Equitable Relief Granted to Stop Board Coup
In a Memorandum Opinion, Palisades Growth Capital II, L.P. v. Alex Bäcker and Ricardo Bäcker and QLess, Inc. (Del. Ch. C.A. No. 2019-0931-JRS) the Delaware Court of Chancery found that actions taken at a board meeting were void because the defendant acted inequitably by formulating a secret plan to deceive the other board members into attending the meeting and then seized control. The Court stated that it will not sanction inequitable action by corporate fiduciaries simply because their act is legally authorized. The Court found that, while the defendants’ actions were technically authorized in the Company’s Charter and Bylaws, they took affirmative action to mislead the other board members in order to take control.
Alex Bäcker (“Bäcker”) is a co-founder of QLess, Inc. (the “Company”), a Delaware corporation that produces virtual queue management systems to reduce the time retail customers have to wait in line for services. Bäcker served as CEO and controlled two director seats. The rest of the board included (a) Jeff Anderson (“Anderson”) who represented the majority owner of the Company’s Series A Preferred Stock, Palisades Growth Capital II, L.P. (“Palisades”), (b) Hodong Nam (“Nam”) who represented the majority owner of the Company’s Series A-1 Preferred Stock, Altos Hybrid 2 L.P., (“Altos”), and (c) one independent director.
In early 2019, the board began receiving reports from the Company’s employees that Bäcker was creating a toxic work environment. The board invited outside consultants to provide coaching to Bäcker, to no avail. The board formed a special committee and hired counsel to investigate the complaints against Bäcker. Counsel reported that Bäcker retaliated against employees, used demeaning language, and made comments to women that were offensive. In June 2019, the board voted to remove Bäcker as CEO. On September 9, 2019, after an extensive search for a new CEO, they hired Kevin Grauman (“Grauman”). Bäcker initially supported Grauman as the new CEO.
On September 30, 2019, Nam resigned as director on behalf of Altos, and later the Altos general counsel emailed the Company’s general counsel asking him to “draft and circulate the necessary stockholder consent to elect Paul D’Addario…as the Altos designee” as authorized by the Company’s Charter. The Company’s general counsel provided misguided information on how to fill the Altos seat, advising that there would need to be a board meeting. The Company’s Charter, however, allowed for the vote or written consent of the A-1 Preferred Stockholders (i.e., Altos and the minority stockholders).
On October 27, 2019, Bäcker requested a board meeting be held telephonically on November 15, 2019. Bäcker later invited Grauman, and he even requested that Grauman circulate proposed resolutions for the meeting. Grauman’s resolutions included replacing Nam with D’Addario and confirming his position as CEO. On November 14, 2019, the independent director unexpectedly resigned.
When the telephonic meeting occurred the next day, Bäcker demanded that Grauman and D’Addario leave the call. Bäcker, believing he had a 2-1 majority on the board, proposed drastically different resolutions, such as termination of Grauman’s appointment as CEO, reappointment of himself as CEO and director, ratification of his employment agreement, appointment of a new director, and amendment of the bylaws to allow a quorum of three board members. Against Anderson and D’Addario’s objections, each of Bäcker’s resolutions was passed.
As majority owner of the Company’s Series A Preferred Stock, Palisades filed this suit with four counts: (1) declaratory judgment that the board is comprised of Anderson, D’Addario, Bäcker, and Bäcker’s designee, (2) declaratory judgment that Grauman is the CEO, (3) specific performance of the Voting Agreement, and (4) breach of fiduciary duty against Bäcker.
The plaintiff argued that the email from Altos’ general counsel to the Company’s general counsel reflected a “vote” to replace Nam with D’Addario. The Court rejected this argument, because there was no opportunity for the other Series A-1 stockholders to cast their votes. The plaintiff then argued that the email constituted a “written consent”, but the Court again rejected this argument, because the email used words like “[w]ould you please draft” and “[w]e would like to”, instead of clearly setting forth that the action was so taken. “A mere expression of intent, without executory language, is not a written consent.”
Next, the plaintiff argued that Bäcker breached the Voting Agreement by failing to appoint Grauman for the open CEO seat on the board, and that Grauman should be appointed immediately. However, the Court found that the Voting Agreement requires a stockholders vote in order to expand the board, and there had been no such vote before the November 15 meeting.
Finally, the plaintiff argued that the Court should invoke its equitable powers to invalidate all actions taken at the November 15 meeting. Bäcker formulated a secret plan on November 14 to seize control of the Company at the November 15 meeting, and he baited Anderson into attending so there would be quorum.
On this final count, the Court found that “[i]t is bedrock doctrine that this Court will not sanction inequitable action by corporate fiduciaries simply because the act is legally authorized.” Here, the actions Bäcker took were technically authorized in the Company’s Charter and Bylaws. However, Bäcker took affirmative action to mislead the other board members by misrepresenting that he wanted Grauman on the board and by requesting that Grauman attend the November 15 meeting. Then Bäcker kept “mum” as he planned his attack. If Anderson had known the change in plans, he would have refused to attend the meeting and the plan would have been thwarted.
In short, the Court found that if a director calls a meeting under false pretenses, then ambushes the board with self-serving resolutions, equitable relief may be warranted.