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.
The court also denied the defendant corporation and directors’ motion to dismiss the plaintiff stockholder’s claim for a declaration that the board improperly approved issuance of warrants in connection with a bridge financing transaction. The court found it reasonably conceivable that the board failed to set the exercise price as required by Del. Code Ann. tit. 8, section 157 because board minutes produced in response to the plaintiff’s pre-litigation books-and-records demand did not reflect approval of the exercise price stated on the warrants. The court also rejected the defendants’ argument that the plaintiff should be held to an alleged concession to the contrary in an earlier version of his complaint:
Plaintiff seeks a declaration that the 2016 Bridge Financing Warrants violated [Del. Code Ann. tit. 8, section 157] because the Board failed to determine the exercise price for the warrants at the time of the stock issuance.
[Del. Code Ann. tit. 8, section 157(b)] provides, as excised by Plaintiff to highlight the language on which Plaintiff relies, that
[t]he terms upon which . . . and the consideration . . . for which any such shares may be acquired from the corporation upon the exercise of any such right or option . . . in every case, shall be set forth or incorporated by reference in the instrument or instruments evidencing such rights or options.
Plaintiff does not plead a straightforward violation of the above-quoted language; rather, Plaintiff's theory is more circuitous. Plaintiff notes that the Bridge Financing Warrants state that the exercise price shall be the “fair market value of the Common Stock at the time of issuance of the Warrant, as determined by Health Fidelity’s Board of Directors.” Plaintiff alleges that the Board failed to make this determination.
As support for the allegation that the Board failed to make such a determination, Plaintiff points to a lack of evidence. Specifically, Plaintiff requested Board materials concerning this issue as part of his pre-suit investigation pursuant to [Del. Code Ann. tit. 8, section 220]. According to Plaintiff, the materials did not reflect any Board determination of the fair market value of the common stock at the time of the issuance of the Warrant. At a minimum, corporate board minutes record actions taken by the Board. Thus, the fact that the Board minutes did not indicate any determination makes it reasonably conceivable that the Board did not make a recommendation and thus failed to comply with Section 157(b).
In response to this argument, Defendants dispute the facts, arguing that the Board relied on its most recent Section 409A valuation to establish the fair market value for stock issued in connection with the Bridge Financing Warrants. [Defendant corporation] contends that Plaintiff conceded this point in his original complaint but then “removed this concession from his Amended Complaint.” Plaintiff should, according to Defendants, “be held to the concession of his original complaint.” But the latest complaint – the Amended Complaint – superseded the original complaint and rendered it of no legal effect. At this pleading stage, the court must accept the allegations in the Amended Complaint as true. Accepting those allegations as true, Plaintiff has not conceded facts regarding the fair market value for stock issued in connection with the Bridge Financing Warrants, as [defendant corporation] contends he does.
The court held in abeyance the defendant corporation and directors’ motion to dismiss the plaintiff stockholder’s claim for a declaration that an amendment of the corporation’s charter to expand the board was void. The court found it reasonably conceivable that the board did not declare the amendment advisable as required by Del. Code Ann. tit. 8, section 242 because board minutes that the plaintiff obtained through a books-and-records demand did not reflect such a resolution, but permitted defendants to submit supplementary briefing on their argument that plaintiff waived his right to challenge the amendment when he approved it by written consent:
Plaintiff requests a declaration that the August 2017 Certificate of Incorporation Amendment, which purported to expand the Board . . . , is void ab initio under [Del. Code Ann. tit. 8, section 242] because the amendment was not recommended and approved by the Board.
Section 242 provides that, in order to amend a certificate of incorporation, a board of directors must “adopt a resolution setting forth the amendment proposed, [and] declar[e] its advisability.” The board must then submit that resolution to the company’s shareholders for approval. Plaintiff alleges that the Board failed to adopt a resolution declaring the amendment advisable.
As support for the allegation that the Board failed to adopt a resolution, Plaintiff . . . points to a lack of evidence. The Board minutes, which Plaintiff inspected prior to filing this action, do not reflect any resolution declaring the amendment advisable. This . . . is the sort of thing that would normally be captured by Board minutes. The fact that the Board minutes did not indicate any resolution makes it reasonably conceivable that the Board did not adopt a resolution and thus failed to comply with Section 242.
Defendants respond that Plaintiff waived any right to challenge the amendment because he executed a stockholder consent approving it. This is an interesting argument, which Defendants fail to support with any case law or other authority. Defendants are granted leave to submit supplemental briefing on this point should they choose to pursue this argument, and the court will hold the motion . . . in abeyance pending resolution of such briefing.
Takeaways
- At a minimum, Delaware companies should have board meeting minutes, which record actions taken by the board of directors, to appropriately reflect the directors’ decision-making process and ensure the board has complied with statutory requirements.
- To assure that a company’s board of directors gets the benefit of Delaware law’s business judgment rule, corporate minutes must be comprehensive, definitive, and inclusive of all the materials, at least by reference, that the board considered prior to making its decision.
- Board meeting minutes should strike a careful balance between being too specific, where the minutes are verbatim transcripts of the meeting and are tedious both to record and to read – and too vague, such that there is only a bare-bones recordation of motions and resolutions. Minutes should be accurate and specific enough that anyone reading them would be able to understand exactly what happened, even if they were not present at the meeting.
- Board meeting minutes are an essential part of corporate governance, and making sure they are accurate and comprehensible is crucial. Not only should board meeting minutes be carefully taken, to accurately summarize what happened at the meeting and what was agreed on, but also the minutes should be carefully reviewed to ensure there are no material omissions.
Client Alert 2021-034
