IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE SOUTHPAW CREDIT ) OPPORTUNITY MASTER FUND, ) L.P. and CLOUDYBLUFF & CO., in ) its capacity as the nominee of ) NORTHEAST INVESTORS TRUST, ) ) Plaintiffs, ) ) v. ) C.A. No. 2017-0059-TMR ) ROMA RESTAURANT HOLDINGS, ) INC., a Delaware corporation, SCOTT ) WILSON, and KENNETH J. ) REIMER, PH.D., ) ) Defendants. )
MEMORANDUM OPINION Date Submitted: January 4, 2018 Date Decided: February 1, 2018
Martin S. Lessner, James P. Hughes, Tammy L. Mercer, and Richard J. Thomas, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Attorneys for Plaintiffs.
Kevin G. Abrams, John M. Seaman, and E. Wade Houston, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Defendants Scott Wilson and Kenneth F. Reimer, Ph.D.
Brock E. Czeschin and Anthony M. Calvano, RICHARDS LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Nominal Defendant Roma Restaurant Holdings, Inc.
MONTGOMERY-REEVES, Vice Chancellor. This case comes before me pursuant to 8 Del. C. § 225 to determine the
proper composition of the board of Roma Restaurant Holdings, Inc. (“Roma” or
the “Company”). In a letter opinion dated October 13, 2017 (the “Pre-Trial Letter
Opinion”), I recalled the Delaware Supreme Court’s guidance that “[i]n
determining what claims are cognizable in a [Section] 225 action, the most
important question that must be answered is whether the claims, if meritorious,
would help the court decide the proper composition of the corporation’s board.”1
In order to properly name Roma’s board, I must determine the stockholders
entitled to vote.
Prior to November 2016, two investment funds held large minority stakes in
the Company. The first fund had an employee and an ally on the three-person
Roma board. But on November 30, 2016, the second fund arranged the purchase
of a sufficient number of shares to become a majority owner of outstanding Roma
stock. Immediately thereafter, the Roma board members rushed to create and
enact an employee compensation plan that issued enough restricted stock to
effectively dilute the second fund back down to a minority position. In addition to
the entrenchment concerns raised by defendants’ actions, the restricted stock
issuance suffered from multiple problems, including the Company’s failure to
1 Pre-Trial Letter Op. 9 (alterations in original) (quoting Genger v. TR Inv’rs, LLC, 26 A.3d 180, 199 (Del. 2011)).
1 obtain contractually mandated joinder documents from each recipient before the
issuance. Though all parties in this litigation agree that the stock issuance is
invalid, plaintiffs argue that the issuance is void, while defendants aver that the
issuance is voidable and may be ratified under the common law. Following trial, I
conclude that the challenged stock issuance is void, and cannot be counted in a
vote, because the board failed to obtain the required joinder before issuing the
stock.
I. BACKGROUND Prior writings from the Court detail the many twists and turns of this case.2
Because I now examine the narrow question of whether the challenged stock
issuance is void or voidable, I provide only a review of the facts surrounding that
issuance and the events that ensued.
The facts in this opinion are my findings based on the parties’ stipulations
and 569 trial exhibits, including deposition transcripts. I grant the evidence the
weight and credibility that I find it deserves. 3
2 See, e.g., Order Granting Defs.’ Mot. to Dismiss (May 30, 2017) (dismissing this action—momentarily—after Director Defendants declined to defend their own position on the eve of trial); Pre-Trial Letter Op. (finding need for this trial to prevent Director Defendants from engaging in gamesmanship by asserting claims in a purportedly new action). 3 After being identified initially, individuals are referenced herein by their surnames without regard to formal titles such as “Dr.” No disrespect is intended. Joint trial exhibits are cited as “JX #.” Unless otherwise indicated, citations to the parties’ briefs are to pre-trial briefs for the trial held on November 21, 2017. 2 A. Roma Reorganizes Roma, the parent company of restaurant chains Tony Roma’s and TR Fire
Grill, filed for bankruptcy in 2005.4 In March 2006, holders of Roma’s senior
class of notes exchanged their debt instruments for common stock pursuant to the
court-approved reorganization plan. 5 Among those receiving stock in the
reorganized Company were Southpaw Credit Opportunity Master Fund L.P.
(“Southpaw”), Northeast Investors Trust (“Northeast”), and Highland Capital
Management, L.P. (“Highland”).6 Southpaw and Cloudybluff & Co, in its capacity
as the nominee of Northeast, are Plaintiffs in the current action. Defendants are
Scott Wilson, a managing director at Highland, and Kenneth J. Reimer, each of
whom were Roma directors during the events leading up to this case (Wilson and
Reimer collectively, the “Director Defendants”). Roma is the nominal Defendant
in the action.
The reorganization bound all stockholders to a governing agreement (the
“Stockholders’ Agreement”).7 Section 5.2 of the Stockholders’ Agreement bars
Roma from “issu[ing] any shares of capital stock or any Common Stock
4 Defs.’ Answering Br. 5. 5 JX 556, at 9-10. 6 Defs.’ Answering Br. 5. 7 JX 4.
3 Equivalents to any Person not a party to [the Stockholders’] Agreement, unless
such Person has agreed in writing to be bound by the terms and conditions of this
Agreement pursuant to an instrument substantially in the form attached hereto as
Exhibit C-2.”8 Furthermore, failure to execute proper joinders to the Stockholders’
Agreement before issuance makes “[a]ny issuance of Shares or any Common Stock
Equivalents by the Company . . . null and void ab initio.”9
On March 27, 2006, Roma adopted an incentive plan (the “2006 Plan”) to
compensate key employees as part of the reorganization. 10 The 2006 Plan
empowered the board to issue options and restricted stock for a period of ten
years. 11 During the decade that followed, Roma’s troubled performance placed the
stock options issued under the 2006 Plan deeply underwater. 12 The 2006 Plan
expired on March 27, 2016.13
Despite the fact that no plan was in place by the end of March 2016, the
Roma board did not pursue a new plan with haste. Instead, the board explored
8 JX 4, § 5.2. 9 Id. 10 JX 6. 11 Id. § 2.1. 12 Indeed, only two employees ever exercised options from the 2006 Plan. Defs.’ Answering Br. 10. 13 JX 6, § 10.
4 various avenues for a new incentive plan at meetings on July 27, 201614 and
October 19, 2016.15 The Company consistently emphasized two points in its
considerations. First, the board wanted stock options with a cashless exercise, 16 so
that, unlike under the 2006 Plan, employees would actually receive valuable
compensation through the new plan. Second, the board’s deliberations highlighted
the importance of receiving stockholder approval for any new plan involving
options, as required by the Stockholders’ Agreement.17
B. Southpaw Acquires Additional Stock By October 7, 2016, Southpaw and Northeast held a combined 48.8% of
outstanding Roma stock. 18 On November 30, 2016, Southpaw negotiated the
purchase of the 2.5% stake held by Kenneth Myres, 19 Roma’s former president and
CEO, which would bring Plaintiffs’ ownership to 51.4%. The existing Roma
board—composed of Wilson, Reimer, and Steven Judge, the Company’s CEO at
14 JX 51. 15 JX 96. 16 See, e.g., JX 41. 17 For example, Roma asked outside counsel for a draft of a possible new incentive plan on May 16, 2016, but noted that the Company did not “need the shareholders’ approval documents at this time.” JX 39. Similarly, on September 21, 2016, Roma’s counsel stated that the board’s “next step would be to decide how many shares to load the plan with and then seek stockholder approval.” JX 87. 18 JX 161. 19 JX 188.
5 the time—received an email from Daniel Cronk, Roma’s counsel, at 2:07 p.m. on
November 30 that notified them that Myres “is selling the shares to Southpaw, and
. . . the sale has not yet occurred.”20 In response, Wilson called Myres to inform
him that the sale would cause other directors to “come in and replace [Wilson] and
[Reimer] on the board,” 21 and Highland would “take any action possible to stop
it.”22
Around 6:27 p.m. on November 30, 2016, a Southpaw representative called
Cronk to make clear that it was not Southpaw’s “intention to ‘shake things up’
following the Myres transaction.”23 Eight minutes after Cronk informed the board
of that phone call, Wilson sent a spreadsheet to Roma’s outside counsel detailing
specific award amounts to employees under a new compensation plan. 24 At trial,
Wilson testified that he could not recall who created the spreadsheet or when the
board discussed the specific award allocations listed.25 Reimer testified that he
20 JX 189. 21 JX 524.1, at 52. 22 JX 535. Wilson was a Highland employee and Reimer a Highland ally. 23 JX 206. 24 JX 240. 25 JX 527, at 185-86.
6 could not recall having reviewed any such allocations.26 Judge testified that
Wilson generated the allocations, but that Judge did not know how Wilson chose
the specific numbers. 27
The new plan (the “2016 Plan”) provided for the issuance of restricted stock
and did not require stockholder approval before the issuance of the restricted
stock. 28 The plan issued 32,000 shares of restricted stock to Judge, 3,000 to Brian
Grusi, Roma’s CFO, and a total of 13,500 to twelve other Roma employees. 29 This
total of 48,500 shares of restricted stock constituted 8.5% of the total outstanding
Roma stock, sufficient to dilute Southpaw and Highland from 51.4% following the
Myres transaction to 46.9%.
Outside counsel advised the board to “consult[] with the Company’s
accountants to determine the financial impact of the cancellation [of stock options
under the 2006 Plan] and new grant [of restricted stock because] . . . [they] may
have negative accounting consequences to the Company.” 30 Instead of taking that
advice, the board proceeded to hold a telephonic board meeting to approve the new
26 JX 526, at 63. 27 JX 529, at 141. 28 JX 202, § 6.1(a). The 2016 Plan also mentioned, but required stockholder approval before, the issuance of stock options. Id. 29 JX 325. 30 JX 232.
7 plan on December 1, 2016. Wilson testified that he could not recall whether the
December 1 meeting to approve the 2016 Plan was related to Southpaw’s new
majority position. 31 While trying to schedule the meeting, Reimer told the other
board members and counsel, “I have a meeting in the a.m. that I can’t cancel [at]
this point, but will cancel the lunch meeting to get on this.”32 Despite this, Wilson
testified that the board meeting occurred in the morning. 33 Judge, who was
traveling overseas at the time, testified that he was “jet lagged [and] tired” 34 and
had to leave his hotel room in Spain in order to find better phone reception because
the call “kept cutting in and out.” 35 The board approved the 2016 Plan at this
December 1 telephonic meeting.36 Roma did not produce any notice, agenda, or
minutes for this board meeting during the pendency of this litigation. 37
On the night of December 1, 2016, Roma employees received an email
notifying them of their awards of restricted stock. 38 Director Defendants do not
31 JX 527, at 63-66. 32 JX 232. 33 JX 527, at 35. 34 JX 529, at 98. 35 Id. at 147-148. 36 JX 527, at 34. 37 JX 524. 38 JX 211. 8 contest that the Company failed to obtain executed joinder forms from the Roma
employees receiving restricted stock under the 2016 Plan, despite the requirements
of Section 5.2 of the Stockholders’ Agreement. 39 By 10:23 p.m. on that same day,
Grusi told Judge and Cronk that the recipients of the restricted stock had questions
about the value of the award; Grusi offered to “take a stab at valuation” but noted
that “it would be biased which is why independent is best.”40 Judge explained that
the Company did not seek an independent valuation of the restricted stock before
approving the 2016 Plan.41 Houlihan Lokey valued Highland’s stake in Roma, but
Wilson refused to share that valuation despite Judge’s request for it.42
Plaintiffs, Judge, Grusi, and Cronk held a phone call on December 6, 2016 to
discuss Southpaw’s acquisition of Myres’s stake.43 On that call, Southpaw stated
that it would seek to obtain board representation through its ownership stake. 44 No
one on the Roma side mentioned that the Company had just issued restricted stock
39 Defs.’ Answering Br. 46. 40 JX 222. 41 JX 529, at 169. Roma did retain an external valuation company, CBIZ, on December 10, 2016. JX 287. But the board viewed the value produced by CBIZ as too high and took steps to lower it. JX 334. 42 JX 529, at 169-171. 43 Id. at 174. 44 Id. at 175-76.
9 under a new incentive plan, diluting Southpaw’s stake to a minority position.45 On
December 9, 2016, Roma issued a stock certificate to Southpaw that reflected the
transfer of Myres’s stock, 46 but Roma did not deliver the stock certificate until
December 21, 2016. Finally, on December 22, 2016, the Roma board informed
stockholders of the new 2016 Plan. 47
On December 30, 2016, Southpaw delivered a written consent to Roma that
purported to remove Wilson and Reimer from the board and appoint Howard
Golden and Bradley Scher. Roma refused to honor the consents, and Southpaw
filed suit on January 25, 2017.
C. This Litigation What followed was a protracted battle over written consents. The Complaint
asserted that the issuances under the 2016 Plan are invalid and void, or at the least
voidable,48 and thus, Golden and Scher are proper board members. 49 The parties
submitted—and the Court approved—a case schedule and a status quo order. Trial
45 Id. at 176. 46 JX 531, at 61. 47 JX 325. 48 Compl. ¶ 82. 49 Id. ¶¶ 5, 43.
10 was scheduled for May 25, 2017. The parties conducted discovery, which included
fourteen days of depositions in four states.50
On May 12, 2017, Director Defendants filed a pre-trial brief and stated that
they “will not assert at trial that [issuances under the 2016 Plan are] . . . valid.”51
At the pre-trial conference on May 18, Director Defendants argued that “it’s [not]
necessary to go to trial to litigate . . . any issue regarding validity of [the issuances
under the 2016 Plan].” 52 Director Defendants explained that although they were
“not conceding that [the issuances under the 2016 Plan are] invalid, . . . we don’t
want them. . . . We don’t want the plan to remain in existence.”53 Instead,
Director Defendants claimed that while there were technical issues with Plaintiffs’
written consents, Director Defendants would allow Plaintiffs to “take action to
correct [the] defective written consents,” 54 which would moot the Southpaw
Action.
In response, Plaintiffs pleaded with me to find the issuances under the 2016
Plan invalid so that the Defendants could not later claim that those shares were
50 Pre-Trial Tr. 39 (May 18, 2017). 51 Defs.’ Pre-Trial Br. 4 (May 12, 2017). 52 Pre-Trial Tr. 36 (May 18, 2017). 53 Id. at 35. 54 Id.
11 voted to remove or elect directors.55 In support of this request, Plaintiffs pointed
me to Infinity Investors Ltd. v. Takefman.56 In Infinity, “the individual defendants
admit[ted] that they [were] no longer directors,”57 but refused to acknowledge the
validity of the stock conversion that brought about their removal from the board.58
The Court noted that “dismiss[ing] this claim merely because the defendants
purported to resign after their removal, while allowing them to question the
validity of the conversion and subsequent election . . . would reward
gamesmanship.” 59 Instead, “[a]s equity looks to the intent rather than to the form,
this Court should not permit parties to manipulate procedural rules for the purpose
of avoiding resolution on the merits.” 60 The Court then held that the defendants’
refusal to defend the conversion was an admission that the conversion was invalid,
and they could not contest the issue in later cases. 61
I asked counsel for Defendant Directors at that hearing whether we were in
55 Id. at 13-31. 56 2000 WL 130622 (Del. Ch. Jan. 28, 2000). 57 Id. at *4. 58 Id. at *4-5. 59 Id. at *5. 60 Id. 61 Id.
12 an Infinity situation.62 In response, counsel assured me that this was not the same
as Infinity, because there “you had two directors . . . who conceded the seats but
wanted to continue the challenge . . . . We don’t think that’s what we’re doing.”63
Counsel urged me not to rule on the validity of the restricted stock issued under the
2016 Plan due to potential negative ramifications for the employees to whom stock
was issued.64 Relying on the representations made to me, I lifted the stay to allow
a new written consent to address the technical issues raised by Director
Defendants.
On May 19, 2017, Plaintiffs submitted new written consents, which Roma
and Director Defendants accepted. Thereafter, on May 30, 2016, the Court entered
an order (1) recognizing Plaintiffs’ nominees as proper board members, (2)
dismissing the action as moot, and (3) retaining jurisdiction to resolve a fee
application.
On July 21, 2017, less than two months later, Director Defendants’ counsel
filed a complaint on behalf of Highland, where one of the Director Defendants is a
managing director, to determine the composition of the Roma board pursuant to 8
Del. C. § 225. Highland claimed that, in addition to voting its own shares, certain
62 Pre-Trial Tr. 44 (May 18, 2017). 63 Id. at 45. 64 Id. at 37.
13 Roma employees had validly voted shares issued under the 2016 Plan to place
Director Defendants back on the Company board (the “Highland Action”).
Determining the proper board composition in the Highland Action also would have
required me to determine the stock eligible to vote. In the Highland Action,
Highland sought to argue that the Roma board had ratified the contested stock
issued under the 2016 Plan.65 Recognizing that the Court would have to determine
whether the stock is void or voidable before proceeding to the common law
ratification question, Plaintiffs and the Company asked me to proceed in the
Southpaw Action—in which the parties were fully prepared for trial scheduled for
May 25, 2017—to first determine whether the stock is void or voidable.
In the Pre-Trial Letter Opinion from October 13, 2017, I found that Director
Defendants had engaged in gamesmanship and ordered the parties to move to trial
in the current action to determine whether the challenged stock is void or voidable,
before incurring additional litigation and discovery costs in Highland’s newly filed
action. 66 On October 18, 2017, as part of trial preparation, Plaintiffs asked
Director Defendants if Director Defendants intended to defend the validity of the
2016 Plan at trial. On October 31, 2017, Plaintiffs sent the Court a letter noting
that Director Defendants still would not commit to either defending or not
65 Oral Arg. Tr. 140. 66 Pre-Trial Letter Op. 12.
14 defending the validity of the 2016 Plan at trial. On November 3, 2017, Director
Defendants informed the Court that they would not defend the 2016 Plan as validly
enacted. The Court held trial on November 21, 2017,67 at which Director
Defendants argued that the restricted stock issued pursuant to the 2016 Plan is
voidable because of Director Defendants’ own actions, but not void. 68
II. ANALYSIS The parties request a determination of the proper composition of the Roma
board under 8 Del. C. § 225, which, in this case, requires an examination of
whether the stock issuance pursuant to the 2016 Plan is void or voidable. On the
one hand, under 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.69
On the other hand, a corporate action “taken in violation of equitable principles is
voidable, not void, because ‘[o]nly voidable acts are susceptible to . . . equitable
67 The parties sent additional submissions to the Court on January 3 and 4, 2018. 68 Defs.’ Answering Br. 1. 69 Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1046 n.70 (Del. 2014) (quoting Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1077-78 (Del. Ch. 2004), aff’d sub nom, Black v. Hollinger Int’l, Inc., 872 A.2d 559 (Del. 2005)); see, e.g., Waggoner v. Laster, 581 A.2d 1127, 1137 (Del. 1990) (holding that action in violation of the certificate of incorporation is void); Klaassen v. Allegro Dev. Corp., 2013 WL 5739680, at *20 (Del. Ch. Oct. 11, 2013), aff’d, 106 A.3d 1035 (noting that action in violation of the bylaws is void).
15 defenses.’” 70 Regarding stock issuances in particular, “if the stock is void, then
cancellation is the proper remedy,” whereas “if the stock is voidable then a [c]ourt
may grant that form of relief that is to be most in accord with all of the equities of
the case.” 71
Plaintiffs argue that the stock issuance is void because it violated the
Stockholders’ Agreement and Delaware statutory law, as well as breached Director
Defendants’ fiduciary duties. 72 Defendants respond that the issuance is not void as
it complied with the Stockholders’ Agreement and statutory law. Defendants add
that fiduciary duties are equitable in nature and, thus, stock issued in violation of
fiduciary duties is voidable as opposed to void. Following trial, I conclude that the
70 Klaassen, 106 A.3d at 1046 (quoting Boris v. Schaheen, 2013 WL 6331287, at *15 (Del. Ch. Dec. 2, 2013)). 71 Byrne v. Lord, 1996 WL 361503, at *4 (Del. Ch. June 11, 1996) (quoting STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1137 (Del. 1991)) (internal quotation marks omitted). 72 Plaintiffs contend that “[m]uch like certificates of incorporation and bylaws, the Stockholders’ Agreement, to which Roma is bound as a party, sets forth the rights of Roma’s stockholders and defines the scope of the Board’s powers and duties.” Pls.’ Opening Br. 9. Thus, according to Plaintiffs, the Stockholders’ Agreement here is a governing instrument. Id. at 9-10. Plaintiffs argue that violations of various provisions of the Stockholders’ Agreement render the issuances void under Delaware case law and the express terms of the Stockholders’ Agreement. Defendants do not contest that the Stockholders’ Agreement here operates as a governing instrument or that a stock issuance found to be in violation of the Stockholders’ Agreement would be void. “Issues not briefed are deemed waived.” Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999). As a result, I do not analyze whether stock issued in violation of contractual obligations is void or voidable under Delaware case law.
16 restricted stock issuance is void for failure to comply with the joinder requirement
in the Stockholders’ Agreement; thus, the stock issued under the 2016 Plan may
not be counted in a vote to determine the composition of the Roma board. 73
A. The Stock Issuances are Void Plaintiffs argue that the issuances under the 2016 Plan are void, instead of
voidable, for contravening the Stockholders’ Agreement. Director Defendants
concede “that the 2016 [Plan] is voidable, but . . . contend that it’s not void”
because the 2016 Plan complies with the Stockholders’ Agreement.74 Thus, I must
analyze the express language of the Stockholders’ Agreement.
“Delaware law adheres to the objective theory of contracts, i.e., a contract’s
construction should be that which would be understood by an objective, reasonable
third party.” 75 “When interpreting a contract, [Delaware courts] ‘will give priority
to the parties’ intentions as reflected in the four corners of the agreement,’
construing the agreement as a whole and giving effect to all its provisions.” 76 The
terms of the contract control “when they establish the parties’ common meaning so
73 Because I decide the case on the joinder requirement, I need not address Plaintiffs’ additional arguments. 74 Oral Arg. Tr. 79. 75 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010). 76 Salamone v. Gorman, 106 A.3d 354, 367-68 (Del. 2014) (quoting GMG Capital Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012)). 17 that a reasonable person in the position of either party would have no expectations
inconsistent with the contract language.”77
The Stockholders’ Agreement in the instant case widely controls Roma’s
activities. For instance, the Stockholders’ Agreement dictates restrictions on the
transfer or acquisition of stock, rules regarding meetings and the election of
directors, and restrictions on board and stockholder actions.78 Section 5.2 of the
Stockholders’ Agreement explicitly bars Roma from “issu[ing] any shares of
capital stock or any Common Stock Equivalents to any Person not a party to [the
Stockholders’] Agreement, unless such Person has agreed in writing to be bound
by the terms and conditions of this Agreement pursuant to an instrument
substantially in the form attached hereto as Exhibit C-2.”79 The joinder document
attached to Exhibit C-2 of the Stockholders’ Agreement requires that an individual
acknowledge that he or she: (1) was “given a copy of the [Stockholders’]
Agreement;” (2) was “afforded ample opportunity to read . . . it;” (3) was “afforded
ample opportunity . . . to have counsel review it;” (4) is “thoroughly familiar with”
the Stockholders’ Agreement; and (5) agrees to be bound by the Stockholders’
77 Id. at 368 (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)). 78 JX 4. 79 Id. § 5.2.
18 Agreement. 80 The Stockholders’ Agreement bars the company from issuing stock
or stock equivalents to any person “unless such [p]erson has agreed in writing to be
bound by the terms and conditions of this [Stockholders’] Agreement pursuant to”
a joinder substantially similar to that in Exhibit C-2. 81 And the joinder in Exhibit
C-2 specifies that “the Company is prohibited from issuing the shares unless and
until” the recipient acknowledges and agrees to be bound by the terms of the
Stockholders’ Agreement. 82 If all of these terms are not met, the issuance is “null
and void ab initio.” 83
Here, Director Defendants do not contest that the recipients of restricted
stock under the 2016 Plan did not agree to be bound by joinders at the time of
issuance. 84 Instead, Director Defendants contend that the award agreements under
the 2016 Plan contain language “substantially in the form” of the joinder required
by Exhibit C-2 of the Stockholders’ Agreement. 85
80 Id. at Ex. C-2. 81 Id. § 5.2. 82 Id. at Ex. C-2 (emphasis added). 83 Id. § 5.2. 84 Defs.’ Answering Br. 46. 85 Id. at 48.
19 The award agreements sent to recipients of restricted stock under the 2016
Plan, however, state that each recipient “acknowledges and understands that the
[restricted stock] issued pursuant to [the 2016 Plan] shall be subject to . . . the
terms of the . . . Stockholders[’] Agreement.”86 Further, each recipient agrees “to
execute any instruments in writing which may be necessary or proper in carrying
out the purposes of [the 2016 Plan] or reasonably requested by the Company,
including, without limitation, a joinder to the Stockholders[’] Agreement.”87
While the joinder in the award agreement need not be identical to that in
Exhibit C-2, it must be substantially similar to the form. Section 10 of the award
agreement does not satisfy this requirement. At best, the award agreement
contains two relevant terms: (1) an acknowledgement that the stock is subject to
the Stockholders’ Agreement and (2) an agreement to agree to the terms of a
joinder, not even necessarily that contained in Exhibit C-2 or one substantially
similar to it. The award agreement does not acknowledge that the recipient had the
opportunity to read the Stockholders’ Agreement and consult with counsel in order
to become familiar with the terms as required by the joinder in Exhibit C-2. Nor
does the joinder explicitly state that the recipient is bound by the terms of the
86 JX 205 Ex. B, § 10. 87 Id.
20 Stockholders’ Agreement. Moreover, the joinder requirement must be satisfied
before issuance of the restricted stock,88 which the Company failed to do.
The terms of the Stockholders’ Agreement and the joinder in Exhibit C-2 are
straightforward, but explicit, from a compliance—and result of noncompliance—
standpoint. The Company needed to obtain joinder forms substantially in the form
of the joinder in Exhibit C-2 before issuing restricted stock under the 2016 Plan.
The rushed nature of Director Defendants’ actions likely made it impossible to
obtain joinders from each restricted stock recipient before issuance. But that does
not excuse noncompliance with the clear and express terms of the Stockholders’
Agreement. All recipients of stock and stock equivalents must understand—
following the opportunity to read and consult with counsel—the Stockholders’
Agreement and then bind themselves to the Stockholders’ Agreement at or before
issuance to ensure compliance with that agreement. The contractually mandated
penalty for failure to comply with this requirement is that the issuance is void ab
initio. Thus, I apply the outcome dictated by the express terms of the
Stockholders’ Agreement and find the restricted stock issued pursuant to the 2016
Plan is void.
88 JX 4 Ex. C-2.
21 B. The Outcome is Equitable Director Defendants also contend that finding the restricted stock issuance
void ab initio is an inequitable outcome because the breach of the Stockholders’
Agreement was on technical grounds. 89 I disagree. Director Defendants point to
Delaware case law noting that “[e]quity . . . abhors a forfeiture . . . [and so] [i]t will
disregard a forfeiture occasioned by failure to comply with the very letter of an
agreement when it has been substantially performed.” 90 But, as discussed above,
the award agreement substantively failed to comply with numerous elements of the
joinder provision, including the timing under which the joinders must be
completed as well as the requirements that the recipient acknowledge that they had
ample time to read and consult with counsel on the Stockholders’ Agreement.
Director Defendants’ failure to satisfy the joinder provision was more than a mere
technical deficiency; it was a failure to substantially perform the required actions.
Thus, Director Defendants’ case law is unavailing.
Moreover, “it is not the job of a court to relieve sophisticated parties of the
burdens of contracts they wish they had drafted differently but in fact did not.
Rather, it is the court’s job to enforce the clear terms of contract.” 91 And “[n]either
89 Defs.’ Answering Br. 47-50. 90 Dittrick v. Chalfant, 948 A.2d 400, 410 n.30 (Del. Ch. Apr. 4, 2007) (quoting Jefferson Chem. Co. v. Mobay Chem. Co., 267 A.2d 635, 636 (Del. Ch. 1970)). 91 DeLucca v. KKat Mgmt., L.L.C., 2006 WL 224058, at *2 (Del. Ch. Jan. 23, 2006). 22 logic nor equity compel the validation of a legally void act.” 92 The terms of the
Stockholders’ Agreement are clear here and dictate finding the issuance void ab
initio.
Finally, significant evidence suggests that Director Defendants acted with
entrenchment motives when adopting the 2016 Plan. These actions appear to have
extended to gamesmanship in front of the Court.93 Director Defendants ask the
Court to find the restricted stock issued under the 2016 Plan voidable so that it may
be argued in the Highland action (or another yet-to-be-filed action) that the Roma
board ratified the challenged issuances. 94 But parties “seeking the aid of equity’s
extraordinary remedies do so subject to the maxim that he who seeks equity must
do equity.” 95 Thus, I find the outcome of this litigation to be equitable under the
facts of this case.
92 STAAR Surgical, 588 A.2d at 1137 (citing Ala. By-Prods. Corp. v. Neal, 588 A.2d 255, 258 (Del. 1991)). 93 Pre-Trial Letter Op. 12 (noting that Director Defendants’ waited until the eve of trial before refusing to defend their position in order to moot the case, only to have Wilson’s employer file a new suit seeking to vote the stock that Director Defendants’ refused to defend as validly issued). 94 Oral Arg. Tr. 140. 95 Nevins v. Bryan, 885 A.2d 233, 248 (Del. Ch. 2005) (quoting Richard Paul, Inc. v. Union Improvement Co., 91 A.2d 49, 54 (Del. Ch. 1952)).
23 III. CONCLUSION For the foregoing reasons, I find the stock issued under the 2016 Plan to be
void; thus, that stock cannot be considered in a vote to determine the composition
of the Roma board.
IT IS SO ORDERED.