Backer v. Palisades Growth Capital ( 2021 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
ALEX BÄCKER AND RICARDO §
BÄCKER, §
§ No. 156, 2020
Defendants Below, §
Appellants, §
§ Court Below – Court of Chancery
v. § of the State of Delaware
§
PALISADES GROWTH CAPITAL II, § C.A. No. 2019-0931-JRS
L.P., §
§
Plaintiff Below, §
Appellee. §
§
Submitted: October 21, 2020
Decided: January 15, 2021
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and
MONTGOMERY-REEVES, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery. AFFIRMED.
Thomas A. Uebler, Esquire (argued), Joseph L. Christensen, Esquire, and Hayley M.
Lenahan, Esquire, MCCOLLOM D’EMILIO SMITH UEBLER LLC, Wilmington,
Delaware; Attorneys for Appellants Alex Bäcker and Ricardo Bäcker.
Bradley R. Aronstam, Esquire (argued), Roger S. Stronach, Esquire, and Holly E. Newell,
Esquire, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Jon M. Talotta,
Esquire, HOGAN LOVELLS US LLP, Tysons, Virginia; Michael C. Hefter, Esquire,
HOGAN LOVELLS US LLP, New York, New York; Attorneys for Appellee Palisades
Growth Capital II, L.P.
MONTGOMERY-REEVES, Justice:
Appellant Alex Bäcker is the co-founder and majority common stockholder of QLess,
Inc. (“QLess” or the “Company”). In June 2019, the Company’s board removed Alex as
CEO following an internal investigation into workplace complaints.1 Alex fought hard to
keep his role as CEO, but eventually relented and expressed support for his successor, Kevin
Grauman.
On November 15, 2019, QLess held a board meeting. In the week leading up to the
meeting, the Company’s outside counsel circulated board resolutions that, among other
things, would appoint Grauman to the board. Alex made a series of statements that
collectively represented support for Grauman’s appointment.
On the eve of the board meeting, the Company’s independent director unexpectedly
resigned, giving Alex a board majority. Alex leapt into action, devising a secret counter
agenda to fire Grauman and lock-in Alex’s control of the Company. Alex caught his fellow
directors by surprise at the meeting, passing his counter agenda over objections and seizing
control of the Company.
Palisades Growth Capital II, L.P., the majority owner of the Company’s Series A
preferred stock, filed a complaint in the Court of Chancery seeking to reverse Alex’s actions.
1
After initially identifying individuals, this Court references surnames without honorifics or regard
to formal titles such as “Doctor.” The Court intends no disrespect. The Court also refers to Alex
Bäcker and Ricardo Bäcker by their first names to avoid confusion. Again, the Court intends no
disrespect and does not mean to suggest familiarity.
1
Following a paper trial, the court held that, even if technically legal, the board’s actions were
invalid as a matter of equity because Alex affirmatively deceived a fellow director to
establish a quorum.
Appellants raise four primary issues on appeal. First, Appellants argue that the Court
of Chancery’s affirmative deception finding relied on clearly erroneous interpretations of the
evidence. Second, Appellants argue that the court erred by imposing an equitable notice
requirement for a regular board meeting, contrary to Delaware precedent. Third, Appellants
argue that the deceived director’s participation in the meeting precludes equitable relief.
Fourth, Appellants argue that the court erred by exercising its equitable powers to grant relief
for a de facto breach of a stockholder voting agreement.
Having reviewed the parties’ briefs and the record on appeal, and after oral argument,
this Court holds that the Court of Chancery’s finding of affirmative deception was not clearly
erroneous. The Court also holds that the Court of Chancery did not impose an equitable
notice requirement for regular board meetings, that Appellants failed to properly raise an
equitable participation defense below, and that the Court of Chancery did not exercise its
equitable powers to grant relief for a de facto breach of contract claim. Accordingly, this
Court affirms the Court of Chancery’s March 26, 2020 Memorandum Opinion.
2
I. BACKGROUND2
A. The Parties and Relevant Non-Parties
QLess is a privately held Delaware corporation headquartered in California.3 QLess
produces and licenses a virtual queue management system that reduces the time that retail
customers must wait in line for services.4
The Company has three primary stockholders: (i) Appellant Alex Bäcker, who owns
the majority of the common stock, (ii) Respondent Palisades Growth Capital II, L.P.
(“Palisades”), which owns the majority of the Series A preferred stock, and (iii) non-party
Altos Hybrid 2 L.P. (“Altos”), which owns the majority of the Series A-1 preferred stock.5
Under the Company’s charter, the common stockholders have the exclusive right as a class
to elect two directors.6 The Series A and Series A-1 preferred stockholders each have the
exclusive right as a class to elect one director.7 The stockholders vote jointly on other board
appointments.8
Alex co-founded QLess in 2009 and served as the Company’s CEO until June 2019.9
Alex, as the majority owner of the Company’s common stock, controls two board seats and
2
The Court takes the essential facts from the Court of Chancery’s Memorandum Opinion. Palisades
Growth Cap. II, L.P. v. Backer, 2020 WL 1503218 (Del. Ch. Mar. 26, 2020).
3
Id. at *3.
4
Id.
5
Id.
6
Id.
7
Id.
8
See Appendix to the Opening Br. 47-48 (hereafter “A__”).
9
Palisades, 2020 WL 1503218, at *3.
3
appointed himself as a board member.10 Alex also appointed his father, Appellant Ricardo
Bäcker, to the board in early 2019 to replace Michael Bell.11
Palisades is a private equity firm that first invested in QLess in August 2017.12
Palisades, as the majority owner of the Company’s Series A preferred stock, appointed Jeff
Anderson, a partner of Palisades, to the board in 2017.13
Altos is an investment firm that first invested in QLess in November 2018.14 Altos,
as the majority owner of the Company’s Series A-1 preferred stock, appointed Hodong Nam,
co-founder of Altos, to the board in 2018. Nam resigned from the QLess board in September
2019.15 After resigning, Nam chose Paul D’Addario, a Senior Managing Director of
Palisades, as his replacement on the board.16
Ivan Markman served as the Company’s independent director from November 2018
until he resigned in November 2019.17
Paul Alderton is the Company’s outside counsel.18
10
Id. at *1, *3.
11
Id. at *3.
12
Id.
13
Id.
14
Id.
15
Id.
16
Id.
17
Id.
18
Id. at *4.
4
Patricio Cuestra is the consultant that Alex and Ricardo purported to appoint as a
common director during the November 15, 2019 board meeting.19
Kevin Grauman was hired as the Company’s CEO in September 2019 and
purportedly was terminated during the November 15, 2019 board meeting.20
B. The Board Terminates Alex Bäcker as CEO
In early 2019, QLess employees began reporting to the board that Alex’s leadership
style was creating a toxic work environment.21 According to some senior executives, Alex
was becoming “increasingly withdrawn and unhinged, either totally absent and disconnected
or hyper micromanaging and combative.”22
At that time, the Company’s board was composed of five directors: Alex (common
director), Michael Bell (common director), Anderson (Series A director), Nam (Series A-1
director), and Markman (independent director).23 The board grew concerned that the
Company could suffer a mass employee exodus.24 Those concerns intensified when Alex
terminated the Company’s Vice President of Engineering in March 2019, frustrating
investors.25
19
Id. at *5, *5 n.60.
20
Id. at *3.
21
Id.
22
Id.; see also Appendix to Answering Br. 1 (hereafter “B__”).
23
See Palisades, 2020 WL 1503218, at *3-4.
24
Id. at *3.
25
Id.
5
Anderson thought that the board should terminate Alex as CEO.26 Nam and
Markman were hesitant to remove Alex as CEO and proposed the intermediate step of hiring
outside consultants to provide coaching and counseling.27 At Nam’s request, Alex and the
board met with two outside management consultants. The meeting was not productive,
leading a majority of the directors to conclude that the board should remove Alex as CEO.
Nam told Alex that he should resign.28
Three days later, Nam and Anderson called a special board meeting to discuss Alex’s
status with the company.29 Unwilling to resign, Alex sought to secure his position as CEO
by firing the Company’s President and Corporate Secretary, and by replacing Bell—who
now supported terminating Alex—with Alex’s father, Ricardo.30 Now Anderson and Nam
favored terminating Alex as the CEO; the Bäckers were both opposed; and Markman was
undecided. Thus, efforts to terminate Alex stalled.31
After weeks of increasing employee unrest, the board voted to form a Special
Committee—consisting of Anderson, Nam, and Markman—to investigate the complaints
against Alex. The Special Committee hired an outside law firm to conduct an internal
investigation.32
26
Id.
27
Id.
28
Id.
29
Id. at *4.
30
Id.
31
Id.
32
Id.
6
In May 2019, the outside law firm completed its investigation and sent a report to the
Special Committee.33 The report substantiated many of the employee complaints against
Alex. In response, the Special Committee recommended that the full board terminate Alex.34
On June 8, 2019, the board met and voted to remove Alex as CEO.35 The board’s
decision to terminate Alex triggered provisions in the charter and a stockholder agreement
that could collectively reduce Alex’s control of QLess. Among other things, the stockholders
had agreed that if Alex ceased to be CEO, the stockholders would vote to expand the board
to six seats and appoint the replacement CEO to the board.36
C. The Events Leading up to the November 15 Board Meeting
After terminating Alex, the board launched an extensive search to select a new
CEO.37 The search eventually focused on Grauman, and the board hired Grauman as CEO
on September 7, 2019.38 Alex initially expressed support for Grauman’s appointment as
CEO, but their relationship quickly soured as Grauman sensed that Alex wanted to reclaim
his former role as CEO.
On September 30, 2019, Nam resigned as the Series A-1 director, leaving the seat
vacant.39 At that time, the Company’s five-seat board was composed of four directors: Alex
33
Id.
34
Id.
35
Id.
36
See A67-69.
37
See Palisades, 2020 WL 1503218, at *4.
38
Id.39
Id. at *5; see also B56.
7
(common director), Ricardo (common director), Anderson (Series A director), and Markman
(independent director).
Anderson reached out to Nam about filling the empty seat, seeking to appoint
D’Addario from Palisades to temporarily serve as the Series A-1 director.40 After
considering some alternatives, Nam agreed and (through counsel) asked Alderton, outside
counsel to QLess, to “draft and circulate the necessary stockholder consent to elect Paul
D’Addario . . . to the QLess Board as the Altos designee[.]”41
Unfortunately, Alderton seems to have misunderstood the charter.42 Although the
charter allows the Series A-1 stockholders to elect a replacement director by unanimous
consent, Alderton told Nam,
Your appointment is contractual, in other words you have the
contractual right to designate who the Series A-1 director will
be, but that person still needs to be either elected by the
stockholders under Delaware law, or in this case since it is filling
a vacancy, appointed by the Board.43
Nam responded:
Got it. From a mechanics perspective it’s easier to appoint with
board approval. For some strange reason if the board does not
approve [the D’Addario appointment] then we can do it the hard
way. Why do it the hard way when it’s simple to do with board
consent. Is that correct?44
40
Palisades, 2020 WL 1503218, at *4.
41
Id.; A178.
42
Palisades, 2020 WL 1503218, at *4.
43
A179.
44
Id.8
Thus, Nam and Anderson decided to wait until the next board meeting to formally appoint
D’Addario to the board.45
On October 27, 2019, Alex sent the Company’s directors an email seeking to schedule
the next board meeting.46 Anderson realized that Grauman did not appear to be on the
scheduling email thread and asked why he was left off. In response, Alex sent an email
stating, “Kevin is on the thread, assuming bod now includes him, which I requested it does.
Kevin, can you please confirm you received this?”47 The parties agree that “bod” referred
to the board’s email listserv, a single email address that would automatically distribute
messages to other recipients included on a distribution list.48 The “bod” distribution list
included all of the Company’s directors and Alderton,49 the Company’s outside general
counsel who sometimes acted as the board secretary.50 The directors ultimately agreed to
hold a board meeting on November 15.51
45
Palisades, 2020 WL 1503218, at *4.
46
Id. at *5.
47
Id.; A172.
48
Opening Br. 25-28; Answering Br. 9.
49
A824, at 97:2-98:21.
50
See, e.g., A289 (minutes from the November 15 board meeting noting that “Mr. Alderton served
as Secretary of the meeting.”).
51
Palisades, 2020 WL 1503218, at *5.
9
On November 11, 2019, Grauman circulated a high-level agenda for the
November 15 board meeting.52 Alex thanked Grauman for the agenda and requested that he
“circulate any proposed resolutions at least 48 hours before the meeting for review[.]”53
Alderton responded to Alex’s request on November 13, attaching proposed board
resolutions that, among other things, would: (i) appoint D’Addario as the Series A-1 director,
(ii) ratify Grauman’s appointment as CEO, (iii) increase the board to six members, and
(iv) appoint Grauman to the new CEO director seat.54 The Bäckers did not object to the
proposed resolutions, although Alex requested that Alderton add an option grant for Ricardo
that the board had previously discussed.55
The same day, Alex communicated with Nam about appointing someone other than
D’Addario, and not from Palisades, to the vacant Series A-1 board seat.56 Nonetheless, Nam
decided to nominate D’Addario.57
On the morning of November 14, Markman unexpectedly resigned from his position
as independent director, leaving the Company with only three directors: Alex, Ricardo, and
Anderson.58 Markman told Grauman that the “[o]ne liner” explanation for Markman’s
52
Id.53
B65.
54
Id.55
See A211; see also Palisades, 2020 WL 1503218, *5.
56
See, e.g., A202-03; see also Palisades, 2020 WL 1503218, at *4 n.46 (“Although Nam did initially
discuss other options with Bäcker, he quickly settled on D’Addario as his choice.”).
57
Palisades, 2020 WL 1503218, at *4 n.46
58
Id. at *5.
10
resignation was “not enough time.”59 That was not the full story. Markman decided to resign
after a phone call with Alex led Markman to believe that Alex would try to reinstate himself
as the Company’s CEO.60
Alex recognized that Markman’s resignation—combined with Nam’s earlier
resignation—gave the Bäckers a two-vote majority on a three-member board. Thus, Alex
began working on a secret counter agenda to fire Grauman and seize control of QLess.
Nonetheless, a few hours after Markman’s resignation, Alex emailed the board and asked
Grauman to “distribute the board materials/deck a day in advance of the meeting so that we
may all do our homework and be prepared to spend our time together most productively.”61
Alex did not disclose his intention to fire Grauman and take control of the Company.
Anderson and Alderton appear to have recognized that Alex could use Markman’s
resignation to take aggressive action and that the Bäckers needed Anderson’s attendance to
establish a quorum.62 Nonetheless, Anderson and Alderton concluded that the Bäckers
would not be able to exercise majority control because the voting agreement compelled the
Bäckers to vote in favor of D’Addario’s appointment, which would be the first item on the
board’s agenda, preventing the Bäckers from forcing any other board actions over objections
from Anderson and D’Addario. 63
59
A243; see also Palisades, 2020 WL 1503218, at *5.
60
Palisades, 2020 WL 1503218, at *5.
61
A207.
62
See, e.g., A639, at 161:6-162:7.
63
See, e.g., A627, at 114:10-115:12.
11
D. Alex Seizes Control of the Company
During the early afternoon of November 15, Alex shared a set of alternative board
resolutions with Ricardo and Cuestra, a consultant that Alex intended to appoint to the
board.64 The alternative resolutions differed dramatically from the resolutions Alderton
circulated two days earlier. Among other things, Alex’s alternative resolutions would:
(i) terminate Grauman as CEO, (ii) appoint Alex as CEO and CFO, (iii) expand the board to
six members and appoint Alex to the new CEO-director seat, (iv) appoint Cuestra to the
common director seat that Alex vacated, and (v) amend the bylaws to allow three directors
(e.g., Alex, Ricardo, and Cuestra) to constitute a quorum.65 Taken as a whole, the alternative
resolutions would effectively lock-in Alex’s control of QLess. Alex did not share his
alternative resolutions with Anderson, D’Addario, Alderton, Nam, or Markman.
Several hours later, but still before the board meeting, Alderton emailed the Bäckers
to follow-up on the board resolutions circulated earlier in the week.66 Alderton noted that
the Bäckers had not electronically signed a board consent adopting the resolutions and stated
that “[i]t is my understanding from Jeff [Anderson] that execution of this Consent prior to
the Board meeting is a prerequisite, and that he will not be joining the call if it is not signed
in advance, which would leave us without a quorum and thus unable to conduct business.”67
64
Palisades, 2020 WL 1503218, at *5.
65
Id.66
See A263.
67
Id.12
The proposed board resolutions were largely unchanged from the resolutions that Alderton
circulated earlier in the week and would, among other things, ratify Grauman’s employment
and appoint both D’Addario and Grauman to the board.
After coordinating, the Bäckers decided to ignore the ultimatum and did not sign the
consent approving the board resolutions.68 Despite not receiving a response from the
Bäckers, Anderson decided to attend the board meeting.
Later that evening, the board held the planned meeting. Alex called the meeting to
order and asked that Grauman and D’Addario leave the meeting.69 Grauman left the
meeting. D’Addario refused to leave. Alex and Ricardo then unveiled and executed their
counter agenda, firing Grauman as CEO, hiring Alex as CEO and CFO, appointing Alex to
the newly created CEO-director seat, appointing Cuestra to the common director seat that
Alex left vacant, and changing the quorum bylaw. Anderson and D’Addario stayed and
objected to each board action.70
At the end of the meeting, the board was composed of four directors: (i) Cuestra
(common), (ii) Ricardo (common), (iii) Anderson (Series A), and (iv) Alex (CEO), with both
the Series A-1 and independent director seats vacant.71 This board composition effectively
68
See B118-21.
69
Palisades, 2020 WL 1503218, at *5.
70
Id.71
Id.13
locked in Alex’s control of QLess by allowing Alex, Ricardo, and Cuestra to establish a
quorum and exercise majority board control.
The Court of Chancery characterized the Bäckers’ actions at the November 15 board
meeting as an “ambush” and a “coup,”72 and the record suggests that the Bäckers caught the
other directors by surprise. For example, three days after the board meeting, Nam sent an
email to Anderson recounting communications that Nam had with Alex leading up to the
board meeting. According to Nam,
[Alex] texted me after Ivan [Markman] resigned and asked me
if I heard anything (via text). He claimed to have no idea what
happened.
When I did speak to [Alex] about a week ago, I specifically
asked him how he thought Kevin [Grauman] was doing. I also
asked him how the relationship was between him and Kevin.
He said everything was fine. He offered absolutely zero clue to
any problems or dissatisfaction he had with Kevin [Grauman]
as CEO.73
Thus, Nam and Anderson both appear to have been unaware of Alex’s plan to reclaim his
role as CEO, although it is unclear when the conversation between Alex and Nam occurred.74
72
Id. at *9-10.
73
A301.
74
See, e.g., A738, at 242:21-244:18 (Nam testifying that he recalled having “two conversations with
Alex” around November 12th, one of which seems to have been the conversation that Nam recalled
in the email quoted above).
14
E. The Court of Chancery Invalidates the November 15 Board Actions
On November 20, 2019, Palisades filed a complaint in the Court of Chancery,
challenging the Bäckers’ actions at the November 15 board meeting.75 The complaint
alleged four counts. Count I sought a declaratory judgment under 8 Del. C. § 225 that the
QLess board consisted of Anderson, D’Addario, Alex, and Ricardo. Count II sought a
similar declaratory judgment under § 225 that Grauman is the Company’s CEO. Count III
sought specific performance of the voting agreement, which would entail electing Grauman
to the CEO director seat. Count IV alleged that the Bäckers breached their fiduciary duties.76
In November 2019, the Court of Chancery agreed to bifurcate the breach of fiduciary duty
claim from the summary § 225 proceeding addressing the first three counts.77
The Court of Chancery held a trial on the papers in January 2020.78 Afterwards, the
court requested two rounds of post-trial briefing on technical issues related to the Company’s
corporate governance documents, such as whether the board’s decision to remove Alex as
CEO in June 2019 automatically trigged an obligation to expand the board to six members
and whether advance notice was required to amend the quorum bylaws.79
75
A304.
76
Palisades, 2020 WL 1503218, at *5.
77
See B122, B126.
78
A1250.
79
B202, A1405.
15
The Court of Chancery issued its memorandum opinion on March 26, 2020.80 The
court held that “D’Addario was never validly appointed to the board,”81 and “while [Alex]
and Ricardo were not forthcoming with Palisades and Altos in advance of the November 15
meeting, they did not take any affirmative action to prevent Altos from exercising its rights”
to appoint D’Addario.82
The court also observed that
it is not at all clear that [Alex] Bäcker breached the Voting
Agreement by refusing to recognize Grauman as a duly
appointed member of the Board. While the evidence clearly
demonstrates that the parties to the Voting Agreement intended
that Grauman would take the newly created CEO Board seat in
advance of the November 15 meeting, the specific means by
which that Board vacancy was to be filed are not at all clear in
either the Bylaws or the Voting Agreement itself.83
Nonetheless, the court invalidated the board’s actions at the November 15 meeting
because the Bäckers affirmatively deceived Anderson to establish a quorum.84 The court
explained that
there must be some affirmative deception before equity will
intervene; if the Bäckers had simply acted in secret to plot their
boardroom coup d'état without any affirmative action to mislead
the other members of the Board, Plaintiff’s call to equity would
rest on softer ground.
80
Palisades, 2020 WL 1503218, at *1.
81
Id. at *2.
82
Id.
83
Id.
84
Id. at *9-10.
16
But that is not what Defendants did. . . . Altos was the recipient
of some erroneous legal advice and [Alex] Bäcker sat silently
on the misinformation. If that were the end of the story, there
would be no basis to invoke equity. But the Bäckers did not stay
silent in all matters related to the November 15 meeting.
Instead, [Alex] Bäcker affirmatively misrepresented to
Anderson and others that he wanted Grauman on the Board, and
that he assumed Grauman had already joined the Board . . . .
. . . After having affirmatively represented to Anderson (and
Markman) that Defendants supported Grauman’s appointment
to the Board, keeping mum as they planned their ambush was
inequitable. If Anderson had known of Defendants’ change of
plans, he would have refused to participate in the meeting,
defeating a quorum and thwarting the coup. As Anderson’s
presence at the meeting was secured under deliberately false
pretenses, any action taken at that meeting is void.85
The Court of Chancery relied on six pieces of evidence to find that the Bäckers
affirmatively deceived Anderson. First, the court found that the scheduling email Alex sent
the board in October 2019 “affirmatively misrepresented to Anderson and others that [Alex]
wanted Grauman on the Board, and that [Alex] assumed Grauman had already joined the
Board.”86 The court quoted the relevant portion of that email as follows: “Kevin [Grauman]
is on the thread, assuming [the Board] now includes him, which I requested it does.”87 The
court also noted that Ricardo responded to the scheduling email by writing “[l]ooks good to
me.”88 Although the court does not explicitly state the relevance of this statement, it seems
85
Id.
86
Id. at *10.
87
Id.
88
Id.
17
to have construed Ricardo’s response to endorse Alex’s request that Grauman be added to
“[the Board].”89
Second, the court observed that “[w]hen Grauman circulated a ‘high-level agenda’
for the November 15 meeting, [Alex] Bäcker responded by thanking [Grauman] and asking
him to ‘circulate any proposed resolutions’” for the meeting.90 The court found that this
statement “gav[e] the impression that [Alex] Bäcker had no issue with Grauman joining the
Board.”91
Third, the court noted that “[o]n the day before the contested meeting, [Alex] Bäcker
emailed Grauman, copying the QLess Board, requesting that Grauman circulate board
materials ‘so that we may all do our homework and be prepared to spend our time together
most productively.’” The court found that this message “g[ave] the impression that [Alex]
Bäcker approved of Grauman’s board membership.”92
Fourth, the court recalled that
[w]hen Alderton circulated draft Board resolutions that would
formalize Grauman’s appointment to the Board, as requested by
Grauman and [Alex] Bäcker, neither Ricardo nor [Alex] gave
any indication that their position had changed. After having
affirmatively represented to Anderson (and Markman) that
Defendants supported Grauman’s appointment to the Board,
keeping mum as they planned their ambush was inequitable.93
89
See id.
90
Id.
91
Id.
92
Id.
93
Id.
18
Fifth, the court cited to an email that Nam authored a few days after the November 15
board meeting stating that “[w]hen I did speak to [Alex] [Bäcker] about a week ago, I
specifically asked him how he thought Kevin [Grauman] was doing. I also asked [Alex]
how the relationship was between him and [Grauman]. [Alex] said everything was fine.”94
Sixth, the court found that Grauman “understood” the October 2019 scheduling email
“to mean that he was now a member of the board,” citing the following testimony from
Grauman’s deposition:
Q. If you could direct your attention to Alex Bäcker’s email . . .
on October 28th . . . .
A. Yes.
Q. He says: Kevin is on the thread, assuming BOD now
includes him, which I requested it does.
A. Correct.
Q. What does that mean?
A. “BOD” is Board of Directors. So Alex is basically saying to
the other members of the Board that he’s added me to the thread
of communications with the Board members, assuming that I’m
now on the Board.
Q. What did that indicate to you, if anything, about your
participation at the Board level?
A. It indicated that there was a follow-through in exactly the
same way as I was expecting and what had been discussed
before, that I would occupy the CEO’s seat on the Board.95
94
Id. at *10 n.116.
95
A812-13, at 52:11-53:5.
19
Relying on the evidence discussed above, the court found that “Anderson’s presence
at the meeting was secured under deliberately false pretenses.”96 “If Anderson had known
of [the Bäckers’] change of plans, he would have refused to participate in the meeting,
defeating a quorum and thwarting the coup.”97
On April 22, 2020, the Bäckers filed a timely notice of appeal. On appeal, the Bäckers
argue that the Court of Chancery erred by relying on clearly erroneous interpretations of
evidence and applying incorrect legal standards to invalidate the actions that the Bäckers
took at the November 15 board meeting.
II. STANDARD OF REVIEW
“This Court reviews questions of law de novo.”98 “[T]he applicable standard by
which the defendants’ conduct is to be judged . . . is a legal question . . . subject to de novo
review by this Court.”99
“We will not overturn the Court of Chancery’s factual findings unless they are clearly
erroneous.”100 The clearly erroneous standard of review is deferential to the trial court. “We
96
Palisades, 2020 WL 1503218, at *10.
97
Id.98
Klassen v. Allegro Dev. Corp., 106 A.3d 1035, 1043 (Del. 2014) (citing DV Realty Advisors LLC
v. Policeman’s Annuity and Benefit Fund of Chi., 75 A.3d 101, 108 (Del. 2013)); see also Brigade
Leveraged Cap. Structures Fund Ltd. v. Stillwater Mining Co., 240 A.3d 3, 9 (Del. 2020) (“This
Court reviews errors of law de novo.” (citing SmithKline Beecham Pharms. Co. v. Merck & Co.,
766 A.2d 442, 447 (Del. 2000))).
99
Nixon v. Blackwell, 626 A.2d 1366, 1375 (Del. 1993) (citing Fiduciary Tr. Co. v. Fiduciary Tr.
Co., 445 A.2d 927, 930 (Del. 1982)).
100
Klassen, 106 A.3d at 1043 (citing DV Realty, 75 A.3d at 108).
20
will not set aside a trial court’s factual findings ‘unless they are clearly wrong and the doing
of justice requires their overturn.’”101 Factual findings are not clearly erroneous “if they are
‘sufficiently supported by the record and are the product of an orderly and logical deductive
process.’”102 “The factual findings of a trial judge can be based upon physical evidence,
documentary evidence, testimonial evidence, or inferences from those sources jointly or
severally.”103 “That deferential standard applies not only to historical facts that are based
upon credibility determinations but also to findings of historical fact that are based on
physical or documentary evidence or inferences from other facts .”104 “When there
are two permissible views of the evidence, the factfinder’s choice between them cannot be
clearly erroneous.”105
“‘Whether . . . an equitable remedy exists or is applied using the correct standards is
an issue of law and reviewed de novo,’ but . . . ‘application of those facts to the correct legal
standards . . . are reviewed for an abuse of discretion.’”106
101
DV Realty, 75 A.3d at 108 (quoting Montgomery Cellular Hldg. Co. v. Dobler, 880 A.2d 206,
219 (Del. 2005)).
102
Biolase, Inc. v. Oracle P’rs, 97 A.3d 1029, 1035 (Del. 2014) (quoting Schock v. Nash, 732 A.2d
217, 224 (Del. 1999)).
103
Cede & Co. v. Technicolor, Inc., 758 A.2d 485, 491 (Del. 2000).
104
CDX Hldgs., Inc. v. Fox, 141 A.3d 1037, 1041 (Del. 2016).
105
RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015) (quoting Bank of N.Y. Mellon Tr.
Co., N.A. v. Liberty Media Corp., 29 A.3d 225, 236 (Del. 2011)).
106
SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 341 (Del. 2013) (quoting Schock, 732 A.2d
at 232).
21
III. ANALYSIS
On appeal, the Bäckers argue that the Court of Chancery’s opinion should be reversed
for four reasons. First, the Bäckers argue that the court’s “finding of affirmative deception
was based on a clearly erroneous rewriting and interpretation of a trial exhibit . . . that even
Palisades did not proffer.”107 Because “Alex and Ricardo’s communications cited by the
Court of Chancery were not deceitful and did not deceive Anderson into attending the
November 15 Meeting, [e]quity . . . cannot invalidate Alex and Ricardo’s votes at the
meeting.”108 Second, the Bäckers argue that the court “imposed an equitable advance-notice
requirement for regular, as opposed to special, Board meetings,” contrary to Delaware
precedent.109 Third, the Bäckers argue that “the affirmative-deception rule” in Koch v. Stearn
does not apply to regular board meetings, and that Anderson’s decision to participate in the
November 15 board meeting and vote against all matters presented forecloses equitable
relief.110 Fourth, the Bäckers argue that “it was reversible error to award extracontractual
relief supplanting the Voting Agreement where the contract was not breached and contains
its own enforcement mechanism.”111
We address each argument in turn.
107
Opening Br. 4.
108
Id.109
Id.110
Opening Br. 44 (referring to 1992 WL 181717 (Del. Ch. July 28, 1992), overruled on other
grounds by Klassen v. Allegro Dev. Corp., 106 A.3d 1035 (Del. 2014)).
111
Id. at 47.
22
A. The Court of Chancery’s Finding that the Bäckers Deceived Anderson
Was Not Clearly Erroneous
The Court of Chancery held that the board’s actions at the November 15 meeting
were invalid as a matter of equity because the Bäckers affirmatively deceived Anderson to
establish a quorum.112 The Bäckers argue that the court’s finding of affirmative deception is
a mixed question of fact and law that we should review de novo.113 The Bäckers next argue
that even if this Court applies the clearly erroneous standard of review, the Court of
Chancery’s finding of affirmative deception was clearly erroneous because the evidence
does not show the Bäckers affirmatively deceived Anderson.114 Finally, the Bäckers
contend that Palisades did not properly raise any theory of affirmative deception as to
Grauman’s appointment, and therefore the court erred by granting equitable relief relating to
Grauman’s appointment.115
1. We review the Court of Chancery’s factual finding of affirmative
deception for clear error
We ordinarily review a trial court’s factual findings for clear error.116 Nonetheless,
the Bäckers argue that the Court of Chancery’s determination that they affirmatively
deceived Anderson is a mixed question of fact and law that we review de novo.117 The
112
Palisades, 2020 WL 1503218, at *9-10.
113
Opening Br. 23.
114
Id. at 4.
115
Id. at 35-37.
116
See, e.g., Klassen, 106 A.3d at 1043.
117
Opening Br. 23; Reply Br. 7-8.
23
Bäckers reason that, because the Court of Chancery stated that affirmative deception was a
prerequisite for equitable relief in this case, the court’s finding that the Bäckers affirmatively
deceived Anderson was an application of law to facts presenting a mixed question of fact
and law.118
We disagree with the Bäckers. At bottom, the determination of whether the conduct
was deceptive was a factual one. Unlike the mixed questions of fact and law that the Bäckers
identify, the court did not need to consider legal principles to determine whether the Bäckers
tricked Anderson. Instead, the court had to answer two factual questions. First, what
representations did the Bäckers make? Second, were those representations false or
misleading? The record supplied full answers to both questions. The Court of Chancery’s
use of the words “affirmative” and “deception” simply describe the factual scenario that
justified equitable intervention: directors misleading a fellow director. Thus, the court’s
finding that the Bäckers affirmatively deceived Anderson is a factual finding that we
review for clear error, not a mixed question of fact and law.
2. The Court of Chancery’s finding of affirmative deception was not
clearly erroneous
As discussed above, the court held that even if the Bäckers complied with the
technical requirements under the Company’s corporate governance documents, the board’s
118
See Reply Br. 7-8.
24
actions were nonetheless invalid under equitable principles because the Bäckers
affirmatively deceived Anderson to create a quorum. 119
This Court has long recognized that “inequitable action does not become permissible
simply because it is legally possible.”120 Under Delaware law, “director action[s] [are]
‘twice-tested,’ first for legal authorization, and second [for] equity.”121 “Stockholders can
entrust directors with broad legal authority precisely because they know that that authority
must be exercised consistently with equitable principles of fiduciary duty.”122 For this
reason, Delaware courts “review issues that could infect the composition of a company’s ‘de
jure directors and officers’ under Section 225, notwithstanding formal compliance with the
voting procedures and requirements for those offices.”123
Consistent with these principles, Delaware courts have used their equitable powers
on numerous occasions to invalidate otherwise lawful board actions tainted by inequitable
deception. For example, in Koch v. Stearn the court invalidated board actions terminating a
CEO where a fellow director “tricked [the CEO] into attending the meeting” by circulating
a special meeting notice that was “silent as to any possible consideration of” a transaction
119
Palisades, 2020 WL 1503218, at *9-10.
120
Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971).
121
In re Invs. Bancorp., Inc. S’holder Litig., 177 A.3d 1208, 1222 (Del. 2017) (quoting Sample v.
Morgan, 914 A.2d 647, 672 (Del. Ch. 2007)).
122
Sample, 914 A.2d at 664 (emphasis added).
123
Brown v. Kellar, 2018 WL 6721263, at *6-7 (Del. Ch. Dec. 21, 2018) (quoting Genger v. TR
Invs., LLC, 26 A.3d 180, 200 (Del. 2011)).
25
that would cause the board to remove the current CEO.124 Further, the company’s outside
directors intentionally failed to disclose their “agenda, which included removing [the CEO]
from office if he did not cooperate and step down voluntarily.”125 Similarly, in Alderstein
the court invalidated a board vote terminating the CEO and issuing stock “with the
purposeful effect of destroying his voting control” where the other directors “all operated in
secret to negotiate terms” for the dilutive transaction “while keeping [the CEO] deliberately
uninformed about their plan to present [that] proposal.”126
Proof of an outright lie is not necessary to justify equitable remedies. Deceptive
omissions can suffice. For example, in Koch the court held that directors deceived the CEO
by providing the CEO with a meeting agenda that intentionally omitted discussion of the
transaction that led to the CEO’s termination.127 The court also held that the CEO could be
“tricked into attending the meeting” even though he “may have had some reason to suspect
that his removal from office would be discussed.”128
Likewise, in Optimiscorp v. Analog Ventures, despite affirming the Court of
Chancery’s holding on other grounds, this Court observed,
[W]e are reluctant to accept the notion that it vindicates the
board’s right to govern the corporation to encourage board
124
Koch v. Stearn, 1992 WL 181717, at *5 (Del. Ch. July 28, 1992), overruled on other grounds by
Klassen, 106 A.3d at 1047.
125
Id.126
Alderstein v. Wetheimer, 2002 WL 205684, at *8-9 (Del. Ch. Jan. 25, 2002) (internal quotation
marks omitted).
127
Koch, 1992 WL 181717, at *5.
128
Id.26
factions to develop Pearl Harbor-like plans to address their
concerns about the company’s policy directions or the behavior
of management. Rather, it has long been the policy of our law to
value the collaboration that comes when the entire board
deliberates on corporate action and when all directors are fairly
accorded material information.129
The Bäckers argue that the Court of Chancery’s affirmative deception finding was
clearly erroneous because the evidence does not show that the Bäckers falsely represented
support for Grauman’s appointment.130 The Bäckers’ core argument is that the Court of
Chancery adopted “a clearly erroneous rewriting and interpretation” of the scheduling email
that Alex sent the board in October 2019 to find that the Bäckers affirmatively represented
support for Grauman’s appointment.131 In the original email, Alex wrote that “Kevin is on
the thread, assuming bod includes him, which I requested it does.”132 The parties agree,133
and the record reflects,134 that “bod” referred to the board’s email distribution list. The Court
of Chancery replaced “bod” with “[the Board]” when quoting the message.135 The Bäckers
129
Optimiscorp v. Waite, 137 A.3d 970, 2016 WL 2585871, at *3 (Del. Apr. 25, 2016) (Table)
(citations omitted).
130
Opening Br. 4.
131
See, e.g., id. at 4, 25-29.
132
A172 (emphasis added).
133
See, e.g., Opening Br. 26-27 (“The reference to ‘bod’ was to Grauman being ‘on the email thread’
by virtue of being on the ‘bod’ email distribution list,” which referred to “‘the Company’s Board
listserv.’” (quoting A1224)); Answering Br. 20 (“[T]he Bäckers focus on the Court of Chancery’s
interpretation of . . . (A172) , an email in which [Alex] Bäcker states that he ‘requested’ that Grauman
be ‘added’ to ‘bod,’ a Board listserv.”).
134
See, e.g., A812, at 52:15-23 (Grauman testified during his deposition that “‘BOD’ is Board of
Directors. So Alex is basically saying to the other members of the Board that he’s added me to the
thread of communications with the Board members, assuming that I’m now on the Board.”).
135
Palisades, 2020 WL 1503218, at *10 (emphasis added).
27
argue that this “textual alteration . . . made a substantive, material change to the evidence.
The original text of [the scheduling email] had nothing to do with the composition of the
Board . . ., and the reference to ‘bod’ was not a reference to Grauman being a director.”136
Thus, the Bäckers argue that the Court of Chancery misconstrued Alex’s request. In
the original email, Alex referred to a request that Grauman be added to the board’s email
distribution list. Misreading “bod” to refer to “[the Board],” the court wrongly concluded
that Alex referenced a request to add Grauman to the Company’s board of directors. The
court then relied on that incorrect reading to find that the Bäckers made statements that were
deceptively incomplete given Alex’s earlier request to add Grauman to the Company’s board
of directors. The Bäckers also argue that the Court of Chancery relied on this
misinterpretation to find that Ricardo’s represented support for Grauman’s appointment by
responding “[l]ooks good to me” to Alex’s email.137
The Bäckers’ concern has some merit. The court’s replacement of “bod” with the
capitalized term “the Board” suggests that the court construed Alex’s request to refer to the
Company’s board of directors, not the board’s email distribution list.138 Further the court
characterized the scheduling email as “expressing [Alex’s] belief that Grauman had been
added to the Board, per his request.”139
136
Opening Br. 26.
137
Id. at 30.
138
See Palisades, 2020 WL 1503218, at *10.
139
Id. at *9 n.107 (emphasis added).
28
Nonetheless, Alex’s request to add Grauman to the board’s distribution list was
consistent with appointing Grauman to the CEO-director seat. The purpose of the “bod”
listserv appears to have been to facilitate communications among the members of the QLess
board.140 It also appears that the distribution list included only the current members of the
board and Alderton,141 the Company’s outside counsel who sometimes acted as the corporate
secretary during board meetings. 142 Requesting that Grauman be added to the board’s email
distribution list, therefore, is consistent with the intent to add Grauman to the Company’s
board of directors at the November 15 board meeting.
Further, Grauman’s testimony supports this interpretation, as he thought Alex’s
request to add him to the “bod” listserv “indicated that there was a follow-through in exactly
the same way as I was expecting and what had been discussed before, that I would occupy
the CEO’s seat on the Board.”143 The Bäckers try to discount this testimony by citing other
testimony indicating that Grauman “did not believe he was a director before the November
140
See, e.g., A812, at 52:19-23 (testimony from Grauman’s deposition: “‘BOD’ is Board of
Directors. So Alex is basically saying that he’s added me to the thread of communications with the
Board members, assuming that I’m now on the Board.”).
141
See, e.g., A172 (this email thread sent to the bod listserv shows emails sent by Anderson,
Markman, Alderton, Alex, and Ricardo); A824, at 97:18-98:12 (testimony from Grauman’s
deposition: “Q. You didn’t infer from this email [A172] that you were a member of the Board of
Directors, did you? A. I didn’t infer anything from this email. Q. If you look at the very top, there’s
an email address that’s . . . bod@qless.com. Do you see that? . . . Looking at it now, you understand,
don’t you, that Alex was referring to a Board distribution list? A. Yeah, I do. But that could have
included Scott [Alderton], too. He’s not on the Board of Directors.”).
142
See, e.g., A289 ( “Mr. Alderton served as Secretary of the meeting.”).
143
A813, at 53:2-5.
29
15 Meeting.”144 This argument does not withstand scrutiny, however, because Grauman’s
testimony that he did not think that he was a director before the November 15 board meeting
does not mean that he did not think that he would be named a director at the meeting. Further,
even if the Bäckers cited to contradictory testimony, the court’s “choice” between “two
permissible views of the evidence . . . cannot be clearly erroneous.”145
Nonetheless, if the Court of Chancery relied on its interpretation of the scheduling
email alone to find deception, we might hold that the court’s finding was clearly erroneous.
But that is not so. The court found that the Bäckers made four more misrepresentations
regarding Grauman’s appointment:
• “When Grauman circulated a ‘high-level agenda’ for the November 15 meeting,
[Alex] Bäcker responded by thanking [Grauman] and asking him to ‘circulate any
proposed resolutions’” for the meeting.146
• “On the day before the contested meeting, [Alex] Bäcker emailed Grauman,
copying the QLess Board, requesting that Grauman circulate board materials ‘so
that we may all do our homework and be prepared to spend our time together
most productively.’”147
• “When Alderton circulated draft Board resolutions that would formalize
Grauman’s appointment to the Board, as requested by Grauman and [Alex]
Bäcker, neither Ricardo nor [Alex] gave any indication that their position had
changed.”148
144
See Opening Br. 28 (citing A835, at 142:5-9).
145
RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015) (quoting Bank of N.Y. Mellon Tr.
Co., N.A. v. Liberty Media Corp., 29 A.3d 225, 236 (Del. 2011)).
146
Palisades, 2020 WL 1503218, at *10 (referring to B65).
147
Id. (quoting A207).
148
Id. (quoting A211).
30
• A few days after the November 15 board meeting, Nam sent an email stating that
“[w]hen I did speak to [Alex] [Bäcker] about a week ago, I specifically asked him
how he thought Kevin [Grauman] was doing. I also asked [Alex] how the
relationship was between him and [Grauman]. [Alex] said everything was
fine.”149
The Bäckers claim that none of these statements show that the Bäckers represented
support for Grauman’s appointment. Regarding the first misrepresentation, the Bäckers
claim that the high-level agenda Grauman circulated did not “mention . . . Grauman’s
appointment” and “simply referred to Alderton leading a ‘Board hygiene’ discussion
involving ‘various resolutions’ without specifying what was proposed.”150 Further, the
Bäckers argue that “Alex asking the CEO to circulate resolutions was not an affirmative
misrepresentation that Alex and Ricardo wanted Grauman on the Board or assumed
Grauman had already joined the Board.”151
Regarding the second misrepresentation, the Bäckers argue that
Alex’s use of the pronouns ‘we’ and ‘our’ in an email copying
the Board and asking the CEO to circulate materials was not an
affirmative misrepresentation that Alex and Ricardo wanted
Grauman on the Board or assumed Grauman had already joined
the Board. Grauman, as the requested distributor of the
materials, already had the Board materials and thus was not part
of the collective ‘we’ that needed to do ‘our’ homework before
the Board meeting.152
149
Id. at *10 n.116 (quoting A301).
150
Opening Br. 31.
151
Id.152
Id. at 31-32.
31
Regarding the third misrepresentation, the Bäckers argue that “Alex did not expressly
or implicitly request ‘Board resolutions that would formalize Grauman’s appointment to the
board.’” Further, “Alex and Ricardo’s failure to specifically object to a draft proposed
resolution prior to the November 15 Meeting was not an affirmative misrepresentation that
[they] wanted Grauman on the Board or assumed Grauman had already joined the Board.”153
Regarding the fourth misrepresentation, the Bäckers argue that “Alex saying to a
former director no longer subject to confidentiality [that] [Alex’s] relationship with Grauman
was ‘fine’ was not an affirmative misrepresentation that Alex and Ricardo wanted Grauman
on the Board or assumed that Grauman had already joined the Board. Alex’s dissatisfaction
with Grauman was clear enough that Markman believed when he resigned that Alex ‘would
try to reinstate himself as CEO.’”154
On reply, the Bäckers further argue that
[t]he timeline of deception relied upon by the Court of Chancery
. . . does not hold up. It was not until after Markman’s
resignation . . . that Alex prepared resolutions for the November
15 Meeting. All but one communication the Court of Chancery
found to be deceptive preceded Markman’s resignation. . . .
....
The only communication after Markman’s resignation was
Alex’s request of Grauman, the CEO, who prepared Board
materials, to circulate materials for the meeting ‘so that we may
all do our homework and be prepared to spend our time together
most productively.’ There is no evidence that this email gave
153
Id. at 32.
154
Id. at 30 (quoting Palisades, 2020 WL 1503218, at *5).
32
Anderson the ‘impression that [Alex] Bäcker approved of
Grauman’s Board membership,’ nor could it have reasonably
given such an impression.155
The Bäckers’ arguments are unpersuasive because they fail to demonstrate that the
Court of Chancery’s factual findings were wrong, let alone clearly erroneous. For example,
it was not unreasonable to find that Alex’s request that Grauman “circulate any proposed
resolutions” created the impression that Alex “had no issue with Grauman joining the
Board.”156 Asking Grauman to circulate resolutions implied that Grauman would have a
meaningful role at the November 15 board meeting.
Similarly, Alex’s statement to Nam that “everything was fine” between Alex and
Grauman implied—if not outright stated—that Alex continued to support Grauman as the
CEO. If everything was fine, Alex would have had no reason to fire Grauman. Thus, this
statement also implied support for Grauman’s continued status as CEO, even if it did not
outright express support for Grauman’s nomination to the board.
The Bäckers’ timing argument suffers from similar problems. It may be true that the
Bäckers did not begin working on a counter agenda until Markman resigned. But it is also
true that Markman resigned “after a phone call with [Alex] Bäcker that led Markman to
believe [Alex] Bäcker would try to reinstate himself as CEO.”157 Thus, the record suggests
that Alex’s intent to fire Grauman predated and caused Markman’s resignation.
155
Reply Br. 8, 10.
156
See Palisades, 2020 WL 1503218, at * 10.
157
Id. at *5.
33
The bigger problem for the Bäckers, however, is that the Court of Chancery identified
at least one misrepresentation that passes muster under all of the requirements that the
Bäckers suggest. On the day before the contested board meeting—and hours after Markman
resigned—Alex asked Grauman to circulate board materials “so that we may all do our
homework and be prepared to spend our time together most productively.”158
This was an affirmative statement. Alex made the statement after Markman resigned.
And the statement was deceptive and misleading on its face. At that point, Alex knew that
he held a board majority, and Alex had left Markman with the impression that he wanted to
fire Grauman. Therefore, Alex must have known that the draft resolutions Alderton
circulated earlier in the week were now a dead letter. Nonetheless, Alex asked that Grauman
share his draft resolutions with Anderson and others “so that we may all do our
homework.”159 There was no reason for Grauman to prepare for a meeting from which he
would be excluded and at which he would be fired. And there was no reason for Anderson
or Grauman to study resolutions that Alex knew the board would not consider. It is not
erroneous to find that this statement was deceptive.
The Bäckers try to blunt this argument by claiming that Alex’s use of the words “our”
or “we” did not refer to Grauman.160 Even if this reading is plausible, the Bäckers fail to
explain why the Court of Chancery’s interpretation was unreasonable, let alone clearly
158
Id. at *10.
159
Id.
160
Opening Br. 31-32.
34
erroneous. It would not be unreasonable to find that “our” and “we” referred to all of the
recipients who expected to meaningfully participate in the meeting, including Grauman.
We therefore hold that the Court of Chancery’s finding of affirmative deception was
not clearly erroneous.
The Bäckers raise two more arguments that we must address before concluding this
section. First, the Bäckers argue that “[t]he Court of Chancery erred by holding that Alex
caused Anderson’s attendance at the November 15 Meeting.”161 Instead, the Bäckers claim
that it was Alderton’s legal advice that Anderson “and D’Addario held two votes—enough
to block Alex and Ricardo’s votes—that led [Anderson] to attend and remain for the entire
meeting,”162 not misrepresentations from the Bäckers.
At best, the Bäckers raise the possibility that multiple factors contributed to
Anderson’s decision to attend the November 15 meeting. It is possible that Anderson
decided to attend the meeting based on Alderton’s legal advice. But it is also possible that
Alderton’s legal advice and Anderson’s decision to attend the meeting relied on
misrepresentations from the Bäckers that they supported the board’s original agenda, which
included appointing both D’Addario and Grauman to the board. That agenda would have
prevented the Bäckers from taking unilateral action. Because the Court of Chancery’s choice
between two permissible views of the evidence cannot be clearly erroneous,163 we hold that
161
Id. at 38.
162
Id. at 39.
163
See, e.g., RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015).
35
the court’s conclusion that the Bäckers secured a quorum by deceiving Anderson was not
clearly erroneous.
Second, the Bäckers argue that because the Court of Chancery held that “there was
no deceptive action related to the appointment of the Series A-1 director [D’Addario] in
advance of the November 15 meeting,”164 the court erred by finding deception as to
Grauman’s appointment.
We disagree. The Court of Chancery did not commit clear error by finding deceptive
conduct as to Grauman’s appointment but not D’Addario’s appointment. This argument
ignores the distinction between the court’s determination that the Bäckers did not prevent
Altos from exercising its rights and the court’s broader determination that the Bäckers
nonetheless acted inequitably. Further, this argument ignores that the Court of Chancery
identified misrepresentations that treated Grauman’s nomination differently from
D’Addario’s nomination. For example, Alex’s statement to Nam that “everything was fine”
between Alex and Grauman implied support for Grauman’s nomination but was silent with
regards to D’Addario.165 Similarly, the multiple correspondences between Alex and
Grauman ahead of the November 15 meeting created an impression that Grauman would
have a meaningful role at the meeting.166 On the other hand, Alex’s suggestion that Nam
164
Opening Br. 24.
165
See Palisades, 2020 WL 1503218, at *10 n.116.
166
See id. at *10.
36
consider someone other than D’Addario cast some doubt on Alex’s support for D’Addario’s
appointment but was silent with regards to Grauman.167
Thus, the Court of Chancery did not commit clear error by finding that the Bäckers
deceived Anderson by falsely representing support for Grauman’s appointment despite
finding that the Bäckers did not inequitably interfere with Altos’s right to appoint D’Addario
as the replacement Series A-1 director.
3. Palisades raised deception as to Grauman’s appointment
The Bäckers next contend that “Palisades never argued below that Alex and Ricardo
affirmatively deceived Anderson into believing that Grauman would be appointed as the
CEO Director.”168 Instead, the Bäckers claim that Palisades raised below a theory of
deception that focused exclusively on D’Addario’s appointment.169 Thus, the Bäckers argue
that they were denied “a fair opportunity to respond” because the Court of Chancery granted
equitable relief “divorced from any theory advanced by Palisades . . . . Had [the Bäckers]
known that they would be accused of affirmatively deceiving Anderson into believing [the
Bäckers] would support Grauman’s appointment, [the Bäckers] could have tried the case
differently.” 170
167
See, e.g., A202-03.
168
Reply Br. 13.
169
Opening Br. 35-37; Reply Br. 13-15.
170
Opening Br. 37.
37
The Bäckers rely on Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. to
support their waiver argument. In Aruba, this Court rejected the Court of Chancery’s “use
[of] the trading price . . . for determining fair value” after finding that such an approach was
“not grounded in the record” because neither party raised the theory, and the approach was
therefore not “subjected to the crucible of pretrial discovery, expert depositions, cross-expert
rebuttal, expert testimony at trial, and cross examination at trial.”171 In other similar
circumstances, the Court of Chancery has rejected arguments that a party failed to raise
before trial on the basis that the opposing party may have tried the case differently given
notice of the new argument.172
Although the deception theory that Palisades raised below focused on D’Addario’s
appointment, we disagree with the Bäckers’ argument that they were denied a fair
opportunity to respond to a theory of deception as to Grauman’s appointment. Palisades has
consistently argued that the Bäckers deceived their fellow directors by representing support
for the board’s original agenda while concealing a secret counter-agenda to seize control of
the company.173 The board’s original agenda would have appointed Grauman to the CEO-
171
210 A.3d 128, 133-34, 139 n.58, 140 (Del. 2019).
172
See HOMF II Inv. Corp. v. Altenberg, 2020 WL 2529806, at *1, *41 (Del. Ch. May 19, 2020);
In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *22 n.117 (Del. Ch. Aug. 18, 2006).
173
See, e.g., A317 (in its complaint, Palisades alleged that “[h]aving ambushed the meeting and
manufactured a false majority, Alex Bäcker then proceeded to purport to ‘pass’ a number of invalid
resolutions . . . ”); B131, at 10:9-13 (at a hearing held before the trial, counsel for Palisades argued
that “it was everyone’s understanding going into the November 15th meeting that . . . Mr. Grauman
would be confirmed as the CEO director . . .”).
38
director seat.174 The Bäckers’ counter agenda hinged on firing Grauman and appointing Alex
to the CEO-director seat.175 Thus, the Bäckers had ample notice that Palisades claimed that
the Bäckers had falsely represented support for an agenda that, among other things, would
have appointed Grauman to the Company’s board.
Further, unlike in Aruba, the Bäckers had the opportunity to explore deception as to
Grauman’s appointment. Grauman’s appointment was the subject of discovery requests176
and deposition testimony.177 Palisades also noted in its pretrial brief that
as recently as November 12, [Alex] Bäcker spoke to Nam and
did not raise any issues regarding Mr. D’Addario’s appointment.
Neither did Bäcker indicate to Nam in response to his specific
questioning that there were any issues with Grauman’s
performance as CEO, which has now become Defendants’
pretextual justification for their November 15 actions.
Despite the lack of any previous indication to the contrary, the
Bäckers’ actions during the November 15 Meeting deviated
174
See, e.g., A263 (“The Board Consent does the following . . . [r]atifies the appointment of Kevin
Grauman as EO [sic], . . . and appoints him to serve as the CEO Director . . . .”).
175
See, e.g., A248-51 (email thread discussing the Bäckers’ secret counter-agenda for the
November 15 board meeting).
176
See, e.g., B180 (Palisades requesting “[a]ll documents and communications concerning Kevin
Grauman’s performance as the Chief Executive Officer of the Company, and “[a]ll documents and
communications concerning Kevin Grauman’s purported termination on November 15, 2019”);
B191 (requesting that the Bäckers “[i]dentify all documents and information supporting Your refusal
to vote for, consent to, appoint, or otherwise recognize Kevin Grauman as the CEO Director . . . ”);
B198 (the Bäckers requesting “[a]ll documents and communications concerning Kevin Grauman”).
177
See, e.g., A739-40, at 248:24-249:10 (Testimony from Nam’s deposition: “Q. Did Alex Bäcker
inform you on your November 12th call with him or at any other time in advance of the November
15th meeting that he was contemplating replacing Mr. Grauman as C.E.O. with Himself? A. No.
Definitely not. Q. Did Alex Bäcker inform you on your November 12th call with him or at any
other time in advance of the November 15th meeting that he was dissatisfied with Mr. Grauman’s
performance as C.E.O.? A. No. And on that particular point, now that you mention it, I specifically
remember I asked him a very direct question.”).
39
entirely from the circulated board resolutions and agenda. Not
only did the Bäckers refuse to recognize D’Addario, they
purported to fire Grauman as CEO and appoint Bäcker to that
position (and CFO).178
This passage gave the Bäckers notice that Palisades linked its deception theory to
Alex’s false support for Grauman. We therefore hold that the Court of Chancery did not err
by granting equitable relief on the basis that the Bäckers falsely represented support for the
original board resolutions that, among other things, would have appointed Grauman to the
board.
B. The Court of Chancery Did Not Impose an Equitable Notice
Requirement for a Regular Board Meeting
The Court of Chancery held that “keeping mum as [Alex and Ricardo] planned their
ambush was inequitable” because “[i]f Anderson had known of Defendants’ change of plans,
he would have refused to participate in the meeting, defeating a quorum and thwarting the
coup.”179 Relying on the assumption that the Bäckers did not deceive Anderson, the Bäckers
reason that the court effectively imposed an equitable notice requirement by faulting the
Bäckers for choosing not to speak and disclose their true agenda to Anderson.180 The
Bäckers also argue that “[a]ll the evidence showed that the November 15 Meeting was a
regular meeting, except for one errant reference to a special meeting in Alderton’s draft
178
A1245-46.
179
Palisades, 2020 WL 1503218, at *10.
180
Opening Br. 41-43.
40
minutes.”181 Combining these premises, the Bäckers contend that the Court of Chancery
erred by imposing an equitable notice requirement on a regular board meeting, contrary to
this Court’s holding in Klassen, which rejected a notice requirement for regular board
meetings.182
Delaware law does not require that board members receive notice of the agenda
related to regular board meetings. For example, in Klassen, this Court held that
[i]t is settled Delaware law that corporate directors are not
required to be given notice of regular board meetings. There
being no such notice requirement, it follows that there is no
default requirement that directors be given advance notice of the
specific agenda items to be addressed at a regular board
meeting.183
Thus, this Court in Klassen held that the Koch, Adlerstein, and Fogel decisions were
inapposite because “in those cases the disputed board actions occurred at special—not
regular—board meetings.”184 Contrastingly, special meetings often require notice, and
Delaware courts have used false or misleadingly incomplete special meeting notices to
invalidate inequitable board actions.185
As Palisades correctly notes, “the Court of Chancery never decided whether the
November 15 Meeting was a regular meeting or a special one,” and Alderton’s minutes from
181
Id. at 42 (citing A1413-18).
182
Id. at 41-43.
183
106 A.3d at 1043-44 (citations omitted).
184
Id. at 1044-45.
185
See, e.g., Fogel v. U.S. Energy Sys., Inc., 2007 WL 4438978, at *1, *4 (Del. Ch. Dec. 13, 2007);
Koch, 1992 WL 181717.
41
the meeting “state[] that the Meeting was a special one.”186 Regardless, the type of meeting
is immaterial because the source of inequity is not the lack of notice, but the Bäckers’
decision to secretly plan an ambush after feigning support for the planned governance items.
Stated differently, contrary to the Bäckers’ suggestion, the Court of Chancery did not impose
an equitable notice requirement by faulting the Bäckers for staying silent. Instead, the court
faulted the Bäckers for choosing to speak and mislead their fellow directors. Most notably,
shortly before the November 15 board meeting Alex asked Grauman to “please distribute
the board materials/deck a day in advance of the meeting so that we may all do our
homework and be prepared to spend our time together most productively[.]”187
This statement was deceptive. There was no reason for the other directors to consider
resolutions that the Bäckers knew that the board would not consider, and there was no reason
for Grauman to prepare for a board meeting at which he would be excluded and fired. Thus,
the court did not impose an equitable notice requirement by faulting the Bäckers for their
silence. The court granted equitable relief because the Bäckers made misrepresentations
designed to deceive their fellow directors.
186
Answering Br. 39 (citing A1413-18) (emphasis removed).
187
Palisades, 2020 WL 1503218, at *10; A207.
42
C. Anderson’s Attendance and Actions at the November 15 Board Meeting
Do Not Preclude Equitable Relief
The Bäckers argue that even if they deceived Anderson, the Court of Chancery erred
by invalidating the board actions as a matter of equity for two reasons. First, the Bäckers
argue that the “Koch rule” against deception “applies only to special meetings, not regular
meetings like the November 15 board meeting. . . . A director cannot be deceived into
attending a regular meeting for purposes of voiding action taken at the meeting.”188 The
Bäckers rely on Klassen’s rejection of an advance notice requirement for regular board
meetings to support this argument.189
We disagree with the Bäckers’ suggestion that equity provides no remedy where a
director has the misfortune of being tricked into attending a regular, as opposed to special,
board meeting. Although Koch addressed deception regarding a special board meeting, the
Court of Chancery’s holding relied on the broader principle that where a director “was
tricked or deceived into attending [a board] meeting . . . the general rule is that actions taken
at such a meeting are void.”190 Subsequent opinions invalidating board actions tainted by
deception have taken a similarly broad approach.191 Nothing in these opinions suggests that
188
Opening Br. 44-45.
189
See id. (citing Klassen, 106 A.3d at 1044).
190
1992 WL 181717, at *4 (citing Schroder v. Cotton, Dillon Co., 299 A.2d 431, 436 (Del. Ch.
1972)).
191
See, e.g., OptimisCorp v. Waite, 137 A.3d 970, 2016 WL 2585871, at *3 (Del. Apr. 25, 2016)
(Table) (“We are reluctant to accept the notion that it vindicates the board’s right to govern the
corporation to encourage board factions to develop Pearl Harbor-like plans to address their concerns
. . . . Rather, it has long been the policy of our law to value the collaboration that comes when the
entire board deliberates on corporate action and when all directors are fairly accorded material
43
Delaware law tolerates deception related to regular board meetings, and we can think of no
good reason why deception would be allowed for regular board meetings, but forbidden for
special board meetings.
Klassen does not save the Bäckers’ argument. Contrary to the Bäckers’
assertions, Klassen does not hold that equitable relief is unavailable where a director is
tricked into attending a regular board meeting. Instead, the Court held more narrowly that
because “[i]t is settled Delaware law that corporate directors are not required to be given
notice of regular board meetings,” the board’s actions were not automatically invalid where
the CEO-director “received no advance notice that his possible termination would be
considered at that [regular board] meeting.”192 Rejecting an advance notice requirement for
regular board meetings did not grant parties a license to deceive. To the contrary, the Court
was careful to note—in a case regarding a regular board meeting—that “[o]ur courts do not
approve the use of deception as a means by which to conduct a Delaware corporation’s
affairs, and nothing in this Opinion should be read to suggest otherwise.”193
information.”); Fogel v. U.S. Energy Sys., 2007 WL 4438978, at *3 (Del. Ch. Dec. 13, 2007)
(“Where a director is tricked or deceived about the true purpose of a board meeting, and where the
director subsequently does not participate in that meeting, any action purportedly taken there is
invalid and void.” (citing Koch, 1992 WL 181717, at *4)); Alderstein v. Wertheimer, 2002 WL
205684, at *8 (Del. Ch. Jan. 25, 2002) (invalidating a board action where other directors coordinated
to keep the CEO-director “deliberately uniformed about their plan to present” a proposal that would
dilute the CEO’s ownership stake at a board meeting); Schroder, 299 A.2d 431, 436 (Del. Ch. 1972)
(“A quorum obtained by trickery is invalid, and the reasoning which forbids trickery in securing a
quorum applies equally well to securing the absence of opposing directors from a meeting by
representing that such a meeting will not be held.” (citation omitted)).
192
106 A.3d at 1043 (citation omitted).
193
Id. at 1046.
44
We therefore reject the Bäckers’ argument that directors cannot be tricked into
attending regular board meetings. Regardless of the type of meeting or form of
communications, Delaware law does not countenance deception designed to manufacture a
quorum or otherwise induce director action. As this Court recognized in City of Fort Myers
General Employees’ Pension Fund v. Haley, “[i]t is elementary that under Delaware law the
duty of candor imposes an unremitting duty on fiduciaries, including directors and officers,
to ‘not use superior information or knowledge to mislead others in the performance of their
own fiduciary obligations.’”194 This principle applies with equal force to regular and special
board meetings.
Second, the Bäckers argue that even if equitable relief was appropriate because the
Bäckers deceived Anderson, his “thorough participation precludes invalidation. . . . ‘[W]here
the deceived director remains at the meeting and participated throughout’ the action taken at
the meeting is not void or voidable.’”195 Relying on Koch, which states that
“[n]otwithstanding any deceit that may have been involved in calling a meeting, the actions
taken will not be invalidated where the deceived director remains at the meeting and
participates throughout . . . ,”196 the Bäckers argue that Anderson’s decision to stay at the
194
235 A.3d 702, 718 (Del. 2020) (quoting Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1283
(Del. 1989)).
195
Opening Br. 45-46 (quoting Klassen, 2013 WL 5967028, at *8).
196
1992 WL 181717, at *5 (citation omitted).
45
November 15 board meeting and vote against the Bäckers’ actions precludes equitable
relief.197
The trouble with the Bäckers’ argument is that they did not properly raise a
participation defense before the Court of Chancery. The Bäckers point to arguments that
Palisades raised throughout the proceedings below regarding Anderson’s participation,198
but those citations are unavailing. Palisades did not raise any equitable defenses that would
defeat its own claims, and the passages that the Bäckers cite do not address the disputed
issues underlying an equitable participation defense, such as whether the Bäckers’ deception
disabled Anderson from meaningfully participating in the meeting.
The Bäckers also assert that their March 12, 2020 post-trial memorandum raised a
participation defense by arguing that
[e]ach of Palisades’s arguments depends on the November 15
meeting being special and notice therefore being required.
None apply to a regular meeting. Each of Klassen, Fogel,
Schroder, Alderstein and Kalisman involved special meetings
and Palisades simply repeats its arguments that silence is
deception. Those arguments fail for the reasons already briefed.
Further, Palisades fails to grapple with the next step in its
deception argument. “[W]here the deceived director remains at
the meeting and participates throughout” the action taken at the
197
Opening Br. 44-46.
198
See, e.g., Reply Br. 18 (“Palisades rested its case below on the premise that Anderson and
D’Addario fully participated in the November 15 Meeting and, as a result, the votes were 2-2) (citing
A1226, 1231-32 (Palisades arguing in its pretrial brief that the Bäckers’ actions were invalid because
they should have recognized D’Addario’s appointment to the board, and both Anderson and
D’Addario voted against all of the proposals that the Bäckers purported to pass during the meeting)).
46
meeting is not void or voidable. Anderson remained and
participated throughout the meeting.199
But if Anderson’s participation “was the cornerstone of Palisades’s claims below,”200
the Bäckers fail to explain why they waited until the last possible instant—after discovery
had closed, depositions were complete, the parties submitted pre-trial briefs, the court held a
paper trial, and the parties completed their first round of post-trial briefing—to unveil a
participation defense. At that late hour, Palisades did not have an opportunity to respond to
the Bäckers’ participation argument, could not gather new evidence, and could not adjust its
trial strategy to account for a new equitable defense.
It is also unclear that the Bäckers’ passing reference to Anderson’s participation
properly raised a participation defense. The Court of Chancery did not think that the Bäckers
raised any equitable defenses,201 and the Bäckers only mentioned Anderson’s participation
in the context of addressing a separate legal issue: whether a director can be deceived into
attending a regular board meeting. The Bäckers also failed to address the substance of a
participation defense, such as whether Anderson could meaningfully participate given the
Bäckers’ deception.
199
A1416-17 (quoting Klassen, 2013 WL 5967028, at *8); see also Opening Br. 44 (claiming that
A1416-17 preserved this issue).
200
Reply Br. 19.
201
Palisades, 2020 WL 1503218, at *10 n.123.
47
Accordingly, we hold that the Bäckers waived their argument that Anderson’s
participation precluded equitable relief. Because we decide this issue on waiver grounds, we
do not reach the merits of a participation defense.
D. The Court of Chancery Did Not Provide Extracontractual Relief under
the Voting Agreement
The Bäckers argue that because “it was Alex and Ricardo’s actions related to the
Voting Agreement that led to the Court of Chancery’s equitable invalidation,” the court erred
by using its equitable powers to grant Palisades extracontractual relief not available under
the voting agreement.202 Further, the Bäckers argue that “[t]he Court of Chancery erred by
imposing an equitable remedy despite declining to find a breach of the Voting
Agreement.”203
The Bäckers’ rely on the Court of Chancery’s holding in Nemec v. Shrader that
“where a dispute ‘relate[s] to obligations “expressly treated . . .” by contract[, it] will be
governed by contract principles.’ If the ‘fiduciary claims relate to obligations that are
expressly treated’ by contract[,] then this Court will review those claims as breach of contract
claims and any fiduciary duty claims will be dismissed.”204 Put differently,
202
Opening Br. 47.
203
Reply Br. 23.
204
2009 WL 1204346, at *4 (Del. Ch. Apr. 30, 2009) (quoting Madison Realty Co. v. AG ISA, LLC,
2001 WL 406268, at *6 (Del.Ch. Apr. 17, 2001)), aff’d, 991 A.2d 1120 (Del. 2010) (“It is a well-
settled principle that where a dispute arises from obligations that are expressly addressed by contract,
that dispute will be treated as a breach of contract claim. In that specific context, any fiduciary claims
arising out of the same facts that underlie the contract obligations would be foreclosed as
superfluous.” (citations omitted)).
48
the general rule under Delaware law, subject to only narrow
exceptions, is that a plaintiff may not ‘bootstrap’ a breach of
fiduciary duty claim into a breach of contract claim merely by
restating the breach of contract claim as a breach of fiduciary
duty. Courts will dismiss the breach of fiduciary [duty] claim
where the two claims overlap completely and arise from the
same underlying conduct or nucleus of operative facts.205
This bootstrapping case law only requires dismissal where a fiduciary duty claim
wholly overlaps with a concurrent breach of contract claim. For example, in Schuss v.
Penfield Partners, the Court of Chancery refused to dismiss breach of fiduciary duty claims
that “share[d] a common nucleus of operative facts with [the] Plaintiffs’ breach of contract
claim” because the breach of fiduciary duty claims “depend[ed] on additional facts [that
were] . . . broader in scope and involve[d] different considerations in terms of a potential
remedy” than the concurrent breach of contract claims.206 In reaching this conclusion, the
court noted that “this case is distinguishable” from cases applying Delaware’s bootstrapping
doctrine “which dismissed breach of fiduciary duty claims as duplicative of breach of
contract claims that either were substantially identical, such that the fiduciary duty claim
would have been ‘superfluous,’ or involved remedies that were likely to be equivalent.”207
Similarly, in In re Mobilactive Media, LLC, the Court of Chancery “reject[ed] the
205
Grunstein v. Silva, 2009 WL 4698541, at *6 (Del. Ch. Dec. 8, 2009) (citing Schuss v. Penfield
P’rs, 2008 WL 2433842, at *10 (Del. Ch. June 13, 2008); Madison Realty, 2001 WL 406268, at *5;
Gale v. Bershad, 1998 WL 118022, at *5 (Del. Ch. Mar. 4, 1998)).
206
2008 WL 2433842, at *10.
207
Id. (quoting Gale, 1998 WL 118022, at *5).
49
Defendants’ characterization of [the Plaintiff’s] fiduciary duty claim as duplicative” because
“the remedies for breach of contract and breach of fiduciary duty in this case are different.”208
Contrary to the Bäckers’ arguments, the Court of Chancery did not grant equitable
relief for a breach of the voting agreement. The court granted equitable relief on the basis
that the Bäckers—acting in their capacities as directors—deceived Anderson to create a
quorum for the November 15 board meeting.209 The subject matter of the voting agreement
may have overlapped with the Bäckers’ inequitable conduct, but the court’s equitable award
addressed harm flowing from the Bäckers’ deceptive conduct in their capacities as directors,
not from a breach of contract in their capacities as stockholders and parties to the voting
agreement.
Thus, the Court of Chancery did not err by exercising its equitable powers to grant
relief for a de facto breach of the voting agreement. The court granted equitable relief for the
harm flowing from the Bäckers’ breach of their equitable duties as directors. Because this
claim involved facts separate from a breach of contract claim, and sought a different remedy,
208
2013 WL 297950, at *20 n.219 (Del. Ch. Jan. 25, 2013) (citing Schuss, 2008 WL 2433842, at
*10); see also Stone & Paper Invs., LLC v. Blanch, 2019 WL 2374005, at *6 n.57 (May 31, 2019)
(“The fiduciary duty claims are grounded in additional distinct facts . . . . Thus, the claims are not
duplicative.”); 2009 Caiola Family Tr. v. PWA, LLC, 2014 WL 7232276, at *9 (Del. Ch. Dec. 18,
2014) (“While some of the factual allegations supporting Plaintiffs’ breach of fiduciary duty claims
overlap with those related to their breach of contract claims, the potential breaches of fiduciary duty
are broader in scope than, and therefore not precluded by, the terms of the Operating Agreement.”).
209
See Palisades, 2020 WL 1503218, at *9-10.
50
Delaware’s bootstrapping case law is inapposite and did not require that the Court of
Chancery dismiss Palisades’s request for equitable relief.
IV. CONCLUSION
Based on the foregoing, the Court of Chancery’s March 26, 2020 Memorandum
Opinion is AFFIRMED.
51