Reed Smith Client Alerts

In Riskin v. Burns, No. 019-0570-KSJM, (Del. Ch. Dec. 31, 2020), the Court of Chancery recently emphasized the importance of accurate and comprehensive board meeting minutes, holding it is reasonably conceivable that a board did not take statutorily required actions in connection with issuing warrants and amending a corporate charter, where the company’s board meeting minutes, which were produced in response to a stockholder plaintiff’s previous books-and-records demand, did not reflect those actions.

In Riskin v. Burns, the plaintiff – the founder, former CEO, and director, and a minority stockholder of Health Fidelity – brought claims against Health Fidelity’s controller (UPMC) and related entities, another Health Fidelity minority stockholder (Charter) and related entities, and Health Fidelity officers and directors, challenging transactions by which UPMC obtained control over the company and then allegedly engaged in unfair self-dealing. Among other claims, the plaintiff filed three statutory claims seeking declarations that: (i) defendants breached Del. Code Ann. tit. 8, section 228(e) by failing to give plaintiff prompt notice after other stockholders approved two transactions by written consent (a June 2016 Bridge Financing involving issuance of warrants and convertible notes to UPMC and a 2017 Series B Financing in which UPMC again provided funding on allegedly unfair terms); (ii) the board violated Del. Code Ann. tit. 8, section 157 by failing to determine the exercise price of warrants issued as part of a 2016 bridge financing transaction; and (iii) a purported charter amendment, expanding the size of Health Fidelity’s board, was void because the board did not adopt a resolution declaring the amendment advisable.

The plaintiff had received notice of the June 2016 Bridge Financing and the 2017 Series B Financing five months and eight months after those transactions were approved, respectively. In support of the remaining alleged statutory violations, plaintiff pointed to the absence from documents he received in response to a books-and-records demand of minutes reflecting that the board took the required actions. In connection with the section 157 claim, the defendants argued that the plaintiff conceded in his original complaint, prior to amendment, that the board did determine the warrant exercise price. In connection with the charter amendment, the defendants argued that the plaintiff waived any challenge by executing a written consent to the amendment.

The court’s decision

The Court of Chancery denied the defendants’ motion to dismiss in part, finding it reasonably conceivable that defendants violated sections 228(e) and 157, but permitting defendants to provide supplementary briefing on their waiver argument. The court denied the defendant corporation’s motion to dismiss the plaintiff stockholder’s claim for a declaration that the defendant breached Del. Code Ann. tit. 8, section 228(e) by failing to give “prompt” notice of two transactions approved by consent of less than a majority of stockholders, observing that prompt notice is not defined in the relevant statute and that assessing promptness is context specific. The court did, however, find it reasonably conceivable that alleged delays of five months and eight months violated the statute when compared to delays in two precedent rulings. The first ruling, Di Loreto v. Tiber Holding Corp., C.A. No. 16564-CC, memo. op. (Del. Ch. May 12, 1999; rev. June 29, 1999), found notice after five months was not prompt where the recipient was in litigation and settlement discussions related to the approved transaction, and the second ruling, Anurag Mehta v. Mobile Posse, Inc., C.A. No. 2018-0355-KSJM, memo. op. (Del. Ch. May 8, 2019), found notice after 17 days was not prompt where notice of the approved transaction within 14 days was required by another statute: 

Plaintiff seeks declaratory judgment that [defendant corporation] failed to comply with the prompt notice requirement of [Del. Code Ann. tit. 8, section 228(e)] in connection with the June 2016 Bridge Financing and 2017 Series B Financing stockholder consents.

Section 228(e) of the [Delaware General Corporation Law (“DGCL”)] requires that when corporate action is taken “without a meeting by less than unanimous consent,” the stockholders who did not consent must receive “[p]rompt notice.” “Prompt notice to the minority stockholders is of critical importance.” That is because “Section 228 ensures some level of transparency for non-consenting stockholders” and allows them to “stay abreast of corporate decision-making and maintain the accountability of boards of directors and controlling stockholders.”

“Prompt” notice under Section 228(e) is not defined by statute. There is probably an outer limit of delay that would presumptively violate Section 228(e)’s prompt notice requirement. For example, it would be difficult to conclude that notice sent a few years after the stockholder written consent was issued is sufficiently prompt. Short of that outer limit, what constitutes prompt notice for Section 228(e) is a context-specific inquiry, as the two cases that have addressed this requirement illustrated.

In [Di Loreto], the court held that a five-month delay was not prompt where the stockholder who should have received notice under Section 228(e) was in litigation and settlement communications concerning the transaction approved by stockholder consent.

In [Anurag Mehta], the court held that a seventeen-day delay was not prompt where the transaction approved by written consent itself triggered a fourteen-day notice obligation under [Del. Code Ann. tit. 8, section 262].

In this case, Plaintiff was not provided notice of the June 30, 2016 stockholder consent authorizing the June 2016 Bridge Financing until December 7, 2016 – approximately five months later. And Plaintiff was not provided notice of the December 21, 2017 Series B Financing stockholder consent until August 17, 2018 – approximately eight months later.

It is reasonably conceivable that delays of this length violated Section 228(e)’s prompt notice requirement, and Plaintiff is entitled to discovery concerning the circumstances surrounding the delay.