Delaware Business Litigation Report

Delaware Court of Chancery Declares Board Action Void For Equitable Reasons, Finding Corporate Directors Deceived Other Board Members into Attending Board Meeting

Palisades Growth Capital II, L.P. v. Bäcker, C.A. No. 2019-0931-JRS (Del. Ch. Mar. 26, 2020).

In keeping with longstanding Delaware precedent, the Delaware Court of Chancery recently held that it may void an action by a board of directors – even where the action is not otherwise in violation of the corporate charter or the Delaware General Corporation Law (“DGCL”) – when equity so requires.

Defendant Alex Bäcker (“Bäcker”) was the co-founder and former CEO of the nominal defendant corporation, QLess, Inc., as well as one of its five directors. Following internal employee reports that his leadership was threatening the stability of the corporation, however, the board voted to remove him as the CEO. After initially protesting the decision, Bäcker appeared to approve of the replacement CEO, and likewise appeared to agree with the board’s plans to create a sixth board seat for the newly appointed CEO to occupy. The board therefore scheduled a meeting in November 2019, at which the new CEO board seat would be created and filled by the new CEO. 

Prior to the board meeting, all five board seats were occupied: Bäcker and his father held two seats; Palisades Growth Capital (“Palisades”), the majority holder of Series A shares, held one seat; the non-party majority holder of the Series A-1 shares held a fourth seat; and an independent director held a fifth seat. Shortly before the board meeting, however, the non-party preferred shareholder and the independent director both unexpectedly resigned their respective seats, leaving only three directors on the board in advance of the meeting. Believing that he held a 2-1 majority, Bäcker allegedly “seized the moment by scheming with [his co-defendant director] (and counsel) to take control of the Company in advance of the November 15 meeting.” At the meeting, the defendants prevented the expected resolutions from being adopted. The defendants instead, with their two to one majority, voted to terminate the newly appointed CEO, to reappoint Bäcker as the CEO (allowing him to occupy the newly-created CEO director seat), and to appoint a new director to fill Bäcker’s newly-vacant director seat.

In response, Palisades brought a Section 225 action against Bäcker and his father, seeking a declaratory judgment that the defendants’ actions during the meeting were invalid for a multitude of reasons. Palisades’ availing argument was that the defendants’ actions were inequitable, and therefore invalid, because the defendants lured the Palisades director to the meeting under the false pretense of planning to vote to appoint the new CEO as a sixth director and to appoint a replacement for the newly-vacant preferred shareholder seat.

While the Court found that the defendants did not violate any specific provisions of the corporate charter, bylaws, or the DGCL, the Court nevertheless noted “[i]t is bedrock doctrine that this Court will not sanction inequitable action by corporate fiduciaries simply because the act is legally authorized.” The Court clarified that, before equity may be invoked in a case such as this, the defendants (acting as fiduciaries) must be shown to have actually affirmatively deceived the plaintiffs. Here, the defendants represented their intentions to vote the new CEO into a director seat, and even suggested that they believed the new CEO already effectively occupied a director position. In light of this affirmative deception, the Court rendered a decision voiding “all actions taken at the contested November 15 meeting.”

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