the option to let the PIK Dividend (i) accrue to the next "Dividend Payment Date" or (ii) to accrete to and increase the Stated Value:

Holders shall be entitled to receive, and the Corporation shall pay, cumulative dividends at the rate per share (as a percentage of the Stated Value per share) of 9.0% per annum (compounding annually . . .), payable annually in arrears, beginning on the first such date after the Original Issue Date and on each Conversion Date . . . in duly authorized, validly issued, fully paid and non-assessable shares of Preferred Stock (the "Dividend Share Amount"). At the option of the Holder, such dividends shall accrue to the next Dividend Payment Date or shall be accreted to, and increase, the outstanding Stated Value.[31]

         Conversion Formula. Series A Preferred holders had the right to convert their shares into shares of common stock in certain specified circumstances. Upon conversion, the holder was entitled to receive a number of common shares determined by multiplying the number of Series A Preferred shares to be converted by a "Stated Value" and then dividing by a "Conversion Price" (the "Conversion Formula").[32] The initial Stated Value was $12.69, and the Conversion Price was $0.09235.[33] To "effect conversions," a Series A Preferred holder had to provide the Company with a completed "Notice of Conversion" in the form attached as "Annex A" to the Series A COD.[34]

         Adjustment Provision. Section 7 of the Series A COD contains a number of terms to adjust the Conversion Formula for the Series A Preferred in the event of certain types of transactions, such as stock dividends, stock splits, and subsequent equity sales of common stock.[35] Relevant here, Section 7(a) adjusted the Conversion Price of the Series A Preferred in the event of a reverse split of the common stock as follows:

If the Corporation, at any time while this Preferred Stock is outstanding: . . . (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares . . . then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock . . . outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event.[36]

         In simple terms, under Section 7(a), a reverse split of the common stock would increase the Conversion Price of the Series A Preferred, which, in turn, would decrease in a proportional manner the number of common shares into which a share of Series A Preferred was convertible through operation of the Conversion Formula. As such, the provision was intended to operate so that, all else being equal, a Series A Preferred holder would receive the equivalent economic benefit upon a conversion of the Series A Preferred after a reverse split of common stock as it would have received upon a conversion before the split.

         To be clear, the preceding discussion concerns how a reverse split of the common stock affects the Series A Preferred. As becomes important in this case, the Series A COD did not provide for any adjustment to the Conversion Formula for the Series A Preferred in the event of a reverse split of the Series A Preferred itself.

         D. The Brands Grant

         As part of the 2009 Transaction, the Company agreed that Glenhill would have three Board designees. Glenhill initially designated Krevlin, Sweedler, and David Rockwell, who joined then-CEO Ray Brunner and Peter Lynch.[37]

         The new Board met on August 20, 2009.[38] After the meeting, DWR's CFO Ted Upland raised concerns that the business plan Brunner introduced did not include "the real numbers."[39] According to Stuart Jamieson of Windsong Brands, the projections were "really unrealistic."[40] At the Board's request, Windsong Brands put together a team to investigate, sending Jamieson, Ken Ragland, and Sweedler to DWR's headquarters in San Francisco.[41] In late August 2009, after discovering that Brunner had engaged in misconduct, Jamieson and Ragland "walked [Brunner] out of the building" and "took over" the Company, with Jamieson as acting CEO.[42] On October 16, 2009, the Board terminated Brunner from his CEO position for cause based on various alleged acts of misconduct.[43]

         From late August 2009 until early 2010, Windsong Brands acted as interim management, performing a top-to-bottom review of DWR's business and evaluating how to "cut the costs as much as possible," given that the Company was losing $1 million to $2 million per month.[44] Windsong Brands oversaw a reduction of 20% to 30% of DWR's staff and the implementation of other cost-cutting measures to "stop[] the bleeding," including changing the Company's medical plan for employees and shutting down the development of new products.[45] On October 16, 2009, the Company terminated the registration of its common stock to save the expense of maintaining public company filings.[46] By the end of 2009, Windsong Brands had reduced the Company's expense structure by 20% or approximately $11.4 million, [47] but the Company's pre-tax losses still increased to $24.9 million.[48]At some point after Brunner was terminated as CEO in October 2009, the Board considered filing for bankruptcy.[49]

         Before performing its restructuring and consulting work, Windsong Brands did not reach an agreement with the Company on compensation.[50] In early 2010, Sweedler began compensation negotiations with Krevlin, seeking a 10% equity interest in the Company, which he believed was "commonplace" for this type of work.[51] After a "long, drawn-out negotiation," Sweedler ultimately agreed to accept a 1.5% interest in the Company.[52]

         On September 28, 2011, the Company granted 54, 796 shares of restricted stock to Windsong Brands that would vest only if a change of control occurred before March 22, 2016 (the "Brands Grant").[53] The stock grant provided that "Windsong shall have all rights of a stockholder (including, without limitation, the right to receive all dividends and distributions and voting rights) with respect to the shares of Common Stock comprising the Award."[54] The stock grant did not state that Windsong Brands would receive anti-dilution protection.

         E. DWR Hires Edelman and McPhee

         In the fall of 2009, Sweedler introduced Krevlin to Edelman and McPhee, who had recently sold their business to one of DWR's competitors.[55] Edelman and McPhee had worked together successfully in other ventures and were "a package deal," with McPhee focused on operations and Edelman focused on sales and design.[56]

         On December 14, 2009, the Company entered into employment agreements with Edelman and McPhee, hiring them to serve as CEO and COO, respectively, beginning in January 2010.[57] Those agreements provided Edelman and McPhee options to purchase 4% and 3% of the Company's equity, respectively.[58] The agreements did not state that Edelman or McPhee would receive anti-dilution protection. In January 2010, Edelman and McPhee joined Krevlin and Sweedler on the Company's Board.[59] These four individuals comprised DWR's entire Board from this point in time until the Merger.

         F. The Windsong Note

         In 2010, DWR was "continuing to not do well."[60] By the end of the first quarter of 2010, net product revenues were down 23.6% from the year before, first quarter income was negative, and EBITDA was lower than the year before.[61] The Company was "losing about [$]1 to $2 million a month, and [was] out of money."[62]

         Shortly after McPhee and Edelman joined the Company in January 2010, the Board began to consider a capital raise.[63] On February 12, 2010, Krevlin emailed Edelman: "Would be great to raise only 5mil[.] Sounds like we can round that up [b]etween you john and friends."[64] That month, Edelman contacted four potential investors: "one of [his] relationships," his co-investor in another project, his brother, and another contact, but "didn't really go through [the investment with them] at length."[65] Sweedler testified that he had discussions with a potential Canadian investor (Knightsbridge Capital), but it wanted terms that were more dilutive than the 2009 Transaction and a higher interest rate.[66]

         On March 11, 2010, Seth Shapiro, a senior analyst at Glenhill, [67] emailed Krevlin that the Company was "[n]ot in a real rush" to raise capital, "given [Edelman and McPhee] cant close until early April and we don't have cash need before then."[68] According to Krevlin, the Board did not seek funding from other potential investors because "it would be extremely difficult to get anyone comfortable with [the Company's] precarious situation, "[69] given the "significant unknown liabilities" in buying out leases for closed and underperforming stores[70] and a potential multimillion-dollar liability arising from "wage and hour" claims regarding the classification of sales associates as exempt employees to avoid paying overtime wages.[71]

         The capital raise ultimately took the form of a $5 million loan referred to herein as the "Windsong Note." The terms of the Windsong Note were the product of a conflicted and deficient process. Shapiro was charged with "negotiating" the transaction on behalf of the Company even though his employer (Glenhill) was to own part of the Windsong Note.[72] Across from Shapiro sat Sweedler, who negotiated on behalf of himself, Jamieson, McPhee, Edelman, and (purportedly) the Glenhill Long Fund.[73] The Board did not consult with an outside financial advisor.[74]

         Sweedler dictated the terms of the transaction. The loan was secured by a first lien on the Company's intellectual property, which was the usual structure Windsong Brands used to make investments, [75] and his lawyers (White & Case) papered the transaction.[76] Ellenoff Grossman & Schole LLP, the law firm that represented Glenhill and the Company, did not participate in any discussions about the legal or economic terms of the Windsong Note.[77] Joshua Englard, an Ellenoff Grossman partner, testified that he played no role in negotiating the terms of the Windsong Note, and that the transaction documents were presented to him as a "done document."[78]

         There were no real price negotiations. The Windsong Note was priced "at the same price as the previous round," i.e., on the same terms as Glenhill's initial investment.[79] That is, the Windsong Note "was convertible into common stock at the same exchange ratio as the [2009 Transaction] ($4.57 per share on a split- adjusted basis) if converted immediately."[80] As Krevlin testified, "the way this note was set up is that, basically, the conversion would be always tied to the same price of the conversion of the original '09 security so that they would move in lockstep in terms of the convertible price."[81]

         Windsong I, a limited liability company, was formed for the purpose of making the $5 million loan reflected in the Windsong Note, which paid interest at a rate of 5% per year, had a maturity date of October 3, 2012, and contained an option to convert all of the principal and accrued interest into DWR common stock based on a conversion matrix.[82] With respect to the 5% cash coupon, Krevlin testified that the original ask was closer to 10%, but the record does not contain any documentary evidence showing that the parties actually negotiated the coupon rate.[83]

         The five members of Windsong I and their capital contributions were as follows: (i) Edelman-$2 million for 40%; (ii) Windsong DB, LLC (an entity associated with Sweedler)[84]-$1.15 million for 23%; (iii) the Glenhill Long Fund- $1 million for 20%; (iv) McPhee-$750, 000 for 15%; and (v) Jamieson Investments, LLC (owned by Jamieson)-$100, 000 for 2%.[85] The limited liability company agreement for Windsong I, dated May 18, 2010 (the "LLC Agreement"), provided that any proceeds from the Windsong Note would be distributed to the members in proportion to their percentage ownership of Windsong I.[86]

         The Company and Windsong I entered into a Note Purchase and Security Agreement dated as of May 18, 2010.[87] The parties agreed that the Company would adjust the exercise price of the Windsong Note to account for any reverse stock split:

If the Company, at any time while this Note is outstanding . . . combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares . . . then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock . . . outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event.[88]

         On May 24, 2010, the Company issued a Notice of Annual Meeting of Stockholders, which disclosed that the Company had entered into the Note Purchase and Security Agreement and that Sweedler, Krevlin, Edelman, and McPhee were "affiliated with" Windsong I.[89]

         G. The Reverse Stock Splits

         During the summer of 2010, DWR common stock "became like a penny stock," trading intermittently and at widely fluctuating prices.[90] To address this volatility and save costs, the Board decided to implement a 50-to-1 reverse stock split of both the common stock and the Series A Preferred.[91] Specifically, on July 26, 2010, the Board recommended and Glenhill, as the Company's majority stockholder, approved (i) a 50-to-1 reverse stock split of the Company's common stock; (ii) a 50-to-1 reverse stock split of the Series A Preferred; and (iii) an amendment to the Company's certificate of incorporation to reduce the authorized number of shares of common stock from 30 million to 600, 000 and the authorized number of shares of Series A Preferred from 1.5 million to 30, 000 (the "Reverse Stock Splits").[92] After the Reverse Stock Splits were approved, Krevlin asked Shapiro to work with the Company's attorneys to effectuate the transaction.[93]

         On August 23, 2010, the Company filed with the Delaware Secretary of State an amendment to its certificate of incorporation stating that the Company was authorized to issue 600, 000 shares of common stock and 30, 000 shares of preferred stock.[94] On or about August 27, 2010, DWR issued a press release announcing the Reverse Stock Splits, and the Company's stock transfer agent sent a notice to the Company's stockholders of record.[95]

         As discussed later in this opinion, although unknown to anyone at the time, there were many flaws in the implementation of the Reverse Stock Splits. Most importantly, instead of reducing by a factor of 50-to-1 the number of shares of common stock into which the Series A Preferred could convert, the transaction mistakenly was structured to reduce by a factor of 2500-to-1 the number of shares of common stock into which the Series A Preferred could convert. I refer to this defect as the "double dilution" problem.

         The prospect of double dilution of the Series A Preferred upon conversion arose because of the combined effect of two actions: (i) the 50-to-1 reverse split of the common stock triggered a 50-to-1 reduction in the number of shares of common stock into which each share of Series A Preferred could convert under the adjustment provision in Section 7(a) of the Series A COD, described above; and (ii) the 50-to-1 reverse split of the Series A Preferred itself reduced by 98% the number of shares of Series A Preferred outstanding. With respect to the latter action, as mentioned previously, the Series A COD did not provide for any adjustment to the Conversion Formula for the Series A Preferred in the event of a reverse split of the Series A Preferred itself.

         H. The 2011 Bridge Loan and Herman Miller's Indication of Interest

         In 2010, DWR closed nineteen stores, negotiated early terminations for five more leases, [96] and reported losses of $15.8 million and EBITDA of negative $3.1 million.[97] In 2011, the Company found itself with a large inventory of unsold outdoor product and needed an additional capital infusion until that excess inventory could be sold.[98] McPhee and Edelman asked Glenhill to make a bridge loan to the Company "to help [it] get over this problem."[99] On July 21, 2011, the Glenhill Long Fund loaned the Company $2 million, which was repaid in November 2011.[100]

         In late August 2011, DWR received an inquiry from Herman Miller, its largest supplier, about a possible acquisition, which indicated a preliminary total enterprise valuation of the Company in the range of $25 million to $30 million.[101] According to Krevlin, the Company was "not excited" about the indication of interest, which he thought was "too low."[102] Over the following months, Herman Miller signed a non-disclosure agreement and received access to a due diligence room, but did not make an offer at that time.[103]

         I. The 2012 Financing

         At the end of 2011, "things were starting to turn positive . . . The company was making money [and] moved from a defensive position to going on offense."[104]Management prepared a budget for 2012 contemplating $3.3 million of capital expenditures.[105] As Shapiro explained, "the [C]ompany was not in the same type of distress that it was in 2010 and 2009" and was seeking to raise "offensive capital."[106]

         During the first half of 2012, the Board discussed a private placement to raise a total of $2.5 million.[107] A transaction was consummated on July 19, 2012, when the Company entered into a series of agreements concerning (i) the sale of stock and granting of options to raise up to $2.5 million; (ii) modification of the Windsong Note; and (iii) establishing a date for the conversion of the Series A Preferred.

         These transactions, which are referred to collectively as the "2012 Financing," involved the following components:

• The Company entered into a Securities Purchase Agreement with Edelman, McPhee, the Glenhill Long Fund, and Windsong II, an entity affiliated with Sweedler.[108] They collectively purchased 401, 108 common shares for a total of $1.8 million, or $4.49 per share (the "2012 Stock Sale") as follows: Edelman and McPhee each paid $400, 000 for 89, 135 shares; and the Glenhill Long Fund and Windsong II each paid $500, 000 for 111, 419 shares.[109]Edelman and McPhee also each received an option to acquire up to $350, 000 worth of additional shares of common stock at the same per share price of $4.49, which they exercised in December 2012.[110]
• The Company and Windsong I entered into an agreement by which the parties amended the Windsong Note to extend its maturity date by one year to October 3, 2013.[111] The PIK Dividend associated with the Series A Preferred continued to accrue until that date.[112]
• The Company, Windsong I, the Glenhill Long Fund, and the Glenhill Overseas Fund entered into a Letter Agreement by which the parties agreed that on October 3, 2013 (i) all outstanding principal of the Windsong Note would be converted into shares of common stock at a conversion price of $3.5339; and (ii) the Glenhill Long Fund and the Glenhill Overseas Fund would convert all of their Series A Preferred shares into common stock (the "2013 Conversions").[113] The parties also agreed that Windsong I's "rights to any interest on the Note are hereby forfeited and that the sole obligation of the Company with respect to the Note shall be the issuance of the Conversion Shares."[114]

         In connection with the 2012 Financing, the Company filed an amendment to its certificate of incorporation, increasing the number of authorized shares of common stock from 600, 000 to 1.6 million shares.[115]

         Krevlin believed the 2012 Financing was "a home-run transaction."[116] He explained the rationale for the transaction at trial, as follows:

[W]e did a holistic solution here which was a negotiation where every party gave up something . . . [Windsong Brands] took the 2012 note and they pushed it out one year to October of 2013 [and] agreed that they would not take any interest . . . which at that point was $600, 000 . . . And they agreed to convert that security, the $5 million security, at the PIK preferred conversion price on October of '13. [The Glenhill Overseas Fund said that] we would stop the PIKing on October [2013], so that that would allow everything to collapse into a simplified structure. So by us stop[ping] PIKing, you stop the dilution on the preferred piece. You basically got Windsong to convert their note, give up interest at exactly the same conversion price as the PIK preferred, which I believe was $3.25, and the equity investment was made. So we simplified everything. Windsong gave up a fair amount. We gave up the PIK, and we were able to get . . . management to invest further in the equity.[117]

         As with the Windsong Note, the 2012 Financing was the product of a conflicted and deficient process. There are no minutes reflecting the Board's consideration of the 2012 Financing, and it never hired an outside financial advisor.[118] Shapiro again was tasked by Krevlin to negotiate on behalf of the Company against Sweedler, who represented the Director Defendants, including Krevlin.[119] Shapiro and Sweedler did not negotiate vigorously. There is no documentary evidence of price negotiations, and Sweedler admitted that he and Krevlin had "two securities that were bumping up against each other," i.e. Glenhill's Series A Preferred and the Windsong Note, and "were trying to protect each other's interest at the end of the day."[120]

         Krevlin, Shapiro, and Sweedler testified that at least two data points were used to determine the price of the 2012 Financing, which implied a $27 million valuation of the Company:[121] (i) the indication of interest from Herman Miller at a $25 million to $30 million enterprise value; and (ii) Glenhill's internal valuation of the Company indicating a value of $4.41 per share as of December 31, 2011.[122] No documents confirm that Shapiro and Sweedler actually used those data points to negotiate the price per share.

         J. The Anti-Dilution Grants

         On July 17, 2012, when the 2012 Financing was under consideration, the Company granted an additional 19, 654 restricted shares of common stock to Windsong Brands and awarded Edelman and McPhee 55, 459 and 41, 594 options to purchase common stock in the Company (the "Anti-Dilution Grants").[123] The restricted stock had the same terms as the restricted stock in the Brands Grant.[124]

         McPhee and Shapiro testified that they believed Edelman and McPhee were supposed to receive anti-dilution protection for the options they were granted under their employment agreements, [125] but those agreements do not contain that protection.[126] Sweedler similarly testified that anti-dilution protection should have been included in the documentation for the Brands Grant, [127] but it was not.[128] The Anti-Dilution Grants were made to offset the dilution each of them otherwise would have suffered by the PIK Dividend and other dilutive events since the Brands Grant and employment agreements were executed.[129]

         K. The 2013 Conversions

         On October 8, 2013, Shapiro contacted Englard of Ellenoff Grossman to complete the paperwork to effectuate the 2013 Conversions.[130] On October 22, 2013, Ellenoff Grossman delivered to the Company (i) a notice of conversion, dated October 16, 2013, purporting to convert the entire amount of the Windsong Note into 1, 414, 868 shares of common stock; and (ii) a notice of conversion, dated October 3, 2013, purporting to convert 1, 432, 397 shares of Series A Preferred held by Glenhill into 3, 936, 571 shares of common stock.[131] The next day, the Company requested that the transfer agent issue the shares requested in the two notices of conversion.[132]

         At the time of the 2013 Conversions, the Company was authorized to issue only 1.6 million shares of common stock, [133] but the 2013 Conversions purported to convert the Series A Preferred and Windsong Note into a total of 5, 351, 439 shares of common stock-1, 414, 868 shares for the Windsong Note, and 3, 936, 571 shares for the Series A Preferred.[134] On October 28, 2013, after this problem was brought to his attention, Englard sent the Company's CFO Lorraine DiSanto and Shapiro forms of consent for the Board and majority stockholder to increase the number of authorized shares of common stock to 7.5 million.[135]

         On October 30, 2013, the Company filed with the Delaware Secretary of State an amendment to the Company's certificate of incorporation stating that the Company was authorized to issue 7.5 million shares of common stock and 30, 000 shares of preferred stock.[136] Although Ellenoff Grossman did not deliver the notices of conversion to the Company until October 22, 2013, [137] the Board's written consent approving the 2013 Conversions was dated as of October 3, 2013.[138]

         L. The Merger and the Change of Control Bonuses

         In November 2013, the Board retained Financo LLC to provide financial advisory services in connection with a potential sale of the Company.[139] Financo contacted a number of potential strategic and financial buyers for the Company, which ultimately led to a transaction with Herman Miller.[140]

         In July 2014, Herman Miller agreed to purchase the Company for an enterprise value of $183 million or an estimated equity value of approximately $170.4 million, subject to certain adjustments.[141] The transaction contemplated combining DWR with Herman Miller's consumer business and involved a number of steps. In simplified form: (i) Herman Miller purchased approximately 83% of the Company's total equity from certain "Selling Stockholders" for $155 million in cash, or $23.9311 per share;[142] (ii) Edelman and McPhee exchanged some of their DWR shares (representing approximately 14% of the outstanding shares of the Company) for an 8% interest in HM Springboard, Inc., a newly formed subsidiary of Herman Miller that ultimately would own all of the shares of the Company as well as the shares of a subsidiary of Herman Miller holding its consumer business; and (iii) DWR ended up as the surviving entity of a short-form merger with HM Catalyst, Inc., a wholly owned subsidiary of HM Springboard, in which the remaining stockholders of the Company were cashed out for $23.9311 per share plus a potential amount for a working capital adjustment.[143] The Merger closed on July 28, 2014.[144]

During due diligence for the Merger, DWR's counsel discovered that a greater number of options had been granted to twelve employees, including Edelman and McPhee, than was authorized under the Company's 2009 Equity Incentive Award Plan.[145] In response to this problem, the Company's counsel recommended treating the options as bonuses, so that the employees would receive the cash equivalent of what they would have received had they exercised their options, as they were entitled to do, upon a change of control (the "Change of Control Bonuses").[146]

         By letter agreements dated July 21, 2014, the Company agreed to pay the Change of Control Bonuses in lieu of the options. In exchange, the recipients provided general releases and relinquished their ability to roll over their shares.[147]In total, $3, 858, 508 in Change of Control Bonuses were paid, with Edelman receiving $1, 143, 780, and McPhee receiving $857, 819.[148]

         In August 2014, a Notice of Merger and Appraisal Rights (the "Merger Notice") was mailed to DWR's stockholders of record.[149] The Merger Notice provided background information about the Company, described the Merger, outlined the stockholders' appraisal rights, and attached copies of three years of the Company's financial statements and a fairness opinion from Financo.[150]

         M. The Litigation Begins and Herman Miller Becomes Aware of the Defects Concerning the Reverse Stock Splits and 2013 Conversions

         On December 19, 2014, plaintiffs filed their initial Verified Complaint, which they amended on March 12, 2015.[151] On November 13, 2015, plaintiffs filed their Second Amended Complaint, which added Herman Miller as a defendant and asserted for the first time that the Merger was void. According to plaintiffs, the Selling Stockholders owned only approximately 60% of the Company's common stock as a result of defects concerning the Reverse Stock Splits and 2013 Conversions, meaning that Herman Miller failed to acquire the 90% ownership interest required to effectuate a short form merger under 8 Del. C. § 253.[152]

         Although Herman Miller, with the assistance of its financial and legal advisors, conducted extensive due diligence in connection with the Merger, it did not become aware of any defects associated with the Reverse Stock Splits and 2013 Conversions until after this litigation began.[153] The general counsel of Herman Miller could not explain how his diligence team could have missed those issues.[154]

         N. The Ratification Resolutions

         Shortly after Herman Miller was added as a defendant, the Company engaged Delaware counsel (Richards, Layton & Finger, P.A.) to review its corporate records "in light of [plaintiffs'] allegations regarding the validity of certain corporate actions of DWR in the Second Amended Verified Complaint."[155]

         On February 10, 2016, the Company's Board (then consisting of Edelman, McPhee, Krevlin, Brian Walker, Ben Watson, and Steve Gane) approved under 8 Del C. § 204 a set of resolutions that, among other things, ratified certain defective corporate acts and putative stock relating to the Reverse Stock Splits and 2013 Conversions (the "Ratification Resolutions").[156] That same day, Herman Miller Consumer Holdings Inc., as the sole stockholder of DWR, approved the Ratification Resolutions in all respects.[157]

         On February 11, 2016, the Company filed with the Delaware Secretary of State four certificates of validation contemplated by the Ratification Resolutions concerning the ratification of the following defective corporate acts:

• "a 50-to-1 reverse stock split purportedly effected on August 23, 2010 pursuant to which each fifty (50) shares of Common Stock . . . were reclassified and combined into one (1) share of Common Stock;"
• an amendment to the Company's certificate of incorporation filed with the Delaware Secretary of State "on August 23, 2010 in connection with a 50-to-1 reverse stock split," which "reduced the number of shares of the Company's preferred stock . . . below the number of shares of Preferred Stock designated as Series A Junior Participating Preferred Stock;"
• "a 50-to-1 reverse stock split purportedly effected on August 23, 2010 pursuant to which each fifty (50) shares of [Series A Preferred] were reclassified and combined into one (1) share of Convertible Preferred Stock;"
• an amendment to the Company's certificate of incorporation filed with the Delaware Secretary of State on August 23, 2010, which "reduced the number of shares of the Company's preferred stock . . . below the number of shares of Preferred Stock designated as Convertible Preferred Stock;"
• "the purported issuance of 3, 936, 571 shares of Common Stock . . . on October 23, 2013 upon conversion of certain shares of Convertible Preferred Stock;"
• "the purported issuance of 5, 351, 439 shares of Common Stock [on October 23, 2013] consisting of 3, 936, 571 shares of Common Stock issued upon the purported conversion of certain shares of [Series A Preferred] and 1, 414, 868 shares of Common Stock issued upon the purported conversion of certain convertible notes of the Company;" and
• an amendment to the Company's certificate of incorporation filed with the Delaware Secretary of State on October 30, 2013 that "increase[d] the number of authorized shares of Common Stock from 1, 600, 000 shares of Common Stock to 7, 500, 000 shares of Common Stock."[158]

         The Ratification Resolutions also recite that, on July 19, 2012, the Company filed an amendment to the Company's certificate of incorporation that increased the number of authorized common shares from 600, 000 to 1.6 million, but the amendment "failed to state that it had been approved by the Company's stockholders by written consent in lieu of a meeting" and the Company "failed to send the notice required by Section 228(e)."[159] The Board determined that this 2012 amendment was not a defective corporate act under Section 204 and did not require ratification, but resolved to file a certificate of correction with respect to the 2012 amendment.[160]

         II. CLAIMS ADJUDICATED AT TRIAL

         On August 14, 2017, about three months before trial, plaintiffs filed their Fourth Amended Complaint (the "Complaint").[161] It asserted the following twelve claims that were to be presented at trial:

• Count I, asserted against all defendants, seeks rescissory damages in connection with the Merger;
• Count II, brought against all defendants other than Herman Miller, asserts a claim for breach of fiduciary duty and "unlawfully benefiting" on the theory that "defendants received a far greater portion of the sum Herman Miller paid to acquire DWR than they were entitled to receive;"[162]
• Count III asserts a conversion claim against all defendants on the theory that through the Merger, defendants unlawfully exercised control and dominion over plaintiffs' shares;
• Count IV, brought against the Director Defendants, asserts a claim for breach of fiduciary duty and "unlawfully benefitting" from void acts in connection with the stock sale that occurred as part of the 2012 Financing;
• Count V, brought against the Director Defendants, asserts a claim for breach of fiduciary duty and "unlawfully benefiting" from void acts in connection with the Series A Preferred conversion in 2013;
• Count VI, brought against the Director Defendants, asserts a claim for breach of fiduciary duty and "unlawfully benefitting" from void acts in connection with the Windsong Note, the modification of the Windsong Note as part of the 2012 Financing, the conversion of the Windsong Note in 2013, the Brands Grant, and the anti-dilution grant to Windsong Brands;
• Count VII asserts a breach of fiduciary duty claim against the Glenhill Defendants as controlling stockholders in connection with the Windsong Note, the 2012 Financing, the 2013 Conversions, the Brands Grant, and the anti-dilution grant to Windsong Brands;
• Count VIII asserts an unjust enrichment claim against all defendants except Herman Miller;
• Count IX, brought against the Director Defendants and the Glenhill Defendants, asserts a breach of the fiduciary duty of disclosure claim based on the Merger Notice;
• Count X asserts a breach of the fiduciary duty of loyalty claim against the Director Defendants and the Glenhill Defendants in connection with the Change of Control Bonuses;
• Count XI asserts an aiding and abetting claim against Herman Miller; and
• Count XII asserts an equitable fraud claim against the Glenhill Defendants, the Director Defendants, and Herman Miller based on alleged material misrepresentations and omissions in the Merger Notice.

         On May 31, 2018, after post-trial argument, plaintiffs conceded that Count VIII (Unjust Enrichment) had been waived.[163]

         In addition to the claims recited above, the trial addressed a counterclaim filed by Herman Miller, HM Catalyst, Inc., and DWR. The counterclaim asserts a single claim seeking judicial validation under 8 Del. C. § 205 of the defective corporate acts identified in the Ratification Resolutions.[164]

         The analysis of the claims that follows is divided into three parts. Section III analyzes the Section 205 counterclaim and related claims in the Complaint. Section IV analyzes plaintiffs' claims challenging the Windsong Note, Brands Grant, 2012 Financing, and Anti-Dilution Grants. Section V analyzes plaintiffs' remaining claims, which relate to the Merger.

         III. ANALYSIS OF SECTION 205 AND RELATED CLAIMS

         Under Section 205 of the Delaware General Corporation Law, this court has the authority to "[d]etermine the validity and effectiveness of any defective corporate act ratified pursuant to § 204 of this title;" "[d]etermine the validity and effectiveness of any defective corporate act not ratified or not ratified effectively pursuant to § 204 of this title;" and "[d]etermine the validity of any corporate act."[165]"In connection with an action under [Section 205]," the court may, among other things, "[v]alidate and declare effective any defective corporate act" and "[d]eclare that a defective corporate act validated by the Court shall be effective as of the time of the defective corporate act or at such other time as the Court shall determine."[166]

         Before deciding whether to exercise its authority under Section 205, "the Court must first determine whether there was a defective corporate act."[167] The court then may consider the factors listed in Section 205(d) in deciding whether to exercise its authority under Section 205 to validate that defective corporate act.

         Section 204(h)(1) defines "defective corporate act" as any act or transaction that is void or voidable due to a failure of authorization:

"Defective corporate act" means an overissue, an election or appointment of directors that is void or voidable due to a failure of authorization, or any act or transaction purportedly taken by or on behalf of the corporation that is, and at the time such act or transaction was purportedly taken would have been, within the power of a corporation under subchapter II of this chapter . . . but is void or voidable due to a failure of authorization.[168]

         Section 204(h)(2) defines "failure of authorization" as a failure to effect an act in compliance with a company's certificate of incorporation to the extent the failure renders the act void or voidable:

"Failure of authorization" means: (i) the failure to authorize or effect an act or transaction in compliance with (A) the provisions of this title, (B) the certificate of incorporation or bylaws of the corporation, or (C) any plan or agreement to which the corporation is a party, if and to the extent such failure would render such act or transaction void or voidable.[169]

         "Precisely because [Sections 204 and 205] were intended to cure inequities, 'failure of authorization' must be read broadly to allow the Court of Chancery to address any technical defect that would compromise the validity of a corporate action."[170]

         A. The Acts the Board Ratified in the Ratification Resolutions Constitute Defective Corporate Acts

         In the counterclaim, Herman Miller, HM Catalyst, and DWR ask the court to declare under Section 205 that the Merger and the ratification of the seven defective corporate acts identified in the Ratification Resolutions are valid.[171] Plaintiffs do not oppose judicial validation of five of these defective corporate acts.[172] For example, plaintiffs do not challenge the actions the Company took to remedy the failure to obtain Board and stockholder approval to combine and reclassify the common stock and Series A Preferred on a 50-to-1 basis in connection with the Reverse Stock Splits. Instead, plaintiffs challenge only the Ratification Resolutions insofar as they seek to remedy the double dilution problem arising from the Reverse Stock Splits by validating the following two defective corporate acts:

• "the purported issuance of 3, 936, 571 shares of Common Stock . . . on October 23, 2013 upon conversion of certain shares of Convertible Preferred Stock;" and
• "the purported issuance of 5, 35 1, 439 shares of Common Stock [on October 23, 2013] consisting of 3, 936, 571 shares of Common Stock issued upon the purported conversion of certain shares of [Series A Preferred] and 1, 414, 868 shares of Common Stock issued upon the purported conversion of certain convertible notes of the Company."

         To repeat, the double dilution problem occurred because, instead of reducing by a factor of 50-to-1 the number of shares of common stock into which the Series A Preferred could convert upon a conversion event, the Reverse Stock Splits reduced by a factor of 2500-to-1 the number of shares of common stock into which the Series A Preferred could convert. This occurred because of the combined effect of two actions: (i) the 50-to-1 reverse split of the common stock triggered a 50-to-1 reduction in the number of shares of common stock into which each share of Series A Preferred could convert under the adjustment provision in Section 7(a) of the Series A COD; and (ii) the 50-to-1 reverse split of the Series A Preferred itself reduced by 98% the number of shares of Series A Preferred outstanding without providing for an adjustment to the Conversion Formula for the Series A Preferred because the Series A COD did not contain an adjustment provision in the event of a reverse split of the Series A Preferred itself. There is zero evidence in the record that anyone involved intended for the Reverse Stock Splits to cause this double dilution.

         The flaws in the implementation of the Reverse Stock Splits in 2010 became a problem in 2013 when the Company purported to convert the Series A Preferred into 3, 936, 571 common shares, although no one recognized the problem at the time. It is undisputed as a mathematical matter that Glenhill was entitled to receive at least 3, 936, 571 common shares upon the conversion of its shares of Series A Preferred in October 2013 if the Reverse Stock Splits had been implemented correctly to reduce by a factor of 50-to-1 (and not by 2500-to-1) the number of shares into which the Series A Preferred could convert.[173] Because of the defects arising from the implementation of the Reverse Stock Splits, however, the Series A Preferred could not be converted into 3, 936, 571 common shares at that time but could only be converted into about 1/50th of that figure, i.e., approximately 78, 731 common shares. The Ratification Resolutions addressed this plainly unintended consequence by amending Section 7(a) of the Series A COD to eliminate one of the two actions that caused the double dilution by providing "that no adjustment shall be made pursuant to this Section 7(a) . . . in respect of the 50-to-1 reverse stock split of the Common Stock effected . . . on August 23, 2010."[174]

         Plaintiffs' primary point of contention in opposing the counterclaim concerns this amendment to Section 7(a). Specifically, plaintiffs argue that the court should not validate this amendment because defendants "have not identified any [defective corporate act] that was rendered void or voidable by the failure to amend [Section 7(a)]."[175] I disagree.

         To begin, the issuance of 3, 936, 571 common shares to Glenhill upon the conversion of its Series A Preferred was void because it violated Section 7(a) of the Series A COD as it existed before that provision was amended as a result of the Ratification Resolutions. "[U]nder Delaware law, a corporate action is void where it violates a statute or a governing instrument such as the certificate of incorporation or the bylaws."[176] The Series A COD was part of the Company's certificate of incorporation, [177] and thus a corporate action violating the Series A COD would be a void act. Here, the Company purported to issue Glenhill 3, 936, 571 common shares as part of the 2013 Conversions but, as the parties agree, Glenhill's Series A Preferred could not be converted into that many common shares under the original version of Section 7(a) of the Series A COD.[178] In other words, the Company issued Glenhill more shares in 2013 than it was entitled to under the original Series A COD, which made that issuance void.

         The Company's failure to amend Section 7(a) is a failure of authorization with respect to the 2013 Conversions because it rendered the issuance of 3, 936, 571 common shares to Glenhill void.[179] As discussed above, Glenhill suffered the prospect of double dilution because of the Reverse Stock Splits, which reduced by a factor of 2500-to-1 the number of common shares into which its Series A Preferred could be converted. Thus, before Section 7(a) was amended, the Series A Preferred could be converted into only approximately 78, 731 common shares. On the other hand, had the Company amended Section 7(a) immediately before the Reverse Stock Splits so that its adjustment provision would not apply to the reverse split of common stock, the Series A Preferred would have been convertible into at least 3, 936, 571 shares, and the issuance of that amount of shares would not have been void. In sum, the issuance of 3, 936, 571 shares of common stock in connection with the 2013 Conversions was a defective corporate act because the issuance of that many common shares was void due to the Company's failure to amend Section 7(a) of the Series A COD before the Reverse Stock Splits in 2010.

         Plaintiffs argue, without citing any supporting legal authority, that the "temporal disconnect" between the failure to amend Section 7(a) in 2010 and the 2013 Conversions "demonstrates that the issuance of shares at the time of the Conversion cannot be a [defective corporate act] for which the failure to amend 7(a) is a failure of authorization."[180] I disagree.

         The plain language of Section 205 does not contain a temporal limitation on the court's power to validate defective corporate acts, nor would such a limitation make sense where, as here, the effect of a defective corporate act may not manifest itself until years into the future. As noted previously, our Supreme Court has emphasized the need to "read broadly" the term "failure of authorization" to "cure inequities" and "to address any technical defect that would compromise the validity of a corporate action."[181] My conclusion that the Company's failure to amend Section 7(a) is a failure of authorization with respect to the 2013 Conversions accords with this approach, particularly given the highly technical nature of the defect and that the equities overwhelmingly support correcting this obviously unintended defect, as discussed below.

         As a secondary matter, plaintiffs challenge judicial validation of the purported issuance of 5, 351, 439 shares of common stock on October 23, 2013, because there were only 1.6 million shares of common stock authorized at that time.[182] This is because the amendment to the Company's certificate of incorporation to increase the authorized number of shares of common stock from 1.6 million to 7.5 million was not approved until one week later, on October 30, 2013.[183] The Ratification Resolutions purported to fix this problem by changing the effective date of the amendment to October 22, 2013, before the 2013 Conversions.[184]

         Plaintiffs do not dispute that the purported issuance of 5, 351, 439 shares of common stock in connection with the 2013 Conversions was a defective corporate act.[185] Rather, plaintiffs contend that the court "should not permit the Miller Parties to change the effective date and time to the [certificate of incorporation] amendment because [the Company] deliberately and improperly backdated the Amendment and the board resolutions approving it in October 2013," making it inappropriate for relief under Section 204.[186] This argument fails because, even if this defective corporate act was "not ratified effectively pursuant to § 204," the court still may determine its validity under Section 205[187] and, as I discuss below, all of the Section 205(d) factors weigh in favor of judicial validation of this and all of the other defective corporate acts set forth in the Ratification Resolutions.

         B. All of the Section 205(d) Factors Support Validating the Defective Corporate Acts Identified in the Ratification Resolutions

         I turn now to the question of whether the court should ratify under Section 205 the defective corporate acts identified in the Ratification Resolutions. In making that determination, the court may consider the following factors:

(1) Whether the defective corporate act was originally approved or effectuated with the belief that the approval or effectuation was in compliance with the provisions of this title, the certificate of incorporation or bylaws of the corporation;
(2) Whether the corporation and board of directors has treated the defective corporate act as a valid act or transaction and whether any person has acted in reliance on the public record ...

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