COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN W. NOBLE 417 SOUTH STATE STREET VICE CHANCELLOR DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179
January 29, 2016
Richard P. Rollo, Esquire Kurt M. Heyman, Esquire Richards, Layton & Finger, P.A. Proctor Heyman Enerio LLP One Rodney Square 300 Delaware Avenue, Suite 200 920 North King Street Wilmington, DE 19801 Wilmington, DE 19801
Re: Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN Date Submitted: January 11, 2016
Dear Counsel:
In November 2014, Plaintiff Knoll Capital Management L.P. (“KCM”) and
Defendant Advaxis, Inc. (“Advaxis”) orally agreed, or so it is alleged, that KCM
would purchase more than 1.66 million shares of unregistered Advaxis common
stock for $3 per share. Even though KCM was already an Advaxis shareholder,
Advaxis found a preferable acquirer of the shares and refused to complete its
transaction with KCM. Instead, on December 19, 2014, it issued Advaxis stock to
another group at a price of $4.25 per share. Because of a non-disclosure agreement
that KCM had signed in reliance upon an Advaxis commitment that its transaction Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 2
would be consummated, KCM was not able to buy Advaxis’s publicly traded
stock. By late June 2015, shares of Advaxis stock were trading for more than
$30 per share. KCM seeks to compel Advaxis to complete the transaction or an
award of damages caused by its failure to do so.
Advaxis has moved to dismiss the First Amended Verified Complaint (the
“Complaint”) under Court of Chancery Rule 12(b)(6). It contends that the
agreement, if there in fact was an agreement, was never memorialized by a writing
and that its board of directors never approved the issuance of Advaxis stock to
KCM. Its motion, of course, may only be granted if, from the proper allegations of
the Complaint (including documents properly incorporated), it is not “reasonably
conceivable” that it could prevail.1
Advaxis has framed a disarmingly straightforward issue: may $5 million (or
more than 1.6 million shares) of stock of a Delaware corporation be sold orally
without a written agreement to convey the stock or a board resolution approving
1 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011). Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 3
the sale?2 It starts its analysis by invoking Grimes v. Alteon, Inc. which teaches
that the “Delaware General Corporation Law requires board approval and a written
instrument evidencing an agreement obligating the corporation to issue stock either
unconditionally or conditionally.”3 KCM, however, has alleged “[o]n information
and belief, [that] the Advaxis board of directors authorized [its Chief Executive
Officer] to enter into the Agreement, or ratified the Agreement.”4 This allegation,
meager as it is and approaching conclusory as it does, is factual in nature and
provides notice to Advaxis as anticipated by Court of Chancery Rule 8(a).5 How
this happened, when it happened, and maybe where it happened would have been
helpful information, but the pleading with particularity requirements of Court of
Chancery Rule 9(b) do not apply to KCM’s claims. Whether KCM will be able to
prove this allegation is not known at this stage. The contention that Advaxis’s
2 See Def. Advaxis, Inc.’s Reply Br. in Supp. of its Mot. to Dismiss First Am. Verified Compl. 1. 3 804 A.2d 256, 266 (Del. 2002). 4 Compl. ¶ 18. The “Agreement” is defined as “a November 17, 2014 agreement for the sale of 1,666,666.67 shares of Advaxis unregistered common stock to KCM at a price of $3 per share, for a total purchase price of $5 million.” Compl. introductory paragraph. 5 RBC Capital Mkts., LLC v. Educ. Loan Trust IV, 87 A.3d 632, 639 (Del. 2014). Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 4
board approved the sale alleviates the need, for the moment at least, to consider
KCM’s arguments that the Advaxis board had a pattern of authorizing its Chief
Executive Officer to make such deals on his own but with the understanding that
the board would support or approve them as necessary, or more specifically, that
the board viewed an agreement as final when this Chief Executive Officer made
his commitment.
Next, the Court must consider whether a failure to satisfy the Grimes
requirement of a writing can be treated as a defective corporate act that could be
cured under 8 Del. C. § 205 (“Section 205”).6 For example, the Court “may . . .
[d]etermine the validity of any corporate act or transaction and any stock, rights or
options to acquire stock.”7 As a result, the Court “may . . . [v]alidate and declare
effective any defective corporate act.”8 A “defective corporate act” includes “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 . . . but is void or voidable due to a failure of
6 Advaxis has not challenged KCM’s standing to pursue a claim under Section 205. 7 8 Del. C. § 205(a)(4). 8 Id. § 205(b)(2). Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 5
authorization.”9 Here, Advaxis’s Chief Executive Officer undertook on behalf of
Advaxis a transaction to issue and sell to KCM common stock of Advaxis; at the
time, had it been done properly, Advaxis could have issued that stock. Advaxis
claims that the transaction is ineffective—whether void or voidable does not matter
in this instance—“due to a failure of authorization.” Again, the board did not
authorize, or so Advaxis claims, the issuance and sale of shares to KCM.
Furthermore, “failure of authorization” includes “the failure to authorize or effect
an act or transaction in compliance with the provisions of this title,” or the “failure
of the board of directors . . . to authorize or approve any act or transaction taken by
or on behalf of the corporation that would have required for its due authorization
the approval of the board of directors.”10 As set forth, Advaxis’s argument against
being bound by the alleged agreement with KCM turns on a failure of
authorization. As pled, KCM’s claim conceivably falls within Section 205 and the
two definitions—defective corporate act and failure of authorization—that are
drawn from 8 Del. C. § 204.
9 Id. § 204(h)(1). 10 Id. § 204(h)(2). Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 6
Thus, the question becomes: whether the Court may validate the defective
contract for the sale of stock and require Advaxis to comply with its terms. If the
board, as alleged in paragraph 18 of the Complaint, authorized the sale of stock,
the question becomes less difficult. However, even if the board did not authorize
the sale of stock, the defective corporate act arguably falls within the remedial
scope of Section 205.
The recent legislation empowering the Court to validate ineffective (void or
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COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN W. NOBLE 417 SOUTH STATE STREET VICE CHANCELLOR DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179
January 29, 2016
Richard P. Rollo, Esquire Kurt M. Heyman, Esquire Richards, Layton & Finger, P.A. Proctor Heyman Enerio LLP One Rodney Square 300 Delaware Avenue, Suite 200 920 North King Street Wilmington, DE 19801 Wilmington, DE 19801
Re: Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN Date Submitted: January 11, 2016
Dear Counsel:
In November 2014, Plaintiff Knoll Capital Management L.P. (“KCM”) and
Defendant Advaxis, Inc. (“Advaxis”) orally agreed, or so it is alleged, that KCM
would purchase more than 1.66 million shares of unregistered Advaxis common
stock for $3 per share. Even though KCM was already an Advaxis shareholder,
Advaxis found a preferable acquirer of the shares and refused to complete its
transaction with KCM. Instead, on December 19, 2014, it issued Advaxis stock to
another group at a price of $4.25 per share. Because of a non-disclosure agreement
that KCM had signed in reliance upon an Advaxis commitment that its transaction Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 2
would be consummated, KCM was not able to buy Advaxis’s publicly traded
stock. By late June 2015, shares of Advaxis stock were trading for more than
$30 per share. KCM seeks to compel Advaxis to complete the transaction or an
award of damages caused by its failure to do so.
Advaxis has moved to dismiss the First Amended Verified Complaint (the
“Complaint”) under Court of Chancery Rule 12(b)(6). It contends that the
agreement, if there in fact was an agreement, was never memorialized by a writing
and that its board of directors never approved the issuance of Advaxis stock to
KCM. Its motion, of course, may only be granted if, from the proper allegations of
the Complaint (including documents properly incorporated), it is not “reasonably
conceivable” that it could prevail.1
Advaxis has framed a disarmingly straightforward issue: may $5 million (or
more than 1.6 million shares) of stock of a Delaware corporation be sold orally
without a written agreement to convey the stock or a board resolution approving
1 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011). Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 3
the sale?2 It starts its analysis by invoking Grimes v. Alteon, Inc. which teaches
that the “Delaware General Corporation Law requires board approval and a written
instrument evidencing an agreement obligating the corporation to issue stock either
unconditionally or conditionally.”3 KCM, however, has alleged “[o]n information
and belief, [that] the Advaxis board of directors authorized [its Chief Executive
Officer] to enter into the Agreement, or ratified the Agreement.”4 This allegation,
meager as it is and approaching conclusory as it does, is factual in nature and
provides notice to Advaxis as anticipated by Court of Chancery Rule 8(a).5 How
this happened, when it happened, and maybe where it happened would have been
helpful information, but the pleading with particularity requirements of Court of
Chancery Rule 9(b) do not apply to KCM’s claims. Whether KCM will be able to
prove this allegation is not known at this stage. The contention that Advaxis’s
2 See Def. Advaxis, Inc.’s Reply Br. in Supp. of its Mot. to Dismiss First Am. Verified Compl. 1. 3 804 A.2d 256, 266 (Del. 2002). 4 Compl. ¶ 18. The “Agreement” is defined as “a November 17, 2014 agreement for the sale of 1,666,666.67 shares of Advaxis unregistered common stock to KCM at a price of $3 per share, for a total purchase price of $5 million.” Compl. introductory paragraph. 5 RBC Capital Mkts., LLC v. Educ. Loan Trust IV, 87 A.3d 632, 639 (Del. 2014). Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 4
board approved the sale alleviates the need, for the moment at least, to consider
KCM’s arguments that the Advaxis board had a pattern of authorizing its Chief
Executive Officer to make such deals on his own but with the understanding that
the board would support or approve them as necessary, or more specifically, that
the board viewed an agreement as final when this Chief Executive Officer made
his commitment.
Next, the Court must consider whether a failure to satisfy the Grimes
requirement of a writing can be treated as a defective corporate act that could be
cured under 8 Del. C. § 205 (“Section 205”).6 For example, the Court “may . . .
[d]etermine the validity of any corporate act or transaction and any stock, rights or
options to acquire stock.”7 As a result, the Court “may . . . [v]alidate and declare
effective any defective corporate act.”8 A “defective corporate act” includes “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 . . . but is void or voidable due to a failure of
6 Advaxis has not challenged KCM’s standing to pursue a claim under Section 205. 7 8 Del. C. § 205(a)(4). 8 Id. § 205(b)(2). Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 5
authorization.”9 Here, Advaxis’s Chief Executive Officer undertook on behalf of
Advaxis a transaction to issue and sell to KCM common stock of Advaxis; at the
time, had it been done properly, Advaxis could have issued that stock. Advaxis
claims that the transaction is ineffective—whether void or voidable does not matter
in this instance—“due to a failure of authorization.” Again, the board did not
authorize, or so Advaxis claims, the issuance and sale of shares to KCM.
Furthermore, “failure of authorization” includes “the failure to authorize or effect
an act or transaction in compliance with the provisions of this title,” or the “failure
of the board of directors . . . to authorize or approve any act or transaction taken by
or on behalf of the corporation that would have required for its due authorization
the approval of the board of directors.”10 As set forth, Advaxis’s argument against
being bound by the alleged agreement with KCM turns on a failure of
authorization. As pled, KCM’s claim conceivably falls within Section 205 and the
two definitions—defective corporate act and failure of authorization—that are
drawn from 8 Del. C. § 204.
9 Id. § 204(h)(1). 10 Id. § 204(h)(2). Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 6
Thus, the question becomes: whether the Court may validate the defective
contract for the sale of stock and require Advaxis to comply with its terms. If the
board, as alleged in paragraph 18 of the Complaint, authorized the sale of stock,
the question becomes less difficult. However, even if the board did not authorize
the sale of stock, the defective corporate act arguably falls within the remedial
scope of Section 205.
The recent legislation empowering the Court to validate ineffective (void or
voidable) corporate acts is broad in scope. Advaxis has not explained why a
failure to satisfy Grimes should not be treated as any other failure to comply with
the DGCL or governing common law.
Perhaps as a matter of discretion, the Court would not, in effect, order the
consummation of an oral agreement for the sale of corporate stock. Because of the
breadth of discretion accorded the Court, motions to dismiss in this context may be
problematic. For instance, Advaxis points to one instance where a board’s long-
term acknowledgement of (or acquiescence in) a stock issuance was given
significant weight in determining that a defective corporate act reflected the Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 7
board’s intentions and understanding.11 Here, the Advaxis board rejected the
notion of a KCM transaction no more than a few days after it was allegedly made.
By Section 205(d)(2), the Court, in deciding whether to validate a defective
corporate act, “may consider . . . [w]hether the corporation and board of directors
has treated the defective corporate act as a valid act or transaction.” Thus, the
decision to consider how the corporation treated the defective corporate act over
time is committed to the Court’s discretion. Long-term acknowledgement of the
act is not a statutory requirement. Accordingly, the prompt turnaround (if that is
what happened) in corporate thinking about the KCM transaction may be a
pertinent consideration, but it is not necessarily determinative and offers Advaxis
no comfort in the context of its motion to dismiss.
In sum, the Complaint alleges a defective corporate act and Advaxis has not
demonstrated that it is not reasonably conceivable that KCM could obtain the relief
11 See In re Numoda Corp., 2015 WL 6437252, at *3 (Del. Oct. 22, 2015). Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN January 29, 2016 Page 8
which it seeks under Section 205.12 Accordingly, Advaxis’s motion to dismiss is
denied.13
IT IS SO ORDERED.
Very truly yours,
/s/ John W. Noble JWN/cap cc: Register in Chancery-K
12 KCM sponsors other theories supporting its claim to a right to purchase the Advaxis shares. Those contentions tend to coalesce into a mix of equitable factors that might inform the Court’s exercise of discretion under Section 205, even if the factors are not outcome determinative on their own. Moreover, those theories, if KCM is successful in its Section 205 efforts, would be enhanced and KCM might be entitled to recovery under several different theories. As pled, KCM’s other theories may not be dependent upon relief under Section 205, but they become viable, even if ultimately unnecessary, following success under Section 205. Advaxis may be frustrated because the Court must accept the well-pled (even if barely) allegations made by KCM. The key component of a Section 205 analysis involves the discretion of the Court, and, in the context of a motion to dismiss, the Court not only takes the facts as alleged in the Complaint, but it also, on these facts, cannot conclude how it would exercise its discretion after assessing the facts. If it is reasonably conceivable that the exercise of discretion would lead to a balancing in Plaintiff’s favor, the motion to dismiss fails. It appears that KCM’s factual pathway to the relief it seeks may be narrow and that there are at least some factors that might induce an exercise of discretion in favor of Advaxis. Nonetheless, the standard for a motion to dismiss is not whether the plaintiff may have a rocky road ahead. 13 With this conclusion, the stay of discovery, entered on October 12, 2015, is vacated.