The Delaware Court of Chancery is frequently called on to resolve disputes between 50-50 owners of a business. In the latest iteration of such a dispute, Millien v. Popescu, C.A. 8670-VCN (Del Ch. Jan. 31, 2014), the court had to resolve whether two stockholders did in fact each own a 50 percent voting interest in the corporation. Resolution of this issue primarily depended upon interpretation of an email from 2009.
Petitioner Kevin Millien and respondent George Popescu were the directors of Boston Technologies Inc. (BT), a Delaware corporation with headquarters in Boston. In 2007, Popescu formed Boston Technologies LLC, the predecessor to BT, to hold intellectual property rights for brokerage software Popescu was developing. In April 2008, Boston Technologies was converted into BT.
Popescu and Millien met in late 2008 or early 2009. Millien worked for a company that became BT's largest customer and Millien and Popescu interacted regularly. In the summer of 2009, Millien and Popescu discussed Millien joining BT. Popescu initially proposed Millien receiving a 25 to 33 percent interest in BT, and Millien countered with a proposal that they each own 50 percent. Although open to Millien receiving a larger equity interest in BT, Popescu expressly told Millien that he had to have exclusive control.
On Aug. 3, 2009, Millien sent Popescu an email with his understanding of the final terms of the agreement he and Popescu had reached. The email provided, inter alia, that they would create a new corporation or partnership and each own 50 percent of that entity. This entity would become a 95 percent shareholder of BT and Popescu would retain a 1 percent share, making him the majority shareholder of BT. Popescu responded to this email and confirmed the terms were correct. Millien began working for BT on Aug. 4, 2009.
In April 2010, Popescu decided BT stock should be issued to Millien before BT applied for a line of credit with a bank. On the bank's recommendation, BT retained the law firm of Gesmer Updegrove to draft the appropriate corporate documents. Millien and Popescu did not provide the Aug. 3, 2009, email to Gesmer.
In an April 15, 2010, email, Popescu described the intended capital structure of BT. This description included a statement that Popescu would have the "absolute majority to take decisions in BT if need be." Millien and Popescu executed documents prepared by Gesmer around April 27, 2010. The Gesmer documents resulted in Millien and Popescu each owning 63 million voting shares of BT stock. Millien and Popescu planned to proceed with a holding company structure for BT, but did not take immediate steps to put that structure in place. Following execution of these documents, Popescu informed another BT executive orally and by email that he owned 51 percent of BT's voting stock and Millien owned the remaining 49 percent. Millien was copied on one of these emails and did not contradict it. In other documents, including tax returns and capitalization tables submitted to banks, Millien and Popescu were listed as equal owners of BT stock.
The parties' relationship began to sour in 2012 as Popescu became increasingly displeased with Millien's job performance. On June 6, 2013, Popescu informed Millien that he would no longer be an employee of BT. After unsuccessful discussions to separate Millien from BT, Popescu terminated Millien as an employee June 21, 2013. Millien then instituted litigation to appoint a custodian to resolve a deadlock between BT's directors pursuant to 8 Del. C. § 226. On July 3, 2013, Popescu delivered a unanimous written consent to Millien proposing that the BT board of directors would implement the agreement set forth in the Aug. 3, 2009, email by authorizing the issuance of 1.26 million shares of BT voting stock to Popescu. This issuance would result in Popescu owning approximately 50.5 percent of the issued BT voting stock and Millien owning approximately 49.5 percent of the issued BT voting stock. Millien refused to execute the written consent. In the litigation, Popescu sought specific performance of the Aug. 3, 2009, email based on Millien's alleged breach of that email by refusing to execute the written consent.
Recognizing that whether there was a deadlock supporting appointment of a custodian under 8 Del. C. § 226 depended upon whether Millien and Popescu had equal interests in the voting stock of BT, the court focused on Popescu's claim that he was entitled to specific performance of the Aug. 3, 2009, email. A threshold issue was the applicable law. Millien argued that Delaware law, which would require Popescu to prove he was entitled to specific performance by clear and convincing evidence, governed pursuant to the internal affairs doctrine, while Popescu argued that Massachusetts law, which would require Popescu to prove he was entitled to specific performance by a preponderance of the evidence, applied. Under the internal affairs doctrine, the law of state of incorporation governs matters relating to internal corporate affairs. The court concluded that the Aug. 3, 2009, email included terms that implicated the internal affairs doctrine and other terms that did not. According to the court, the email also raised issues concerning the limits of the internal affairs doctrine. In a footnote, the court noted a possible tension between the Delaware Supreme Court's decision in McDermott v. Lewis, 531 A.2d 206 (Del. 1987), stating that the internal affairs doctrine applied to relationships among the corporation and its current officers, directors and shareholders, and more recent decisions that did not include the term "current." The court indicated that reference to current officers, directors and shareholders might mean that the internal affairs doctrine would not apply to a dispute regarding how somebody became a stockholder. The court also recognized, however, that later decisions and authorities contained broader language, and therefore the internal affairs doctrine could apply to the present dispute.
Ultimately, the court did not decide whether the internal affairs doctrine should govern the terms of the Aug. 3, 2009, email. Instead, the court chose to analyze Popescu's specific-performance claim under the law of the jurisdiction with the higher evidentiary standard (Delaware), because if Popescu could satisfy that standard he could also satisfy the lower evidentiary standard (Massachusetts). To obtain specific performance of the Aug. 3, 2009, email, Popescu had to show, by clear and convincing evidence, that the email reflected the essential terms of the parties' agreement, there was no adequate remedy at law and enforcement of the requested relief was sufficiently precise to be practicable.
The court concluded that the email reflected the essential terms of the parties' agreement—Millien would work for BT in exchange for a salary and BT stock, with Popescu having a majority of the voting power. In the email, Millien stated he was glad he and Popescu had reached agreement and described the terms as "final." As far as internal documents and documents provided to third parties showing Millien and Popescu as equal stockholders, those documents accurately reflected BT's current capital structure but did not displace the parties' agreement that Popescu would have majority voting control. The court also found there was no adequate remedy at law because Popescu's lack of voting control could not be compensated by damages. Finally, the court rejected Millien's argument that an integration clause in the stock purchase agreement pursuant to which Millien purchased BT stock from Popescu superseded the Aug. 3, 2009, email. The integration clause applied to the subject matter of the stock purchase agreement, which the court viewed as being Millien's purchase of BT stock, not BT's capitalization.
In crafting a remedy, the court did not simply find that Popescu was entitled to 1 percent of BT's stock as set forth in the email. The value of BT had increased since Aug. 3, 2009, and the court did not want Popescu to receive more stock than was necessary to give him voting control. Accordingly, the court decided the most equitable remedy would be for Millien to authorize the issuance of one additional share of BT voting stock to Popescu, which would make Popescu the majority holder of BT voting stock and moot Millien's application for a custodian to resolve a deadlock.
This case offers a useful overview of specific performance under Delaware law. While an email would not seem to be the ideal way to agree on a company's capital structure, the court was willing to grant specific performance of an email setting forth the final terms of the parties' agreement concerning voting control of the company. The result could have been different if the record was less clear that the email reflected the final terms of the parties' discussions concerning voting control. It will also be interesting to see if the court's footnote discussion of the internal affairs doctrine leads to any attempts to limit application of the internal affairs doctrine to disputes involving a corporation and its current officers, directors and shareholders.