Kleinberg v. Aharon
CA 12719-VCL
| Del. Ch. | Feb 13, 2017Background
- Applied Cleantech (Delaware) formed to commercialize sewage‑processing technology by founder/CEO Dr. Refael Aharon; investors (Saturn, Kleinberg, Herzog, SePage) negotiated preferred stock and a voting agreement establishing a six‑member board.
- Voting agreement gave Aharon practical control of three board seats (he filled two historically; in July 2016 he appointed his brother‑in‑law Boaz Cohen to the third seat).
- A disputed Bioform joint‑venture (manufacturing/distribution) negotiated 2015–2016 fractured over document terms, process, and alleged failures to perform; relations deteriorated and Bioform threatened to sue and demanded change in corporate control.
- By August 22, 2016 the board was split 3–3 on major questions (whether to sue Bioform, how to respond to Bank Mizrahi litigation, CEO removal, Vertenergy issues), and multiple parallel lawsuits were pending in Canada, Israel, Mexico, and Delaware.
- Plaintiffs (Kleinberg, Herzog, Saturn/others) filed for appointment of a custodian under 8 Del. C. § 226, arguing the directors were deadlocked, the company faced irreparable harm (operational paralysis and likely insolvency), and stockholders could not resolve the impasse because of the voting agreement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether board deadlock exists under 8 Del. C. § 226(a)(2) | Board is deadlocked 3–3 after Aharon appointed Cohen; required votes cannot be obtained | Aharon argued deadlock was manufactured by plaintiffs and earlier votes were unanimous | Court: Deadlock exists; Aharon caused it by appointing third director to block anticipated majority; divisions are genuine |
| Whether deadlock threatens irreparable injury to the corporation | Deadlock prevents board action on Bioform, Vertenergy, capitalization, CEO selection and risks insolvency and loss of goodwill | Aharon argued no custodian needed and proposed alternatives (double power to president) | Court: Harm is present and threatened (operational paralysis, likely insolvency); injurious consequences justify relief |
| Whether stockholders can resolve the deadlock | Voting agreement locks factions into 3–3; shareholders cannot cure deadlock by vote | Aharon contended shareholders could act and plaintiffs acted in bad faith | Court: Voting agreement prevents shareholder cure; statutory requirement met |
| Whether appointment of a custodian is appropriate and its scope | Plaintiffs sought custodian to break deadlock and preserve enterprise | Aharon opposed appointment, argued other remedies or director removal | Court: Custodian warranted in discretion; appointed with power to act as a seventh director, preside at meetings, set agendas, create quorum with custodian +3 directors, document minutes, and seek means to raise capital/resolve deadlock |
Key Cases Cited
- In re Acadia Dairies, Inc., 135 A. 846 (Del. Ch. 1927) (director cannot act by proxy)
- Lippman v. Kehoe Stenograph Co., 95 A. 895 (Del. Ch. 1915) (language/accessibility at meetings bears on validity of deliberations)
- Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994) (management of corporate business and affairs is entrusted to the board)
- In re Walt Disney Co. Deriv. Litig., 907 A.2d 693 (Del. Ch. 2005) (CEO must act consistent with board authority; board's hiring/monitoring/firing of CEO is fundamental)