In this post-trial memorandum opinion, the Court of Chancery ruled on the board composition of Defendant and Counter-Plaintiff Biolase, Inc. (“Biolase”). The Court declared that only one of two contested director resignations during a telephonic board meeting held on February 28, 2014 (the “February 28 Meeting”) had been effective. Thus, only one of the two subsequent appointments made at that February 28 Meeting was valid. The Court also ruled against Biolase on their counterclaims for fraud or negligent misrepresentation. Biolase claimed that Plaintiff and Counterclaim Defendant Oracle Partners, L.P. (“Oracle”) and the directors purportedly appointed at the meeting had participated in a conspiracy to take over Biolase from the inside.
Oracle is an investment firm focused exclusively in the healthcare industry. Larry Feinberg is the managing member of Oracle’s general partner. Biolase is a medical device manufacturer. Before the events that led to the dispute, six directors comprised the 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.
From the fall of 2013 into the winter of 2014, Oracle acquired 16.4% of Biolase’s common stock through two private placements and purchases on the open market. While steadily increasing its stock ownership, Feinberg expressed an interest in changing the board composition, getting new management, and getting new financing at Biolase. He also stated to friends and affiliates, but not the Company, that he was considering launching a proxy contest to accomplish his goals.
In February 2014, Feinberg recommended to Pignatelli two potential director nominees: Paul Clark and Mark Gainor. Pignatelli was also considering Jeffrey Nugent (“Nugent”) as a possible director nominee. The Court rejected the Company’s argument that once Oracle learned about the possible involvement of Nugent, Oracle and Nugent began to cooperate in the conspiracy for an inside takeover.
Before the February 28 Meeting, Pignatelli asked Arrow to agree to resign from the board at the meeting. Pignatelli made the same request of Low. Once the February 28 Meeting convened, Arrow debated with the directors whether he should resign as he was concerned about the treatment of his stock options. The debate ended when Arrow stated, “Okay, I agree, I go along with that.” Low never spoke during the meeting and testified that he intended his resignation to be effective via a written tender. After the debate with Arrow ended, the board voted to appoint Clark and Nugent. After the meeting, Arrow and Low sent written resignations, based on a template provided by the Company, that their resignations were effective at noon (an effective time that was after the purported appointments of Clark and Nugent).
Unaware of any potential procedural defect, Nugent and Clark conducted themselves after the February 28 Meeting as if their appointment had been effective. On March 3, 2014, Clark and Nugent asked Pignatelli to resign as CEO, Chairman, and director. Subsequently, Pignatelli asked Arrow and Low to rescind their resignations. On March 7, during a meeting of all eight alleged directors, Nugent moved to have Pignatelli removed as Chairman and CEO, but the board recessed without taking any vote. That same day, Oracle notified Biolase of its intent to run a proxy contest for four director seats. Oracle’s nominees included Clark and Nugent. At the same time, Oracle initiated an action pursuant to 8 Del. C § 225 seeking a declaration that the resignations of Arrow and Low and appointment of Clark and Nugent were valid and effective.
Biolase’s bylaw governing resignations had wording similar to 8 Del. C. § 141(b). The bylaw stated, in relevant part, “Any director . . . may resign at any time upon written notice to the Board, the Chairman of the Board, the Executive Vice Chairman of the Board, the CEO or the President. Unless specified otherwise in the notice, such resignation shall take effect upon receipt of the notice . . . .” In its opinion, the Court relied on precedent interpreting 8 Del. C. § 141(b) to conclude that the “may” in the bylaw was permissive rather than mandatory. Accordingly, Biolase’s directors could resign verbally.
The Court found that Arrow made a sufficiently clear verbal statement such that his oral resignation was effective. Because Low did not speak at the meeting, the Court found that he did not resign at the meeting. With respect to Clark and Nugent, the Court found that there was only one vacancy at the time of their purported appointments. Therefore, only one appointment could be valid. To determine which director filled the single vacancy, the Court relied on the order of the names as they appeared in the draft meeting minutes describing the resignations and appointments. Because Arrow’s name occurred in the same order as Clark’s name, the Court concluded that Clark replaced Arrow.
The Court rejected Biolase’s unclean hands defense. According to the Court of Chancery, the evidence was insufficient to find that Oracle sought “control” of Biolase. In addition, even if Clark and Nugent shared with Oracle material non-public information in violation of their fiduciary duties and/or a non-disclosure agreement, this alone did not warrant applying unclean hands because Oracle had not induced them to share the information.
Finally, the Court held that Oracle was not liable for fraud or negligent misrepresentation. It found that Oracle had not made false statements or omissions. The Court further stated that there was no evidence from which it could conclude that Oracle had an agreement with Clark and Nugent to terminate Pignatelli. The Court reasoned that in looking at the evidence, Clark and Nugent had sufficient grounds to determine that a change was appropriate based on their own experience and independence.
Biolase has appealed this decision to the Delaware Supreme Court.
The full opinion is available here