A recent Delaware Court of Chancery decision is noteworthy for several key principles applied to a set of facts that involve company counsel using corporate machinery and corporate funds to join with a faction of the board to oust a board member. Dalby v. Kastner, C.A. No. 2025-0136-NAC (Del. Ch. Aug. 29, 2025), is a 100-page post-trial decision in a Section 225 action that went to trial less than three months after the complaint was filed. It deserves careful review. In this blog post I only intend to highlight certain aspects of the decision.

Key Facts

Many of the key facts in this decision raise important issues, but the narrow focus of the court’s opinion in this Section 225 action was primarily to determine whether a board member was properly ousted. He was not. The key facts include the following:

  • The founder of a company, who also owned 49% of the shares, designed a cell phone that was suitable for younger children. After bringing on investors, he was the subject of a scheme by management and a faction of the board, who were aided by outside corporate counsel, to remove the founder. Outside corporate counsel invoiced the company for all of their fees.
  • The founder, Stephen Dalby, was unaware that management and a faction of the board were secretly using company resources to further his removal from the board. When he learned of the removal effort and asked if company resources were being used to fund the effort, management and the board faction did not respond.
  • To avoid being seen as the face of the effort to oust the director, outside counsel for the company collaborated with a board faction to use an apparently neutral stockholder as the face of the removal effort. But that stockholder contributed little more than its name. The company’s outside counsel drafted all the documents for the removal and the company management continued to spearhead the effort, along with in-house counsel. When the removal was presented to the stockholders, management solicited stockholder votes and its outside counsel kept the official tally.
  • The company’s outside counsel devised a plan that would get rid of the founding director. Slip op. at 3.
  • An earlier settlement agreement that resolved prior litigation gave the founding director certain rights including an anti-dilution right. Nonetheless, outside corporate counsel prepared written consents to approve stock options that would arguably dilute the founding director as part of a plan to sideline him from the company. Slip op. at 14.
  • A board faction persuaded a lender who had already agreed to extend the due date for a note, to refuse an extension of the note in order to pressure Dalby to agree to terms that would push him aside. Slip op. at 26-29.
  • Despite at least one outside corporate counsel advising that replacement of a board member was not a default of a loan agreement, another outside corporate attorney worked with a board faction to tell Dalby that it would be a default if he exercised his right to replace a board member. This was part of the plan to coerce his consent to a scheme to oust him. Slip op. at 36-37.
  • Then the outside corporate counsel came up with another plan along with the board faction to remove Dalby from the board–and billed all of the work to the company. Slip op. at 39-40.
  • As part of the plan, the outside corporate attorney enlisted new Delaware corporate counsel to help with the plan to remove Dalby as a director. Slip op. at 40-41.
  • Delaware corporate counsel also billed the company for the plan to oust Dalby from the board. An additional firm was also hired to investigate Dalby, and they also billed the corporation for their investigation. Slip op. at 49-52.
  • Continuing to charge the company, Delaware counsel for the company contributed to a plan to have a stockholder be the “façade” to solicit stockholders to remove Dalby as a board member at the same time they were devising a plan to dilute his shares. Slip op. at 55-62.
  • The court observed that the primary goal of the board faction was not to save the company from its financial distress–but rather to oust Dalby from the board and dilute his 49% ownership. Slip op. at 70 and footnote 373.

Highlights of the Court’s Reasoning

  • The court provided extensive reasoning for why it determined that the solicitation of the stockholder votes to oust Dalby was misleading and materially false. Slip op. at 87-89.
  • Notwithstanding a vote of approximately 50.1% of the stockholders to remove Dalby as a director, the court determined that the vote was invalid because it was procured by misleading and materially false solicitation materials sent to stockholders. Slip op. at 75-79 and 86-91.
  • Notably, the court did not decide if the high bar for removal of a director “for cause” was met in this case.
  • A noteworthy procedural aspect of this case is that after Dalby sued to challenge his ouster, the corporation “took no position” in its filings with the court. Slip op. at 83.
  • Although other claims such as specific performance and details of the dilution efforts discussed by the court were not covered here, a final noteworthy aspect of this decision is that the court copied and pasted handwritten notes by board members in the body of the opinion. That should be a reminder to be careful what you write. Quotes from text messages also featured prominently in the factual portion of the opinion.

Takeaways

Two of many takeaways from this opinion are:

  • As a general matter, counsel for the company should not use company resources to oust a board member—or, in particular, pretend that a stockholder initiated a solicitation of other stockholders when the materials were prepared by management and a board faction with company counsel. For that and related reasons, the court concluded that the shareholder votes were procured by misleading and materially false proxy materials.
  • Company counsel should be more interested in the best interests of the entire company and not be advocating for a particular board faction that, according to the court, had a primary goal of ousting a board member as opposed to what might be in the best interest of the company.

Postscript

  • After this opinion, the court denied a motion seeking to stay enforcement of the court’s ruling, that denied a request for specific performance, pending an appeal. See Dalby v. Kastner, C.A. No. 2025-0136-NAC, Order (Del. Ch. Oct. 7, 2025).

Also notable: About a month before trial, the court ruled on a motion to compel by the plaintiff which was granted a few days after it was filed, but the court does not discuss in this post-trial opinion the details of that motion. One can surmise that attorney/client privilege issues abound, based on the facts of this case. See footnote 465, referencing the oral argument and rulings of the court on April 4, 2024. There was also a request for contractual fee shifting which this decision does not address.

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