In Boris v. Schaheen, C.A. No. 8160-VCN (Del. Ch. Dec. 2, 2013), the Delaware Court of Chancery held stock issuances to be void where there existed no written instrument, namely board minutes or a written consent of the board of directors, evidencing the board’s approval of the specific stock grants.  As a result, a subsequent “omnibus” written board resolution, purporting to ratify all prior acts of the board, was held ineffective to validate the void stock issuances.  However, the Court held valid an oral resignation by a director.

In this action, plaintiffs requested that the Court find valid stockholder consents which purported to remove defendant from, and elect plaintiffs to, the boards of nominal defendants Numoda Technologies, Inc. (“Numoda Tech”) and Numoda Corporation (“Numoda Corp.”).  Defendant Mary Schaheen, CEO of Numeda Tech and Numoda Corp. (“defendant” or “Mary”), argued that the actions by written consent were ineffective because plaintiffs did not hold a majority of the outstanding voting power of Numoda Tech and Numoda Corp.  The success of plaintiffs’ argument depended on the Court finding several purported stock issuances valid notwithstanding the failure of the stock issuances to be listed in the corporations’ respective stock ledgers or memorialized in a writing approved by the boards.

More specifically, the board of directors of each of Numoda Tech and Numoda Corp. purported to issue stock by informal meeting during which the directors would agree on who should own what percentage of the companies and leave it to others to determine the number of shares to be issued.  This process was employed to issue the disputed stock issuances in 2004 and 2006.  No board resolutions documented the issuances.  Similarly, the stock ledgers contained no entries reflecting issuances in 2004 and 2006.  Instead, according to Mary, “Excel stock ledgers” were used to document the purported issuances.  However, there were no board resolutions adopting the Excel spreadsheets.  The board of Numoda Corp had purported to ratify all actions of the board taken to date by a unanimous written consent, dated October 2, 2006.  In relevant part, the Numoda Corp ratification consent provided that the directors “hereby accept, adopt, ratify and approve all prior acts, business and transactions of the Company.”

In reviewing the parties’ claims which were brought in the context of a Section 225 action to determine the lawful directors of Numoda Corp. and Numoda Tech, the Court began by stressing that the Delaware General Corporation Law contemplates, in large part, a formal approach to corporate governance, particularly for changes to the corporation’s capital structure.  According to the Court, stock is not validly issued unless the board of directors authorizes the issuance in a written instrument evidencing its approval.  That the directors and purported stockholders may have conducted themselves as if the stock has been issued as “persuasively suggested” by the weight of the evidence produced at trial, was of no import, in the Court’s view, in the absence of a written instrument evidencing the board’s approval of the issuances.  Furthermore, the Court held that the purported stock issuances were void, not voidable, and therefore could not be cured by ratification or another other equitable defense.

However, the Court did find that an informal or oral resignation by a director to be valid.  Under Section 141(b) of the DGCL, “[a]ny director may resign at any time upon notice given in writing or by electronic transmission to the corporation.”  (emphasis added).  The Court noted that prior decisions had interpreted the use of “may” in Section 141(b) to mean that it is permissive, rather than mandatory, for a director to resign with written notice.  According to the Court, subsequent actions consistent with an oral resignation can support finding a resignation without written notice.  Here, defendant claimed that plaintiffs had resigned from the board of Numoda Tech in 2006, leaving her as the sole director.  Although no written resignation was produced at trial, the Court found that a preponderance of the evidence demonstrated that plaintiffs did resign as directors of Numoda Tech.  Specifically, under penalty of perjury, plaintiffs signed Delaware Franchise tax returns for Numoda Tech from 2006-2009 which reported that defendant was the sole director of Numoda Tech.