Reed Smith Client Alerts

The Delaware Court of Chancery recently held, in Applied Energetics, Inc. v. George Farley, 2020 WL 4432271 (Del. Ch. Aug. 3, 2020), that a former director’s action by unanimous consent and without a quorum was invalid, but explained that the action constituted a failure of authorization, opposed to a lack of corporate power, and therefore could be validated as a defective corporate act under Sections 204 and 205 of the Delaware General Corporation Law.

Authors: Brian M. Rostocki Benjamin P. Chapple Alexandria P. Murphy

Background

Applied Energetics, Inc. (the Company) is a Delaware corporation and was founded in response to the terrorist attacks on 9/11. The Company markets, develops, and manufactures products for the defense and security industry.1 Although the Company experienced initial success and received federal funding, it later suffered from failures to meet government product specifications and subsequent funding cuts.2 Following the resignation of five of the Company’s six directors, George Farley became the Company’s sole director in 2016.3  Farley had previously been appointed as principal executive officer and principal financial officer.4 A group of insurgent shareholders eventually removed Farley as a director in 2018, at which time he also resigned from his role as an officer.5

The Company asserted claims against Farley and AnneMarieCo, LLC, an entity owned by Farley’s wife and children, for breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, conversion, fraudulent transfer, and seeking cancellation of Farley’s previously issued shares of common stock.6 Specifically, the Company claimed that Farley improperly issued himself 25 million shares of common stock and granted himself an annual salary of $150,000.7  The Company sought partial summary judgment on its claim that the actions Farley took in his capacity as the Company’s sole director from February 10, 2016, through his removal on March 9, 2018 – including Farley’s issuance of shares to himself and his annual compensation – were invalid.8  Among other claims, Farley brought a counterclaim to validate his actions under Section 205 of the Delaware General Corporation Law (DGCL).9