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ABA FLASH REPORT-Delaware Supreme Court Affirms Court of Chancery’s Lack of Damages Award as an Exercise of Remedial Discretion in OptimisCorp v. Waite

ABA FLASH REPORT-Delaware Supreme Court Affirms Court of Chancery’s Lack of Damages Award as an Exercise of Remedial Discretion in OptimisCorp v. Waite

May 24, 2016 by Maylynn

May 24th, 2016 - Posted in In The News

The following is a reposting of the Exercise of Remedial Discretion in OptimisCorp v. Waite, written by Brett M. Amron, Development Chair of the D&O Liability Committee for the Business Law section of the ABA.

The Delaware Supreme Court recently issued its ruling in OptimisCorp v. Waite, C.A. No. 523, 2015 (Del. 2016). The opinion is noteworthy in that it provides practical insight for those who need to know the rights and obligations of directors who are appointed by written agreement as a condition of an investment in a company.

In OptimisCorp, the plaintiff corporation and its CEO, Alan Morelli, sought to recover $50 million in damages and other equitable relief.  The plaintiffs alleged that the defendant directors had engaged in a conspiracy by intentionally failing to notify Mr. Morelli that an important amendment to the stockholders agreement, which would strip Mr. Morelli of his power to appoint a majority of the board, would be on the agenda at an upcoming special meeting of the board.  When the meeting was held on October 20, 2012, the board voted in favor of the amendment, which ultimately resulted in Mr. Morelli’s termination as CEO of the company.

Mr. Morelli subsequently filed a separate action pursuant to Section 225 of the Delaware General Corporation Law, which provides that upon application of any stockholder or director, or any officer whose title to office is contested, the Delaware Court of Chancery may hear and determine the validity of any election, appointment, removal or resignation of any director of any corporation and the right of any person to hold or continue to hold such office. The Court ruled expeditiously and sided with Mr. Morelli, invalidating his removal and the amendment to the stockholders agreement.

The Court of Chancery concluded that that the plaintiffs were not entitled to any relief and dismissed all claims with prejudice. The Court of Chancery further ordered the parties to bear their own costs and declined to award damages to either side. The Court’s decision was based on, among other things, its conclusion that the plaintiffs had engaged in misconduct that had threatened the integrity of the entire proceeding.

The Delaware Supreme Court affirmed the lower court’s decision not to award damages. The Supreme Court, however, was explicit in stating that its affirmance was based the fact that, because the amendment to the stockholders agreement was promptly invalidated as a result of Mr. Morelli’s Section 225 action, the plaintiffs failed to show that they had suffered any additional non-speculative harm.

Despite the affirmance, the Supreme Court disavowed the Chancery Court’s labelling of Mr. Morelli’s claim as resting on a “super-director” theory, in which directors who have large stockholdings and the accompanying right to elect directors have “special rights” as super-directors.  In the Supreme Court’s view, such a tendentious description obscured the core issue, which was whether all directors are entitled to fair and non-misleading notice of the agenda for a special meeting. To that end, the Supreme Court stated: “Be it a director with a controlling interest or a director with only a handful of shares, we are uncomfortable embracing the idea that cliques of the board may confer and sandbag a fellow director.”  The Supreme Court went on to state, “it has long been the policy of our law to value the collaboration that comes when the entire board deliberates on corporate action and when all directors are fairly accorded material information.”

The following is a reposting of the Exercise of Remedial Discretion in OptimisCorp v. Waite, written by Brett M. Amron, Development Chair of the D&O Liability Committee for the Business Law section of the ABA.

The Delaware Supreme Court recently issued its ruling in OptimisCorp v. Waite, C.A. No. 523, 2015 (Del. 2016). The opinion is noteworthy in that it provides practical insight for those who need to know the rights and obligations of directors who are appointed by written agreement as a condition of an investment in a company.

In OptimisCorp, the plaintiff corporation and its CEO, Alan Morelli, sought to recover $50 million in damages and other equitable relief.  The plaintiffs alleged that the defendant directors had engaged in a conspiracy by intentionally failing to notify Mr. Morelli that an important amendment to the stockholders agreement, which would strip Mr. Morelli of his power to appoint a majority of the board, would be on the agenda at an upcoming special meeting of the board.  When the meeting was held on October 20, 2012, the board voted in favor of the amendment, which ultimately resulted in Mr. Morelli’s termination as CEO of the company.

Mr. Morelli subsequently filed a separate action pursuant to Section 225 of the Delaware General Corporation Law, which provides that upon application of any stockholder or director, or any officer whose title to office is contested, the Delaware Court of Chancery may hear and determine the validity of any election, appointment, removal or resignation of any director of any corporation and the right of any person to hold or continue to hold such office. The Court ruled expeditiously and sided with Mr. Morelli, invalidating his removal and the amendment to the stockholders agreement.

The Court of Chancery concluded that that the plaintiffs were not entitled to any relief and dismissed all claims with prejudice. The Court of Chancery further ordered the parties to bear their own costs and declined to award damages to either side. The Court’s decision was based on, among other things, its conclusion that the plaintiffs had engaged in misconduct that had threatened the integrity of the entire proceeding.

The Delaware Supreme Court affirmed the lower court’s decision not to award damages. The Supreme Court, however, was explicit in stating that its affirmance was based the fact that, because the amendment to the stockholders agreement was promptly invalidated as a result of Mr. Morelli’s Section 225 action, the plaintiffs failed to show that they had suffered any additional non-speculative harm.

Despite the affirmance, the Supreme Court disavowed the Chancery Court’s labelling of Mr. Morelli’s claim as resting on a “super-director” theory, in which directors who have large stockholdings and the accompanying right to elect directors have “special rights” as super-directors.  In the Supreme Court’s view, such a tendentious description obscured the core issue, which was whether all directors are entitled to fair and non-misleading notice of the agenda for a special meeting. To that end, the Supreme Court stated: “Be it a director with a controlling interest or a director with only a handful of shares, we are uncomfortable embracing the idea that cliques of the board may confer and sandbag a fellow director.”  The Supreme Court went on to state, “it has long been the policy of our law to value the collaboration that comes when the entire board deliberates on corporate action and when all directors are fairly accorded material information.”

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Maylynn Menoud  | Marketing Director
T: (305) 379-7904 | D: (305) 357-4794
mmenoud@bastamron.com

BAST AMRON is a boutique law firm focused on business insolvency and litigation. Our insolvency practice emphasizes workouts, restructurings, liquidations, bankruptcy, and bankruptcy avoidance. We represent debtors, creditors, committees, trustees, and other fiduciaries in bankruptcies, receiverships, and assignments for the benefit of creditors. Our litigation practice is primarily plaintiff oriented. We know how to investigate, formulate and prosecute claims arising from business disputes. By combining our business insolvency knowledge with our extensive courtroom experience, we successfully guide our clients through all aspects and types of commercial litigation in state and federal courts across the country. Whether the issue is litigation or insolvency or both, we view our clients’ needs through a holistic lens to formulate and implement dynamic solutions to their most important challenges.

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