Nguyen v. View, Inc.: The Court of Chancery Discusses the Contours of Ratification of Defective Corporate Acts under Section 204
March 8, 2018
In Nguyen v. View, Inc., 2017 WL 2439074 (Del. Ch. June 6, 2017), the Delaware Court of Chancery held in a proceeding brought under Section 205 of the General Corporation Law of the State of Delaware (the “DGCL”) that Section 204 of the DGCL (“Section 204”) may not be used to ratify a “deliberately unauthorized corporate act” in order to “undo a stockholder vote rejecting a transaction proposed by the company’s board of directors.”
In View, the founder of View, Inc. (“View”) challenged the ratification of several rounds of financings in which View had raised an aggregate of approximately $500 million. Prior to the first round of such financings (the “Series B Financing”), the founder held approximately 70% of View’s outstanding common stock and was entitled to certain representation rights on View’s board of directors. In connection with the Series B Financing, View’s governance documents were to be amended to, among other things, eliminate such representation rights and enable the company to increase or decrease the number of authorized shares of common stock without a separate class vote of the holders of common stock.
The negotiation of the Series B Financing coincided with the deterioration of the founder’s relationship with View. The founder’s employment with View was terminated, and he was removed from View’s board of directors. The founder challenged those actions, and thereafter the parties negotiated and entered into a settlement agreement. At View’s insistence, the settlement agreement included the founder’s consent to the Series B Financing. The settlement agreement also provided that either View or the founder could rescind the agreement within seven days of its execution.
Following the execution of the settlement agreement but before the seven-day revocation period had expired, View consummated the Series B Financing. Subsequently, the founder revoked the settlement agreement within the revocation period, and the parties agreed to submit their claims relating to the revocation to arbitration. While the arbitration was pending, View proceeded to consummate a series of additional financing rounds. The arbitrator then issued a decision finding that the founder had properly revoked the settlement agreement, including his consent to the Series B Financing, and that the Series B Financing was void and invalid. Due to the invalidity of the Series B Financing, the subsequent financings were also effectively invalidated.
After the arbitrator’s decision, View acted under Section 204 to ratify each of the financings. In connection with the ratification, the holders of View’s Series A preferred stock converted their shares into common stock, which resulted in their holding a majority in voting power of the outstanding common stock at the time of the ratification. The conversion of the Series A preferred stock also eliminated View’s need to obtain the founder’s consent to authorize the ratification of the financings under Section 204. Following the ratification, the founder filed suit under Section 205 of the DGCL challenging the ratification.
Addressing whether to grant View’s motion to dismiss, the Court of Chancery noted that it must first determine whether the Series B Financing and the subsequent financings constituted defective corporate acts that were eligible for ratification under Section 204. In framing the issue, the Court stated that it “must consider whether an act that the majority of stockholders entitled to vote deliberately declined to authorize, but that the corporation nevertheless determined to pursue, may be deemed a ‘defective corporate act’ under Section 204 that is subject to later validation by ratification of the stockholders.” Noting that the issue was one of first impression, the Court considered the plain language of the statute and the legislative synopsis, and wrote that Section 204 is a remedial statute that requires the action that is the subject of the ratification to be an action that was within the corporation’s power at the time that the act was purportedly taken.
In considering whether View had the power to consummate the Series B Financing and the subsequent financing rounds, the Court did not limit its consideration to whether the act taken was an act within the power of corporations generally under subchapter II of the DGCL, such as the power to issue one or more classes of stock. Rather, the Court also considered whether, at the time the acts were initially taken, View had the power to take the actions under its operative governing documents in light of the composition of its stockholder base. In this regard, the Court noted that View’s “operative reality” at the time of the Series B Financing and the subsequent financings was that the founder, as the holder of a majority in voting power of the outstanding common stock at such times, was required to consent to the Series B Financing and the subsequent financings. Consequently, the Court concluded that View did not have the corporate power to consummate the Series B Financing or the subsequent financings without the consent of the founder, which consent had been revoked.
In finding that the Series B Financing and the subsequent financings were not defective corporate acts subject to ratification under Section 204, the Court explained that the validity of the Series B Financing was not called into question by a “failure of authorization,” but rather “the classic exercise of the stockholder franchise to say ‘no’ to a Board-endorsed proposal.” In making such distinction, the Court stated that “[t]he plain meaning of ‘failure’ in [the context of Section 204] is distinct from a ‘no’ vote or outright rejection of the proposal by a majority of the stockholders entitled to vote.” Thus, because the Series B Financing was deliberately rejected by the founder (as opposed to as a result of View’s failure to comply with the DGCL or its organizational documents), the Court held that the Series B Financing was not an act that was subject to ratification under Section 204. To hold otherwise, the Court noted, would “allow a corporation to ratify an act that stockholders years earlier had expressly voted not to take and to certify that act as effective on the date the stockholders rejected it,” a result that the Court noted was clearly not intended by the Delaware General Assembly in adopting Section 204.