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Section 225 Action Filed Eight Months After Removal Barred by Laches

Simple Global, Inc. v. Banasik, C.A. No. 2018-0809-PAF (Del. Ch. June 24, 2021)
Under Delaware law, a director or officer who disputes her removal as such may be subject to equitable defenses if she does not proceed promptly to contest it.  Here, plaintiff Simple Global was owned by three stockholders, one of which, defendant Banasik, was removed as a director and officer by the others in June 2018.  In November 2018, Simple Global sued Banasik for breach of fiduciary duty, to which Banasik responded in April 2019 by, among other things, filing a counterclaim under Section 225 of the DGCL asserting he was not properly removed as a director. 

Although the trial record concerning the capital structure was insufficient to show what number of shares were validly issued and outstanding, the parties’ documents, communications, and testimony concerning percentage ownership – including Banasik’s own statements under penalty of perjury in documents provided to the IRS and to solicit bank financing – showed that Banasik had transferred part of his stock ownership interest to the other two stockholders in 2014, who thereafter together held a majority. Accordingly, they had the voting power to remove Banasik as a director. The Court additionally concluded that equitable principles would have barred Banasik’s claims. Banasik acquiesced in that transfer, raising no challenges until his counterclaim in April of 2019, and repeatedly holding himself out as a minority stockholder in the interim. 

The Court further held that laches barred his Section 225 claim. Noting that a delay as short as six weeks has been held to bar a Section 225 claim, the Court indicated that the reasons for the delay were more critical than the amount of time that had elapsed. Here, Banasik testified that immediately after the removal, he “walked away from what was essentially a company that wasn’t worth anything.” It was only after the fiduciary complaint was filed against him that he brought the Section 225 claim, which the Court found was asserted only for tactical reasons, including to undermine the company’s authority to bring suit against him. Because the Company had been prejudiced by this delay – among other things, it had conducted an interim financing premised on the notion that Banasik was a minority stockholder – his Section 225 action also was barred by laches.

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