Keyser v. Curtis, C.A. No. 7109-VCN (July 31, 2012).

Issues Presented:

(i)         whether plaintiffs are entitled to a declaration, pursuant to 8 Del. C. § 225, that they comprise the board of directors of Ark Financial Services, Inc.;

(ii)        whether one of the signatories to the 2011 Written Consent actually owned the shares he purported to hold;

(iii)       whether a December 13, 2011 written consent purporting to elect the plaintiffs to the Board was valid; and

(iv)       whether a December 2010 issuance of Ark super-voting stock to Ark’s then sole Board member was invalid.

Short Answers:

Yes to (i) though (iv).  The Court determined that the plaintiffs were entitled to a declaration under Section 225 that they comprised the board of directors of Ark.  The Court also determined that the signatories to the 2011 Written Consent did own all of the stock that they purported to own and that the 2011 Written Consent was valid.  Moreover, the Court found that  the December 2010 issuance of super-voting stock was invalid because it was a self-dealing transaction, that failed to meet the strictures of the entire fairness test.  


A Section 225 is a summary proceeding that is limited to those issues that pertain to the validity of any actions to elect or remove an officer or director.  In this 54-page opinion, the Court discusses a factual scenario that is too complex to describe in detail, so I will cover the highlights.  The case involved a company’s inability to satisfy its obligations on five promissory notes (payable to three creditors) which had an option to allow the creditors to acquire common stock as long as the loans were outstanding.  The factual scenario involved a single member board resigning followed by a plan to remove the sole board member and have the original sole board member reinstated.  The scenario also included a questionable written consent in 2010 by the sole director expanding the size of the board and creating shares of new super-voting Series B preferred stock.  There were settlement discussions with standstill and confidentiality agreements, a settlement agreement under Florida law, a subscription agreement for new Series A preferred stock, purchase agreements and valuation of warrants. The end result is a December 2011 Written Consent that plaintiffs executed that purported to elect them to the board and remove defendants Curtis, Hands and Shek.

Standard of Review

The Court discussed the standard under which to review the Series B issuance.  Poliak, current CEO and director of Ark, had caused Ark to issue the Series B shares in order to prevent Keyser, former CEO and director of Ark, and his colleagues Curtis, Hands and Shek, from electing a new board which, the Court noted, suggested that Poliak’s actions might be subject to review under Blasius Industries, Inc. v. Atlas Corp. (where the board acts primarily to impede the exercise of shareholder voting power, the board bears a heavy burden of demonstrating a compelling justification for its acts).  However, the Court noted that the standard changed to a self-dealing transaction (and the entire fairness test) when  Poliak  issued himself shares of Series B preferred stock for $0.01 a share (which he had the right to redeem for $1.00 per share), and that gave Poliak an overwhelming majority of the votes to be cast in any matter for which Ark’s shareholders have a vote.  The Court stated:

Although Poliak caused Ark to make the Series B Issuance in order to prevent Keyser and his allies from electing a new Board, which is the quintessential Blasius trigger, this Court and our Supreme Court have intimated that Blasius‘ main role, to the extent it has one, is as a specific iteration of the intermediate standard of review laid out in Unocal Corp. v. Mesa Petroleum Co.  Moreover, the Blasius standard was established in a case where this Court could not ‘conclude that the board was acting out of a self-interested motive.’  A standard of review that was established to review selfless conduct is, by definition, ill-suited to serve as a standard of review for self-dealing conduct. Thus, the issuance of the Series B preferred stock is not subject to review under Blasius; it is subject to review under the standard usually applicable to self-dealing conduct — entire fairness.

The Defendant officers and directors or Ark argued that Poliak caused Ark to make the Series B issuance because: (i) Ark had not performed well under Keyser’s leadership, and therefore, Poliak thought that if Keyser and his allies gained control of Ark, the Company would suffer even greater financial distress; and (ii) Poliak feared that if Keyser gained control of Ark, then Keyser  would make a decision as a director or controlling shareholder in his own best interests and not those of the company or its three creditors.  The Court concluded that even if all of the Defendants contentions were accepted as true, the Defendants could not prove entire fairness.  With regard to fair dealing, while the Court accepted Poliak’s testimony that if he was going to prevent Keyser and his allies from ousting him from office, he had to act fast, the Defendants didn’t prove that Poliak was entitled to try to prevent the Plaintiffs from removing him as a director.  With respect to fair price, Poliak paid $250 for a controlling interest in Ark and for the immediate right to $25,000. The Defendants argued that at the time of the Series B Issuance, Ark was insolvent, and thus, the Series B preferred stock was worthless. However, the Court rejected that argument noting that “[c]ontrol of an insolvent corporation is worth something because there is always a chance that it will become solvent. Moreover, even if Ark had no money, it was unfair for Poliak to pay $250 for an option to demand $25,000 from Ark in the event it ever became profitable.”