1 in the court of chancery of the state of delaware …
TRANSCRIPT
1
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE ELITE HORSE INVESTMENTS LTD., : a British Virgin Islands company, :
: Plaintiff, :
: v : Civil Action : No. 10550-CB T3 MOTION, INC., a Delaware : corporation, :
: Defendant. :
- - -
Chancery Courtroom No. 12A
New Castle County Courthouse 500 North King Street Wilmington, Delaware Friday, January 23, 2015 1:34 p.m.
- - - BEFORE: HON. ANDRE G. BOUCHARD, Chancellor. - - - ORAL ARGUMENT ON PLAINTIFF'S MOTION FOR A TEMPORARY
RESTRAINING ORDER and RULINGS OF THE COURT
- - -
------------------------------------------------------ CHANCERY COURT REPORTERS
New Castle County Courthouse 500 North King Street - Suite 11400
Wilmington, Delaware 19801 (302) 255-0524
2
CHANCERY COURT REPORTERS
APPEARANCES:
MEGAN WARD CASCIO, ESQ.CHRISTOPHER P. QUINN, ESQ.Morris, Nichols, Arsht & Tunnell LLP for Plaintiff
RICHARD L. RENCK, ESQ.CHRISTOPHER M. WINTER, ESQ.Duane Morris LLP -and-KENNETH S. AUGUST, ESQ.
of the California Bar August Law Group, P.C. for Defendant
- - -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
3
CHANCERY COURT REPORTERS
THE COURT: Good afternoon, Counsel.
MR. RENCK: Good afternoon, Your
Honor.
THE COURT: Mr. Renck.
MR. RENCK: Ms. Cascio has been kind
enough to let me make some introductions.
THE COURT: Sure.
MR. RENCK: It's Richard Renck of
Duane Morris on behalf of the defendant here. I also
have with me Chris Winter of my office, my partner at
Duane Morris, and Ken August from the August Law Group
of Los Angeles, who is also counsel to the company.
THE COURT: Welcome.
MR. RENCK: Thank you, Your Honor.
THE COURT: Ms. Cascio.
MS. CASCIO: Thank you, Your Honor.
Megan Cascio for plaintiff Elite Horse Investments
Limited. At counsel table with me, Your Honor, is
Chris Quinn of my firm.
THE COURT: Good afternoon.
MS. CASCIO: I want to start by
thanking Your Honor for scheduling this temporary
restraining order motion so quickly. We truly
appreciate Your Honor's attention to this matter.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
4
CHANCERY COURT REPORTERS
THE COURT: Certainly.
MS. CASCIO: As we had informed the
Court on Tuesday, we had hoped that the parties would
be able to work out some type of stipulated order and
avoid this hearing. Unfortunately, despite my
inquiries, the defendant was not interested in
discussing such an agreement after we had Tuesday's
hearing. So we're therefore, here today on
plaintiff's motion for a temporary restraining order.
Just a little background. Plaintiff
initiated this case pursuant to Section 225 of the
DGCL seeking a declaration, first, that four
individuals that the plaintiff and seven other
consenting stockholders are stockholders of the
defendant T3 Motion had elected to the T3 board
pursuant to a written consent. We're seeking a
declaration that they had the right to take those
seats or to be seated.
Late last week we learned that T3, and
primarily its CEO and chairman William Tsumpes,
intended to attempt to prevent those new board members
from taking their seats. Mr. Tsumpes sent an e-mail
to the other two incumbent directors but excluded the
four new directors, seeking to schedule an immediate
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
5
CHANCERY COURT REPORTERS
board meeting to decide, among other things, to issue
stock to dilute the consenting stockholders' majority
control of T3. So faced with this blatant refusal to
honor the consents or recognize the consents, we had
no choice but to file our complaint and seek the
temporary restraining order.
Now, as we disclosed to both
defendant's counsel and the Court on the Tuesday
teleconference, seven of the eight consenting --
original eight consenting stockholders holding over
58 percent of the outstanding shares of the company
delivered a second written consent. That consent
ratified the actions taken by the first written
consent, retook those actions of electing four new
directors, and removed Mr. Tsumpes and Mr. Healy from
their position as directors.
THE COURT: I'm not sure it matters,
but when I did the math, I came out a little
differently than you did. As I understand it, the
first consent is an even 60 million shares. In the
second consent, I think it's Northside that doesn't
sign.
MS. CASCIO: Right.
THE COURT: When I looked at the first
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
6
CHANCERY COURT REPORTERS
consent and the number attributed to Northside and I
subtracted out, I get a little different number than
--
MS. CASCIO: You get a little over --
THE COURT: -- you did.
MS. CASCIO: -- 60 percent, I think.
I think there's a little confusion. And, honestly,
Your Honor, there's still kind of a little confusion
on my part as to exactly how many shares Northside
has. But to be conservative --
THE COURT: Right. You think --
MS. CASCIO: -- and I think the
company would say it's a little bit over -- it still
is at 50. It's over 58, or 58.3 percent.
THE COURT: Okay.
MS. CASCIO: And so we're in the
ballpark, Your Honor. We're certainly over
50 percent.
THE COURT: Well, it's not disputed,
at least not yet.
MS. CASCIO: Not yet.
THE COURT: But I just noticed that
and wanted to raise it.
MS. CASCIO: Thank you, Your Honor.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
7
CHANCERY COURT REPORTERS
So the five remaining directors, the
four new directors plus Mr. Ki Nam, who had not been
removed by the second written consent --
THE COURT: Right.
MS. CASCIO: -- then delivered a
unanimous consent of the members of the board to
remove Mr. Tsumpes as CEO and replace him with Zhang
Mi. And Zhang Mi is a director of the plaintiff,
Elite Horse.
On Wednesday we amended our complaint
to seek declarations that the second written consent
and the director consent are valid and effective and
that the -- the actions that they purport to take be
blessed by the Court. So this is a straightforward
225 motion, we believe.
The case law from the Court says that
this action should be summary in nature. It also
supports the entry of a TRO or status quo order in the
interim, especially to address the uncertainty facing
a company when the control of its board is at issue.
And I think we cite cases in our papers, including the
Arbitrium case, that stands for that proposition, Your
Honor.
The parties apparently disagree about
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
8
CHANCERY COURT REPORTERS
the first prong of the test for a TRO. However,
regardless of whether it must show a colorable claim
or reasonable likelihood of success on the merits,
plaintiffs more than meet that, either test.
And I want to pause for a moment, Your
Honor. The plaintiff filed its motion for a TRO
before it filed its amended complaint. However, the
grounds for granting the TRO are as strong, if not
stronger, with the existence of the second written
consent, stockholder consent.
In its opposition, plaintiff
specifically asserts that the second written consent
fails for the same reasons that it argues that the
first written consent is invalid, as I believe the
parties have joined issue on the allegations in the
amended complaint and the plaintiff's right to a TRO
based on those allegations as well.
Now, there can be no question, we
believe, as to the merits of the plaintiff's amended
complaint. It alleges that eight stockholders holding
more than 65 percent of the outstanding shares
delivered a written consent to the company on
December 26, 2014, filling four vacancies on the
board. Section 2.9 of the company's bylaws explicitly
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
9
CHANCERY COURT REPORTERS
allows stockholder consent -- stockholder action by
consent. There can be no dispute that there were four
vacancies on the board, as the amended and restated
bylaws, approved in August 2012, authorized seven
directors.
THE COURT: Can I just stop you there?
MS. CASCIO: Sure.
THE COURT: So there are three dates,
in my mind, here.
MS. CASCIO: Uh-huh.
THE COURT: December 26th, the day of
delivery of the first consent; January 15th, the date
of the second consent; and January 20th, the date of
delivery of the second consent. To your knowledge,
has anything happened at the company between the
beginning and end of those dates that's relevant to
what we're doing today?
MS. CASCIO: Other than Mr. Tsumpes
trying to call a board meeting by only giving Mr. Nam
and Mr. Healy notice and listing actions that he
wanted to take to dilute our stockholders -- and we
attached that to our -- probably our complaint, if not
also our original motion -- I'm not aware of a changed
circumstance in the company.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
10
CHANCERY COURT REPORTERS
THE COURT: Right.
MS. CASCIO: If that's Your Honor's
question.
THE COURT: I understand there's an
issue about what may have been attempted; but insofar
as you know, nothing has actually happened between,
again, December 26th and January 20th, maybe most
relevantly January 15th to January 20th, that has
changed the status quo from your perspective.
MS. CASCIO: We're not aware of
anything. I will confess to the Court that we don't
have a lot of visibility into this company, either.
It purports to be a publicly traded company. It
trades on the OTC Bulletin Board, but it's been
delisted and deregistered as of, I believe, an action
in October 2013 which became effective as a 90-day
effective period. So it would have been January 2014.
There aren't any public filings regarding the
financials of the company since, I believe, the third
quarter of 2003. And the last 10-K was for 2012.
So we don't have -- they're not filing
8-Ks to tell us that they're doing. We don't have a
lot of visibility.
THE COURT: Okay.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
11
CHANCERY COURT REPORTERS
MS. CASCIO: I think I said, but let
me just -- to complete my thought in case I did not,
the bylaws have -- authorize seven directors. Four
were vacant. The consenting stockholders acted as
permitted by the bylaws to fill the vacancies, and
those actions were effective upon delivery of the
consents; the first consent on December 26th, 2014, to
the principal place of business of the company.
Then on January 20th, as Your Honor is
aware, the seven stockholders holding over 58 percent
of the company's outstanding stock, delivered the
second written consent to the registered agent of T3
Motion here in Delaware. That same day they also --
I'm sorry. The board then delivered the written --
the unanimous written consent of the directors
removing the CEO and replacing him.
I think it's important to note what
the defendant does not deny with respect to these
actions. Defendant does not deny that the two
stockholder consents were executed by holders of a
majority of the outstanding shares of T3 Motion, nor
does defendant deny that each of the consents were
properly delivered. Defendant further does not
dispute that T3's board had seven authorized seats and
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
12
CHANCERY COURT REPORTERS
that four of those were vacant, at least as of
December 25th, 2014.
THE COURT: And just -- it may be
irrelevant, but just for my own edification, how long
had these slots been vacant?
MS. CASCIO: I'm not sure I have the
complete answer. I know I read in their opposition
that the last seat became vacant around the time or in
connection with the eight consenting stockholders'
investment, which occurred at the beginning of
December --
THE COURT: Right.
MS. CASCIO: -- of 2014. They
invested $6 million into the company for their
60 million shares or their 65 percent interest.
Finally, defendant does not deny that
T3 stockholders are permitted to act by written
consent pursuant to the bylaws.
Instead, defendant attacks the merits
with three challenges to the stockholder consents
themselves, none of which pass muster.
First, defendant argues that the
stockholder consents were invalid under Section 211(b)
because the section requires unanimous stockholder
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
13
CHANCERY COURT REPORTERS
consent to elect directors.
That reliance is misplaced, Your
Honor. As we explained in our reply papers -- I
apologize for getting them in this morning, Your
Honor.
THE COURT: I reviewed them.
MS. CASCIO: Thank you.
Section 211(b) applies to elections in
lieu of -- elections by consent in lieu of an annual
meeting. The purpose is to prevent less than all of
the stockholders from attempting to eliminate the
requirement that the company hold an annual meeting by
replacing one director and saying that that director
has been validly elected up to the 13 months under
Section 211.
The -- we went through the statutory
support for that, the secondary sources that were
written contemporaneous with it. And I don't think
there's any question that we have the only correct
reading of Section 211(b).
Indeed, the one case that defendant
has presented to the Court for its proposition that
you have to act by unanimous written consent to fill
vacancies, EMAK actually acknowledged that
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
14
CHANCERY COURT REPORTERS
"Stockholders can act in between annual meetings to
remove directors, to fill vacancies, or to fill newly
created directorships ...." That's cited in our reply
papers. That is exactly what the consenting directors
did here. First, they filled four vacancies. Then
they removed two directors. EMAK only prevented the
removal of sitting directors through a consent that
purported to shrink a board.
THE COURT: That was the -- I was
involved in that case.
MS. CASCIO: You were, Your Honor.
THE COURT: That holding was made in
the context of the Crown solicitation; right?
MS. CASCIO: Correct. That was the
Crown solicitation.
THE COURT: Right.
MS. CASCIO: They purported to shrink
the board from, like, nine to three or twelve to
three. I've forgotten how many it is. Maybe it is
seven to three.
THE COURT: Where the cross
solicitation by the dissidents actually did seek
through consents to fill vacancies, if I recall
correctly --
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
15
CHANCERY COURT REPORTERS
MS. CASCIO: Exactly.
THE COURT: -- is that right?
MS. CASCIO: Take Back EMAK. Did
exactly what we've done here. They did it in the
reverse order, I believe. There were two vacancies of
seven, and they removed two more directors and put
three people on the board. So there were five, I
think, sitting directors out of the seven seats. And
the Court recognized that that was valid, but I know
that there was issues with respect to counting the
shares of that consent.
THE COURT: Uh-huh.
MS. CASCIO: But the action was not
challenged under -- was not found to be invalid under
Section 211(b).
Now, defendant next argues that the
first written consent is invalid because the
signatories did not hand-date their -- next to their
signatures. This argument is quickly dispatched by
review of the second written consent, which is
hand-dated and hand-signed.
THE COURT: Let's assume for a second
you didn't have the written consent. I don't know if
you'll concede anything, but would you agree you would
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
16
CHANCERY COURT REPORTERS
have a real problem, especially as the Wexford case
construes the requirement in the statute for each
stockholder dating their consent?
MS. CASCIO: I think that's what the
Wexford case says, Your Honor. There's not a lot of
other law out there. The Wexford case does say that
you need to construe the Section 228 strictly because
you're doing this, kind of, outside of the annual
meeting or the meeting context.
THE COURT: I think I looked at it
quickly. But just having some familiarity with the
statute, I think the rationale is, you know, written
consents can only be a fact of -- effective within
certain time parameters. You need to know the date of
executions at consent so you know, you know, when you
cross the magic threshold and if that action's taken
within the requisite time period.
Anyway --
MS. CASCIO: Right, Your Honor. I
believe it's 60 days under the statute.
THE COURT: Right.
MS. CASCIO: Of course, here, we've
not been stockholders for 60 days yet. So I'm not
sure that that's really an issue.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
17
CHANCERY COURT REPORTERS
THE COURT: Oh, yes. So tell me about
that. When did your stockholders become --
MS. CASCIO: Around December 21st,
'14. They had escrowed the $6 million in the middle
of the summer while they completed the transaction.
And I don't have all of the documents yet, Your Honor,
but we believe that the money was transferred to the
company around November -- right around Thanksgiving,
and it took a little while to get the stock
certificates.
THE COURT: Okay.
MS. CASCIO: So around -- or to get --
I don't know. I don't actually even know if they have
the stock certificates, but recognized as shareholders
around December 1st.
THE COURT: Okay.
MS. CASCIO: So we haven't been
stockholders for 60 days. In any event, the second
written consents dated the 15th -- they signed it on
the 15th -- was delivered on the 20th. I don't think
we have an issue with respect to 228(c) for the second
written consent, which ratifies and retakes all of the
action, in addition to removing directors that were --
that was taken in the first written consent.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
18
CHANCERY COURT REPORTERS
Third, the defendant argues that the
written consents are invalid because the 228 notice
has not been sent promptly. Of course, the second
written consent was just delivered on Tuesday. So, I
mean, no matter what the definition of "prompt" is, I
think we're still within that time frame; but we'd
argue even if we were just standing here at the first
written consent, a month -- less than a month,
actually, I guess -- is still -- still prompt.
THE COURT: So does your client
even -- does your client have the necessary contact
information for the other shareholders even to send a
notice?
MS. CASCIO: We don't have the most
recent stock -- we don't believe we have the most
recent stock listing. We have a stock listing but --
THE COURT: Has your client requested
it?
MS. CASCIO: Not yet, Your Honor.
We're working through it. But it certainly is a
question of whether we have an obligation to send it
or the company does. I don't think that the statute
is very clear on that point. But even if we were
within -- we would be within 30 days if we were just
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
19
CHANCERY COURT REPORTERS
talking about the first written consent.
But the defendants' reliance on Tiber
Holdings is misplaced. Tiber Holdings doesn't stand
for the proposition or does not hold, I should say,
that a written consent is invalid until the 228
notice -- 228(e) notice is sent. Tiber Holdings was a
very unusual situation. First, it actually recognizes
that -- that consents are effective when they're
delivered before the -- the notice is sent except in
unusual circumstances. The Court
specifically (Inaudible) -- I guess actually argues
the reverse. Consents may not be valid until the
notice is sent under certain circumstances. And that
was a very -- as I said, a very unusual circumstance.
The written consent was not sent until five months
after it was purported to be executed and delivered.
The plaintiff, closely held family
company, filed an action, I believe it was in
Pennsylvania. They're arguing about a provision in
the certificate of incorporation restricting stock
transfers. The defendants purport to take action by
written consent that would remove that provision from
the certificate but failed to tell the plaintiff that
their litigation is moot. Then they go on to attempt
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
20
CHANCERY COURT REPORTERS
to settle the litigation with the plaintiff without
revealing the written consent has -- has deleted the
provision at issue.
And then for, quite frankly, something
that was not completely clear to me in the opinion,
the plaintiff then purports to take action under the
provision in the certificate of incorporation, which
allows it to put its stock to the company. At that
point, after it has purported to take action, the
company says, "We have a written consent that was
supposedly executed five months previously, and that
provision is no longer part of our certificate of
incorporation." Under those circumstances -- and as
far as we can find, only under those circumstances --
has a court ever found that a consent is not effective
until it is delivered -- or the notice is provided
pursuant to 228(e).
THE COURT: Right. So the five months
was with reference the provision of notice, not the
delivery of the consent; right?
MS. CASCIO: I'm sorry, Your Honor.
THE COURT: The five months that's
referred to in Tiber, I read the briefs to say -- and
I haven't had a chance to independently read the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
21
CHANCERY COURT REPORTERS
case -- that the five months related to the notice
period, not the period of delivering the consent,
which presumably would be a problem under the 60-day
requirement, in any event.
MS. CASCIO: Correct, Your Honor, yes.
THE COURT: Okay.
MS. CASCIO: It was purported to be
dated, like, in October, and then this is all
occurring in March that they actually filed the
amended certificate of incorporation with the
Secretary of State and then turn around and give the
notice --
THE COURT: The notice. Okay.
MS. CASCIO: Yes.
THE COURT: All right.
MS. CASCIO: So those facts do not
remotely resemble our case here.
Finally, the complaint states a very
strong claim that any action taken by three members of
the board is void under the company's unambiguous
bylaws. Section 3.10 of the bylaws requires the
presence of a majority of the authorized number of
directors to constitute a quorum. T3's motion has
seven authorized director seats. Thus, the three
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
22
CHANCERY COURT REPORTERS
incumbent directors cannot constitute a quorum and
cannot take action on behalf of the company. As a
matter of public policy, the incumbent board should be
enjoined from purporting to take action that is
clearly void under the bylaws. And defendant has had
no response to this argument.
Unless Your Honor has any questions on
the merits, I'm going to turn to the irreparable harm
argument.
THE COURT: That's fine.
MS. CASCIO: The next element for a
temporary restraining order is a finding of a threat
of imminent irreparable harm. The case law
establishes that the uncertainty concerning the
legitimate board creates irreparable harm, both to the
stockholders and to the company, sufficient for the
entry of a status quo or temporary restraining order
in connection with a 225 action. That's one of the
cases, Salamone versus Gorman, which we cite in our
papers. Thus, it has, in the Court's words, become
customary for the entry of a status quo order to
preserve the corporation's affairs pending judicial
resolution of the dispute as to the control of a
board. And that's the Arbitrium case, again, that's
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
23
CHANCERY COURT REPORTERS
cited in our papers.
Here, plaintiff is seeking to enjoin
the actions Mr. Tsumpes -- I'm sorry. I think it's
Tsumpes -- is attempting to cause the board to take
for the specific purpose of diluting a majority
position held by the consenting stockholders. The
threat of loss of their control position for any
period and that the fact the Court may not be able to
fully redress that loss, especially in this case where
such action is void, in any event, under Section 3.10
of the bylaws for lack of a board quorum is
irreparable.
In the Bass case, the Court found that
management's attempt to take effective control of a
subsidiary from the stockholders, thereby depriving
the stockholders of a control premium, constitute
irreparable harm that could not be completely remedied
with the cancellation of the newly issued stock.
I think we also cite the Flight
Options case where Vice Chancellor Noble found that
further diluting an already minority position in a
closely held company would irreparably harm the
minority stockholder because you did not know what the
majority stockholder would do with those additional
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
24
CHANCERY COURT REPORTERS
shares in the interim. It could sell it, it could
encumber it in some way --
THE COURT: Right.
MS. CASCIO: -- involve third parties.
Here, we've got a possible sale of
enough shares to dilute our control position to a
Mexican entity beyond the jurisdiction of this court.
And we don't know the terms of that, of that potential
sale. We don't know if they will be restricted in
their further transfer. I think it's very similar to
the issues raised by the Vice Chancellor in Flight
Options.
I would also note in the Klaassen case
the Court noted that actions that were void or
voidable could constitute -- I'm sorry -- taking
actions that would later be found void could
constitute irreparable harm. And, again, since
there's no quorum purporting to issue new securities
to the Mexican entity by this three-person board would
be a void act.
THE COURT: The Klaassen case is Vice
Chancellor Laster's decision in 2013?
MS. CASCIO: Vice Chancellor Laster's.
There were a couple of decisions.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
CHANCERY COURT REPORTERS
THE COURT: That's what I thought.
MS. CASCIO: This is the post-judgment
decision of the stay pending appeal. It does refer
back to the first status quo opinion prior to the --
so the first opinion in the case where the -- I
honestly don't know if it was styled status quo or
temporary restraining order -- was put in place
because of the question of the acts being void.
THE COURT: All right.
MS. CASCIO: So here, the potential
sale of stock to the third party, as I said, the
Mexican entity beyond the Court's reach, would create
an imminent threat of irreparable harm to my client.
Defendant does not dispute any of
these arguments. Instead, defendants simply say
because the written consents are invalid, the
consenting stockholders are not entitled to make any
changes to the board and the CEO office and,
therefore, the plaintiff cannot be irreparably harmed.
The argument conflates the two
separate elements of a motion for a temporary
restraining order and because defendant has not
disputed the irreparable harm, the motion identifies,
including the uncertainty of the composition and the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
26
CHANCERY COURT REPORTERS
proper running of the company, the dilution of
control, and the risk of the company entering into
out-of-the-ordinary actions that would later be found
to be void, plaintiff has more than met its burden of
establishing irreparable harm.
Finally, the balance of hardships tips
decidedly in plaintiff's favor. Plaintiff has made a
strong showing that both it and the company itself
faces irreparable harm from the uncertainty of actions
to be taken by the incumbent board when that authority
is questioned and, in fact, potentially is void
because of the quorum issue.
On the other hand, T3 has made no
showing of hardship to be suffered from entering into
the TRO prohibiting actions outside of the ordinary
course and to prevent the dilution that Mr. Tsumpes is
seeking for his own personal reasons and not to
benefit the company.
T3 does mention the need for
additional financing, but has submitted absolutely no
evidence on that point. And, again, Your Honor, we
just invested $6 million at the very end of last year.
We would -- we would submit that without any showing
of a need of the additional funds, that T3 can't meet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
27
CHANCERY COURT REPORTERS
its burden on the balance of hardships issue.
So we have got on one side defendant's
passing reference to some debt and default as a need
for an additional investment, which is unestablished
and unsupported on the current record. On the other
side we have evidence the plaintiff attached to its
motion that of the e-mail Mr. Tsumpes reacting to the
consenting stockholders and informing them that they
were going to take the action to fill the four board
seats -- it's the December 25th e-mail -- where
Mr. Tsumpes threatened to close the sale of the
additional stock for the purpose of diluting the
consenting stockholders, undoing the changes they were
seeking to make to the board.
It can't be clearer, Your Honor --
just pause a minute -- that that is Mr. Tsumpes'
intent. It says, "The company will immediately take
steps to block it," "it" being adding the four
directors to the board. "This will not happen without
our support. We are involving New York Council to
handle this matter and are prepared to close the other
transactions we have pending to ensure that the
majority position that is currently held by your
investors will be reduced to a non-controlling
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
28
CHANCERY COURT REPORTERS
position."
And the only other argument of
hardship defendant offers is the need to continue to
operate T3's business. But, of course, we're not
seeking to change the CEO pending the conclusion of
this litigation. We're just seeking to place
restrictions on the company's ability to enter into or
to take -- take actions outside of the ordinary
course.
THE COURT: So under your form of
order, Mr. Tsumpes remains in place. He's just
restricted in what he can do until we can get to a
trial; is that right?
MS. CASCIO: Correct, Your Honor.
And, you, know the three incumbents would be the
board. They just are limited in what actions that
they can take. We're not -- although I think we
probably could meet the burden, given Mr. Tsumpes'
e-mail of December 25th and the circumstances here
with this company that we should be -- that the
directors should change over to the ones that we have
elected, but we're not seeking that extraordinary
relief, Your Honor. We just want to ensure that this
company is going to be, you know, in a pause position
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
29
CHANCERY COURT REPORTERS
so that if we can get this resolved quickly and our
directors take over the company, that Mr. Tsumpes and
the people that we believe should be removed don't
destroy the company in the interim or take action to
destroy our rights to be a controlling stockholder and
continue to control the future of this company.
THE COURT: What does this company do?
Like, what are its operations?
MS. CASCIO: They make electric
scooters, as best I can describe it. It has a fancier
name, three-wheel scooters that are primarily target
or -- or sold to police and private security, like on
college campuses.
THE COURT: Hmm. Like Segway scooters
or something --
MS. CASCIO: It's like a scooter.
Almost like my son's three-wheel scooter, but
apparently it's electric.
THE COURT: Okay. But it's primarily
a manufacturing business?
MS. CASCIO: Not quite sure about
that, Your Honor.
THE COURT: All right.
MS. CASCIO: I believe they own both
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
30
CHANCERY COURT REPORTERS
the technology and they manufacture and market it.
There may be some third-party manufacturing involved.
THE COURT: Okay.
MS. CASCIO: So as I said, Your Honor,
the defendant hasn't pointed to any of the provisions
of the status quo order or the TRO as being so
restrictive that it would prevent it from continuing
to operate the business in the ordinary course and,
therefore, again, has not met its burden to show that
the hardships tilt in its favor.
So given this record, we respectfully
submit that the proposed TRO we request is entirely
appropriate and reasonable, and respectfully request
that the Court enter it.
Thank you.
THE COURT: Thank you, Ms. Cascio.
Mr. Renck.
MR. RENCK: Good afternoon, Your
Honor.
THE COURT: Good afternoon.
MR. RENCK: Let me shed a little bit
light about what the company does.
THE COURT: Sure.
MR. RENCK: She's right. It is an
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
31
CHANCERY COURT REPORTERS
electric scooter, but it is essentially a three-wheel
Segway. You've seen them probably in the malls or at
parks and stuff. It's, you know, security detail on
essentially three-wheeled scooters or versions of
Segways.
THE COURT: And the company
manufactures it or it's principally manufactured?
MR. RENCK: They do. And that is part
of what is animating this entire dispute, is that, you
know, these things are manufactured, they're being
done the way they're being done. And, you know, this
transaction done with these stockholders was not ever
intended to be a control situation. They knew it at
the time that they entered into it. And essentially
the -- I think this would ultimately be taking the
manufacturing, moving it to China and a complete
change in the direction of the company. That's kind
of the background that animates all of what's
happening here today.
THE COURT: I did see, you know, that
discussion at the beginning of your papers, but it's
not disputed -- well, certainly not disputed in the
papers. So you'll have to tell me otherwise now --
that the defendants -- excuse me -- that the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
32
CHANCERY COURT REPORTERS
plaintiffs -- I guess we have one plaintiff, but the
eight stockholders or seven, if you look at the second
consent, to be more precise, as to the time that those
consents were signed owned a majority of the
outstanding shares of the company; right?
MR. RENCK: Right. You're right. We
have not taken that position at this point in the
litigation because, you know, we felt like there was
kind of a rifle shot to deal with this, and it was
based on these consents, not necessarily on whether
they actually had them or not, had the stock equity.
As far as the -- you asked about, you
know, what does the company -- or what does the
plaintiff know about the company, and the answer was
there's not much because they haven't had filings.
You know, the company is working closely with auditors
and trying to get their, you know, financial house in
order, to get caught up on their SEC filings; but this
idea that the company, plaintiff had no visibility
whatsoever is not right. They just did a big
transaction in November of 2014. It was extensive due
diligence. I don't have the due diligence list with
me, but they know what was going on.
I may back up and maybe start kind of
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
33
CHANCERY COURT REPORTERS
at the ending here on the irreparable harm and the
balance of the equities and then we can kind of wade
into the consent issue. I mean, we didn't argue a lot
about the quorum issue because of exactly what Your
Honor asked Ms. Cascio. You know, when this thing
came in to the company last Friday, you know, they
just didn't take any of those actions that were in
that e-mail.
THE COURT: Right.
MR. RENCK: So --
THE COURT: None of the actions that
were referenced in the e-mail have happened to date?
MR. RENCK: Correct. And, you know,
that -- you know, as of Tuesday, there was a
standstill agreement in place. So --
THE COURT: Okay.
MR. RENCK: -- you know, none of that
has been done.
THE COURT: Remind me -- maybe this
was discussed on Tuesday's call -- the nature of the
standstill that's been in place as of Tuesday. Did
you basically agree to the provisions that are in the
form of a TRO order?
MR. RENCK: Correct, Your Honor.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
34
CHANCERY COURT REPORTERS
THE COURT: Tuesday until now?
MR. RENCK: We did agree to do that
until now, kind of let everybody deal with this on
kind of a slower basis. They have not taken those
actions.
But, you know, we don't think -- and I
think that that's why there's no irreparable harm
here, Your Honor. That immediacy has gone. The
company is not doing anything right now. This is a
stockholder that is a minority stockholder.
Everything that they've complained of in their papers
that might happen to them, whether it's a dilution or
whether it's anything else, there are other ways to
deal with that if it actually happens and they feel
like they're aggrieved.
THE COURT: Well, I mean, if the order
goes away and there's merit to their claims, there's
enormous irreparable harm potentially, isn't there?
Because all sorts of things could be done to change
the status quo while there's a cloud under who had the
right to act on behalf of the company. Would you
really disagree with that?
MR. RENCK: Well, I do, Your Honor. I
mean, you know, let's just take whatever -- let's go
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
35
CHANCERY COURT REPORTERS
through that e-mail. If the issue is you've got --
and, you know, they did say, you know, they put the
$6 million in. They don't know what happened to it.
There's a big, long list of all these debts that got
paid right after that deal was done in the deal docs
that -- you know, there's the wiring instructions. So
all of them went out to pay the debts of the company
that they had, but they still have significant debts.
There is -- that's the explanation for that.
But, you know, if you're going to do a
deal with this company out of Mexico or whenever it
is -- I'm not sure exactly -- but I think that may be
right, that's not been done. They were well deep into
due diligence back in November when this all came
about. Even if you did do that and issued equity to
this investor on a basis that is, you know -- if you
do it at a price that's fair and, you know -- I don't
know why they have a right to preserve their equity
ownership at the same percentage it is right now.
They didn't bargain for that in the agreement. They
did with the stock purchase agreement. They didn't
pay for a control block. So --
THE COURT: Well, but -- I mean, the
issue for today is whether as of a certain day in the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
36
CHANCERY COURT REPORTERS
past -- we can debate whether that's December 26th or
January 20th, but it sounds like it's irrelevant for
today's discussion -- they have majority control of
this board and, in turn, have changed the management
of this company. And those people ought to be
deciding what equity investments ought to be in play
or not. That's the key question.
So I think you really got to get to
your merits about why you think that consent's
invalid.
MR. RENCK: Sure, Your Honor. Your
Honor, you know, we think that 211(b) is pretty clear
about this. There -- EMAK talks in a lot of different
places and there's a lot of language in there about
acting in lieu of an annual meeting or between annual
meetings or in between annual meetings. You know, in
the Chancery Court opinion of Vice Chancellor Laster
in talking about the Crown consents, you know, makes
the observation that, you know, "Stockholders cannot
simply use a non-unanimous written consent to ...
elect successor directors, between annual meetings."
And so, you know, when you read 211(b)
--
THE COURT: Successor directors.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
37
CHANCERY COURT REPORTERS
We're talking about vacancies.
MR. RENCK: I'm sorry?
THE COURT: You used the word
"successor directors." We're talking about filling
vacancies here.
Let me ask a different question. For
this company, T3 I guess it is, is there anything that
prevents a stockholder -- I think it's assuming they
had 20 percent. I looked at the bylaws real quick --
from taking any action at a special meeting?
MR. RENCK: No. They can call a
special meeting, Your Honor.
THE COURT: And would you agree, at a
special meeting these stockholders could fill the
vacancies with their nominees?
MR. RENCK: Well, I think so, if they
comply with 211(b). You know, my reading of 211(b) --
and I think it's important --
THE COURT: 211(b) speaks to annual
meetings, doing something in lieu of an annual
meeting. So my question is could -- would you agree
that the plaintiff and their stockholder group,
assuming they validly called a special meeting --
because I looked at the bylaws for this company.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
38
CHANCERY COURT REPORTERS
They're in the record. And a special meeting can be
called for any purpose. That's what it says. I think
you need 20 percent of the stockholders to call it,
but it can be called for any purpose.
So my question is: Assume a validly
called special meeting. Would they have the right at
that meeting to elect directors to fill vacancies, in
your view?
MR. RENCK: If they call a special
meeting, yes, Your Honor, as long as they go through
whatever -- if there's notice requirements and any of
those, you know, type of hoops that they have to jump
through, then, yes, at a special meeting they could
have done this. But that's not how they've done this,
Your Honor.
THE COURT: I understand. Let's go to
Section 228. Section 228 says you can -- unless your
charter says you can't act by written consent, you can
take any action by written consent that may or could
be taken at an annual or special meeting. And forget
about your 211(b) argument for a moment. Wouldn't
that suggest, well, therefore, if they could do it at
a special meeting, they could do it by written
consent?
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
39
CHANCERY COURT REPORTERS
MR. RENCK: I don't think so, Your
Honor. I mean, I -- you know, I -- I read EMAK. I
know Your Honor was involved in it. So you certainly
have more familiarity than I do with it. But, you
know, they were acting in between annual meetings in
doing what they were doing.
THE COURT: There's actually like two
consents going on in EMAK. One is, as Ms. Cascio
pointed out, I think it was the Crown side. Crown was
an Ackerman-affiliated entity that had a preferred
security and purported to take certain actions
pursuant to the voting rights of that preferred
security. That was one thing that was going on.
The second thing that was going on was
that Take Back EMAK, which was a plaintiff insurgent
slate, was seeking to elect directors, including some
that were, by virtue of filling a vacancy, not an
annual meeting, but after an annual meeting -- in
fact, the whole reason it was done that way was
because they missed their opportunity at the annual
meeting.
With respect to the second, there was
no dispute or holding that said they couldn't do that.
The issue concerned whether or not they validly had
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
40
CHANCERY COURT REPORTERS
enough shares because of an arrangement in acquiring
some of the shares.
Now, I'm not saying it expressly says
you can, except for the sentence that Ms. Cascio
pointed to, which in turn cites a treatise, which in
turn cites lots of authorities. I'm just drilling
down with you sort of what's in those underlying
authorities. It certainly had always been my
understanding of the law that absent a charter or
bylaw provision expressly telling you if you have the
ability to act by written consent, that you could,
indeed, elect directors to fill a vacancy by consent.
Now, I've seen your 211(b) argument.
But I'm looking at 211(b), and it seems to me what it
says is if you were trying to elect directors by
consent in place of an annual meeting, that specific
circumstance, not in place of, for example, every
scenario by which you could elect a director. And
that's why I focused you on the special meeting
scenario.
MR. RENCK: And I understand, Your
Honor. I understand that's the argument that
Ms. Cascio made, and, you know, that this -- the "in
lieu of" language. But, you know, as I read the EMAK
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
41
CHANCERY COURT REPORTERS
Supreme Court decision, I didn't get the flavor that
that was where -- you know, that that -- I looked at
all the briefs in front of the Supreme Court. This
issue wasn't briefed that heavily. I listened to the
oral argument. It was only one sentence by your
former partner about -- that -- kind of, that dealt
with this issue. It was only a couple minutes, if at
all, about this. So I -- it wasn't fleshed out that
heavily in, kind of, the presentation. But, you know,
when you read Justice Holland's opinion, you know,
he's -- he clearly seems to be talking about actions
in between meetings.
And so I just -- I guess -- I
understand the "in lieu of" argument and that the --
but I just -- I'm not sure 211 was intended to be that
restrained; that it was only the "in lieu of." Even
the ... You know, even the -- I think it's Black and
Alexander statement that they attach to their reply
papers talking about those amendments, you know, seems
to be contemplating, you know, the 211(b) was put in
place to do exactly and prevent exactly the kind of
mischief that's happening. And, you know, it talks
about ... 211(b) -- Section 211 has been amended to
make it clear that unanimous written consent to the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
42
CHANCERY COURT REPORTERS
election of directors can serve as a substitute for
the annual meeting process. Okay. Furthermore, as
amended --
THE COURT: Cannot? Is that what that
was? Can or cannot?
MR. RENCK: Can.
THE COURT: Can, okay. Then it
probably goes on to explain --
MR. RENCK: Then it goes on to explain
we're trying to prevent the mischief of insurgents
coming in. And that could be at any time. It doesn't
have to be at the annual meeting. It could be exactly
this is the situation. You know, 211(b)'s
introductory sentence, it says, "Unless directors are
elected by written consent in lieu of an annual
meeting as permitted by this section, an annual
meeting of stockholders shall be held for the election
of directors [at] a date and ... time designated ...."
As far as I know, this is the section that deals with
electing directors.
And, you know, I read 228 as being the
more general statement that stockholders can act by
written consent and here's the mechanism for acting.
And generally the statement is if you're acting by
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
43
CHANCERY COURT REPORTERS
written consent, it's whatever the vote is that's
required to do what you're trying to do. So if you
have something that you're trying to do that requires
a two-thirds vote, you have to have a two-thirds vote
by the consent.
I view 220(b) as being a more specific
version of that. If you are electing directors -- and
I think it can be in between annual meetings because
that seems to be what EMAK is saying. If you were
acting in between annual meetings, you still have to
comply with this section. And I don't think that --
THE COURT: Whoa, whoa, whoa. Okay.
So EMAK has a specific sentence. Hold on one sec. It
says, "Stockholders" -- I'm quoting now.
"Stockholders can act in between annual meetings to
remove directors, to fill vacancies, or to fill newly
created directorships ...." It's a flat clear
statement. Now, how would you do it between an annual
meeting if you're not doing it in a special meeting or
written consent?
MR. RENCK: Well, those would be the
two ways, Your Honor.
THE COURT: Right, okay. So that --
so the next question I have: Did you look at the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
44
CHANCERY COURT REPORTERS
treatise that EMAK cites?
MR. RENCK: I did not have it, Your
Honor.
THE COURT: Okay. So when you look at
that treatise, you're going to see a sentence that
says the following -- and it will cite a bunch of
cases. "The case law suggests stockholders may,
operating independently and over the opposition of the
board, fill vacancies and create and fill new
directorships either by causing a special meeting to
be convened or by using written consents under
Section 228."
That's what it cites to, which in turn
cites the two decisions by Chancellor Seitz and a
decision by Chancellor Allen.
So you're telling me, like, a version
of the law that's very different than anything I'd
ever understood that seems pretty well-documented. So
you're going to have to help me out how this sentence
in 211, which appears in the context of a sentence
referring to annual meetings, isn't just saying that
if you wanted to elect directors to a vacancy at an
annual meeting and to do it by -- instead of having an
annual meeting and do it by consent, then you have to
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
45
CHANCERY COURT REPORTERS
do it by unanimous consent, or there is another
circumstance, and, that is, everybody could be removed
and you fill the slots, but only dealing in the
context of when you're purporting to act in the
context of doing something in place of having the
annual meeting.
MR. RENCK: Your Honor, I understand.
And it strikes me, though, as odd that the construct
is that you can -- if you just look at 228 and you're
doing -- you're filling vacancies between annual
meetings, you can do that through the version of using
written consents, which had a history of not being,
you know, very well thought of. They took their time
to get settled in. And if you're going to use that --
if you're going to look to 228 and say that, then
why -- it strikes me as odd that you can act in
between meetings in a way that is less restrictive by
using just a mere majority than what you could do at
an actual annual -- you know, doing it, you know, in
lieu of an annual meeting. If you were going to do it
at kind of annual meeting time and you weren't going
to go out and hire the, you know, room and the hotel
and hire the, you know, inspector of elections because
you had just a small electorate that is all on the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
46
CHANCERY COURT REPORTERS
same page about what they're going to do and that's
kind of -- that was my understanding of why they do
this, is that, you know, it doesn't make sense to --
to make people jump through hoops they don't have to
jump through if there's no dissenting opinion. If you
go back and think about why it is a board has to act
by unanimous written consent -- because there's always
been a history of the Court saying "Look, we value
people getting around the table and debating if there
is dissent and" -- because you might be able to
convince somebody to come over to your side.
And so it strikes me as odd that if
you're going to replicate or, you know, not use the --
an annual meeting to do an election and that has to be
unanimous unless you have, you know, no people in
there, you know, why is it that you can have an
insurgent come in in the middle of the year and do it
on a lesser standard? It just -- it strikes me as an
odd construct. And I just -- I think that the 211(b)
is a much more specific -- even though it's in a
section titled "Meetings ...," but it's a subchapter
talking about, you know, meetings and elections and
voting. And I'm not aware of, you know, another
section that so specifically talks about electing
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
47
CHANCERY COURT REPORTERS
directors to office. You know, 228(b) is, you know,
pretty general. It talks about anything.
And so, Your Honor, we -- you know, we
think that 211(b), you know, says that you got to
either do this -- if you're going to do this -- if
you're going to fill vacancies, you're going to have
to do this unanimously or you got to have all the --
all the spots have to be empty. And, you know, I
think that's where, you know --
THE COURT: So your proposition is
that your directors are -- this board is frozen until
the company's next annual meeting. No stockholder
could come along, either hold a special meeting under
your theory -- well, a moment ago I thought you were
agreeing they could hold a special meeting and elect
directors, in which case logically they have to be
able to do by consent.
MR. RENCK: Yeah.
THE COURT: But -- so under your
theory, you're saying nobody can change this board
until the next annual meeting.
MR. RENCK: No, that's not what I'm
saying, Your Honor, because --
THE COURT: What's the circumstance
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
48
CHANCERY COURT REPORTERS
they can in between the annual meeting?
MR. RENCK: They can call a special
meeting.
THE COURT: Okay. So, then, how do
you deal with the language -- let's look at 228 for a
minute. So the first sentence -- I hope you can hear
me. The first sentence of 228 says, "Unless otherwise
provided in the certificate of incorporation" -- I
don't think you contended that the charter takes away
their consent right -- "any action required by this
chapter to be taken at any annual meeting or special
meeting of the stockholders of a corporation or any
action which may be taken at any annual or special
meeting of [the] stockholders ...," and then it goes
on.
They can do it by consent. So if you
could do it at a special meeting, which you just
agreed with me they could, why isn't it that make
clear they can do it by consent?
MR. RENCK: You know, I -- I think
it's because I'm wedded to this idea that -- even if
you have a special -- if you have a special meeting,
you're not acting by consent. So everybody's there.
You go through the notice procedure. You do whatever
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
49
CHANCERY COURT REPORTERS
you have to do. You go get your room, you get your
inspectors of elections. You have everybody sitting
there. You get the breakfast delivered in, and you
have your special meeting because it's not an annual
meeting.
THE COURT: I may not get breakfast at
this one.
MR. RENCK: Some of them have bagels
and stuff.
But that's different than acting by
written consent. If you're acting by written consent,
you're not at a meeting, whether it's special or
annual. That's where I think this issue -- that's
where I'm wedded to the 211(b) issue is that that is a
very specific provision of the DGCL that talks about
how you can elect directors via written consent. And
I think it trumps the more general idea that you can
just generally act by written consent under 228
because it's a specific application of that.
And if you're going to do it by
written consent and elect directors and it's going to
be in between an annual meeting -- you know, there's
no meeting, no special, no annual, no nothing. You're
doing this on your own just like they've done here --
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
50
CHANCERY COURT REPORTERS
it either has to be unanimous, because everybody's on
board, or you need to call the special meeting so that
people can, you know, voice their dissent. And I
think that's how this construct was set up.
THE COURT: All right. So what else
do you have?
MR. RENCK: I think we've talked a
little bit about the irreparable harm. Again, I just
don't -- they haven't taken any of those actions.
That's come and gone. They -- they make a lot about
the three-director issue. I mean, if there's a -- if
there's an injunction in place or a TRO they can't do
anything, anyway, other than what's in the -- you
know, permitted. But if not, I mean, the bylaws are
pretty clear that, you know, the directors could act,
even if they're less than a quorum, to fill it if they
were able to act and actually do things. But they
haven't taken that because they're at three right now
and they've agreed not to do anything.
I do think that all of this harm that
they say that would occur to them is something that
they could have protected themselves from
contractually. They haven't. And I don't think it's
something that the Court can't sort out if later they
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
51
CHANCERY COURT REPORTERS
decided that any actions taken to dilute them happen
to be unfair for some reason, why it was an
infringement motive or whether it was, you know --
they say that the -- any new equity was sold for, you
know, a wasteful price or whatever the suit might be.
But that's -- we just don't have that right now, and
the specter of that is not there.
As far as the balance of the equities,
again, you know, we think that these things are so
clearly invalid, that, you know, the company needs to
be able to do this and they can protect themselves.
They've been protected. They are minority
stockholders right now. They have all the protections
of the DGCL, the document -- you know, the governing
documents of this company and, you know, fiduciary
duties. So if the -- if the board, you know -- if
they get to where they have more than three people and
they can do when they do things that the plaintiff
feels aggrieved about, I have no doubt that they will
assert them. I think -- I suspect that this is just
the first salvo of a longer-running dispute between
these parties as it is.
I think that was all I had, Your
Honor. Unless Your Honor has some additional
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
52
CHANCERY COURT REPORTERS
questions.
MR. RENCK: I guess I didn't talk
about the dates and the stuff.
THE COURT: Sure.
MR. RENCK: I mean, I think most of
this either falls or rises on this 211(b) argument.
THE COURT: Right.
MR. RENCK: The date thing, I think
they clearly recognize they had a problem. I think
the Wexford case, you know, does say, you know, you've
just got to do it. You need to be able to tell when
the 60-day clock starts and ends.
The delivery issue I do think makes a
difference. And I think the Tiber case makes that
point, is that's the mischief that can happen when you
do something by written consent and you don't
promptly -- I mean, promptly is probably context
specific; but, you know, if you do something by
written consent and then don't tell anybody and you do
a lot of things pursuant to that written consent and
then all of a sudden you tell somebody, you know --
THE COURT: Well, what's -- let's be
practical here, though. I mean, I know what the
statute says -- and I did look at the Wexford case, at
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
53
CHANCERY COURT REPORTERS
least the part you say, briefly. But let's be real
about the prejudice here.
You certainly know about it and your
client know about it and knew about it very quickly,
whether or not it was -- technically the notice went
out to all the other shareholders. You're in court;
you're expressing your views. It escapes me what on
earth would be the conceivable prejudice to other
shareholders, especially ones that might be of like
mind with you, since you're obviously advocating
against what they're doing in the first place.
MR. RENCK: Well, Your Honor, there
was some delay between the notice. I mean, you know,
the consent -- the first one was delivered -- it was
dated what, December 17th or something like that. It
was delivered -- or ... let me get --
THE COURT: It's December 17th.
MR. RENCK: December 17th. You know,
it was finally delivered to the company during the
Christmas holiday on December 26th. You know, the
second written consent was executed on January 15th.
THE COURT: What was the date this
case was filed? Remind me.
MR. RENCK: It was last Friday. I
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
54
CHANCERY COURT REPORTERS
think it was the 16th.
THE COURT: Okay.
MR. RENCK: And so, you know, there
has been some delay here that, you know, these
consents are getting, you know, entered and then it
seems like, you know -- I'm not sure what the delay
is, why there was a delay in getting these to the
company. But, you know, even the second one, it
purports to be, you know, done --
THE COURT: Well, what's --
MR. RENCK: -- on the 15th and we get
it on the 20th.
THE COURT: What's the prejudice?
That's really my question.
MR. RENCK: Well, the second one,
there wasn't much on it, Your Honor, because we had
already been, you know, kind of, to the point where we
had agreed to the standstill. So, you know, nobody
had agreed to that.
THE COURT: Even -- even the first
one, what's the prejudice?
MR. RENCK: Well, Your Honor, they
didn't take any actions between the date of -- you
know, there was nothing that happened, although, you
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
55
CHANCERY COURT REPORTERS
know --
THE COURT: The prejudices, we might
have had otherwise had a chance to dilute them before
somebody could get in court? I hope that's not what
you're saying.
MR. RENCK: No, Your Honor. No. And
you're right. The company didn't do anything there;
but the problem is now is that the balance of the
hardships is -- is an issue because the company is
locked down and can't, you know -- it can't do a big
-- you know, the big transactions that it needs to do,
and we're kind of stuck in this litigation. And I do
think --
THE COURT: So let me ask you on that.
This seems like a pretty narrow dispute. Maybe you
disagree, and I guess I want to hear if you do. How
long do you think it can take to get to trial?
MR. RENCK: Well, you know, it
depends. I mean, we've tried to keep it narrow for
purposes of this. I mean, I suspect, you know, the
first written consent that came in, all the -- you
know, it was written -- you know, I don't read
Chinese. So, you know, I --
THE COURT: I thought that was one of
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
56
CHANCERY COURT REPORTERS
your many skills.
MR. RENCK: No, Your Honor. I do a
lot of things, Your Honor, you know, but that's not
one of them.
And I -- you know, so whether there
were defenses to that because of some language issue,
I don't know. And whether you have to depose people
in China, I just -- I haven't gotten that far, Your
Honor.
THE COURT: Okay.
MR. RENCK: But I suspect this will --
this dispute is going -- if it goes forward, will kind
of -- as these things are prone to do, will somewhat
expand, you know, beyond the narrow discussion we're
having today about 211(b) and 228.
THE COURT: Okay.
MR. RENCK: Thank you, Your Honor.
THE COURT: Thank you, Mr. Renck.
Ms. Cascio.
MS. CASCIO: Just a few points, Your
Honor.
THE COURT: Sure.
MS. CASCIO: Excuse me.
I heard Mr. Renck say that the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
57
CHANCERY COURT REPORTERS
transaction by which my client and the other
consenting stockholders purchased 65 percent of the
company was never intended to be control and that we
knew that. There isn't any evidence of that. I'm not
going to represent what the stock purchase agreement
says, Your Honor, because I haven't seen it yet. But
what I haven't heard from them is there was a
stockholders agreement that required us to vote for
their -- for their directors, there was a standstill
that prevented us from taking any action for a period
of time while they worked out the transaction with the
Mexican entity, or that they amended the bylaws to
take away the right for us holding 65 percent of their
company's stock to act by written consent while they
finalized their Mexican --
THE COURT: Right. It has been done
under the charter anyway, doesn't it? They have to
take it -- I guess it's academic because it didn't
happen.
MS. CASCIO: There was no action, Your
Honor. There is no restriction that I'm aware of --
again, this is in its infancy, but I haven't heard
from the defendants, that there was a restriction that
they placed us on taking the action that we took here.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
58
CHANCERY COURT REPORTERS
I think there was a question about
what visibility my clients had into this company. I
believe the question was -- was what had -- that Your
Honor posed to me was what had occurred between
December 26th and January 20th. And I said that we
didn't know the due diligence occurred before that.
But I really meant -- and I want to
just be clear so the Court -- because I don't want to
make a representation -- I don't know what this
company has been done, but I don't know what they have
done since December -- or between December 26th and
January 20th, in part because they don't file 8-Ks. I
don't -- we don't have visibility --
THE COURT: Right.
MS. CASCIO: -- into.
THE COURT: That was the time frame of
my question.
MS. CASCIO: Next point. Honestly, I
can't remember -- recall from my notes how it came up
as I stand here. But the -- I guess the question was
with respect to the -- Your Honor posed a question
about the irreparable harm. And the point is that I
think that 225 actions, that TROs or status quo orders
are customary these types of fights that we're having
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
59
CHANCERY COURT REPORTERS
right now.
And ... we discussed EMAK. And I
think Your Honor and I are on the same -- in alignment
in understanding the facts of that case. And I do
think it applies to only successor directors.
But going back to 211(b) -- and it's
in our papers, but maybe I can pull together your
discussion with Mr. Renck about the purpose of 211(b).
The purpose of 211(b) was to answer Chancellor Allen's
question in the Hoschett case. The question we quoted
was, "... when directors are designated through a
consent process that removes holdovers and designates
replacements, as here, for what term do they hold
office?"
And the question was raised because
that was a 211 case. Plaintiff brings a 211 case.
The defendant says, "Oh, well, we had written consents
a couple of months ago that elected directors. So
we've complied with Section 211. We don't have to
hold an annual meeting."
It doesn't say -- neither 211 nor the
Hoschett -- Hoschett -- Hoschett --
THE COURT: I think it's Hoschett.
MS. CASCIO: -- case says that you
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
60
CHANCERY COURT REPORTERS
cannot take action by written consent in between
annual meetings with respect to changing the board.
Mr. Renck says we don't have to worry
about the things that were in the e-mail because
they've come and gone. But he also said that the
Mexican entity transaction had been -- they'd been
working on it for months. In their papers I believe
they said that Mr. Tsumpes had notified that he was
going to convert some stock before we even purchased
our shares. So I just -- honestly, there's no comfort
that these things will not be revived again if there's
no order maintaining the status quo in the interim.
Unless Your Honor has any other
questions, thank you.
THE COURT: I don't.
Mr. Renck, anything else?
MR. RENCK: Your Honor, may I make one
statement?
THE COURT: Sure.
MR. RENCK: Mr. August reminded me of
a fact and it's about the successor directors. One of
these seats was a successor director, because as you
recall from our papers, you know, one of the -- there
was a -- a condition added to the deal documents at
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
61
CHANCERY COURT REPORTERS
the very last minute requiring the resignation of one
of the board members. And so, you know, I -- I --
THE COURT: Did he resign?
MR. RENCK: He did. And so one of
these purported four that they've added is, I would
call that a successor director. You know ...
THE COURT: But how? Because if he
resigned, then it creates a vacancy. You might say
there was some trickeration surrounding circumstances
of his resignation, I guess, but if he resigned, I
think you just have a vacancy.
MR. RENCK: Okay. Well, I did want to
make that -- you know, because that was a condition
that they had put on to that.
THE COURT: Okay.
MR. RENCK: So it wasn't like a
long-running vacancy that had been sitting there.
THE COURT: I understand.
MR. RENCK: It was pretty close in
time.
THE COURT: I'd like to recess
briefly, and I think I'll be in a position to give you
ruling, but I'd like to take a few minutes. If I
don't think I'll be able to give you a ruling, I'll
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
62
CHANCERY COURT REPORTERS
let you know, but if you can just bear with me, we'll
stand in recess for a bit.
(A short recess was taken from 2:36
p.m. until 2:48 p.m.)
THE COURT: All right. Thank you. I
am in a position to give you my ruling, and I'll
provide that now.
Pending before the Court is a motion
of plaintiff Elite Horse Investments Ltd. for a
temporary restraining order against defendant T3
Motion, Inc., which I'll refer to as "the Company" or
"T3." For reasons that I'm going to explain, I'm
going to grant the motion for a temporary restraining
order.
Some brief background. The plaintiff
is a stockholder of the Company, a Delaware
corporation, that's based in California. Section 3.02
of the Company's bylaws, which are Exhibit A to the
amended complaint, authorizes seven directors on its
board of directors. Before December 26th, 2014, the
Company's board comprised three members: William
Tsumpes, who was also the Company's CEO; Steven Healy;
and Ki Nam. Thus, at that point in time, the board
had three members and four vacancies.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
63
CHANCERY COURT REPORTERS
On December 26th, 2014, the plaintiff
and seven other stockholders who held 60 million
shares of the Company, or approximately 65 percent of
its shares, delivered a signed stockholder written
consent dated December 17, 2014, to elect four
individuals to the Company's board as new directors.
Those individuals are Zhang Mi, Yao Ran, Ying Jie Xu,
and Wu Jiang. I'm going to refer to the consent
that's dated December 17, 2014, as the first
stockholder consent, which is attached as Exhibit B to
the amended complaint.
On Thursday, January 15th, 2015,
Director Tsumpes contacted Steven Healy and Ki Nam to
hold a board meeting sometime over the weekend or on
Monday. Tsumpes' e-mail is attached as Exhibit D to
the amended complaint. Tsumpes did not notify the
four purportedly new directors about this board
meeting. The tentative agenda of the urgent matters,
as it's explained in the e-mail, of company business
to be considered at the meeting included selling
equity to a third-party investor, converting debt held
by Tsumpes and an entity called T-Energy to common
stock, and converting unpaid salary owed to Tsumpes to
common stock.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
64
CHANCERY COURT REPORTERS
On January 16, 2015, plaintiff
initiated this action pursuant to 8 Del. Code Section
225 seeking a declaratory judgment that the new
directors were validly elected to the Company's board
by the first stockholder consent. There have been
subsequent factual developments as alleged in the
amended complaint, which the plaintiff filed on
January 21st, 2015.
On January 15th and 16th, 2015, the
new directors and Ki Nam executed a unanimous written
consent effective upon the removal of William Tsumpes
and Steven Healy from the board to, first, remove
Tsumpes as CEO and, second, appoint Zhang Mi as the
CEO. That was a director consent that was executed,
and that's attached as Exhibit G to the amended
complaint.
On January 20th, 2015, the plaintiff
and six other stockholders, who held approximately
58 percent of the Company's stock, delivered a signed
written consent dated January 15th, 2015, that
ratified and retook the actions reflected in the first
stockholder consent and removed Mr. Tsumpes and Steven
Healy from the board. And I'll refer to that consent
as the second stockholder consent, which is attached
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
65
CHANCERY COURT REPORTERS
as Exhibit E to the amended complaint. If effective,
after the second stockholder consent, the board would
be comprised of Ki Nam and the four new directors.
On January 20th, 2015, the director
consent that I referred to earlier also was delivered
to the Company.
On January 21st the plaintiff filed an
amended complaint asserting two counts. In Count I,
plaintiff seeks a declaratory judgment that the first
and second stockholder consents were valid and
effective. In Count II, plaintiff seeks a declaratory
judgment that the director consent was valid and
effective.
Plaintiff now seeks a temporary
restraining order for two overlapping reasons. One,
to prevent the board from taking certain actions that
would purportedly cause irreparable harm to the
Company and, two, to maintain the status quo for the
company pending resolution of the plaintiff's 225
claim.
I think there has been agreement in
this case to expedite the proceedings. So I'm not
going to separately address that, and we'll talk a
little bit at the end how this case will proceed in
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
66
CHANCERY COURT REPORTERS
terms of a schedule.
Let me just briefly comment on the
legal standard for a TRO and then I'll go to my
analysis.
For establishing a temporary
restraining order, the plaintiff has to demonstrate
three elements: a colorable claim on the merits,
existence of imminent irreparable harm, and the
balance of the hardships that favors it as the moving
party. I should add, I think that is the correct
legal standard. But even if I were to apply, as I'll
articulate a little further later, that the standard
were the higher standard applicable to a preliminary
injunction motion of demonstrating a reasonable
probability of success on the merits, I believe that
standard has been met as well.
Of those elements, imminent
irreparable harm is the most important element,
although in this case, interestingly enough, most of
the attention really has been spent on the merits.
And it does seem to be largely controlled by those
merits.
In my opinion, the plaintiff has
demonstrated all three elements, though, very clearly
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
67
CHANCERY COURT REPORTERS
in this case. There are three arguments that are made
by the defendant that deal with the merits. And I'll
go through those in turn.
The primary argument, as I think
counsel candidly acknowledged, is the contention that
the first stockholder consent was unlawful under
Section 211(b) because, as a less than unanimous
stockholder consent, the first stockholder consent did
not remove all the company's directors before filling
vacancies.
It is preliminary, but I disagree very
plainly with the interpretation of Section 211(b)
that's been articulated here. And I don't find,
frankly, that provision to be relevant here.
Section 211(b), in my view, applies
when a stockholder written consent electing directors
purports to be in lieu of -- and I emphasize "in lieu
of" -- an annual meeting. The first stockholder
consent here does not purport to be in lieu of an
annual meeting. It simply seeks to elect directors to
preexisting vacancies, and it seeks to do so, in
effect, between annual meetings.
Section 228 of the Delaware General
Corporation Law provides that -- and I'm quoting --
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
68
CHANCERY COURT REPORTERS
"Unless otherwise provided in the certificate of
incorporation," any action that is required or
permitted to be taken at an annual or special meeting
may be taken by written consent of stockholders.
Section 2.09 of the Company's bylaws includes
practically identical language, permitting
stockholders to take any action that is required or
permitted to be taken at an annual or special meeting
by written consent. Thus, the question becomes
whether at a special meeting and, thus, by written
consent, the Company's stockholders may elect
directors to fill vacancies, i.e., at a moment that
would be between annual meetings.
In my opinion -- and, again, I'm not
reaching a final conclusion on the issue because this
is preliminary and we've only had limited time to
research and brief these issues. But, nonetheless, as
I said, I think it would even meet the reasonable
probability of success standard. I believe the
plaintiff will be able to establish that stockholders
may, indeed, elect directors to fill vacancies at a
special meeting and, thus, may do so by written
consent.
As the plaintiff notes in its reply
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
69
CHANCERY COURT REPORTERS
papers, the Supreme Court stated in Crown EMAK
Partners, LLC versus Kurz that -- and I now quote --
"Stockholders can act in between annual meetings to
remove directors, to fill vacancies, or to fill newly
created directorships ...." In doing so, the Supreme
Court cited a leading treatise on Delaware corporation
law, which states -- and I now quote again -- "The
case law suggests that stockholders may, operating
independently and over the opposition of the board,
fill vacancies and create and fill new directorships,
either by causing a special meeting to be convened or
by using written consents under Section 228."
The authorities cited by that treatise
include Chancellor Allen's decision in DiEleuterio
versus Cavaliers of Delaware, Inc. and two decisions
by Chancellor Seitz, including a seminal decision in
Campbell versus Loew's.
Citing to Campbell versus Loew's, Vice
Chancellor Laster recently held in the Klaassen versus
Allegro Development Corporation case that, quote, "As
a matter of common law, stockholders having the power
to vote in an election for the vacant directorship can
fill the vacancy."
Now, there's some subsequent history,
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
70
CHANCERY COURT REPORTERS
if I recall correctly, concerning the Klaassen case;
but I'm pretty confident, without having
double-checked prior to this hearing because we did
this rather quickly, that that conclusion is not
something that was in contention in the subsequent
history of the Klaassen case. I can be proven wrong
on that, but that's my understanding.
The treatise that I referred to
earlier that EMAK cites goes on to state, "The case
law suggests that any intention to deprive
stockholders of the power to fill both vacancies and
newly created directorships must be explicit and
unambiguous."
Here, no provision of the Company's
charter or its bylaws has been identified that says
anything to the effect that only directors may fill
vacancies or stockholders may not fill vacancies. To
the contrary. Section 223(a) of the Delaware General
Corporation Law provides default rules providing that
directors may fill vacancies. And there is
practically identical language in Section 3.05 of the
bylaws providing that director vacancies may be filled
by directors, but not ruling out that they cannot also
be filled by stockholders.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
71
CHANCERY COURT REPORTERS
Furthermore, the Company's bylaws,
Section 2.02 in particular, expressly provide that
special meetings of stockholders may be called for any
purpose or purposes.
So for all these reasons, and
considering the entire framework of the statutory
context and taking into account the Company's charter
and bylaws, I conclude that it is reasonably colorable
and, as I indicated earlier, indeed, reasonably
probable that the plaintiff will be able to
demonstrate that the consenting stockholders here had
the ability under Delaware law to elect the new
directors to fill vacancies and that the Company's
Section 211(b) argument is without merit.
The company's second argument is a
technical one. Specifically, the company argues that
the signatures of the consenting stockholders were not
individually dated regarding the first stockholder
consent and, thus, that that consent did not comply
with the requirements of 8 Del. Code Section 228(c),
which provides, quote, "Every written consent shall
bear the date of signature of each stockholder or
member who signs the consent ...." And the Company
cites to Vice Chancellor Lamb's decision in H-M
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
72
CHANCERY COURT REPORTERS
Wexford, LLC versus Encorp for the proposition that
this Section 228(c) requirement is to be strictly
construed.
Here, the first stockholder consent is
dated December 17th. It's typewritten on the first
page, and on the signature page it states that, quote,
"... the undersigned" -- and I'm ellipsizing a little
language -- "have executed this Written Consent on and
effective for all purposes as of the date first
written above."
Now, I must say, to be practical
here -- and I didn't appreciate this until the
argument -- given that the stockholders here only
acquired their shares on December 1st and conceivably,
therefore, the consent must have been, at least to be
an act of a stockholder, signed and delivered within
the 60-day provision that the statute provides for,
it's not even clear to me what this signature
requirement, in an equitable sense, would be really be
designed to prevent against. Nonetheless, the Company
has raised a legitimate point based on the language of
Section 228(c) and the H-M Wexford decision; but I
don't need to resolve that issue because of the second
stockholder consent which ratified and retook the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
73
CHANCERY COURT REPORTERS
actions that were taken in the first consent because
that consent -- I'm now referring to the second
stockholder consent -- is hand-signed and hand-dated
by seven of the eight original consenting
stockholders, and it's undisputed on this record that
those seven of eight stockholders held a majority of
the Company's shares, something in the order of
magnitude of 58 percent of the Company's outstanding
shares.
Thus, even if the Company had raised a
legitimate defense as to the timing issue concerning
the dating of the first stockholder consent, in my
view, the plaintiff has stated a colorable claim --
indeed, it is reasonably probable to win on the merits
-- concerning the validity of the second stockholder
consent.
Finally, with regard to the merits
arguments, the Company argues that the first
stockholder consent is invalid because the Company has
failed to comply with the "prompt notice" requirement
of Section 228(e). The first stockholder consent was
delivered to the Company on December 26th, less than
30 days ago. The second stockholder consent was
delivered to the Company on January 20th, just three
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
74
CHANCERY COURT REPORTERS
days ago. The Company has not identified any
authority interpreting the prompt notice requirement
of Section 228(e) to require notice within these time
frames. And I decline to do so for today's purposes,
particularly since I really cannot conceive of any
prejudice to the Company or any of its stockholders
from having not received notice to this point. And
there's no authority cited anywhere in the ballpark of
requiring such notice within a 30-day time frame, even
if we were to go with the longest period that's at
issue here. It's actually less than 30 days.
So for all the reasons I've stated,
based on the allegations of the complaint and the
documents that are attached to it, I conclude that
plaintiff has stated a colorable claim and -- again,
I'll repeat -- has satisfied even the higher standard
for a preliminary injunction of a reasonable
probability of success that the action it has taken
with the stockholder consents are valid and effective
to fill four vacancies on the Company's board.
So let me turn to irreparable harm,
which, frankly, almost follows as a matter of course
in a Section 225 case of this nature. The plaintiff
offers two theories of irreparable harm. Either one
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
75
CHANCERY COURT REPORTERS
could be sufficient. I'll focus on the first to
start.
The first is the uncertainty of the
composition of the Company's board, which does,
indeed, put a cloud over how the Company manages
itself. This is plainly irreparable harm, in my view.
Given that the new directors, if validly elected,
would represent a majority of a seven-person board,
there is a sufficient and legitimate risk that any
material board action taken before resolution of this
lawsuit could irreparably harm their interest as well
as the Company's interest. And those forms of harm
include conceivably the potential dilution of a
controlling stockholder, which is a highly significant
act that may involve third parties and be
impracticable to unwind later if they're found to be
wrongful actions.
It is, indeed, I think for those
reasons -- and I'll elaborate on this a little more --
very customary, as Ms. Cascio pointed out, to enter
something akin to a status quo order of the nature of
this TRO order that I've been presented with in cases
of this nature for that very reason. So, in my view,
there's plainly a showing of irreparable harm
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
76
CHANCERY COURT REPORTERS
sufficient to satisfy the standards for a TRO.
In my opinion, the threat of that
irreparable harm to the Company's stockholders, to the
Company itself, and to the stockholders represented by
the plaintiff during the pendency of this lawsuit
tilts the balance of the hardships in favor of
granting the relief requested by the plaintiff. There
really hasn't been an identification of harm per se
that I can discern to the Company that's really been
pressed. It would be hard to do so, given that the
current CEO is going to remain as CEO during the
pendency of this case. He'll have his actions
limited, admittedly, but we're going to get to a
prompt resolution of this case.
And as I pointed out earlier, the
proposed order doesn't really appear to differ
materially from status quo orders that this court
commonly enters in Section 225 cases of this nature
that preclude directors who are presently in control
of a Company from engaging in a transaction outside
the ordinary course of the corporation's business
until the control issue can be resolved.
So for all those reasons, I'm going to
grant the motion for a temporary restraining order.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
77
CHANCERY COURT REPORTERS
And I guess I want to talk a bit about
where we go from here.
This has to obviously move quickly.
It's a 225 case. It needs to move quickly. I would
hope you get the flavor from my ruling is that it
would be obviously desirable if, you know, cooler
heads prevailed and both sides went back and tried to
figure out a resolution that does not, you know,
necessitate further proceedings, particularly if the
company is in some sort of, you know, financial -- I'm
not going to say financial difficulties, but
particularly if it doesn't have the luxury of a lot of
resources to spend on litigation that can become
expensive very quickly.
So in either event, do counsel have
thoughts about -- this has to have a trial date to
have a conclusion point. Do you guys have thoughts
about a trial date? Either one.
MS. CASCIO: I hurriedly sketched some
out because I thought -- I anticipated this potential
question.
I don't think there's a lot of
discovery that needs to occur. I think they are
mainly legal issues. We've kind of started to flush
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
78
CHANCERY COURT REPORTERS
them out already here today. I don't expect there
will be a lot of document production. I know
Mr. Renck -- I heard Mr. Renck say that the issues
might expand, but I think that the law isn't -- I
haven't had an opportunity to refresh myself recently.
But I think the law is that you're supposed to keep
225 actions very narrow, and these other issues about
fiduciary duties that might -- anything along the
lines that we generally see in our Chancery actions
are not supposed to be addressed in the 225 action
because it needs to be moving along quickly.
So just sketching things out quickly,
I think we should be able to get this case to a trial
the first week of March, the first two weeks of March
time frame, Your Honor.
THE COURT: Okay. Mr. Renck.
MR. RENCK: Your Honor, I think when
we talked last Tuesday, you mentioned 60 days. That,
I think, might be a little more doable just because of
if we are going to have to take discovery where there
are foreign language issues, we're going to have
translation issues, Your Honor has entered the TRO.
When I say the -- when I argued that
the company doesn't have the tremendous resources of
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
79
CHANCERY COURT REPORTERS
the $6 million -- I don't think they're gasping right
now, either; but, you know, I think that would also
give people a little room, especially in the next few
days, to try to see if there's a -- you know, now that
we have the benefit of Your Honor's ruling -- to see
if there is ways for cooler heads to prevail.
But, you know, I don't see -- I don't
see this thing expanding into breach of fiduciary duty
type things; but I could see potential arguments, you
know, already in what we've looked at as to whether
they even own the stock. We've not junked up this
proceeding with that. And it may not come to pass.
THE COURT: (Inaudible) their
6 million?
MR. RENCK: It may not come to that,
but, you know, I think 60 days is probably a little
more realistic.
THE COURT: I'm not sure there's a
real material difference between the time frame
Ms. Cascio is talking about and the 60 days, in any
event. The reality is this: My March schedule is
pretty busy already.
So what I suggest you do is you get on
the line with my scheduling secretary and try to find
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
80
CHANCERY COURT REPORTERS
a date in March. I think we're probably looking at a
one-day trial. But why don't you reflect on that,
call my scheduling secretary, find it -- I think your
request for that time frame is fair, Ms. Cascio, and
it falls, frankly, in the neighborhood of 60 days,
anyway. So I don't think you're really very apart.
And it's going to largely dictated by what I can give
you, anyway. So just give her a call, figure out a
date, nail one down, and we'll go from there.
Is there anything else you need from
me today?
MS. CASCIO: Not from our side, Your
Honor.
MR. RENCK: I'm sure we can work out a
schedule from there, Your Honor.
THE COURT: All right. Have a good
day. Have a nice weekend.
(Court adjourned at 3:10 p.m.)
- - -
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
81
CHANCERY COURT REPORTERS
CERTIFICATE
I, NEITH D. ECKER, Chief Realtime
Court Reporter for the Court of Chancery of the State
of Delaware, Registered Diplomate Reporter, Certified
Realtime Reporter, and Delaware Notary Public, do
hereby certify that the foregoing pages numbered 3
through 81 contain a true and correct transcription of
the proceedings as stenographically reported by me at
the hearing in the above cause before the Chancellor
of the State of Delaware, on the date therein
indicated, except for the rulings at pages 62 through
77, which were revised by the Chancellor.
IN WITNESS WHEREOF I have hereunto set
my hand at Wilmington, this 10th day of February 2015.
/s/ Neith D. Ecker --------------------------------- Chief Realtime Court Reporter Registered Diplomate Reporter Certified Realtime Reporter Delaware Notary Public
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24