Biolase v. Oracle Partners, L.P., C.A. No. 9438 (Del. June 12, 2014)

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In this expedited appeal from a post-trial decision of the Court of Chancery, the Delaware Supreme Court affirmed the Court of Chancery’s holding that, under 8 Del. C. § 141(b), directors may resign by verbal statements, thereby affirming the Court’s determinations that one of the Biolase director’s resignations was valid and one of the contested directors was properly appointed to the board.  The Delaware Supreme Court also affirmed the summary denial of Oracle’s claim for attorneys’ fees.

Oracle is an investment firm focused exclusively on the healthcare industry.  Following a series of purchases from fall 2013 to winter 2014, Oracle became Biolase’s largest stockholder, holding 16.4% of Biolase’s common stock.  Before the events that led to this dispute, six directors comprised the Biolase board: Federico Pignatelli, Frederick Moll, M.D., Norman Nemoy, M.D., James Talevich, Alexander Arrow, M.D., and Samuel Low, D.D.S.  Pignatelli also served as Biolase’s Chairman and Chief Executive Officer. 

At a board meeting held on February 28, the board intended to have two directors resign (Arrow and Low) and to appoint two new directors (Jeffrey Nugent and Paul Clark).   When it was announced that Arrow would be resigning, Arrow and the directors discussed how his resignation would affect his stock options. At the end of the discussion, Arrow said, “Okay, I agree, I go along with that.”  Low did not speak during the February 28 meeting.  After Arrow’s statement, the board voted to appoint Clark and Nugent to fill Arrow and Low’s positions.  Afterwards, Arrow and Low sent written resignations to Pignatelli and Biolase’s general counsel based on a template provided by Biolase. The form letter stated that their resignations were effective at noon on February 28—after the supposed time for Clark and Nugent’s appointments that day.

The Court of Chancery held that Arrow made a sufficiently clear verbal statement, making his resignation effective.  Low’s resignation was not effective because he did not speak at the meeting.  Thus, there was only one vacancy on the board when Clark and Nugent were appointed.  The Court of Chancery examined the draft meeting minutes and concluded that because Arrow’s name occurred in the same order as Clark’s name, Clark had filled Arrow’s vacancy.

On appeal, the Delaware Supreme Court addressed whether: (1) 8 Del. C. § 141(b) is a permissive statute that does not require a written resignation from a director; (2) there was substantial evidence to support that Arrow resigned at the February 28, 2014 board meeting; and (3) it was an abuse of discretion to deny Oracle an award of attorneys’ fees when Oracle did not make an argument in favor of a fee award in its trial briefs or post-trial arguments. (Oracle did not appeal from the Court of Chancery’s determination that Low’s resignation was not effective, so that ruling was not considered on appeal.).

First, the Delaware Supreme Court found that it was not erroneous for the Court of Chancery to conclude that a director could resign from a board though an oral statement.  The Court of Chancery relied on precedent holding that 8 Del. C. § 141(b) permitted oral resignations to find that Biolase’s bylaw, which substantially tracked the language of the statute, did not require that resignations be in writing.  In addition, the Supreme Court noted that the General Assembly amended 8 Del. C. § 141(b) several times, including in 2000, and had never signaled disagreement with that prior case precedent.  The Supreme Court also noted that the amendments did not expressly prohibit verbal resignations.

Second, the Delaware Supreme Court affirmed the Court of Chancery’s ruling that Arrow resigned from the board of directors and Clark was appointed to replace him at the board meeting.  The Delaware Supreme Court found that the record supported the Court of Chancery’s factual conclusion that Arrow resigned.  Arrow discussed his resignation with Pignatelli before the board meeting, indicated that he agreed to resign at the end of the meeting, and agreed to the appointment of his successor.  The Supreme Court also deferred to the Court of Chancery’s finding that Clark was appointed to fill Arrow’s vacant board position based on evidence in the draft meeting minutes.

Lastly, the Delaware Supreme Court affirmed the Court of Chancery’s summary denial of Oracle’s claim for attorneys’ fees.  The Court of Chancery entered a final judgment that awarded Oracle its costs under Court of Chancery Rule 54(d).  However, the Supreme Court did not accept Oracle’s argument that, in this type of summary action, the court should enter a judgment on the merits and allow the prevailing party to present claims for attorneys’ fees at a later date.  The Supreme Court noted that Oracle had multiple opportunities during pre-trial briefs, the trial itself, and the post-trial argument to present an argument for attorneys’ fees but did not do so.  The Supreme Court stated that requiring the Court of Chancery to enter a judgment on the merits and hold subsequent hearings on fee-shifting would be inefficient and cause delays.

The full opinion is available here

Topics:  Biolase, Board of Directors, Delaware General Corporation Law, Directors, Oracle Partners, Post-Trial Order, Resignation, Shareholder Litigation

Published In: Business Organization Updates, Civil Procedure Updates, Civil Remedies Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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