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interpreting Delaware's non-resident director implied consent statute, 10 Del. C. § 3114, in the context of a Section 225 proceeding
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Civil Action No. 17347.
Date Submitted: January 12, 2000.
Date Decided: January 28, 2000.
Stuart M. Grant and John C. Kairis, of GRANT EISENHOFER, P.A., Wilmington, Delaware; OF COUNSEL: William A. Brewer III and James S. Renard, of BICKEL BREWER, Dallas, Texas, Attorneys for Infinity Investors Limited.
Martin P. Tully, Thomas R. Hunt, Jr., and S. Mark Hurd, of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware; OF COUNSEL: Lewis F. Murphy and Eduardo Palmer, of STEEL HECTOR DAVIS LLP, Miami, Florida, Attorneys for Earl T. Takefman and Richard Parker.
MEMORANDUM OPINION
Visual Edge Systems, Inc. ("Visual Edge" or the "Company") is a Delaware corporation that produces and sells videotape golf lessons featuring "one-on-one," "personalized" instruction from golfing legend Greg Norman. A Company photographer videotapes the purchaser's golf swing and, then, using a synchronized "split-screen," the Company produces a video juxtaposing the purchaser's swing with Greg Norman's swing. Pre-taped instruction from Greg Norman is also incorporated into the video.
Infinity Investors Limited ("Infinity"), a significant investor in Visual Edge, seeks a declaration pursuant to 8 Del. C. § 225 that it validly converted its non-voting preferred stock to voting common stock and, as a result, rightfully controls Visual Edge's Board of Directors. Infinity also alleges that defendants Earl Takefman and Richard Parker, former officers and directors of Visual Edge, breached their fiduciary duties through several acts of nonfeasance and misfeasance, and tortiously interfered with Infinity's conversion rights.
Takefman and Parker served on the Visual Edge Board of Directors and respectively held the positions of Chief Executive Officer and Chief Operating Officer pursuant to employment agreements dated January 1, 1996.
Individual defendants seek to dismiss this suit on mootness grounds because they have renounced all previously made claims to their board seats and corporate offices. Infinity contends that the individual defendants' renunciation does not obviate the need for a § 225 proceeding because the validity of Infinity's stock conversion must still be resolved. Resolution of the conversion issue, argues Infinity, is vital for purposes of determining that the newly constituted Visual Edge Board, appointed by Infinity solely by virtue of its stock conversion, is valid and legal for any and all purposes. Essentially, Infinity would like to prevent the individual defendants from questioning the validity of their removal and Infinity's control of the Company in this, or any other, court. Further, Infinity argues that regardless of this Court's decision on the § 225 proceeding, the tortious interference claim and breach of fiduciary duty claims should survive as they have not been mooted by defendants eleventh hour concessions. This is my decision on the individual defendants' motion to dismiss.
I. STANDARD OF REVIEW FOR A MOTION TO DISMISS
In evaluating the individual defendants' motion to dismiss, I assume the truthfulness of all well-pleaded, non-conclusory allegations found in the complaint and extend the benefit of all reasonable inferences that can be drawn from the pleading to the plaintiff. To dismiss a claim, I must find plaintiff has either failed to plead facts supporting an element of the claim or that under no reasonable interpretation of the facts alleged in the complaint (including reasonable inferences) could plaintiff state a claim for which relief might be granted. Notwithstanding Delaware's permissive pleading standard, I am free to disregard mere conclusory allegations made without specific allegations of fact to support them. With that standard in mind, I examine the parties' contentions.
Loudon v. Archer-Daniels-Midland Co., Del. Supr., 700 A.2d 135, 140 (1997).
Delaware State Troopers Lodge v. O'Rourke, Del. Ch., 403 A.2d 1109, 1110 (1979) ("A complaint should not be dismissed upon such a motion unless it appears to a certainty that under no set of facts which could be proved to support the claim would the plaintiff be entitled to relief.")
Wolf v. Assaf, Del. Ch., C.A. No. 15339, Steele, V.C. (June 16, 1998).
II. BACKGROUND
Visual Edge sells video packages under the name "One-On-One With Greg Norman." It maintains seventeen mobile "One-On-One" production facilities (vans) that travel about their assigned regions filming golfers and producing videos. The Company's key asset is its relationship with Australian golfing legend Greg Norman, undeniably one of golfs most popular and recognizable figures.
Norman and his corporation, Great White Shark Enterprises, Inc., granted Visual Edge a license to use his name and likeness in connection with the production and promotion of its products. The original term of this agreement expires on December 31, 2000, but is subject to renewal for two additional five year periods at the Company's option and upon payment of a fee.
Infinity invests in securities and other financial assets, including securities of publicly traded U.S. companies. Infinity presumably liked Visual Edge's prospects because it invested millions of dollars in the Company. To protect its investment, Infinity insisted upon various contractual arrangements designed to prevent the Company from taking action detrimental to Infinity. In one such arrangement, Visual Edge warranted to maintain its listing on the NASDAQ Small Cap Market. If it failed to do so, Infinity had the right to convert its preferred stock into common stock.
On July 16, 1999, NASDAQ delisted the stock from the Small Cap Market. This event triggered Infinity's right to convert its holdings into Visual Edge common stock. Infinity filed for the conversion and, after so doing, controlled nearly half of the Company's voting equity. Infinity then took steps to consolidate control of the Company.
Visual Edge stock currently trades on NASDAQ's OTC Bulletin Board.
The individual defendants, according to Infinity, were poorly managing the Company. The relationship between Takefman and Greg Norman had become severely strained. Infinity worried that Takefman and Parker were leading the Company to ruin, while at the same time enriching themselves.
On August 2, 1999, shortly before it took action to take control of the Company, Infinity filed its initial complaint. The complaint's purpose was allegedly to prevent the individual defendants from "destroying" the Company and to stop them from interfering with Infinity's planned conversion of its preferred stock; the conversion's primary purpose was to remove the individual defendants from the Company's Board and management. As is typical in § 225 cases, this Court entered a Standstill Stipulation and Order, requiring the Company to provide Infinity with notice before entering into any transaction outside the ordinary course of business.
On August 13, 1999, Infinity delivered a notice of conversion to Visual Edge. Upon converting its non-voting preferred shares into voting common, and coupled with an August 2, 1999 voting agreement entered into between Infinity and another investor, Marion Interglobal, Ltd. ("Marion"), Infinity controlled a majority of Visual Edge's voting equity. Shortly after the conversion notice, Infinity delivered to Takefman and the Company a stockholder consent purporting to remove Takefman, Parker and Peters from the Visual Edge Board. The stockholder consent also appointed Stuart J. Chasanoff and J. Keith Benedict to fill two of the newly-created vacancies. The new Visual Edge Board then terminated the defendants as officers and employees of the Company.
Despite the stockholder consent purportedly executed on August 13, Infinity and other stockholders executed a second § 228 stockholder consent, removing the individual defendants from the Company's Board on August 30, 1999.
Initially, defendants vigorously contested the effectiveness of the August 13 conversion and the August 13 and August 30 stockholder consents. Indeed, Takefman, Parker and Peters, purporting to act as the proper directors of Visual Edge, filed a host of affirmative defenses and counterclaims in their answer to Infinity's August 2 complaint. Infinity filed a summary judgment motion, seeking a judicial determination that it owned the common stock into which its preferred stock was converted and that Infinity properly exercised its rights as a stockholder in removing the individual defendants as directors of the Company. The parties briefed the motion and oral argument was held September 9, 1999. I declined to grant Infinity's summary judgment motion at that time primarily because the factual record was insufficiently developed.
See Infinity v. Takefman, Del. Ch., C.A. No. 17347, Chandler, C. (Sept. 9, 1999).
On September 13, 1999, Infinity and other stockholders appointed John A. Wagner to the Visual Edge Board, and the following day the Board (now comprised of Ronald F. Seale (Chairman), Chasanoff, Benedict, and Wagner — all Infinity designees) voted again to terminate the individual defendants as officers and employees of Visual Edge. After Infinity took control of the Board, it amended its complaint to include three counts: declaratory relief pursuant to 8 Del. C. § 225 (Count I), tortious interference with contract (Count II), and breach of fiduciary duty (Count III). As Infinity now controls Visual Edge, the amended complaint no longer names Visual Edge as a defendant.
On September 21, 1999, Takefman and Parker abruptly "resigned" from the Visual Edge Board and conceded that they were terminated as officers and employees of Visual Edge. Two days later, Takefman and Parker proceeded to bring suit in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida, against the Company, its newly-constituted Board of Directors, and Infinity (the "Florida Action"). In the Florida Action, Takefman and Parker allege that the Company has breached their employment agreements by refusing to disburse severance payments. In addition to the underlying breach of employment agreement claim, Takefman and Parker allege that several of the defendants tortiously interfered with their employment agreements by causing the Company to withhold the severance payments.
In the Florida complaint, Takefman and Parker state that "[the Company] purported to terminate" their employment. Plaintiffs in the present action are concerned that use of the word "purported" signals that Takefman and Parker intend to argue in the Florida Action that they were wrongfully removed from the Board. In the present action, Takefman and Parker, however, insist that they will make no such claim. Indeed, they argue that because they no longer make any claim to Visual Edge's board room or corporate offices, the present § 225 action is moot.
See Defs.' Reply Br. at 4-5 (Takefman and Parker "make no such claim" to their former positions at the Company).
Once securely under the control of Infinity and its Board designees, Visual Edge filed suit in this Court against the individual defendants on October 12, 1999 ("the Contract Action"). In the Contract Action, the Company alleges that the individual defendants breached their employment contracts and fiduciary duties, and tortiously interfered with the Company's contractual relationship with Greg Norman and Great White Shark.
See Visual Edge Systems, Inc. v. Takefman, Del. Ch., C.A. No. 17472 (filed Oct. 12, 1999).
On November 5, 1999, Takefman and Parker filed a motion to dismiss or stay the Contract Action arguing: (i) the claims asserted in the complaint are compulsory counterclaims that should have been brought in the Florida Action; and (ii) the Court lacks personal jurisdiction over the defendants with respect to the claims for breach of contract and tortious interference. This Court has yet to rule in the Contract Action.
III. ANALYSIS
A. Section 225
Pursuant to Count I of the amended complaint, Infinity seeks a declaration that (1) Infinity is record owner of 9,775,553 shares (nearly 50%) of Visual Edge common stock, (2) Infinity and Marion together own a majority of Visual Edge common stock, (3) Infinity and Marion effectively removed the individual defendants, and (4) Infinity and Marion's nominees are rightful Company Board members. Initially, the parties disagreed over whether Infinity properly converted its preferred stock into common stock. The individual defendants, although promising they would make no claim to directorships, were not willing to acknowledge the propriety of Infinity's stock conversion or their removal from the Company's Board. As I discuss in more detail below, the individual defendants now, necessarily, concede the validity of the conversion and their removal from the Visual Edge Board.
Section 225 provides for an accelerated adjudication of disputed shareholder votes in order to properly resolve doubts concerning the authority of purported corporate leaders. Specifically, the Court of Chancery "may hear and determine the validity of any election of any director." A § 225 proceeding has been called "a quick method of review of the corporate election process in order to prevent a corporation from being immobilized bycontroversies as to who are its proper officers and directors." To achieve its goal of quick resolution, § 225 proceedings are only appropriate to resolve narrow issues bearing directly on the validity of the questioned election or the integrity of the voting process.
See. e.g., Atkins v. Hiram, Del. Ch., C.A. No. 12887, Hartnett, V.C. (Dec. 23, 1993).
Bossier v. Connell, Del. Ch., C.A. No. 8624, mem. op. at 6-7, Hartnett, V.C. (Oct. 7, 1986).
Kirby v. Kirby, Del. Ch., C.A. No. 8604, Berger, V.C. (July 29, 1987), aff'd sub nom. Oberly v. Kirby, Del. Supr., No. 467, 1989, Walsh, J. (Nov. 19, 1990).
Nonetheless, if this case involved an ongoing dispute over Board membership, the propriety of Infinity's stock conversion would surely be within the scope of a § 225 proceeding. If such a dispute existed, the events leading directly to Infinity's claim to remove the individual defendants would have to be examined in order for this Court to fairly determine who rightfully holds positions on the Company's Board.
See Kahn Bros. Co. v. Fischbach Corp., Del. Ch., C.A. No. 8987, Allen, C. (Nov. 15, 1988) (holding right of controlling shareholder to vote his shares is "critical to the theory that plaintiffs advance in support of their claim that the directors who purport to hold office do not do so validly," and therefore within the scope of a § 225 proceeding).
Here, the individual defendants admit that they are no longer directors. This admission, however, is somewhat elliptical and, based on my reading of defendants' motion to dismiss, comes with certain implicit caveats. Early in this litigation, Takefman and Parker refused to acknowledge the validity of the election of their replacements. Indeed, they vigorously contested it. In mid-September, they had a change of heart. Now, they repeatedly plead that they have "resigned" their board seats, will not seek to regain them, and have come to "accept their termination [as officers] and seek only the severance payments required under their employment contracts with [the Company]."
Defs.' Reply Br. at 5 (emphasis added).
What is implicit in, though patently clear from, defendants' motion is that they are loath to admit the validity of the stock conversion. Their reluctance, however, is logically and legally untenable. Defendants insist that they do not (and will not) contest the legal sufficiency of the currently constituted Visual Edge Board of Directors. The currently constituted Visual Edge Board, however, is in place solely by virtue of Infinity's stock conversion and the subsequent corporate action Infinity took in conjunction with Marion. Consequently, if defendants concede, or at a minimum do not (and will not) contest the result of the stock conversion, they surely cannot contest the validity of the conversion itself in this or any other proceeding. Viewed as a whole, the various arguments set forth by defendants urging me to dismiss the § 225 action as moot constitute an admission that the election resulting in the ouster of the individual defendants is valid and undisputed between these parties.
I.e., removal of Takefman, Parker and Peters from the Visual Edge Board, election of Chasanoff Benedict and Wagner to the Visual Edge Board and, finally, termination of Takefman, Parker and Peters as officers and employees of Visual Edge.
A decision to dismiss this claim merely because the defendants purported to resign after their removal, while allowing them to question the validity of the conversion and subsequent election in this or another jurisdiction, would reward gamesmanship. As equity looks to the intent rather than to the form, this Court should not permit parties to manipulate procedural rules for the purpose of avoiding resolution on the merits. The § 225 claim against the individual defendants is moot because I conclude that no dispute exists between these parties over who holds the Company's directorships or over the validity of the stock conversion and any Board action taken thereafter. These issues have been fully resolved and do not warrant further review in this, or for that matter any other, jurisdiction.
B. Effect of Mooting § 225 Claim on Counts II and III
Defendants argue that Counts II and III of Infinity's amended complaint — tortious interference with contract and breach of fiduciary duty — should be dismissed because they were "improperly appended" to this § 225 proceeding. As noted above, § 225 actions are narrow and focused. The Court routinely endeavors to wall-off all issues collateral to the underlying question of which persons properly reside in the corporation's boardroom.
Nevertheless, there is no "hard and fast" rule mandating the dismissal of common law claims for damages in actions wherein relief is also requested under § 225. If such common law claims are in fact dismissed, they are obviously done so without prejudice. More appropriately, in my view, the court might simply sever all non-essential claims from the § 225 proceeding. If this case involved a live § 225 controversy, I would indeed be reluctant to consider collateral claims. As this decision grants defendants' motion to dismiss the § 225 claim, however, they can hardly predicate their motion to dismiss the common law claims on the existence of a pending § 225 action when such action is no longer pending. In other words, granting defendants' motion to dismiss the § 225 action has neutralized whatever force this argument might have had.
Accord Carballal v. PMBC Corp., Del. Ch., C.A. No. 17058, Jacobs, V.C. (May 14, 1999) (severing counterclaim in § 225 proceeding).
C. Section 3114 In Personam Jurisdiction
Takefman and Parker next challenge Count II — tortious interference with contract — on the ground that 10 Del. C. § 3114, Delaware's non-resident director implied consent statute, is an improper basis for this Court to assert personal jurisdiction over them. Defendants properly observe that in Hana Ranch, Inc. v. Lent, the Court held that § 3114 is limited to "those actions directed against a director of a Delaware corporation for acts performed only in his capacity as a director." Because Infinity's tortious interference claim is not directed at them in their capacities as directors but rather, as stockholders, Takefman and Parker contend the claim should be dismissed.
Here, Infinity claims that the defendants interfered with its rights under the preferred stock instrument by obstructing its efforts to convert its preferred stock into common stock.
Del. Ch., 424 A.2d 28, 30-31 (1980).
Here, defendants seek to establish that Infinity brings this claim as a stockholder by citing to Infinity's Answering Brief: Takefman and Parker "have an economic incentive to prevent and challenge any dilution to their stockholdings." Defs.' Reply Br. at 10.
This argument fails. The Court of Chancery has held that once jurisdiction is properly obtained over a non-resident director defendant pursuant to § 3114, such non-resident director is properly before the Court for any claims that are sufficiently related to the cause of action asserted against such directors in their capacity as directors. Here, Infinity's tort claim for interference with contract is predicated on the same set of facts as one of its breach of fiduciary duty allegations, i.e., obstruction of the preferred stock conversion. Clearly, the two claims are closely related. Defendants resisted the preferred stock conversion in their capacity as directors for the alleged purpose of maintaining control of the Company, i.e., to entrench themselves. The fact that defendants might also have resisted the conversion to prevent the dilution of their stock qua stockholders is sufficiently related to the breach of fiduciary duty claim to justify assertion of § 3114 personal jurisdiction over defendants for the tortious interference claim.
See Baldwin v. Russet, Del. Ch., C.A. No. 10898, let. op. at 2, Hartnett, V.C. (Feb. 7, 1990) (emphasis added); see also In re Cambridge Financial Group, Ltd., Del. Ch., C.A. No. 9279, let. op. at 7, Hartnett, V.C. (Nov. 9, 1987) (holding § 3114 only confers jurisdiction over non-fiduciary duty claims that are sufficiently related to the claim alleging a breach of fiduciary duty so as to require the defendant to appear and defend that claim in Delaware).
See Manchester v. Narragansett, Inc., Del. Ch., C.A. No. 10822, mem. op. at 10, Chandler, V.C. (Oct. 18, 1989) ("Given the fact that the individual defendants are all employees, shareholders, officers, and directors of corporation, it would be artificial to distinguish their actions as having been taken in different guises when, as directors, they control the corporation. In that capacity, they should expect to answer in a Delaware court for the contract actions related to Plaintiffs breach of fiduciary duty claims.")
D. Breach of Fiduciary Duty Claims — Direct or Derivative
As set forth in its amended complaint, Infinity alleges that defendants breached their fiduciary duties of care and loyalty by, among other things: (1) interfering with Infinity's stock conversion; (2) failing to disclose their intent to take control of the Board; (3) enriching themselves at the expense of the Company; (4) engaging in acts of misfeasance and nonfeasance constituting gross negligence; (5) attempting to destroy the Company's relationship with Greg Norman and Great White Shark Enterprises; and (6) wasting corporate assets with the express purpose of leaving nothing for the shareholders.
The individual defendants contend that the fiduciary duty allegations rightfully belong to the Company, not Infinity. That is, they are derivative claims not properly brought by Infinity directly and, consequently, should be dismissed. I agree that these allegations, save the first and second, are properly brought by the Company and not by Infinity.
As a general matter, when the substantive nature of an alleged injury falls directly on the corporation as a whole and secondarily falls upon its stockholders as a function of and in proportion to their pro rata investment in the corporation, the claim is derivative in nature and may be maintained only on behalf of the corporation. Infinity's allegations of misfeasance, nonfeasance, and waste are classic derivative claims that, if true, injure the corporate entity and the stockholders' investments ratably. In other words, allegations three through six of Count III do not encompass injuries uniquely suffered by Infinity. Appropriately, the Company, now securely under the charge of the Infinity designated Board, has brought an action containing virtually identical claims in this Court.
See, e.g., Grimes v. Donald, Del. Supr., 673 A.2d 1207 (1996); Kramer v. Western Pac. Indus., Inc., 546 A.2d 348 (1988).
See Visual Edge Systems, Inc. v. Takefman, Del. Ch., C.A. No. 17472 (filed Oct., 12, 1999).
Therefore, all the allegations of Count III in Infinity's amended complaint, excepting defendants' alleged obstruction of Infinity's preferred stock conversion and alleged failure to disclose intent to take control of the Board, are dismissed.
Although I am somewhat confounded as to how Infinity intends to move forward with its nondisclosure allegation, I am not considering a 12(b)(6) motion and as the allegation is properly brought as a direct action, it would be improper to dismiss on the grounds raised by defendants' motion.
V. CONCLUSION
For all of the foregoing reasons, defendants' motion to dismiss is granted with respect to the § 225 action, denied with respect to the tortious interference with contract claim, and granted in part and denied in part with respect to the breach of fiduciary duty claims.
IT IS SO ORDERED.