Palisades Growth Capital II, L.P. v. Alex Bäcker and Ricardo Bäcker and QLess, Inc. (Nominal Defendant)
Westlaw Citation3/26/2020
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PALISADES GROWTH CAPITAL II, L.P., )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0931-JRS
)
ALEX BÄCKER and RICARDO BÄCKER, )
)
Defendants, )
)
and )
)
QLESS, INC., a Delaware corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: March 12, 2020
Date Decided: March 26, 2020
Bradley R. Aronstam, Esquire, Roger S. Stronach, Esquire and Holly E. Newell,
Esquire of Ross Aronstam & Moritz LLP, Wilmington, Delaware; Michael C.
Hefter, Esquire of Hogan Lovells US LLP, New York, New York; and Jon M.
Talotta, Esquire, Samuel W. Yergin, Esquire and Thomas B. Hunt, Esquire of Hogan
Lovells US LLP, Tysons, Virginia, Attorneys for Plaintiff Palisades Growth
Capital II, L.P.
Thomas A. Uebler, Esquire, Joseph L. Christensen, Esquire and Hayley M. Lenahan,
Esquire of McCollom D’Emilio Smith Uebler LLP, Wilmington, Delaware,
Attorneys for Defendants Alex Bäcker and Ricardo Bäcker.
Catherine A. Gaul, Esquire, Marie M. Degnan, Esquire, Randall J. Teti, Esquire and
Michael D. Walker, Esquire of Ashby & Geddes, Wilmington, Delaware, Attorneys
for Nominal Defendant QLess, Inc.
SLIGHTS, Vice Chancellor
Defendant, Alex Bäcker (“Bäcker”), is a co-founder of QLess, Inc. (“QLess”
or the “Company”). He was also the Company’s CEO until QLess’s Board of
Directors (the “Board”) removed him from that position in June 2019. Bäcker
appeared to accept his termination and cooperated with the Board as it searched for
his replacement. While questions remained about what Bäcker’s continuing role at
QLess would be, the Company’s investors believed Bäcker had accepted he would
no longer lead QLess as CEO.
Like many early stage companies, QLess’s governance documents apportion
control between the Company’s founder and its investors. Specifically, under
QLess’s certificate of incorporation (the “Charter”), Bäcker, as the majority owner
of the Company’s common stock, has the right to appoint two directors to QLess’s
Board. Plaintiff, Palisades Growth Capital II, L.P. (“Palisades”), as the majority
owner of the Series A Preferred Stock, has the right to appoint one director to the
Board. And non-party, Altos Hybrid 2 L.P., (“Altos”), as majority owner of the
Company’s Series A-1 Preferred Stock, has the right to appoint one director to the
Board. Bäcker and the investors made further provisions for appointing directors to
the Board in a voting agreement (the “Voting Agreement”), whereby the parties
agreed to appoint one jointly designated independent director and, if Bäcker were
terminated as CEO, to create a new CEO director seat to be filled with Bäcker’s
replacement.
1
At the time Bäcker was terminated as CEO, all five board seats were filled.
Bäcker served as one common director; his father, Defendant, Ricardo Bäcker
(“Ricardo”),1 served as the second common director; non-party, Jeff Anderson
(“Anderson”), served as Palisades’s designee; non-party, Hodong Nam (“Nam”),
served as Altos’s designee; and non-party, Ivan Markman (“Markman”), served as
the independent director.
Non-party, Kevin Grauman (“Grauman”), was hired as CEO in September
2019, with Bäcker’s apparent blessing. Under the Voting Agreement, with Bäcker
now terminated as CEO, Grauman was to fill the newly-created CEO Board seat.
Nam resigned his position on the Board shortly after Grauman was hired.
After some dithering, Nam agreed that non-party, Paul D’Addario (“D’Addario”),
a partner at Palisades, should replace him as Altos’s designated director. While the
Series A-1 holders have an exclusive right under the Charter to appoint a director,
QLess’s outside counsel advised Altos that a Board vote would be required to
confirm D’Addario’s appointment. With this advice in mind, the Board arranged
for a telephone meeting to occur on November 15, 2019, in order formally to appoint
D’Addario and Grauman to the Board, and to attend to other QLess business.
1
I refer to Ricardo Bäcker by his first name to avoid confusion, without intending
familiarity or disrespect.
2
Markman unexpectedly resigned his independent director seat on
November 14. Believing that he held a 2-1 Board majority, Bäcker seized the
moment by scheming with Ricardo (and counsel) to take control of the Company in
advance of the November 15 meeting. With plan (and corresponding Board
resolutions) in hand, Bäcker announced at the outset of the meeting that he held a 2-
1 Board majority and then demanded that Grauman and D’Addario disconnect from
the call (i.e., leave the Board meeting) since they were not members of the Board.
Grauman left the meeting but D’Addario refused to disconnect. With Ricardo’s
support, Bäcker then fired Grauman as CEO, appointed himself to replace Grauman
as CEO and fill the CEO director seat, appointed himself as CFO, ratified a new
employment agreement for himself, appointed non-party, Patricio Cuestra
(“Cuestra”), to fill Bäcker’s now vacant common director seat and amended the
Company’s Bylaws to provide for a quorum of three when (or if) the Board were to
be comprised of six members. This concerted action was undertaken over
Anderson’s dissenting vote and D’Addario’s heated objection.
According to Defendants, at the conclusion of the November 15 meeting, the
Board was comprised of Ricardo and Cuestra as common directors, Bäcker as CEO
director, and Anderson as the Series A Director. By Defendants’ lights, the Series
A-1 and independent director seats were, and remain, vacant.
3
Palisades filed its Complaint on November 20, 2019, in which it seeks an
order under 8 Del. C. § 225 declaring that D’Addario was validly appointed to the
Board before the November 15 meeting, rendering any action taken at that meeting
a nullity. The Complaint also alleges a breach of the Voting Agreement for failure
to confirm Grauman to the CEO director seat. In the alternative to its statutory and
contractual arguments, Plaintiff urges this Court to exercise its equitable powers to
invalidate the actions taken at the contested meeting.
In this post-trial Memorandum Opinion, after careful consideration of the
evidence, I find that D’Addario was never validly appointed to the Board. And,
while Bäcker and Ricardo were not forthcoming with Palisades and Altos in advance
of the November 15 meeting, they did not take any affirmative action to prevent
Altos from exercising its rights with respect to the Series A-1 Board vacancy.
As there was no deceptive action relating to the appointment of the Series A-1
director in advance of the November 15 meeting, equity cannot be invoked to turn
back the clock and appoint D’Addario to the Board prior to that meeting.
Additionally, it is not at all clear that Bäcker breached the Voting Agreement
by refusing to recognize Grauman as a duly appointed member of the Board. While
the evidence clearly demonstrates that the parties to the Voting Agreement intended
that Grauman would take the newly created CEO Board seat in advance of the
4
November 15 meeting, the specific means by which that Board vacancy was to be
filled are not at all clear in either the Bylaws or the Voting Agreement itself.
The inquiry regarding the propriety of the Bäckers’ conduct in advance of,
and at, the November 15 meeting does not end with an assessment of their
compliance with the operative QLess governance documents. The Bäckers were
fiduciaries and must conduct themselves accordingly. While they took no steps to
interfere with Altos’s right to elect its Board designee, they did affirmatively deceive
the other QLess directors into attending the November 15 meeting on the belief that
the Bäckers would honor the Voting Agreement by appointing Grauman to the
vacant CEO director seat. As Grauman should have been appointed to the Board as
of, or at, the November 15 meeting, the actions taken at that meeting lacked approval
by a majority of the Board and are, therefore, voided, regardless of whether vel non
Bäcker breached the Voting Agreement.
I. BACKGROUND
I have drawn the facts from the parties’ pretrial stipulation and the evidence
admitted at trial.2 The trial record consists of eight lodged depositions, 495 joint
trial exhibits and the arguments of counsel presented at a trial on a paper record on
2
I cite to the trial arguments of counsel as “Tr.__”, the Joint Pre-Trial Stipulation and Order
as “PTO ¶ __”, the joint trial exhibits as “JX__” and Depositions as “Name Dep. __.”
5
January 7, 2020. The following facts were proven by a preponderance of the
competent evidence.3
A. The Parties and Relevant Non-Parties
Plaintiff, Palisades, is a private equity firm that first invested in QLess in
August 2017.4 Per the Charter, Palisades controls the Series A Director seat through
its ownership of the majority of the Company’s Series A preferred stock.5
Defendant, Alex Bäcker, co-founded QLess in 2009 and served as the
Company’s CEO until June 7, 2019.6 Bäcker owns the majority of the Company’s
common stock.7 As majority common stockholder, he controls the two common
director seats of the Board.8
3
Elements of Plaintiff’s claims appear to rest on a prayer for specific performance of the
Voting Agreement. While I ultimately do not grant that relief, I did consider the evidence
during deliberations with the burden of proof applicable to a decree of specific performance
in mind. See Pipkin v. Johnston, 1977 WL 9570, at * (Del. Ch. Apr. 15, 1977) (“It is well
established that specific performance will not be decreed unless the evidence and terms of
the contract to be enforced are established by that high degree of proof which has been
variously characterized as ‘clear,’ ‘clear and convincing,’ ‘clear and satisfactory’ or other
equivalent expressions.”) (citations omitted).
4
PTO ¶ 4; JX 458 (Anderson Dep.) 14:25–15:4.
5
PTO ¶ 4.
6
JX 457 (Bäcker Dep.) 14:2–5; PTO ¶ 5.
7
PTO ¶ 5.
8
Id.
6
Defendant, Ricardo Bäcker, is Alex Bäcker’s father.9 He holds a small
amount of preferred stock in the Company and was elected as the second common
director by Alex Bäcker on March 31, 2019.10
Nominal Defendant, QLess, is a privately held Delaware corporation
headquartered in Pasadena, California.11 QLess produces and licenses a virtual
queue management system that reduces the time retail customers have to wait in line
for service.12
Non-party, Altos, is an investment firm that first invested in QLess in
November 2018.13 Per the Charter, Altos controls the Series A-1 Director seat
through its ownership of the majority of the Company’s Series A-1 preferred stock.14
9
PTO ¶ 6.
10
Id.
11
PTO ¶ 3, JX 5 (“Charter”) at 1.
12
PTO ¶ 14.
13
PTO ¶ 7.
14
Id.
7
Non-party, Grauman, was hired as QLess’s CEO in September 2019.15 His
purported firing at the November 15, 2019 Board meeting is at issue in this
litigation.16
Non-party, Anderson, is a partner at Palisades. He was Palisades’s initial
designee to the Series A Director seat and still serves in that role.17
Non-party, Nam, is a co-founder of Altos.18 He was Altos’s designee to the
QLess Board from when Altos first invested in QLess until his resignation on
September 30, 2019.19
Non-party, D’Addario, is a Senior Managing Director of Palisades.20 He was
Nam’s choice to take Altos’s Series A-1 Director seat after Nam’s resignation.21
15
PTO ¶ 8.
16
Id.
17
PTO ¶ 4: Anderson Dep. 16:12–18.
18
JX 453 (“Nam Dep.”) 14:13–15:5.
19
PTO ¶¶ 18, 26.
20
PTO ¶ 9.
21
PTO ¶ 28; JX 254 at 2–3.
8
Non-party, Markman, served as the independent director of QLess from
November 27, 2018 until his resignation on November 14, 2019.22 The parties agree
that the independent director seat remains vacant.
B. Bäcker’s Termination as CEO
In early 2019, only a few months after Altos invested in QLess, the
Company’s employees began to report to the Board that Bäcker’s leadership was
creating a toxic work environment.23 Senior executives told Anderson that Bäcker
was becoming “increasingly withdrawn and unhinged, either totally absent and
disconnected or hyper micromanaging and combative,” and the Board grew worried
that the Company was at risk of a mass employee exodus.24 Exasperating the
situation, Bäcker terminated the Company’s Vice President of Engineering in March
2019, a move that drew considerable ire from the QLess investors.25
At this point, Anderson thought Bäcker should be relieved of his duties as
CEO, but Nam and Markman were more hesitant, expressing a preference that
Bäcker receive leadership coaching before the Board gave further thought to
22
PTO ¶ 10.
23
Anderson Dep. 159:15–160:6; JX 451 (“Markman Dep.”) 26:7–28:23; Nam Dep.
174:16–175:17.
24
JX 45; Anderson Dep. 26:20–27:2.
25
Nam Dep. 35:16–17; JX 21; Anderson Dep. 145:4–147:20.
9
termination.26 The Board, sans Markman, met on March 28, 2019.27 At Nam’s
request, two outside consultants were invited to provide coaching (and counseling)
to Bäcker and the Board.28 The meeting was not productive and ended with a
majority of the Board concluding that Bäcker should be terminated as CEO.29 Nam
informed Bäcker soon after that the Board believed he should step down.30
Three days later, Nam and Anderson called a special meeting of the Board to
discuss Bäcker’s status with the Company.31 Unwilling to resign, Bäcker took action
to secure his role as CEO. He fired QLess’s President and Corporate Secretary and
replaced Michael Bell, Bäcker’s initial designee as common director who now
supported Bäcker’s termination, with Ricardo.32 While there was some dispute
among the Board members as to the legal validity of Bäcker’s replacement of Bell
with Ricardo, Nam, Anderson and Bell eventually acknowledged the change after
26
Anderson Dep. 69:22–70:15; JX 21; Anderson Dep. 90:14–20.
27
JX 24.
28
Id. at 1–2.
29
Id.; Nam Dep. 155:14–156:4.
30
Nam Dep. at 259:14–260:1.
31
JX 34 at 2–3.
32
JX 58; Anderson Dep. 69:22–70:25; JX 81 at 2; JX 456 (“Ricardo Dep.”) 32:15–33:4.
10
being advised by QLess’s outside general counsel, Scott Alderton (“Alderton”), that
the replacement was valid.33
With Ricardo staunchly in Bäcker’s camp and Markman on the fence, firing
Bäcker no longer had majority Board support.34 In the following weeks, unrest at
QLess increased with a key employee resigning and members of the management
team detailing their objections to Bäcker’s leadership in a letter to the Board.35
In response, the Board voted to form a Special Committee, comprising Anderson,
Nam and Markman, to investigate the complaints lodged against Bäcker.36 The
Special Committee hired counsel who conducted a month and a half long
investigation.37
On May 29, 2019, counsel sent its report of the investigation to the Special
Committee.38 The report substantiated many of the employee complaints about
Bäcker, including that staff reasonably believed he “retaliated” against employees,
“made demeaning comments or used demeaning language,” and “made comments
33
See JX 37; JX 53; JX 42; JX 104.
34
See JX 73.
35
JX 119; JX 111.
36
JX 129.
37
JX 149.
38
While QLess has asserted privilege over the full report, a summary of the report was
admitted into evidence without objection. See Tr. 13:9–20; JX 149.
11
about (or to) women” that were offensive.39 In response, the Special Committee
recommended to the full Board that Bäcker be terminated.40 On June 8, the Board
met and voted to remove Bäcker as CEO.41
C. The Events Leading to the November 15 Meeting
After Bäcker’s termination, the Board conducted an extensive search for a
new CEO, eventually hiring Grauman on September 7, 2019.42 While Bäcker
supported Grauman’s appointment as CEO, their relationship soon became
“strained” as Grauman sensed that Bäcker was not comfortable relinquishing the
CEO role.43
On September 30, 2019, Nam resigned as Series A-1 Director.44 Anderson
quickly reached out to Nam requesting that Altos designate a Palisades party to serve
as Series A-1 Director rather than leaving the seat vacant.45 After some
39
Id.
40
JX 166 at 11.
41
Id. at 1. It is undisputed this event constituted a “Bäcker Termination Event” as defined
by the Voting Agreement. See JX 7 at § 1.1.
42
JX 196.
43
Id.; JX 454 (“Grauman Dep.”) 36:12–38:16.
44
JX 212.
45
JX 220.
12
consideration of alternate arrangements, Nam agreed.46 Altos General Counsel, Rick
Arnold, sent an email to Alderton on October 28 requesting that Alderton “draft and
circulate the necessary stockholder consent to elect Paul D’Addario . . . to the QLess
Board as the Altos designee[.]47 The email continued, “[w]e would like to fill the
vacancy left by [Nam’s] resignation with [D’Addario] as soon as possible.”48
Unfortunately, Company counsel misunderstood the mechanics of how a
Series A-1 Director vacancy is filled. Even though the Charter gives the Series A-1
preferred stockholders the exclusive right to elect a director by vote or written
consent, Alderton advised Nam and Anderson that a Board resolution presented at a
duly called Board meeting would be required to place D’Addario in Nam’s vacant
Series A-1 Board seat.49 Relying on this advice, Altos took no further action to elect
46
JX 276. Defendants’ arguments that Nam did not have a firm intent to appoint
D’Addario to the Board border on frivolous. Although Nam did initially discuss other
options with Bäcker, he quickly settled on D’Addario as his choice. Id; JX 254, JX 292;
JX 293.
47
JX 254 at 2.
48
Id.
49
Charter § 3.2; see JX 254 at 1 (“It is mechanics [Nam]. Your appointment is contractual,
in other words you have the contractual right to designate who the Series A-1 director will
be, but that person still needs to be either elected by the stockholders under Delaware law,
or in this case since it is filling a vacancy, appointed by the Board.”) (emphasis added).
There is no evidence that Bäcker had anything to do with the incorrect advice Alderton
gave to Altos. I say incorrect advice because, as discussed below, the Charter allows the
Series A-1 stockholders the exclusive right to elect their Board designee, and the Bylaws
expressly defer to the Charter with respect to filling Board vacancies. JX 8 (“Bylaws”) §
3.2.
13
D’Addario, though Nam reiterated his desire that D’Addario be appointed to the
Board on numerous occasions.50
On October 27, Bäcker requested that the Board convene for a meeting, and
the parties agreed to meet telephonically on November 15.51 As the parties were
scheduling this meeting, Anderson realized Grauman was not on the email thread
and inquired as to why he was not included.52 Bäcker responded, “Kevin [Grauman]
is on the thread, assuming [the Board] now includes him, which I requested it
does.”53 On November 11, per Bäcker’s request, Grauman circulated proposed
resolutions for the meeting.54 The resolutions included, among other items,
replacing Nam on the Board with D’Addario and confirming Grauman’s role as the
CEO director.55 Neither of the Bäckers objected to these agenda items.56
50
JX 292; JX 293.
51
JX 246.
52
JX 224 at 1.
53
Id. (emphasis added).
54
JX 268; JX 289.
55
JX 289 at 1–2; see JX 303.
56
Bäcker did inform Alderton that there was an issue with an option grant to Ricardo in
the proposed resolutions and requested new resolutions correcting the error. See JX 290
at 1; JX 452 (“Alderton Dep.”) 110:24–112:18; JX 700.
14
On the morning of November 14, just one day before the meeting, Markman
unexpectedly resigned his position as independent director.57 Markman made this
decision after a phone call with Bäcker that led Markman to believe Bäcker would
try to reinstate himself as CEO.58 In explaining his resignation, Markman stated,
“I decided I just didn’t have time” for continuing as a Board member.59
Believing that Markman’s resignation allowed him to make the case that he
enjoyed a 2-1 majority on the Board, Bäcker leapt into action in advance of the
November 15 meeting. After discussing the matter with his own counsel, Bäcker
circulated alternate proposed resolutions to Ricardo and Cuestra.60 This set of
proposed resolutions differed radically from the set Grauman had circulated a few
days earlier. Among other actions, the resolutions purported to: terminate
Grauman’s appointment as CEO; reappoint Bäcker as CEO and appoint him CFO;
appoint Bäcker to the CEO director Board seat; appoint Cuestra to Bäcker’s newly
vacant common director seat; ratify an employment agreement for Bäcker; and
amend the Bylaws to provide for a quorum of three members when the Board is six
57
JX 425.
58
Markman Dep. 68:12–69:6. His resignation notice did not include any reason as to why
he resigned. JX 425.
59
Markman Dep. 70:14–19.
60
JX 304; Tr. 124:5–13. Cuestra had been consulting for QLess for several months prior
to the November 15 meeting. Bäcker Dep. 267:8–20.
15
members.61 These moves, in total, would essentially lock in Bäcker’s control of
QLess.
Bäcker, with Ricardo’s support, executed his plan at the November 15
meeting. The meeting’s participants included Bäcker, Ricardo, Anderson,
D’Addario, Grauman and Alderton.62 After calling the meeting to order, Bäcker
demanded Grauman and D’Addario leave the call. Grauman agreed but D’Addario
refused.63 With Ricardo’s support, Bäcker proceeded to vote through each of his
proposed resolutions over the objections of Anderson and D’Addario.64
D. Procedural History
Palisades filed its Verified Complaint on November 20, 2019. The Complaint
asserts four counts: Count I seeks a declaratory judgment pursuant to 8 Del. C. § 225
that the QLess Board comprises Anderson, D’Addario, Bäcker and Ricardo;
Count II seeks a declaratory judgment pursuant to 8 Del. C. § 225 that Grauman is
the QLess CEO; Count III seeks specific performance of the Voting Agreement,
which would require the parties to elect Grauman to the CEO director seat; and
Count IV alleges direct and derivative breach of fiduciary duty claims against Alex
61
JX 304.
62
JX 402 at 4.
63
Id.
64
Id.
16
and Ricardo Bäcker.65 Given the expedited nature of Section 225 proceedings, the
parties agreed to bifurcate the fiduciary duty claims from the Section 225 Action.66
II. ANALYSIS
Our General Corporation Law vests power in the Court of Chancery to review
contested elections of officers and directors.67 A Section 225 proceeding is
“summary in character, and its scope is limited to determining those issues that
pertain to the validity of actions to elect or remove a director or officer.”68
Palisades advances two arguments as to why D’Addario was validly elected
to the QLess Board in advance of the November 15 meeting such that all actions
taken at that meeting are void. First, it argues that an October 28 email from Altos’s
general counsel to QLess’s outside general counsel reflects a “vote” of the Series A-
1 Preferred Stockholders to place D’Addario on the Board.69 Second, it argues that
if the email was not a vote, then it was a written consent.70
65
JX 435 (“Compl.”) ¶¶ 35–61.
66
PTO ¶ 2.
67
8 Del. C. § 225(a)
68
Genger v. TR Inv’rs, LLC, 26 A.3d 180, 199 (Del. 2011).
69
Pl.’s Pretrial Br. (“PB”) 46.
70
Id.
17
Palisades next argues that the Bäckers breached the Voting Agreement by
failing to appoint Grauman to the open CEO director seat on the Board.71 As the
Voting Agreement contains a stipulation of irreparable harm and a consent to
specific performance provision, Palisades argues Grauman must be appointed to the
Board immediately.72
Last, Palisades argues that even if D’Addario and Grauman were not elected
to the Board, this Court should invoke its equitable powers to invalidate all actions
undertaken by the Bäckers at the November 15 meeting.73 In this regard, it appears
Palisades is arguing that Bäcker utilized trickery and deceit to call the November 15
meeting and to secure the presence of other Board members at that meeting.
Defendants counter that the October 28 email relating to D’Addario is neither
a vote nor a written consent under Delaware law.74 They next argue they did not
breach the Voting Agreement because Grauman was validly terminated at the
November 15 meeting and there was no action taken by a stockholder prior to that
meeting to appoint Grauman to the open CEO director seat.75 Last, they argue that
71
Id. at 58.
72
Id. at 58–59; JX 7, § 4.3.
73
PB 52.
74
Defs.’ Pretrial Br. (“DB”) 31.
75
Id. at 57–68; D.I. 86 (“Defs.’ Post-Trial Letter Mem.”) 1–3.
18
equity cannot be invoked to invalidate the actions taken at the contested meeting
because Plaintiff has not provided any evidence that Defendants affirmatively acted
to deceive Plaintiff or prevent any party from exercising its voting rights.76 I address
each contested issue in turn.
A. D’Addario Was Not Validly Elected to the Board
The QLess Charter gives the A-1 Preferred Stockholders the exclusive right
to fill the Series A-1 Director seat.77 The Charter provides two mechanisms for the
A-1 Preferred Stockholders to exercise that right: “by vote or written consent in lieu
of a meeting . . . .”78 While the QLess Bylaws allow Board vacancies to be filled by
a majority vote of the directors, the Charter is unequivocal that each class of
stockholders has an exclusive right to appoint specified directors.79 When presented
with a conflict or inconsistency between the documents, as required by the DGCL,
the Bylaws make clear that the Charter controls.80
76
DB 43–47.
77
Charter § 3.2.
78
Id.
79
Compare Bylaws § 3.2 with Charter § 3.2.
80
See Bylaws § 3.2 (prefacing the Board vacancy provision with, “[u]nless otherwise
provided in the corporation’s certificate of incorporation . . .”); 8 Del. C. § 109(b).
19
1. The October 28 Email Is Not a Vote
Plaintiff would have me find that Arnold’s October 28 email, where he asked
Alderton to prepare a stockholder consent for Altos to elect D’Addario to the Board,
actually reflects a vote of the Series A-1 stockholders to that effect. To state the
conclusion succinctly, an email requesting that QLess counsel take action to
facilitate a stockholder consent is not a stockholder “vote” under our law. The
DGCL is clear that stockholders vote at meetings.81 Palisades has not attempted to
argue there was a meeting of the Series A-1 Preferred stockholders where votes were
cast to seat the Series A-1 Director. Instead, it cites to case law it claims supports
the proposition that an email can constitute a vote.82 The cases cited by Plaintiff for
that proposition are inapposite.83
The DGCL is not alone in providing a basis to conclude there was no vote
with respect to D’Addario. The QLess Charter makes clear that every Series A-1
81
See 8 Del. C. §§ 212(b), 213(a), (b), 216, 219(a).
82
PB 46 (citing A & J Capital, Inc. v. Law Office of Krug, 2019 WL 367176, at *8 (Del. Ch.
Jan. 29, 2019); Gassis v. Corkery, 2014 WL 2200319, at *7 (Del. Ch. May 28, 2014)).
83
A & J Capital, Inc. v. Law Office of Krug involved members of an LLC improperly
removing the manager of that LLC without cause. A & J Capital, 2019 WL 367176, at *1.
While certain “votes” by members were purportedly cast by email, the question of whether
that means of voting was legally effective was not at issue in the case. Id. at *10. And, of
course, the requirements of the DGCL were not in play since the entity involved was a
Delaware LLC. Similarly, Gassis v. Corkery involved a Delaware nonstock, charitable
corporation. Gassis, 2014 WL 2200319, at *1. And the dispute there related to the
contested removal of a director by other directors, not a stockholder vote. Id.
20
Preferred Stockholder is entitled to vote to elect the Series A-1 Director.84 Plaintiff’s
counsel noted at trial that Altos does not hold 100% of the Series A-1 Preferred
Stock.85 A holding that an email from Altos’s general counsel constituted a “vote”
of the entire Series A-1 Preferred would disregard the minority Series A-1
shareholders’ right to exercise their franchise. While Altos’s status as majority
Series A-1 stockholder would render the results of the vote a foregone conclusion,
that fact does not alter the right of the minority Series A-1 stockholders to cast a vote
for their Board designee should they so choose.86
2. The October 28 Email Is Not a Written Consent
Palisades next claims the October 28 email sent by Altos’s general counsel is
a written consent.87 The language of that email clearly shows otherwise. In the
email, Altos’s general counsel writes, “[w]ould you please draft and circulate the
necessary stockholder consent to elect Paul D’Addario . . . to the QLess Board as
the Altos designee? We would like to fill the vacancy left by [Nam’s] resignation
84
Charter § 3.2.
85
Tr. 9:23–10:24.
86
Charter § 3.2; see Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1188
(Del. 2010) (“If charter or bylaw provisions are unclear, we resolve any doubt in favor of
the stockholders’ electoral rights.”).
87
PB 46.
21
with Paul as soon as possible.”88 A request that somebody else draft a written
consent, under any sensible reading, cannot be construed, itself, as a written consent.
The email also cannot be deemed a consent as a matter of law. 8 Del. C. § 228
governs stockholder consents. While electronic transmissions may suffice to meet
the statutory requirements, such transmissions still must “[set] forth the action so
taken” by the stockholder giving the consent.89 Section 228’s technical requirements
must be “strictly complied with[,]” even in the case of a controlling stockholder.90
Thus, although the intent to act may have been clear, the formalities embedded in
Section 228 still must be followed.91 The October 28 email did not comply with
those formalities because it did not “set forth the action so taken”; it merely
expressed a request that certain action be taken.92 A mere expression of intent,
without executory language, is not a written consent.
88
JX 225 (emphasis added).
89
8 Del. C. §§ 228(a), (d) (emphasis added).
90
Espinoza v. Zuckerberg, 124 A.3d 47, 57 (Del. Ch. 2015).
91
Id. at 64.
92
8 Del. C. § 228(a) (emphasis added); JX 225.
22
B. QLess’s Corporate Documents Lack Clarity With Respect to the
Authorized Size of the Board
8 Del. C. § 141(b) provides that “[t]he number of directors shall be fixed by,
or in the manner provided in, the bylaws, unless the certificate of incorporation fixes
the number of directors . . . .”93 QLess’s Charter does not set the number of directors;
it only provides that the common and preferred stockholders shall be entitled to elect
certain directors.94 In the absence of direction in the Charter, the Court must look to
the Bylaws.95
Section 3.1 of the Bylaws states, “[t]he number of directors that shall
constitute the whole Board of Directors . . . shall [] be determined from time to time
by resolution of the Board of Directors or by the stockholders at the annual meeting
of the stockholders, except as provided in Section 3.2 of this Article . . . .”96
Section 3.2 provides, “vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of the
directors then in office . . . and the directors so chosen shall hold office until the next
93
8 Del. C. § 141(b).
94
Charter § 3.2. As noted earlier, each preferred class is entitled to elect one director, with
the common stockholders entitled to elect two. Id.
95
Neither party substantively addressed how the Bylaws govern director appointments in
their briefing or at trial.
96
Bylaws § 3.1 (emphasis added).
23
annual election and until their successors are duly elected and shall qualify, unless
sooner displaced.”97
There is no evidence in the record that, at any point, an annual stockholder
meeting was held to set the size of the Board. The Bylaws allow that the size of the
Board may also be set by Board “resolution.”98 But, again, the parties’ trial
presentations paid no attention to this requirement. Instead, they focused their
analysis on the provisions of the Voting Agreement and assumed that the provisions
in that agreement addressing expansion of the Board were valid.99 I, therefore, do
the same.100
C. The Voting Agreement and the CEO Director Seat
Section 1.1 of the Voting Agreement requires its signatories to vote their
shares “in whatever manner as shall be necessary” to expand the Board to six
members within eighteen months of Bäcker’s termination as CEO.101 Section 1.2 of
97
Bylaws § 3.2.
98
Bylaws § 3.1.
99
The Voting Agreement authorizes an expansion of the Board to either five or six
members. Voting Agreement §§ 1.1, 1.2.
100
While it is unclear if the Voting Agreement is consistent with 8 Del. C. § 141(b), neither
party has questioned the agreement’s validity. The Court, therefore, assumes, without
deciding, that the Voting Agreement is consistent with the DGCL, the Charter and the
Bylaws.
101
Voting Agreement § 1.1. If the parties decide not to expand the Board during this
eighteen-month period, the Board remains at five directors. Id.
24
the Voting Agreement obligates the signatories to “vote, or cause to be voted, all
Shares owned by such Stockholder . . . in whatever manner as shall be necessary to
ensure that . . . the following persons shall be elected to the Board: . . . [f]rom after
a Bäcker Termination Event, the Company’s Chief Executive Officer . . . .” 102
Assuming entering into this agreement was a valid act of the QLess shareholders to
authorize an expansion of the Board, the question, then, is how any such expansion
is to be executed.
The Voting Agreement calls for an expansion of the Board, as specified
therein, to be effectuated by stockholders voting their shares.103 There is no evidence
in the record that any QLess stockholder voted its shares to expand the Board prior
to the November 15 meeting.104 The Bylaws, as mentioned, mandate that any Board
expansion be effected by stockholder vote at an annual meeting or by Board
102
Voting Agreement § 1.2.
103
Voting Agreement § 1.1 (“Each Stockholder agrees to vote, or cause to be voted, all
Shares . . . from time to time and at all times, in whatever manner as shall be necessary to
ensure that the size of the Board shall be set and remain at five (5) directors.
Notwithstanding the foregoing, in the event . . . [of] a ‘Bäcker Termination Event,’ each
Stockholder agrees to vote, or cause to be voted, all Shares . . . from time to time during
the eighteen (18) month period following a Bäcker Termination Event . . . to ensure that
the size of the Board shall be set and remain at six (6) directors.”).
104
The parties, again, gave short shift to the mechanics of the Voting Agreement in their
arguments. It is, therefore, far from clear how any party breached by not voting their shares
when no party formally requested such a vote (assuming the Voting Agreement was
triggered).
25
“resolution.”105 It further provides that any Board vacancy properly created can be
filled by Board resolution unless otherwise provided for in the Charter.106
It appears from the evidence that at least a majority of the QLess Board
believed Grauman had been appointed to the Board prior to the November 15
meeting, and stated as much in writing.107 Whether these expressions are sufficient
to constitute a Board “resolution,” as referenced (but not defined) in the Bylaws,
however, was not addressed by the parties in their briefing or at trial. 108 The only
105
Bylaws § 3.1. Apparently, the QLess Charter, Bylaws and Voting Agreement were
drafted based on model documents provided by the National Venture Capital Association.
Alderton Dep. 14:20–16:6. While I appreciate that startup companies frequently lack the
resources or inclination to draft constitutive documents from scratch, and that model
documents can be important resources for these companies, blind reliance on forms,
without any effort to harmonize them, can be problematic. Such is the case here. QLess’s
constitutive documents were haphazardly slapped together. This sloppiness has made what
is frequently a straightforward exercise of contract construction substantially more
difficult.
106
Bylaws § 3.2.
107
See JX 298 (Anderson noting on 11/14 “[w]ith Kevin [Grauman] added to board, 3:2 is
good for now”; JX 224 at 1 (Bäcker expressing his belief that Grauman had been added to
the Board, per his request).
108
The lack of guidance offered by the parties on the inner workings of the QLess
constitutive documents has been frustrating. This Court requested and received post-trial
submissions that did clarify some of the gaps left by the parties’ briefs and trial arguments,
albeit on issues that ultimately are not relevant to the outcome. See D.I. 84, D.I. 86, D.I. 87,
D.I. 96, D.I. 110 and D.I. 101. But the parties have offered virtually no guidance with
respect to other key issues, including: (1) whether the Voting Agreement conforms with
the requirements of 8 Del. C. § 141(b); (2) how the Company’s Charter, Bylaws and Voting
Agreement interact and operate; (3) what constitutes a “resolution” of the Board based on
QLess’s past practices, or otherwise, and whether any such resolution would have to be
unanimous; and (4) exactly how the CEO director seat was to be filled by the Voting
Agreement’s signatories. In the interest of proceeding expeditiously in a case that is
26
evidence in the record of a QLess Board vacancy being created and filled was
Markman’s appointment to the Board by a formal, executed “Unanimous Written
Consent of the Board of Directors.”109 With that in mind, I would hesitate to find
less formal actions sufficed to evidence a Board “resolution” that Grauman be seated
to fill the newly created CEO director position on the Board in advance of the
November 15 meeting. For reasons discussed below, however, I need not decide the
issue.
D. The Actions Taken at the November 15 Meeting Are Invalid as a Matter
of Equity
Palisades last argues that, even if D’Addario or Grauman were not validly
elected or appointed to the QLess Board, equity requires that the Court declare the
actions taken by the Bäckers at the November 15 meeting void.110 Specifically, it
maintains that the Bäckers acted inequitably by formulating a secret plan, after
Markman’s resignation, to seize control of QLess at the November 15 meeting, and
then by securing Anderson’s presence at that meeting by means of deception.111
summary by statute, and because I have determined that the case can be decided as a matter
of equity, I have elected not to request yet another round of briefing.
109
JX 11.
110
PB 52.
111
Tr. 47:20–48:19; D.I. 84 Pl.’s Post-Trial Letter Mem. at 6–7. With the exception of
actions to amend the Bylaws, the QLess Bylaws require no advance notice of “the business
to be transacted at, nor the purpose of, any regular or special meeting of the Board of
Directors.” Thus, Plaintiff must ground its charge that the Bäckers acted improperly
27
It is bedrock doctrine that this Court will not sanction inequitable action by
corporate fiduciaries simply because the act is legally authorized.112 In this vein,
corporate acts are voidable when “board action [is] carried out by means of
deception . . . .”113 As our case law makes clear, however, there must be some
affirmative deception before equity will intervene; if the Bäckers had simply acted
in secret to plot their boardroom coup d’état without any affirmative action to
mislead other members of the Board, Plaintiff’s call to equity would rest on softer
ground.114
But that is not what Defendants did. To be sure, Defendants did nothing to
interfere with Altos’s right to fill the Series A-1 vacancy on the Board.115 Altos was
leading up to, and at, the November 15 meeting in equity rather than contract. Bylaws
§ 3.7.
112
Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439–40 (Del. 1971).
113
Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1047 (Del. 2014).
114
See Klaassen, 106 A.3d at 1047; Koch v. Stearn, 1992 WL 181717, at *4 (Del. Ch.
July 28, 1992) (overruled on other grounds Klaassen, 106 A.3d at 1047); Fogel v.
U.S. Energy Sys., Inc., 2007 WL 4438978, at *3 (Del. Ch. Dec. 13, 2007) (overruled on
other grounds Klaassen, 106 A.3d at 1047); Hockessin Cmty. Ctr. v. Swift, 59 A.3d 437,
458 (Del. Ch. 2012).
115
See Nam Dep. 138:7–13 (Q: What, if anything, did [Bäcker] do to prevent Altos from
delivering a stockholder written consent appointing Paul D’Addario to the board of QLess?
A: Nothing. I don’t think Alex could do anything for or against such a motion.); Alderton
Dep. 211:20–23 (Q: What, if anything, did [Bäcker] do to prevent Altos from signing and
delivering a stockholder consent? A: Nothing to my knowledge); Anderson Dep. 133:22–
24 (same).
28
the recipient of some erroneous legal advice and Bäcker sat silent as a beneficiary
of the misinformation. If that were the end of the story, there would be no basis to
invoke equity. But the Bäckers did not stay silent in all matters related to the
November 15 meeting. Instead, Bäcker affirmatively misrepresented to Anderson
and others that he wanted Grauman on the Board, and that he assumed Grauman had
already joined the Board, noting, “Kevin [Grauman] is on the thread, assuming [the
Board] now includes him, which I requested it does.”116 Ricardo responded that
Bäcker’s message “[l]ooks good to me.”117 When Grauman circulated a “high-level
agenda” for the November 15 meeting, Bäcker responded by thanking him and
asking him to “circulate any proposed resolutions,” further giving the impression
that Bäcker had no issue with Grauman joining the Board.118 On the day before the
contested meeting, Bäcker emailed Grauman, copying the QLess Board, requesting
that Grauman circulate board materials “so that we may all do our homework and be
116
JX 224 at 1. See JX 500 (Nam noting, “[w]hen I did speak to [Bäcker] about a week
ago, I specifically asked him how he thought Kevin was doing. I also asked him how the
relationship was between him and [Grauman]. He said everything was fine.”). Grauman
also understood this email to mean he was now a member of the Board. Grauman Dep.
52:11–53:5.
117
JX 224 at 1.
118
JX 293 at 3.
29
prepared to spend our time together most productively,” again giving the impression
that Bäcker approved of Grauman’s Board membership.119
When Alderton circulated draft Board resolutions that would formalize
Grauman’s appointment to the Board, as requested by Grauman and Bäcker, neither
Ricardo nor Bäcker gave any indication that their position had changed.120 After
having affirmatively represented to Anderson (and Markman) that Defendants
supported Grauman’s appointment to the Board, keeping mum as they planned their
ambush was inequitable.121 If Anderson had known of Defendants’ change of plans,
he would have refused to participate in the meeting, defeating a quorum and
thwarting the coup.122 As Anderson’s presence at the meeting was secured under
deliberately false pretenses, any action taken at that meeting is void.123
119
JX 296 (emphasis added).
120
See JX 318.
121
See Klaassen, 106 A.3d at 1046 (“Our courts do not approve the use of deception as a
means by which to conduct a Delaware corporation’s affairs . . . .”); Koch, 1992
WL 181717, at *4 (“The validity of the board action taken [at the meeting] . . . depends
upon whether [Plaintiff] was tricked or deceived into attending the meeting.”) (overruled
on other grounds Klaassen, 106 A.3d at 1047).
122
Anderson Dep. 105:23–109:17 (Discussing that he considered not attending the meeting
to defeat a quorum, but decided against it because he believed Bäcker did not control a
Board majority.).
123
Klaassen, 106 A.3d at 1046. Defendants have not raised any equitable defenses that
would save the contested Board actions.
30
III. CONCLUSION
For the foregoing reasons, all actions taken at the contested November 15
meeting are void. The QLess Board comprises Alex Bäcker and Ricardo Bäcker as
common directors and Jeff Anderson as the Series A Director. The Series A-1
Director, independent director and CEO director seats remain vacant. Kevin
Grauman remains as QLess’s CEO. The parties shall confer and submit a
conforming order and final judgment within ten (10) days.
31