Relevant case background
Simple Global, Inc. (the Company) is a logistics business for e-commerce that was formed by Darius Banasik (Banasik) and co-founder Jongik Justin Kim (Justin). The Company was incorporated as a Delaware corporation in 2012. On the date of its incorporation, and at all times thereafter, the Company had five million authorized shares of common stock.
Banasik and Justin were the Company’s original directors. At the Company’s first board meeting, Banasik was elected as president, and Justin as secretary, chief financial officer, and treasurer. The original board meeting minutes state that the board authorized the issuance of 4,280,500 shares to Banasik and 719,500 shares to Justin. Based upon that issuance, Banasik owned 85.61 percent of the Company’s equity and Justin owned 14.39 percent of the equity.
There is no evidence that any stock certificates were ever issued, and the Company did not maintain a stock ledger. The original board minutes contained a signature line for Justin as secretary, but it was unsigned; there was a separate signature page attached to those minutes containing the signatures of Banasik and Justin as having accepted their officer appointments. The original stockholder meeting minutes, signed by Justin, depict the same shareholdings and ownership percentages as the original board meeting minutes.
In 2013, Banasik and Justin’s brother (James) entered into a personal loan contract (the PLC) under which Banasik borrowed $50,000 interest free, and James had the right to request approximately 830,000 shares of Banasik’s stock as repayment. The PLC included representations about the Company’s then current equity ownership and ownership that would result from repayment of the loan with stock that were inconsistent with the equity ownership reported in the Company’s 2012 and 2013 minutes ‒ stating that two million shares were authorized and that Banasik owned 1,219,280 shares, with a stated ownership percentage of 61 percent.
According to the minutes of the Company’s annual stockholder meeting one year later in March 2014, James owned approximately 3.3 million shares (66.09 percent), Banasik owned 975,911 shares (19.52 percent), and Justin owned 719,580 shares (14.39 percent). The minutes indicate that Banasik was present at the meeting, and state that 3,304,509 shares of Banasik’s stock were transferred to James by converting the PLC loan amount of $50,000 to shares in the Company. Banasik denied that any board or stockholder meeting occurred on that date in March 2014 (but the documentary evidence, including emails from Banasik, suggest otherwise).
At a special meeting of stockholders in June 2018, Banasik was removed as an officer of the Company, and at an annual stockholder meeting in July 2018, two stockholders voted to remove Banasik from his role as a director of the Company. Banasik did not contest his removal as an officer, and he did not contest his removal as a director until filing his counterclaim in the lawsuit at hand.
On November 7, 2018, the Company filed suit against Banasik for breach of fiduciary duties, conversion, and waste of corporate assets. On April 1, 2019, Banasik filed a counterclaim challenging his removal under Section 225 of the Delaware General Corporation Law (DGCL) and third-party claims against James and Justin. The Company moved to dismiss Banasik’s counterclaim and third-party claims. The Court granted the motion as to the third-party claims, and the court severed the Section 225 claim from the rest of the case and conducted the trial on that claim.
The Court of Chancery’s decision
At the hearing on the Section 225 claim, Banasik argued that his removal as a director was invalid because he owned a majority of the Company’s outstanding stock, relying on an argument that any purported stock transfer to James under the PLC was statutorily void. Among other things, the Company argued that Banasik’s challenge to his stock transfer was barred by the doctrine of acquiescence and that his challenge to his removal was barred by laches.
Thus, the narrow issue to be decided on the Section 225 claim was whether Banasik was validly removed as a director of the Company at the special meeting of stockholders in July 2018. To decide that issue, the court had to determine whether the two stockholders that voted to remove Banasik owned a majority of the Company’s outstanding common stock on that date.
Under Delaware law, a director may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. To determine stock ownership, the first, and frequently the only, source to consult is the stock ledger. The court noted that the DGCL “implies an affirmative duty to maintain a stock ledger” to which the court may look in determining stockholders entitled to vote or act by written consent. In this case, however, the Company had no stock ledger and had issued no stock certificates. Thus, the court explained that when the stock ledger is blank or non-existent, the court has the power to consider other evidence to ascertain and establish shareholder status.
The court noted that there was no dispute that the Company had five million authorized shares of common stock. Based on the documentary record, the court found that at least as of August 31, 2018, James, Justin, and Banasik were the only stockholders of the Company. And the court found the documentary record consistent with Banasik’s transfer of a majority of his stock to James in repayment of the $50,000 loan described in the March 2014 annual meeting minutes. After the transfer of shares from Banasik to James under the PLC, the court determined Banasik owned only 19.52 percent of the Company’s common stock. Despite the Company’s lack of formal record-keeping and compliance with Delaware law on certain matters, the court held that under any outcome James and Justin owned a majority of the Company’s outstanding shares entitled to in an election of directors on that date and validly removed Banasik as a director.
Moreover, the court concluded that Banasik’s claims were barred by the equitable doctrines of acquiescence and laches.
First, the court concluded that Banasik was fully aware of the transfer of his stock to James on March 21, 2014, and that the Company acknowledged the transfer. In particular, Banasik did not challenge the transfer for over five years (i.e., until after the lawsuit had been filed against him), and in that time, Banasik held himself out as a minority stockholder, including when he swore under penalty of perjury that he owned 19.52 percent of the Company’s stock when he signed the Company’s 2015 tax return. He also disclaimed being a majority stockholder to a bank so that he could avoid signing a personal guarantee on a loan application. His conduct in this action was inconsistent with his prior acceptance of the stock transfer. Therefore, the court held that Banasik acquiesced to the Company’s recognition that he had transferred 3,304,509 of his shares to James under the PLC, and his challenge to that share transfer was barred by the doctrine of acquiescence.
The court also held that Banasik’s challenge to his removal as a director was barred by the doctrine of laches. In assessing a defense of laches, the court normally applies the applicable statute of limitations by analogy. If the plaintiff asserts its claim after the expiration of the analogous statute of limitations, and such limitations period has not been tolled, the delay is presumptively unreasonable. The doctrine of laches also recognizes, however, that a party seeking an equitable remedy may need to assert its rights “with greater alacrity than is required by the analogous statute of limitations to preserve entitlement to relief.”
In this regard, the court noted that in the Section 225 context, even a delay of six weeks has been held sufficient to bar a claim under the doctrine of laches. Banasik did not assert his Section 225 claim until eight months after his removal, and he did not even seek restoration of his position as director. Rather, it appeared Banasik’s challenge to his removal was to undermine the authority of James and Justin’s ability to assert claims against him.
The court also noted that the Company established prejudice resulting from Banasik’s unreasonable delay. In the wake of his removal as a director, the Company obtained desperately needed financing through a subscription offer to its stockholders, premised on the notion that Banasik was a minority stockholder and was no longer a director. At this late date, the court concluded that a recognition that Banasik is a controlling stockholder would threaten to “throw [the Company] into chaos.” Moreover, the Company was prejudiced because had Banasik complained of his removal sooner, the Company could have sought to file its own Section 225 action to confirm his removal.
Finally, the court concluded that Banasik’s challenge to the transfer of his stock under the PLC ‒ the linchpin of his case ‒ was also barred by laches. The court explained that Banasik’s challenge to the PLC sounded in contract, and the analogous statute of limitations in Delaware is within three years from the date that the cause of action accrued. Because the transfer of shares under the PLC occurred on March 21, 2014, the court noted that Banasik was required to assert his challenge to the transfer of shares under the PLC no later than March 21, 2017. Banasik did not assert his challenge to the share transfer under the PLC until the filing of his counterclaims on April 1, 2019. Accordingly, the court held that Banasik’s delay was presumptively unreasonable and that prejudice is presumed.
Key takeaways
- A Delaware corporation’s stock ledger is the primary record of stock ownership, but the court may rely on other evidence of stockholder status when a stock ledger is unavailable, such as the parties’ documents, communications, and testimony concerning ownership.
- A director or officer who disputes their removal may be subject to equitable defenses, such as laches, if they do not proceed promptly to contest it.
- In Delaware, a delay as short as six weeks has been held to bar a director’s Section 225 claim.
- In assessing a defense of laches, the court normally applies the applicable statute of limitations by analogy (absent any tolling of the limitations period), and if the plaintiff asserts its claim after the expiration of the analogous statute of limitations, the delay is presumptively unreasonable.
Client Alert 2021-236
