239 A.3d 409
Del. Ch.2020Background
- Applied Energetics (the Company) sued former CEO/director George Farley and AnneMarieCo (Farley family entity) after Farley, as the sole remaining director, caused issuances of large blocks of stock (including ~25 million to himself) and accrued $150,000/year compensation for himself.
- The board had three director seats and the bylaws required a majority of the total number of directors to constitute a quorum; Levy resigned leaving Farley alone and Farley acted by written consents and filings.
- Farley executed a "Board Consent" and "Committee Consent" (and later a revised committee consent), retained counsel(s), caused stock certificates to be issued, made SEC disclosures, and later gifted 20 million shares to AnneMarieCo.
- The Company obtained a preliminary injunction barring transfers and then filed this action alleging breach of fiduciary duty, conversion, fraudulent transfer, and seeking cancellation of the shares; Farley counterclaimed for breach of contract, unjust enrichment, and sought validation under DGCL §205.
- Court addressed Company's motion for partial summary judgment: it held Farley lacked statutory authority to act as sole director (so issuances and his self-approved compensation were invalid) but denied summary judgment on whether those defective acts could be validated under §205 and denied summary judgment on Farley’s contract and unjust-enrichment counterclaims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of stock issuances and self-approved compensation taken by Farley as sole remaining director | Farley lacked authority because board had three seats and bylaws required majority of total directorships for a quorum; unanimous written consent cannot substitute for a quorum | Farley contends he could act as sole director (or that bylaws were implicitly amended / relied on counsel opinions) | Court: Granted for Company — acts invalid. Farley could not meet quorum and could not act by written consent as sole director. |
| Availability of judicial validation under DGCL §205 for Farley’s defective acts | §205 unavailable because corporation lacked power to act when acts were taken (no quorum) | §205 available: distinguish corporate power (exists) from failure of authorization (quorum/bylaws); §205 may validate acts that were within corporate power but defectively authorized | Court: Denied summary judgment for Company — §205 can apply; whether to validate is an equitable, fact-specific question for trial. |
| Farley’s breach of contract claim for $150,000/year salary | Company: Farley could not bind the Company as sole director, so no enforceable contract | Farley: If validated under §205, the purported agreement can be enforced; factual disputes over terms and expectancy of pay | Court: Denied summary judgment — validation could cure authorization defect and factual issues remain. |
| Unjust enrichment / quantum meruit for services and compensation | Company: Directors served without pay; bylaws/board process govern compensation; no equitable recovery | Farley: Performed services with expectation of compensation; evidence supports quantum meruit | Court: Denied summary judgment — material factual disputes exist; unjust enrichment/quantum meruit may be available if no binding contract. |
Key Cases Cited
- Crown EMAK P'rs LLC v. Kurz, 992 A.2d 377 (Del. 2010) ("total number of directors" refers to directorships, not directors actually in office)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (corporate claims are corporate assets; board decides whether to assert them)
- Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981) (framework for board evaluation of corporate claims and litigation decisions)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (elements and principles governing unjust enrichment)
- Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618 (Del. Ch. 2013) (discussion of corporate power and ultra vires doctrines)
- Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401 (Del. 1985) (bylaw validity and internal authorization requirements)
- Belle Isle Corp. v. MacBean, 49 A.2d 5 (Del. Ch. 1946) (vacancies and the limits of implied bylaw amendment)
- In re Ivey & Ellington, 42 A.2d 508 (Del. Ch. 1945) (doctrine and evidence required for implied amendment of bylaws)