A recent Court of Chancery decision is notable for its analysis of an issuance of shares approved by a sole director–but without stockholder approval. In the matter of Applied Energetics, Inc. v. Farley, C.A. No. 2018-0489-TMR (Del. Ch. Jan. 24, 2019), the court considered a somewhat unusual set of facts that included a shell corporation, at the time of the issuance of stock being contested, that only had one director–although the bylaws required a minimum of three directors.  A stockholder challenged the issuance of a large number of shares to the sole director at a price that was allegedly less than fair market value.

The most notable aspects of this opinion include the following bullet points:

• When discretionary director compensation–including issuance of stock by directors to themselves–is done without stockholder approval, the directors have the burden of establishing the entire fairness of the transaction to the corporation and stockholders. See footnotes 99 to 103 and accompanying text.
• In the context of this case, the stockholders sought a preliminary injunction to prevent the director from selling or transferring the shares that he authorized to be issued to himself. In the context of a motion for preliminary injunction, despite the normal burden under the entire fairness standard, the moving party must carry the burden to show a reasonable probability of ultimate success on the merits in order to obtain injunctive relief prior to trial.
• The entire fairness standard includes a requirement for both fair price and fair dealing. In the circumstances of this case, the court determined that those two criteria were so overlapping that it focused on the fair price that the sole director determined on his own.
• The court found that there was an insufficient basis for the director to determine the low price that he set for himself for the large number of shares that he purported to authorize to be issued to himself.
• See DGCL § 141 requiring board approval by written consent to be unanimous. Only one director was serving at the time, but the bylaws provided for a minimum of three directors.
• The court reviewed the prerequisites of injunctive relief: (1) a likelihood of success on the merits; (2) irreparable harm, and (3) a balance of the equities, to support its reasoning for granting a preliminary injunction.
• The court also considered a claim for fraudulent transfer based on some of the shares being transferred to an LLC controlled by the family of the director–after it became likely the issuance of shares would be challenged. See Slip op. at 28 to 32 and accompanying text.
• The court also discussed how it determined the amount of the bond that would be required in order for injunctive relief to be granted. See Slip op. at 38 to 40 and accompanying text.