Facts
- A Delaware corporation’s charter allocated board-designation rights: the common stockholder (Alex Bäcker) could appoint two directors; Palisades (Series A) could appoint one; Altos (Series A‑1) could appoint one.
- A voting agreement also required (i) a jointly designated independent director and (ii) creation of an additional “CEO director” seat if Alex was terminated as CEO, to be filled by the replacement CEO.
- The board removed Alex as CEO after an investigation found workplace misconduct; it later hired Kevin Grauman as replacement CEO, who was expected to fill the CEO-director seat.
- Alex’s communications and conduct initially reflected acceptance of Grauman as a board participant, including incorporating him into board communications and not objecting to resolutions treating him as a director.
- Altos’s director resigned; due to erroneous legal advice, Altos did not promptly exercise its exclusive charter right to fill the vacancy by stockholder action, instead expecting board-level confirmation at the next meeting.
- Shortly before a scheduled November 15, 2019 board meeting, the independent director resigned, leaving only Alex, Ricardo Bäcker, and Palisades’ designee (Jeff Anderson) as directors of record.
- At the November 15 telephonic meeting, Alex presented a surprise agenda, asserted a 2–1 voting majority with Ricardo, demanded that Grauman and Altos’s intended designee (Paul D’Addario) disconnect, and then—over Anderson’s opposition—removed Grauman, reinstated himself as CEO, claimed the CEO-director seat, and appointed another director to consolidate control.
- Palisades sued for equitable relief seeking to invalidate the actions taken at the meeting.
Issues
- Whether board actions that are facially consistent with governance documents may be voided in equity when accomplished through bad-faith process and deception.
- Whether directors breach fiduciary duties by using a surprise agenda and affirmative deception to alter board composition and seize control.
Decision
- The Court of Chancery voided all actions taken at the November 15, 2019 board meeting as a matter of equity.
- The court found Alex and Ricardo breached fiduciary duties by orchestrating a deceptive control grab, including affirmative deception of a fellow director about meeting intentions and expected board composition.
- The court held that technical compliance with governing documents did not validate actions implemented through inequitable conduct.
Legal Principles
- Corporate action is “twice-tested”: legal authorization is necessary but not sufficient; equity separately reviews the fairness of the conduct used to achieve the result.
- Inequitable conduct can render corporate acts invalid even if the acts were legally possible under the charter, bylaws, or agreements.
- Directors breach fiduciary duties when they employ affirmative deception, lack of fair notice, and bad-faith manipulation of board process to entrench control.
- The Court of Chancery may use equitable remedies, including voiding board actions, to address fiduciary misconduct in corporate governance.
Conclusion
The court set aside an attempted control shift accomplished through a surprise agenda and affirmative deception, holding that equity will nullify board actions taken in bad faith even when the steps appear formally permissible under the company’s governance documents.