Knott Partners, L.P. v. Josselyn Boudett

• Court: Court of Chancery of Delaware
• Decided: June 29, 2023
• Docket: CA No. 2022-0376-SG
• Status: Published

Opinion

COURT OF CHANCERY OF THE SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE VICE CHANCELLOR 34 THE CIRCLE GEORGETOWN, DELAWARE 19947

Date Submitted: June 23, 2023 Date Decided: June 29, 2023

Neal C. Belgam, Esquire Thomas G. Macauley, Esquire Jason Z. Miller, Esquire MACAULEY LLC SMITH, KATZENSTEIN & 300 Delaware Avenue, Suite 1018 JENKINS LLP Wilmington, DE 19801 1000 West Street, Suite 1501 Wilmington, DE 19801

Re: Knott Partners, L.P. v Josselyn Boudett, et al., C.A. No. 2022-0376-SG

Dear Counsel:

This letter resolves Plaintiff’s contested application for a mootness fee. I

heard oral argument on the matter on June 21, 2023, and made a partial bench ruling.1

I need not revisit the issues addressed there in detail. It is sufficient to say that I

determined that Plaintiff’s lawsuit was meritorious when filed and that the lawsuit

caused Defendants to ratify certain corporate acts under 8 Del. C. § 204 (“Section

204”), resulting in a substantial corporate benefit. Accordingly, the only question

remaining before me is the size of the appropriate fee due to Plaintiff.

On March 10, 2020, the two director board of Telepathy Labs, Inc. (the

“Company”) executed a written consent allowing for one director’s immediate

1 Oral Arg. on Pl.’s Appl. For Att’ys’ Fees Dated 6.21.23, Dkt. No. 40. retirement, leaving the board unable to form a voting quorum in compliance with the

corporation’s foundational documents.2 In June 2021, Plaintiff brought a books and

records action under 8 Del. C. § 220.3 At the trial in that matter in November 2021,

Plaintiff noted the issue of defective corporate actions due to an insufficient

quorum.4 In April 2022, Defendant purported to remedy these issues through

stockholder consents associated with a financing, which attempted to backdate a

rightsizing of the board.5 Plaintiff filed this suit later that month.6 The Company

subsequently ratified the defective corporate actions under Section 204.7

Under the corporate benefit doctrine, equity requires that a litigant who has

thereby worked a benefit on the entity should not have to bear the costs alone. 8

Instead, the costs, including fees, are appropriately borne by the company. Here, the

Company’s board had acted without a quorum over several years, rendering its

actions challengeable as ultra vires; Plaintiff’s litigation caused the Company to

ratify these defective acts under Section 204, thus bringing the corporation in line

with the Delaware General Corporation Law and defusing the uncertainty caused by

2 Pl.s’ Appl. For an Award of Att’ys’ Fees (the “Application”) 2-3, Dkt. No. 25. 3 Id. at 3. 4 Exs. 1-4 to Transmittal Aff. of Jason Z. Miller 60 (pages numbered sequentially based on PDF), Dkt. No. 25. 5 Defs.’ Opp. to Pl.’s Appl. For an Award of Att’ys’ Fees (“Opposition”) 6-7, Dkt. No. 32 6 See Verified Compl., Dkt. No. 1. 7 See Ex. 5 (Part 1) to Transmittal Aff. of Jason Z. Miller, Dkt. No. 25. 8 See United Vanguard Fund, Inc. v. TakeCare, Inc., 727 A.2d 844, 850 (Del. Ch. 1998) (citing Weinberger v. UOP, Inc., 517 A.2d 653, 656 (Del. Ch. 1986)). 2 reliance on the board’s actions.9 Plaintiff requests a total award of $300,000 in

attorneys’ fees and expenses.10

Defendants’ primary argument is that the backdating of approval for the

reduced board rendered the subsequent ratification under Section 204 redundant.11

Per Defendants, the Section 204 ratification therefore resulted in no corporate benefit

and merits no fee award.12 I disagree. The corporate benefit here is the difference

between the reduction in the risk of subsequent corporate trauma, if any,13 worked

by the backdating, on the one hand, and the impact of definitive ratification under

Section 204 on the other. This benefit, to my mind, is substantial.

I assess whether the requested fee is fair and reasonable under the factors set

out by our Supreme Court in Sugarland.14 I begin my analysis with the primary

factor: the benefit achieved.15 Here, the benefit conferred upon the corporation,

while therapeutic in nature, is substantial. This litigation caused the Company to

9 See generally Application (describing the defects in the corporation’s actions and the subsequent remedial steps). 10 See id. 11 Opposition at 13-22. 12 Id. at 19-20. 13 While I need not make any finding on the matter, there are at least two reasons to be skeptical of the backdating’s efficacy. First, allowing a board to fully cure a yearslong series of defective corporate actions by the mere backdated resolution of the defect itself would (if successful) seemingly obviate, or at least undermine, 8 Del. C. § 205. Second, there is no evidence in the record that the disclosures accompanying the backdating sufficiently informed the voting stockholders of the defective corporate acts, potential director conflicts, etc. that they were purportedly ratifying. 14 Sugarland Indus., Inc. v. Thomas, 420 A.2d 142, 149 (Del. 1980). 15 See Americas Mining Corp. v. Theriault, 51 A.3d 1213, 1255 (Del. 2012). 3 validate a series of defective actions, preempting an array of potential future

challenges. This Court has held that consistency in awards is important to the

administration of justice, thus, actions producing similar benefits warrant similar fee

awards.16 Accordingly, Plaintiff points to two cases involving similar challenges to

and subsequent remediation of improperly authorized stock issuances, resulting in

fee awards of $850,000 and $1.1 million, respectively.17

Turning to the secondary Sugarland factors, however, I find that they

generally counsel against a fee in the range above. First, I find that the core issue—

whether the actions of the board complied with the foundational documents—was

not novel or complex. I note that the fee was contingent. That requires an award

sufficient to set an adequate incentive for wholesome litigation. In computing such

a fee, however, it is appropriate to consider the time and effort expended by

Plaintiff’s counsel, looking to the “lodestar” fee implied as a crosscheck on the

amount of the award.18 The case settled at an early stage, and a fee in the range

above would be twenty to twenty-five times the lodestar amount.19 The Plaintiff, of

course, has not sought that amount—it seeks an award of $300,000, a more

wholesome multiple of the lodestar.20 The Defendants, for their part, concentrated

16 See Garfield v. Boxed, Inc., 2022 WL 17959766, at *13 (Del. Ch. Dec. 27, 2022). 17 See De Felice v. Kidron, C.A. No. 2021-0255-MTZ, at 16 (Del. Ch. Apr. 27, 2022) (TRANSCRIPT); Olson v. ev3, Inc., 2011 WL 704409, at *15 (Del. Ch. Feb. 21, 2011). 18 See Garfield, 2022 WL 17959766, at *15. 19 See Application at 13 (setting forth a lodestar of $36,370.00). 20 Id. at 12-13. 4 on their all-or-nothing position that no benefit was worked.21 They have not

persuasively offered a different methodology for setting an award given my finding

of substantial corporate benefit.

In light of both the substantial benefit achieved and the contingent nature of

the litigation, together with the relatively small amount of time expended, I find that

the Plaintiffs’ proposed award—$300,000—is appropriate. None of the remaining

Sugarland factors cut against this analysis.

An order is attached.

Sincerely,

/s/ Sam Glasscock III Vice Chancellor

21 See Opposition at 13-22. 5 IN THE COURT OF CHANCERY FOR THE STATE OF DELAWARE

KNOTT PARTNERS L.P., ) ) Plaintiff, ) ) v. ) C.A. No. 2022-0376-SG JOSSELYN BOUDETT and ) TELEPATHY LABS, INC., a Delaware ) Corporation, ) ) Defendants. )

ORDER GRANTING PLAINTIFF’S APPLICATION FOR AN AWARD OF ATTORNEYS’ FEES

AND NOW, this 29th day of June, 2023, for the reasons provided in my

accompanying letter opinion,

IT IS HEREBY ORDERED THAT Plaintiff’s Application is GRANTED and

Plaintiff’s counsel is hereby awarded $300,000 in attorneys’ fees and expenses.