This post was prepared by an Eckert Seamans attorney.

The Court of Chancery recently clarified a prior ruling involving DGCL §204, which presented the Court with an issue of first impression about the validity of a stock issuance. In Nguyen v. View, Inc., C.A. No. 11138-VCS (Del. Ch. July 26, 2017), Vice Chancellor Slights analyzed defendant’s motion for reargument, and found that it amounted to little more than a “rehash” of the arguments raised in the Court’s denial of the motion to dismiss.  That ruling was previously detailed on these pages.  The Court ruled in its prior decision that Section 204 does not allow for the ratification of corporate acts previously rejected by the majority of stockholders.

Background: Plaintiff, Paul Nguyen, was the majority common stockholder of the corporate defendant, View Inc., in 2009 when defendant sought to issue Series B preferred stock.  Plaintiff consented to the issuance of the Series B preferred stock, in connection with the settlement of certain disputes with the defendant.  Plaintiff’s consent, however, was subject to a 7 day revocation period.  Before the expiration of the 7 day revocation period, defendant issued the Series B preferred shares unbeknownst to plaintiff.  Plaintiff then exercised his right to revoke his consent within the prescribed 7 day window.

Defendant then pursued additional rounds of financing, and raised $500 million. Plaintiff filed an arbitration action against defendant seeking to invalidate the Series B issuance.  The arbitrator found that plaintiff had properly revoked his consent and declared the Series B issuance as “void and invalid.”

Defendant then sought to validate its capital structure by ratifying its capital-raising efforts via 8 Del. C. §204.    Plaintiff filed a verified Complaint seeking a “declaration of invalidity” under 8 Del. C.  §205.  Defendant filed a motion to dismiss the Complaint.  Section 204 permits a corporation to ratify certain acts that would otherwise be void or voidable due to the corporation’s failure to follow applicable statutes or its own governance documents.  Section 205 vests the Court of Chancery with jurisdiction to review disputes arising under Section 204.  Section 205 actions may involve requests by the corporation for validation of its ratifying conduct and/or requests by other litigants to invalidate the corporation’s purported ratification.

Analysis:  The Court denied the motion to dismiss, finding that plaintiff had pled facts supporting a reasonable inference that the Series B issuance was invalid, and that 8 Del C.  §204 did not afford any relief to defendant.  The Court noted that the issue was one of first impression: “whether a corporate act that the majority of shareholders entitled to vote thereon deliberately declined to authorize could retroactively be authorized.”

Key Holding: After examining the legislative history of Section 204, Vice Chancellor Slights found that Section 204 did not permit the subsequent ratification of corporate acts expressly rejected by the majority of stockholders.

The Court denied defendant’s motion for reargument because defendant offered no additional factual or legal bases in addition to its arguments advanced in the first instance. Accordingly, the Court found that “View has failed to identify any law or facts that the Court misapprehended or failed to consider.”

Practice Tip: The Court gently chastised the defendant, in a footnote, for its assertion that the Court misapprehended the operative timeline of the key facts at issue.  The Court had stated in the introductory section of its written opinion that the plaintiff revoked his consent prior to the issuance of the Series B preferred shares.  The Court noted that its general, introductory statement could not be construed as a factual misapprehension by the Court, and that such a contention “comes with little grace.”   Finally, this is an example of the “low odds of success” when filing a motion for reargument based on Rule 59(f).