What California Lawyers May Learn From This Delaware Case

by Allen Matkins
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Allen Matkins

Shortly before leaving Delaware's Court of Chancery in 2015, Vice Chancellor Donald F. Parsons issued a decision that is widely known for the conclusion that Section 205 of the Delaware General Corporation Law does not authorize the Court of Chancery to invalidate a corporate act.  Genelux Corp. v. Roeder (In re Genelux Corp.), 126 A.3d 644.  If that were the only issue decided, the case would be of little interest to California lawyers because there is no analog to Section 205 in the California General Corporation Law.

In Genelux, the corporation originally filed an application to determine the validity of a share issuance under Section 205.  Later, the corporation filed an amended complaint adding a director/stockholder as plaintiff to determine pursuant to Section 225 the validity of the election of two directors in which the questioned shares were voted.  The Vice Chancellor was chary of this maneuver:

There is a good possibility, however, that Simus is a shill for Genelux, who the Company pushed forward to pursue the Section 225 claim on its behalf. Simus is an accomplished individual in his own right, and I understand from his testimony that he has invested a significant portion of his life as a Genelux stockholder and director, but it does not appear that Simus is paying for this litigation out of his own pocket. His Board seat is not subject to dispute. And, Plaintiffs admit that, although Simus does not have an engagement letter with any of the lawyers in this action, Genelux is paying all of the necessary legal fees and expenses.  Furthermore, as discussed above, Simus filed carelessly (or worse) a sworn verification stating that he read the Complaint, but later admitted that he had not read the whole thing and disclaimed knowledge of many of its core facts. Then, when Defendants sought production of his laptop computer to verify that he had, in fact, read it, he admitted to having disposed of the computer after this litigation began and after a litigation hold had been disseminated. Simus also admitted that Vandeman selected him to be the Plaintiff in the Section 225 action and at one point acknowledged that Genelux was driving this litigation. For all of these reasons, Simus's actions in this case are troubling, but they do not warrant, in my mind, further sanctions, let alone the draconian penalty of a dismissal.

Section 709, like Section 225, specifies that only certain persons may file action for a judicial determination of the validity of an election.  Corporations undoubtedly have an interest in obtaining certitude in elections, but neither state's legislature put them on the list of authorized plaintiffs.  Genelux stands as a cautionary tale for those corporations that are tempted to put themselves on the list by enlisting the assistance of an authorized plaintiff. 

 

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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