Julia Haart v. Silvio Scaglia ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JULIA HAART, )
)
Petitioner, )
)
v. ) C.A. No. 2022-0145-MTZ
)
SILVIO SCAGLIA, )
)
Respondent, )
)
and )
)
FREEDOM HOLDING, INC., and ELITE )
WORLD GROUP, LLC, )
)
Nominal Respondents. )
MEMORANDUM OPINION
Date Submitted: May 10, 2022
Date Decided: May 26, 2022
Date Issued: August 4, 2022
Henry E. Gallagher, Jr., Matthew F. Boyer, and Scott E. Swenson, CONNOLLY
GALLAGHER LLP, Wilmington, Delaware; Thomas R. Ajamie, Wallace A.
Showman, Ryan van Steenis, and Lewis S. Fischbein, AJAMIE LLP, New York,
New York, Attorneys for Petitioner Julia Haart.
Rudolf Koch, Susan Hannigan Cohen, Travis S. Hunter, Kyle Lachmund, Sandy Xu,
and Kevin M. Kidwell, RICHARDS, LAYTON & FINGER, P.A., Wilmington,
Delaware; Peter Bicks, Lisa T. Simpson, and Marc R. Shapiro, ORRICK,
HERRINGTON & SUTCLIFFE LLP, New York, New York; Emily Rae, ORRICK,
HERRINGTON & SUTCLIFFE LLP, Los Angeles, California, Attorneys for
Respondent Silvio Scaglia.
ZURN, Vice Chancellor.
Fashion designer Julia Haart and telecom billionaire Silvio Scaglia have a
carefully curated public image supporting both their business partnership and their
marriage. They met through work at a luxury fashion brand, and married in a lavish
ceremony. Scaglia brought his new wife into the leadership of one of his businesses,
a major model management company. Haart and Scaglia present as though they own
and run that business as equals. In their free time, the couple maintains a glamorous
lifestyle. They host friends and family in their sprawling Tribeca penthouse. They
drive matching Bentleys. And television cameras follow their every move for
Haart’s Netflix reality series, My Unorthodox Life. But their public image differs
from their formal business arrangement. That tension is the central issue in this case.
Behind the cameras and bright lights is a pair of Delaware entities. The first
is the holding company for the modeling business, Elite World Group, LLC
(“EWG”). The second is the couple’s umbrella company, Freedom Holding, Inc.
(“Freedom”), which holds EWG and the couple’s other personal and business
investments. Haart and Scaglia are co-owners of Freedom; Haart was an EWG
director and its CEO; and this opinion assumes Haart was a Freedom director. To
the public, Haart and Scaglia presented a united front, telling potential investors,
other third parties, and tax authorities that they owned Freedom equally. But behind
the scenes, Freedom’s internal documents told a different story.
1
Scaglia formed Freedom and initially held all one hundred shares of its
common stock. In December 2018, anticipating his marriage to Haart, Scaglia
caused Freedom to issue him 123,665 preferred shares of Freedom stock. After the
couple married in June 2019, Scaglia transferred Haart fifty of Freedom’s common
shares, but did not mention or transfer any preferred shares. In March 2020, Haart
learned about the preferred shares, and demanded that the two be equal partners. In
response, Scaglia executed a stock power, transferring 61,832, or 49.9995957%, of
the preferred shares to Haart. Scaglia thus maintained a one-share voting advantage
over Haart. Haart discovered this discrepancy as the couple’s marriage deteriorated,
but continued to insist she was an equal owner.
In the final moments of their marriage, Scaglia used his control over Freedom
to oust Haart from her positions at Freedom and EWG; a majority of EWG’s board,
including Scaglia, also removed her from her positions at EWG. Haart argues that
because she is an equal owner of all classes of Freedom stock, Scaglia could not
unilaterally remove her from her Freedom directorship, Freedom is deadlocked, and
neither Freedom nor EWG’s board could remove her from her EWG roles. She
brings declaratory judgment claims to resolve who controls Freedom and EWG
under 8 Del. C. § 225 and 6 Del. C. § 18-110, a claim to dissolve Freedom under
8 Del. C. § 226, and a breach of fiduciary duty claim. Scaglia brought reciprocal
counterclaims for declaratory judgments.
2
This post-trial opinion on the declaratory judgment and dissolution claims
finds that Haart does not own half of Freedom’s preferred shares, and so is not
entitled to relief under any of her theories. Despite the appearance of an equal
partnership, the evidence reveals that Haart never owned an equal stake of
Freedom’s preferred stock. For the reasons that follow, judgment is entered for
Scaglia on all those counts.
I. BACKGROUND
This matter was tried on April 19 and 20, 2022.1 The trial record includes
over 300 joint exhibits, live testimony from three witnesses, and deposition
testimony from two more witnesses.2 I find the following facts based on a
preponderance of that evidence.3 And I limit my findings to those necessary to
resolve the narrow dispute in this expedited summary proceeding.4
1
See Docket Item (“D.I”) 124; see also D.I. 57.
2
Citations in the form “[Last Name] Tr. —” refer to trial testimony of the referenced
witness, available at D.I. 127 and D.I. 128. Citations in the form “JX —” refer to the
parties’ joint trial exhibits. See D.I. 121. Citations in the form “PTO —” refer to the
parties’ stipulated pre-trial order, available at D.I. 119. Unless otherwise noted, I have
reproduced the parties’ correspondence in its original form.
3
Reynolds v. Reynolds, 237 A.2d 708, 711 (Del. 1967) (“The side on which the greater
weight of the evidence is found is the side on which the preponderance of the evidence
exists.”).
4
See Nycal Corp. v. Angelicchio, 1993 WL 401874, at *1 (Del. Ch. Aug. 31, 1993) (“An
action under [Section] 225 is a summary proceeding to determine the lawful board of a
Delaware corporation. . . . [I]n order to promptly and fairly address this issue, I will not
consider ‘collateral’ issues, or those unnecessary to decide the validity of the July 23
shareholder consents, at this time.” (citing Bossier v. Connell, 1986 WL 11534, at *2 (Del.
Ch. Oct. 7, 1986)); see also Genger v. TR Inv’rs, LLC, 26 A.3d 180, 201–02 (Del. 2011)
3
A. Scaglia Acquires The Elite Businesses And Meets Haart.
Scaglia is an Italian entrepreneur and investor whose business interests span
from technology to fashion.5 In 2011, Scaglia invested in the “Elite” brand, which
at the time included numerous European modeling and fashion businesses.6 Scaglia
invested in Elite through his holding company, S.M.S. Finance S.A. (“S.M.S.
Finance”).7
Scaglia also owned La Perla, a fashion and lingerie company. 8 In 2015,
Scaglia, then La Perla’s CEO, met Haart during a cobranding project between La
Perla and Haart’s business, Julia Haart Shoes.9 Haart became a designer at La Perla
and quickly took on more responsibilities.10 In May 2016, she became La Perla’s
creative director, earning an approximately $2 million annual salary.11 Haart and
(holding the Court of Chancery properly adjudicated who was entitled to vote disputed
shares but erred in adjudicating questions of ultimate beneficial ownership in a Section 225
proceeding because such a proceeding is in rem and the Court lacked in personam
jurisdiction over the litigants). Cf. Zohar II 2005-1, Ltd. v. FSAR Hldgs., Inc., 2017 WL
5956877, at *25–26 (Del. Ch. Nov. 30, 2017) (holding the issue of beneficial ownership
was not collateral and that deciding it would not violate the parties’ due process rights).
5
E.g., Scaglia Tr. 208–12, 214.
6
Id. 215–17; see JX 9 at 2–3.
7
Scaglia Tr. 214, 217.
8
Haart Tr. 10, 14; Scaglia Tr. 217.
9
Haart Tr. 10, 12–13.
10
Id. 13–14.
11
Id. 14–15.
4
Scaglia began dating and by early 2018, they were engaged to be married.12 Around
the time of their engagement, Scaglia sold La Perla.13 After the sale, the buyer
removed Haart from her role as creative director.14
B. Scaglia Forms Freedom And EWG.
In anticipation of their June 2019 marriage, Haart and Scaglia discussed the
possibility of owning and running Elite together.15 They also hoped Elite could
attract public investment via a SPAC transaction. To accomplish these two goals,
Scaglia’s ownership structure was modified. The plan was to form Freedom as a
holding company for the couple’s business ventures and personal investments, for
Freedom to hold EWG, and to restructure the Elite business under EWG.
Scaglia formed Freedom on November 7, 2018.16 Freedom’s formation
documents provided it would be managed by a board of directors (the “Freedom
Board”) and have a single class of common stock.17 Scaglia was the Freedom
Board’s sole director when it was formed.18 Scaglia was also Freedom’s only initial
12
Id. 14 (“Q. Okay. Roughly when were you engaged? A. We were trying to figure that
out before all of these attacks. I think somewhere either at the end of 2017 or the beginning
of 2018.”).
13
Id. 15; Scaglia Tr. 218.
14
Haart Tr. 15; Scaglia Tr. 218.
15
E.g., Haart Tr. 20, 23, 134; Scaglia Tr. 238.
16
PTO ¶¶ 33, 35; JX 10.
17
JX 10 at 1; JX 11 at 1.
18
JX 10 at 3; JX 11 at 3; JX 13 at 4.
5
stockholder, holding one hundred percent of its common shares.19 Among other
things, Freedom held the couple’s personal assets, like their apartment and
vehicles.20
Then, Freedom acquired Scaglia’s interest in S.M.S. Finance, thereby
indirectly holding the numerous international entities that operated as Elite. Scaglia
contributed all his interest in S.M.S. Finance, and his interest in a loan agreement
with S.M.S. Finance, to Freedom. In exchange, Scaglia secured voting control over
Freedom. On December 28, Freedom adopted an amended certificate of
incorporation, which Scaglia approved by written consents as Freedom’s sole
director and sole stockholder.21 The amended certificate empowered Freedom to
issue 123,665 new shares of preferred stock.22 The preferred shares are convertible
to a calculable number of common shares.23 Preferred stockholders hold votes equal
19
Scaglia Tr. 223; JX 12 at 3; see also PTO ¶ 38. Freedom’s certificate of incorporation
indicates that it is authorized to issue up to 200 shares of common stock. JX 10 at 1; JX
11 at 1. Scaglia insists, and Haart does not dispute, that only 100 shares were ever issued.
See D.I. 130 at 7 n.2; Scaglia Tr. 260, 307–08. But the record contains a stock certificate
issuing Scaglia 200 shares of Freedom common stock. JX 12 at 3. I need not resolve this
discrepancy, as I find that in any case, Scaglia initially owned all of Freedom’s outstanding
shares.
20
See Haart Tr. 22; Scaglia Tr. 229.
21
PTO ¶¶ 37–39; JX 27 (depicting the amended certificate of incorporation); JX 30
(depicting the Freedom Board’s written consent); JX 31 (depicting stockholder written
consent); Scaglia Tr. 226–27.
22
JX 27 at 1; see also JX 57.
23
JX 27 at 5–6.
6
to the number of whole shares of common stock into which their preferred stock was
convertible as of the record date.24 Common stockholders are entitled to one vote
per share.25 With that capital structure, Freedom entered into a contribution
agreement with Scaglia by which he contributed his S.M.S. Finance interests in
exchange for all 123,665 shares of Freedom preferred stock.26
Next, Freedom created a wholly owned subsidiary intended to hold the Elite
business. On January 24, 2019, Freedom formed EWG.27 Freedom was EWG’s sole
member and managing member, with the authority to delegate its management
powers to an agent, employee, or officer.28 Haart became EWG’s CEO in
March 2019, replacing Paolo Barbieri, one of Scaglia’s business associates.29 On
March 1, 2020, Scaglia caused Freedom to appoint Haart, Scaglia, and Barbieri to
EWG’s board of directors (the “EWG Board”).30
24
Id. at 4.
25
Id. at 2.
26
JX 29 at 1; see also JX 22.
27
JX 35; PTO ¶ 34.
28
See PTO ¶¶ 34, 40; JX 35; JX 50 §§ 4.1–4.2; JX 284 §§ 4.1–4.2.
29
PTO ¶ 41.
30
PTO ¶ 43; JX 52.
7
C. Haart And Scaglia Marry And Scaglia Transfers Haart Half
Of Freedom’s Common Stock.
Haart and Scaglia married in June 2019.31 Shortly thereafter, around July 8,
Scaglia executed stock certificates that transferred Haart half of Freedom’s common
stock.32 The parties agree that as of that transfer, Haart and Scaglia each owned 50%
of Freedom’s common stock; they also agree that the July 2019 transfer did not
involve Freedom’s preferred stock.33
Freedom and EWG began reporting in financial statements that Scaglia and
Haart owned Freedom equally. For example, EWG’s 2018 pro forma financial
statements stated the Elite modeling network was held by Scaglia until December
2018, when it transferred to Freedom.34 It went on to state that Freedom is “a US
holding company owned by Silvio Scaglia (50%) and Julia Haart (50%), Group
Chief Executive Officer of ELITE WORLD GROUP.”35 On October 31, 2019,
Scaglia forwarded the financial statements to a broker, copying Barbieri and Jeffery
Feinman, EWG’s accountant.36
31
PTO ¶ 42. When the pair married, Scaglia took Haart’s surname and went by Silvio
Scaglia Haart. See JX 4 at 152, 188, 435, 458; see also D.I. 107 at 13. I refer to Scaglia
by his pre-marriage name as the parties have.
32
See JX 279; JX 289; Haart Tr. 133–34; Scaglia Tr. 238–39, 245; see also JX 290 at 8.
33
Compare D.I. 129 at 6, 39, with D.I. 130 at 11.
34
JX 44 at 16.
35
Id.
36
Id. at 1 (emailing statements to a David Barnitt); see Scaglia Tr. 390 (“Q. And this is
what you, Mr. Scaglia, are writing to Mr. Barnitt. And remind us again briefly, who was
8
Of course, the assertion that Scaglia and Haart were equal shareholders was
wrong in 2018: Haart agrees Scaglia owned all of Freedom’s stock until July 2019.
It was also wrong in October 2019: at that point, Haart held fifty percent of
Freedom’s common stock, but Scaglia held all the preferred.
D. EWG Considers A SPAC Transaction And Restructures Its
Business.
With Freedom and EWG established, the parties turned to Elite’s business
structure, organizing those entities under EWG and separating them from Freedom’s
other holdings for purposes of a strategic transaction like a SPAC transaction.37 The
intended structure is shown below.
Mr. Barnitt? A. He was a broker that we engaged to find financing lines for Elite World
Group.”); Haart Tr. 42 (“David Barnitt was hired to get us a loan so that we could continue
growing the business.”).
37
See, e.g., Haart Tr. 192; Scaglia Tr. 257.
9
To move the Elite entities under EWG, the parties executed several entity
restructuring agreements (“ERAs”) at different times.38 The first ERA was prepared
by Feinman’s accounting team.39 In November 2019, the parties executed what is
referred to as the “2019 ERA.”40 The 2019 ERA was backdated to April 1, 2019,
38
See Scaglia Tr. 266–70. Haart persistently testified the ERAs transferred interests in
Freedom to her as a form of “apology” from Scaglia. E.g., Haart Tr. 135–36. As explained
in more detail below, her version of events is not possible, so I do not credit it.
39
See Barbieri Tr. 524; see also JX 291 at 18–19 (Feinman testifying that he did not
remember who drafted the 2019 ERA but that he did not personally draft it).
40
JX 38; JX 47 at 4–10. JX 38 is the 2019 ERA only; JX 47 includes a cover email. Haart’s
signature on the “assignment of membership interest” portion, the cover emails
accompanying the document, and Scaglia’s testimony all support a November 2019
execution date. JX 38 at 6; JX 47 at 1, 9; Scaglia Tr. 265–68. Haart conspicuously did not
refute Scaglia’s testimony. See Haart Tr. 132. She also admitted that later ERAs were
backdated. Id. 133.
10
and contains errors that betray this artifice. For example, it recites that Haart and
Scaglia “were married in June of 2019,”41 despite being dated April 2019.
The 2019 ERA has many other flaws. It begins by reciting that Haart and
Scaglia owned “One Hundred (100%) Percent of the of the [sic] Membership
Interests in” EWG.42 But Freedom owned EWG, not Haart or Scaglia. The
2019 ERA also recites that EWG owned “One Hundred (100%) Percent of the stock
of all classes of the capital stock” of several Elite entities, including E. 1972, Men
Women N.Y. Model Management, Inc., and Society Model Management, Inc.43 But
EWG did not own that stock: these entities were Freedom indirect subsidiaries, and
the entire point of the ERAs was to transfer ownership to EWG.44
Next, the 2019 ERA recites that Haart and Scaglia
agree[d] to transfer all of their Membership Interests in [EWG] to their
wholly [sic] Delaware corporation known as [Freedom], and thus
change the structure of ownership such that [Freedom] shall be owned
50% by each shareholder, and [Freedom] shall own all of the
Membership Interests in [EWG], which in tum shall own all of the stock
in [various Elite-branded business].45
41
JX 38 at 1 (emphasis added); JX 47 at 4 (emphasis added).
42
JX 38 at 1; JX 47 at 4.
43
JX 38 at 1; JX 47 at 4.
44
JX 38 at 1; JX 47 at 4.
45
JX 38 § 1.1; JX 47 § 1.1.
11
Then, Haart and Scaglia agreed to “execute their appropriate assignment of
Membership Interests in [EWG] in order to effectuate a transfer of the complete
ownership of all Membership Interests in [Freedom].”46 The 2019 ERA included
two “assignment of membership interest” documents, which purported to transfer
“any and all ownership interests [Scaglia or Haart] may own in [EWG]” to Freedom
in exchange for $1.00.47 But, again, neither Haart nor Scaglia owned any interest in
EWG; only Freedom did. No similar document assigns any of Scaglia’s or Haart’s
interests in Freedom, and no other language effectuates any Freedom transfer.
E. Haart Learns Scaglia Owns Preferred Stock And He
Executes A Stock Power.
In the spring of 2020, Freedom negotiated with Gabelli Group Capital
Partners (“Gabelli”) over a possible SPAC transaction for Elite.48 Barbieri arranged
a March 2020 meeting between Scaglia and Marc Gabelli, and Scaglia and Barbieri
handled the negotiations from there.49 Gabelli did not plan on retaining Haart as
CEO if a SPAC deal closed.50 Scaglia occasionally forwarded Haart emails among
Scaglia, Barbieri, and Gabelli representatives.51 Haart responded with characteristic
46
JX 38 § 1.2; JX 47 § 1.2.
47
JX 38 at 5–6; JX 47 at 8–9.
48
E.g., Scaglia Tr. 270; Barbieri Tr. 547–48.
49
See JX 53 at 1; JX 54; Barbieri Tr. 547–48.
50
Barbieri Tr. 549.
51
JX 55 at 1–4; JX 56 at 1.
12
frustration that she was not included in the discussions and that they downplayed her
significance to the enterprise.52 The Gabelli transaction eventually fizzled.
During these negotiations, Haart learned for the first time that Freedom
preferred shares existed, and that Scaglia owned all of them.53 Haart testified she
was “devastated” to learn that Scaglia had “misled and lied to [her]” and that he
could make decisions for the business, including selling it to Gabelli, without her.54
Haart’s discovery of Freedom’s capital structure compounded her frustration from
being excluded from the Gabelli negotiations. On April 5, she wrote:
52
JX 55 at 1 (“It doesn’t mention me as CEO not even once . Just says I continue to run
operations . That could be a COO for all intents and purposes and it says nothing about
my running the whole company and choosing acquisitions etc.”).
53
Haart Tr. 129–32. Haart testified that she believed she first learned about the preferred
shares in March 2020. Id. 132.
54
See id. 130–31 (“Q. And you were surprised because at the time, what that meant was
that Mr. Scaglia could okay and approve that deal without your involvement. Right? A. I
wasn’t surprised. I was devastated. Q. Okay. And at the time he told you, he said, I --
you don’t have any decision-making power here, and you’re not actually a 50 percent
owner. Right? A. That is correct. He acknowledged that he had misled and lied to me.
Yes. Q. And you were angry? A. I was devastated. . . . [A.] And that’s why I was
devastated to find out that he had lied to me and that, lo and behold, I was not an equal and
I did not have the decision-making powers if you refer to the shares themselves, not talking
about the entity restructuring agreement. Q. But you said to Mr. Scaglia, you need to make
this right. You need to give me preferred shares. Correct? A. Yes. Q. You didn’t say, I
don’t need preferred shares because I have the ERA. Right? A. I didn’t need to say that,
no.”).
13
The fact that he has no interest in meeting me or even speaking w me
says everything. No matter what the original thing that bothers him is .
It’s shocking to want to speak to the CFo , heads of just very specific
agencies and not even once meet or speak to the CEO . It’s not normal .
If I had really been your partner as I thought ...if we were really 50/50
I would have been included from day 1 . I would have met him . He
would have respected me and included me and I wouldn’t be such a
nonentity . You don’t buy a company and not ask to meet or speak to
the CEO . It’s not normal . If you had included me from day 1 this
wouldn’t be the care
You chose to keep me out of it . I asked many times to meet him
And you told me no
That is not right . I do not deserve to be treated like I don’t matter .55
Haart testified that Scaglia eventually acknowledged that Haart did not own
preferred shares and apologized.56
Later, Scaglia endeavored to transfer preferred shares to Haart. On May 28,
he texted Feinman: “Julia and I are now ready to finalize our wills and the transfer
of the remaining 50% of the Freedom Holding shares tuo [sic] Julia. Please let me
know when and how we can do it, All the best!!”57 On June 3, Scaglia followed up,
55
JX 4 at 448 (formatting and ellipses in original).
56
Haart Tr. 130–31; 136. Specifically, Haart testified that the ERAs transferred the
preferred stock as Scaglia’s apology. Id. 136. This is chronologically impossible: Haart
did not learn about the preferred stock until March 2020, months after the 2019 ERA was
executed. Id. 132. And as explained below, the 2020 ERA was largely unchanged and
was executed to correct errors in the 2019 ERA. Haart’s testimony that Scaglia used the
ERAs to apologize to Haart is not credible. And in any case, Haart’s understanding of the
documents’ purpose does not change or overcome their plain meaning.
57
JX 8 at 19.
14
requesting a meeting “next week” to, among other things, “execute the transfer of
the preferred shares to Julia.”58 Feinman texted Scaglia on June 11 to confirm a
10:30 meeting the next day at Scaglia and Haart’s home.59
It appears the parties followed through on this meeting. The record contains
a June 12 stock power purporting to transfer from Scaglia to Haart 61,832 of
Freedom’s 123,665 preferred shares (the “Stock Power”).60 The Stock Power was
drafted by Feinman’s accounting team.61
The Stock Power, by its own terms, does not transfer half of Scaglia’s 123,665
preferred shares. Rather, it transfers one half share less than half, or 49.9995957%,
of those preferred shares. Assuming the Stock Power was effective, Scaglia
continued to hold the bare majority—50.0004043%—of Freedom’s preferred
shares.62 Both Scaglia and Feinman testified this structure was intentional.63 Scaglia
58
Id. at 20; JX 60 at 1.
59
JX 8 at 20; JX 60 at 1.
60
JX 61 at 5–6.
61
Scaglia Tr. 278; JX 291 at 37.
62
Scaglia protests that the witness line on this document was not signed and that Haart has
not introduced proof that the shares were actually delivered. See D.I. 130 at 40–48. Scaglia
also attempted to distance himself from his signature, and testified he did not specifically
remember signing the Stock Power. See Scaglia Tr. 279–81. In this summary proceeding,
I do not reach whether the Stock Power actually transferred the shares to Haart.
63
JX 291 at 36–37; Scaglia Tr. 282, 285, 288, 290; see also Feinman Tr. 152. Counsel
was in the habit of offering video deposition testimony as substantive proof during
examinations of a different live witness. In the absence of an objection, I reluctantly accept
this deposition evidence.
15
credibly testified he was willing to share Freedom’s economic gains with Haart
through common shares, but he insisted on keeping control for himself.64
F. The Parties Continue To Pursue Going Public And Execute
The 2020 ERA.
EWG continued trying to go public through late 2020. After the Gabelli deal
fell through, the parties’ focus turned to another SPAC transaction, this time with
Galileo Acquisition Corp. (“Galileo”).65 The Galileo transaction also fell through.66
But these efforts resulted in an updated ERA that fixed some, but not all, of the errors
in the 2019 ERA.
In September, during due diligence for the Galileo transaction, EWG’s CFO
at the time sought out “formal documentation we have regarding the transfer of the
ownership” of Elite entities to EWG.67 The CFO received the 2019 ERA in response,
and realized it “contained errors” and proposed corrections.68 The parties tried to fix
64
See, e.g., Scaglia Tr. 240, 253, 285–86, 290, 294–95, 319.
65
See Haart Tr. 192; Scaglia Tr. 290, 448; JX 106; JX 120 at 7.
66
Scaglia Tr. 290.
67
JX 68 at 1.
68
JX 83 at 1; see also JX 73 (depicting the CFO’s handwritten draft changes). The CFO’s
statements and the parties’ contemporaneous exchanges make it clear that the purpose of
these changes was to clean up the 2019 ERA so it would be acceptable for due diligence.
Again, this undermines Haart’s testimony that the ERAs were an “apology” from Scaglia
meant to ensure the pair’s equal ownership stakes in Freedom.
16
the 2019 ERA by signing the “2020 ERA”69 in September 2020, keeping it
backdated to April 2019.70 The 2020 ERA fixed incorrect recitals about the
formation of EWG and Freedom, defined various S.M.S. Finance subsidiaries as the
“Entities,” and backdated Haart’s signature on the assignment page.71 It corrected
the 2019 ERA’s statement that EWG owned all the stock of the Elite entities, reciting
that Freedom owned the relevant interests.72 It corrected that Freedom held only a
94.12% interest in Men Women N.Y. Model Management.73 And it corrected the
tense of the recital about Haart and Scaglia’s marriage, putting it in the future
respective to the April 2019 backdate.74 But the changes in the 2020 ERA did not
add any language that transferred Freedom shares to Haart. The “assignment of
interest” portion and descriptions of the EWG stock transfer remained substantively
unchanged.75
69
JX 290. The 2020 ERA is also reproduced in other exhibits. See JX 108 at 27–33;
JX 183.
70
E.g., JX 68; JX 73; JX 83; see also JX 81 (depicting emails from September 2020); JX
82 (same); JX 94 (“Could I get you to have two people serve as witnesses and sign and
send these back to me? I don’t think that we have anyone here who was around in
April 2019!”).
71
See JX 73. Compare JX 38, and JX 47 at 4–10, with JX 290.
72
See JX 290 at 1.
73
See id.
74
See id. (“WHEREAS: The Shareholders are residents of New York and will be married
in June of 2019;”).
75
The only changes in the “assignment of interest” were backdating and a new font.
Compare JX 38 at 5–6, and JX 47 at 8–9, with JX 290 at 6–7. The only change in the stock
17
In addition to the documents designed to support a SPAC transaction, the
parties continued to execute documents in the ordinary course of business suggesting
Scaglia and Haart equally shared Freedom’s stock. Examples include director and
officer insurance questionaries,76 organizational charts,77 and statements to potential
investors.78 Most of these documents were prepared by nonparty EWG employees
and contractors, including Barbieri, Feinman, and others.79 Scaglia saw some of
these documents, and failed to either notice or correct the inaccurate statements
about Haart’s share.80
transfer portion of the 2020 ERA is the use of a defined term, rather than list, for the various
Elite-branded “Entities.” Compare JX 38 § 1.1, and JX 47 §1.1, with JX 290 § 1.1.
76
JX 129 at 11 (stating, in a November 2020 D&O insurance questionnaire prepared by
Barbieri, that EWG was held “Silvio Scaglia 50% – Julia Haart 50%” and explaining that
“In April 2019 50% of Freedom Holding shares have been transferred from Silvio Scaglia
(who owned previously 100%) to Julia Hendler (now Julia Haart)”); JX 115 at 11 (same);
see also JX 114; JX 126; JX 127.
77
JX 174 (depicting a 2019 organizational chart showing Haart and Scaglia as each owning
50% of Freedom); JX 281 (depicting a 2020 organizational chart showing the same); JX
146 (depicting a 2021 organizational chart showing the same); see also JX 172 (depicting
minutes of a Freedom Board meeting stating Scaglia and Haart each own 50% of Freedom).
78
JX 160 at 3; JX 219 at 3; see also JX 169 at (depicting declarations to European
government authorities); JX 168 (attaching JX 169).
79
E.g., JX 219 (Feinman); JX 114 (Barbieri); JX 115 (Barbieri); JX 126 (Barbieri); JX 127
(Barbieri); JX 129 (Barbieri); JX 168 (Barbieri); JX 169 (Barbieri); JX 202 (Zaffiris);
JX 160 (Zaffiris).
80
See, e.g., JX 168; JX 169; JX 126; JX 127; JX 129.
18
G. Haart And Scaglia’s Relationship Sours And Haart Is Fired.
Haart and Scaglia increasingly disagreed about EWG’s operations. In early
January 2021, their disagreements focused on hiring a new CFO.81 Haart wanted the
new CFO to report to her, as the CEO, while Scaglia wanted the CFO to report
directly to the EWG Board.82 Haart resisted, telling Scaglia: “If the purpose of your
proposed arrangement is because you no longer have faith in my ability to run the
company, or you think I’m doing an inadequate job, then you should fire me and
take over as CEO yourself.”83 She repeatedly suggested that if Scaglia was
dissatisfied with her performance as CEO, he ought to take the job on himself.84 On
January 13, Scaglia proposed a meeting of the EWG Board (himself, Haart, and
Barbieri) to discuss these issues.85 A meeting was held on January 15; Haart
repeatedly asked both Barbieri and Scaglia if they were “firing” her.86
81
E.g., JX 135 at 1–4; Haart Tr. 192; Scaglia Tr. 298–99.
82
JX 135; Scaglia Tr. 299.
83
JX 135 at 3; see also JX 134 at 1 (Haart emailing Barbieri: “I think it’s best that I step
down as CEO , and that Silvio takes over so that he can solve things his way. I’m sure he
will be much more effective than I am .”).
84
E.g., JX 4 at 421–25, 520–21, 535.
85
JX 135 at 2.
86
JX 136 at 1–2; JX 141 at 2; see also JX 135 at 3.
19
At the same time, Haart was considering divorcing Scaglia.87 After consulting
a divorce lawyer, she began to compile documents showing her interest in EWG,
Freedom, and other entities.88 Based on the documents she received, Haart
definitively understood she did not own an equal stake. On January 15, Haart
exchanged messages with Brian Cousin, an attorney who had previously worked
with Haart and EWG.89 Cousin asked Haart to send him core documents for
Freedom, EWG, and other related entities.90 Haart quickly forwarded Cousin’s
request, nearly verbatim, to Feinman.91 Feinman responded with several
attachments, including the Stock Power.92 Haart forwarded the documents to Cousin
and asked him to “look it over.”93 Meanwhile, Haart implored Feinman: “And
you’re sure they’re iron clad and I own half of everything? 100000% sure ?,” to
which Feinman responded simply, “yes.”94
87
Haart Tr. 83, 152–53; see also Scaglia Tr. 299–300 (testifying that Scaglia did not know
Haart was consulting divorce attorneys in January 2021).
88
Haart Tr. 83–84, 152–53, 200.
89
JX 140; Haart Tr. 153, 158; see also Scaglia Tr. 301.
90
JX 140 at 1.
91
JX 139 at 1; JX 3 at 11; see also Haart Tr. 202.
92
JX 139 at 2, 3–5; JX 3 at 12, 29–31. These attachments did not include the ERAs.
93
JX 140 at 1.
94
JX 139 at 2; JX 3 at 12.
20
Minutes later, Cousin messaged Haart, pointing out that her 61,832 shares of
Freedom’s preferred stock are “slightly less than 50%” and stating that “[t]his will
likely prove to be significant once we review the corporate operating documents.”95
Cousin also sent Haart articles about valuing a minority share in a private company.96
Haart copied some of Cousin’s messages and sent them to Feinman, pointing out
that her shares were “slightly less than 50%” and asking “Does that give him more
power than me ? That he has one more share than me?”97 Feinman did not text
back.98 Two days later, Haart texted Feinman:
We reconciled and decided to try and make it work . Just wanted you
to know ! Thank uou [sic] for being so kind and patient w me on
Friday . I would still like to get all docs ... all the stuff I asked for .. as
this incident just shows me how little I know99
In short, Haart knew no later than January 2021 that she held less than 50% of
Freedom’s preferred shares.100
95
JX 140 at 1.
96
Id. at 1–4.
97
JX 139 at 2; JX 3 at 12.
98
Haart testified that she and Feinman later discussed the issue over the phone and that
Feinman reassured her that despite the one share discrepancy in the Stock Power, she had
“nothing to worry about.” Haart Tr. 202–03.
99
JX 3 at 12 (ellipses in original).
100
Haart testified at trial that did not tell her first team of litigation counsel about the
preferred stock discrepancy when she initially filed her claims in this court. See Haart
Tr. 187–91.
21
After their January 2021 reconciliation, Haart and Scaglia continued to try to
take EWG public. In May, Scaglia contacted a representative from Jefferies Group
(“Jefferies”), an investment bank, about backing a potential SPAC or IPO.101 Just
as with the Gabelli transaction, Haart expressed frustration that conversations with
Jefferies did not respect her status in the company and that Scaglia talking to
representatives one on one “set[] a very bad precedent and undermine[d] [her]
authority.”102 She told Scaglia to send an email to “set things straight.”103 She
suggested he say: “I want to clarify our structure prior to our meeting . Julia haart
is equal co-owner with me and the CEO of elite world group . I am the non-executive
Chairman of the Board .”104 Less than six hours later, Scaglia sent an email to a
Jefferies representative mirroring Haart’s suggested language: “Julia and I own an
equal share of EWG through own [sic] common holding company. Julia is the CEO
and the real force behind EWG success and stature in the industry. I am the non
executive Chairman.”105 Scaglia testified that by this statement, he was
“positioning” Haart to be the point person for a deal with Jefferies.106 He was also
101
See JX 151; Scaglia Tr. 392–93.
102
JX 4 at 596.
103
Id.
104
Id.
105
JX 151 at 1.
106
Scaglia Tr. 396.
22
hopeful that an upcoming Netflix series focusing on Haart would bring value to
EWG and accelerate a potential deal.107
Discussions with Jefferies continued for some time,108 but Scaglia and Haart’s
reconciliation did not. By spring of 2021, the pair was discussing a “friendly”
divorce.109 Those discussions continued into early 2022, turned hostile, and swelled
into this litigation.
As litigation drew near, Haart worked to solidify her position within the
parties’ business. For example, she tried to be formally appointed to the Freedom
Board.110 For purposes of this opinion, in which I find Scaglia could validly remove
Haart from the Freedom Board, I assume she was appointed in the first place.111
Haart remained concerned that the parties’ formal documents did not make
her an equal owner. She focused on convincing Feinman to parrot that she owned
half of Freedom. While nominally, Feinman was EWG’s accountant, he appears to
have served in the role of on-call personal assistant to Scaglia and Haart, and Haart
107
JX 4 at 606; Scaglia Tr. 472–73.
108
E.g., JX 167.
109
Scaglia Tr. 297, 509.
110
See Kozinn Tr. 625–27.
111
This is consistent with other statements in the record, which suggest Haart was already
on the Freedom Board. E.g., JX 115 at 4–5; JX 172 at 1–2; JX 283 at 3–4; JX 57 at 1;
JX 147 at 1. I note that Scaglia disputes whether Haart’s efforts were successful. See D.I.
107 at 26–28.
23
texted with Feinman frequently and with familiarity.112 On February 5, 2022, Haart
instructed Feinman that even if the documents “didn’t actually make [Haart] an equal
in any way,” he should say that making Haart equal “was the full intention of the
contract” and that Scaglia said that was so “directly in [Feinman’s] presence.”113
Haart texted Feinman:
I’m going to need you to do what you said my darling if push ever came
to shove and tell the truth that the second document we signed .... it was
supposed to make us equal in not only cash but in true partnership and
I asked you then if I have the same rights as Silvio and you said yes and
then we find out that that’s not the case at all and that I do not have
equal decision making ( actually no decision making rights
whatsoever ) but that was def Silvios intention and what he told you to
draft up.114
Haart tried to give Feinman a foothold for these statements, telling him they
would be “the truth.”115 She elaborated, “we all came to an agreement to finally
make the shareholders agreement fair” and that Scaglia had since “reneged on
everything.”116 Haart continued leaning on Feinman after this litigation began:
when Feinman complained about unpaid bills Haart owed, Haart responded “You
want to get paid ? Plz help me help you ! I cannot pay you without the truth first
112
E.g., JX 139 at 1–2; JX 3 at 2, 4, 8; JX 165 at 5–10.
113
JX 165 at 5.
114
Id. at 4 (ellipses in original).
115
Id. at 4–5.
116
Id. at 5.
24
coming out and being acknowledged as a 50% owner which you know better than
anyone that I am .”117
Haart was right to be concerned about her positions at EWG and Freedom.
On February 7, Scaglia and Barbieri sent Haart a letter indicating their plan to
propose her dismissal as EWG’s CEO at the next EWG Board meeting, scheduled
for February 11.118 On February 8, Scaglia executed a written consent on behalf of
Freedom as EWG’s sole member.119 It resolved, in relevant part:
NOW, THEREFORE, BE IT RESOLVED THAT, effective as of
February 11, 2022, Julia Haart is removed from her appointment and
shall no longer be a Director of the Company, while Silvio Scaglia and
Paolo Barbieri shall remain in their role as Directors of the Company,
until such time as any or all of them are removed by the Member.120
Haart, through counsel, responded with a letter to Scaglia and Barbieri later on
February 8.121 She also executed a dueling written consent, also purportedly on
behalf of Freedom as EWG’s sole member.122 It stated that “Scaglia does not have
117
Id. at 14. These exchanges damage the credibility of both Haart and Feinman,
particularly Feinman’s statements that Haart and Scaglia were equal partners. E.g., JX 219
at 3 (Feinman stating, in a message on February 7, that “Freedom is owned by Julia and
Silvio equally”).
118
PTO ¶ 44; JX 220; see also JX 221 (depicting an agenda for the February 11 EWG
Board meeting that included a proposal to dismiss Haart as CEO).
119
PTO ¶ 45; JX 222.
120
JX 222 at 2.
121
PTO ¶ 46.
122
PTO ¶ 47; JX 223.
25
the authority to act on behalf of Freedom to remove Ms. Haart as a director of the
Company,” and resolved that “the Action by Written Consent executed by Silvio
Scaglia is null and void.”123 Scaglia responded with a letter through counsel on
February 9.124 Also on February 9, Scaglia and Barbieri, as the EWG Board, held a
meeting and voted to remove Haart as EWG’s CEO.125 Later that day, Freedom and
EWG terminated Haart’s access to her EWG email and corporate credit card, and
Scaglia announced that Barbieri would be taking over as EWG’s CEO.126 Haart filed
for divorce.127
Even after this litigation commenced on February 11, Scaglia continued to
execute documents purporting to remove Haart. On February 13, he executed a
series of written consents. The first was as the holder of the majority of Freedom’s
voting power, amending Freedom’s bylaws.128 Those amendments set the size of
the Freedom Board at one and the written consent removed all directors other than
Scaglia.129 The second written consent was as the sole member of the Freedom
123
JX 223 at 2.
124
PTO ¶ 48; JX 231.
125
JX 235 at 2; see Barbieri Tr. 570; see also D.I. 13 [hereinafter “Am. Pet.”] ¶ 103
(alleging “Scaglia’s and Barbieri’s February 8 ouster of Haart as the CEO of EWG . . . was
unlawful”).
126
PTO ¶ 49.
127
See D.I. 74 ¶ 61.
128
PTO ¶ 50(a); JX 244.
129
JX 244 at 2; see also JX 247 at 8; JX 249 at 4.
26
Board, removing Haart from any positions she holds or ever has held at Freedom
and EWG.130 And the third was a written consent of Freedom, as EWG’s sole
member, removing Haart from any position she had at EWG and appointing Barbieri
as EWG’s new CEO.131 Scaglia also filed a notice of stockholder action by written
consent, explaining these measures.132
H. Haart Initiates This Litigation.
Haart initiated this action on February 11.133 After retaining new counsel,
Haart filed an amended and supplemented petition (the “Amended Petition”) on
February 28.134 The Amended Petition asserts that Haart and Scaglia own equal fifty
percent shares of all classes of Freedom stock.135 On that basis, Haart contends that
Freedom is deadlocked and EWG’s affairs are irreparably frozen.136 She argues
Scaglia’s removal of her as a Freedom director and as EWG’s CEO was invalid
because he did not control Freedom.137 Counts I and II of the Amended Petition seek
declarations to that effect under 8 Del. C. § 225 and 6 Del. C. § 18-110, respectively;
130
PTO ¶ 50(b); JX 245.
131
PTO ¶ 50(c); JX 246.
132
PTO ¶ 50(d); JX 248.
133
D.I. 1; see also PTO ¶ 51.
134
See generally Am. Pet.; see also PTO ¶ 51.
135
Am. Pet. ¶¶ 12–13, 102.
136
Id. ¶¶ 10, 117, 119.
137
E.g., id. ¶¶ 69, 102.
27
Count IV also seeks related declaratory judgments.138 Count III seeks judicial
dissolution of Freedom under 8 Del. C. § 226.139 And Count V, which was
bifurcated and has not yet been tried, asserts a claim for breach of fiduciary duty.140
Haart filed a motion to expedite her claims,141 which I heard and granted on
March 11.142 At the parties’ urging, this action has proceeded quickly.143 On
March 25, I entered a status quo order (the “Status Quo Order”) stabilizing Freedom
and EWG while the parties litigated their claims.144 The Status Quo Order declared
that during the pendency of this litigation: (a) Scaglia is the sole director of
Freedom; (b) Scaglia and Barbieri are the directors of EWG; (c) Barbieri is the Chief
Executive Officer of EWG; and (d) Haart holds no positions at either Freedom or
EWG.145 It also placed limits on Freedom’s and EWG’s business operations.146
138
Id. ¶¶ 104–08, 109–14, 122–24.
139
Id. ¶¶ 115–21.
140
Id. ¶¶ 115–21. The parties agreed to stay Count V, and it was not part of the April trial.
See D.I. 57 ¶ 11.
141
D.I. 2; D.I. 16.
142
D.I. 40; D.I. 41; see also PTO ¶ 55.
143
See D.I. 57; see also PTO ¶ 56.
144
D.I. 64; see also PTO ¶ 57.
145
D.I. 64 ¶ 2.
146
Id. ¶ 4.
28
Scaglia answered the Amended Petition on March 18 and filed an amended
answer on March 31.147 Scaglia denies Haart’s allegations and filed two
counterclaims, seeking competing declarations that his actions were valid under
Section 225 and Section 18-110.148 Haart responded to Scaglia’s answer and
counterclaims on April 2.149
This matter was tried on April 19 and 20.150 The parties filed post-trial briefs
on May 3 and agreed on May 4 that further briefing and post-trial argument were
not necessary.151 I took this matter under advisement on May 10.152 In an effort to
expedite final relief and steady Freedom and EWG, I issued an order on May 26 that
vacated the Status Quo Order and entered judgment in Scaglia’s favor.153 In that
order, I explained that a forthcoming memorandum opinion would detail my factual
findings and legal conclusions supporting that decision. This is that memorandum
opinion.154
147
D.I. 43; D.I. 74; see also PTO ¶¶ 52–53.
148
See generally D.I. 43; D.I. 74.
149
See D.I. 78; PTO ¶ 54.
150
See D.I. 124; D.I. 127; D.I. 128; see also D.I. 57.
151
D.I. 129; D.I. 130; D.I. 133.
152
D.I. 135.
153
D.I. 140.
154
To the extent there is a conflict between that order and this opinion, this opinion governs.
29
II. ANALYSIS
“Regardless of the theory under which the removal or election of a director is
challenged, the burden of proving that a director’s removal or election is invalid rests
with the party challenging its validity.”155 Haart bears the burden of showing
Scaglia’s removal of her from her board and management positions at Freedom and
EWG was invalid.
In her effort to carry that burden, Haart leans heavily on her assertion that she
and Scaglia equally owned “all classes of Freedom stock.”156 The parties agree this
is a crucial threshold question. Haart and Scaglia equally own Freedom’s common
stock,157 and Haart does not meaningfully dispute that Scaglia initially owned all
Freedom’s preferred stock, which he caused Freedom to issue in December 2018.158
I find Haart did not and does not own fifty percent of Freedom’s preferred stock.
From that conclusion, Haart’s claims unravel. Because Scaglia has more
Freedom voting power than Haart, he was able to validly execute a written consent
to remove her from the Freedom Board. With Scaglia in control of Freedom, Haart
155
Kerbawy v. McDonnell, 2015 WL 4929198, at *13 (Del. Ch. Aug. 18, 2015) (alterations
and internal quotation marks omitted) (quoting Unanue v. Unanue, 2004 WL 5383942, at
*10 (Del. Ch. Nov. 9, 2004)).
156
Am. Pet. ¶ 12; see D.I. 108 at 2–3, 11, 20; D.I. 129 at 1–2, 25, 28, 46, 52, 56.
157
Compare D.I. 108 at 10, and D.I. 129 at 6, with D.I. 107 at 13–14, and D.I. 130 at 11,
and PTO ¶ 24.
158
See D.I. 108 at 9; D.I. 129 at 6.
30
is powerless to stop Freedom as EWG’s managing member, or Scaglia and Barbieri
as two of the three members of the EWG Board, from removing her as an EWG
director and EWG’s CEO. And because Haart and Scaglia do not equally share
control over Freedom, it is not deadlocked.
A. Haart Did Not Own Fifty Percent Of All Classes Of Freedom
Stock.
Haart has failed to meet her burden of proving she holds half of Freedom’s
preferred stock. The only document in the record that purports to transfer any
preferred stock is the Stock Power.159 On its face, that document contemplates a
transfer of 61,832 of Scaglia’s 123,665 Freedom preferred shares, giving Haart
49.9995957% of those shares.160 There are no other documents in the record that
purport to transfer any preferred shares to Haart. Thus, at best, Haart holds one
preferred share less than Scaglia does, giving him voting control over Freedom.
Haart builds her case to the contrary on two general categories of documents:
the ERAs and a series of other documents, which she calls “admissions” of her equal
ownership.161 I address each in turn.
159
See JX 61.
160
See id. at 5–6. Again, in this summary proceeding, I assume without deciding that this
transfer was effective and do not reach Scaglia’s arguments to the contrary.
161
D.I. 129 at 8.
31
The proper interpretation of the ERAs is a question of law.162 Under both the
2019 ERA and the 2020 ERA, that question is governed by New York law,163 which
largely mirrors Delaware law.164 “Like Delaware, New York follows traditional
contract law principles that give great weight to the parties’ objective manifestations
of their intent in the written language of their agreement.”165 New York law seeks
to give effect to the contracting parties’ intent “as revealed by the language they
chose to use.”166 In doing so, New York courts, like Delaware courts, read the
contract as a whole:
It has long been the rule that a contract must be read as a whole in order
to determine its purpose and intent, and single clauses cannot be
construed by taking them out of their context and giving them an
interpretation apart from the contract of which they are a part. Words
considered in isolation may have many and diverse meanings. In a
written document the word obtains its meaning from the sentence, the
sentence from the paragraph, and the latter from the whole document.167
162
E.g., Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 145 (Del. 2009).
163
See JX 38 § 6.5; JX 47 § 6.5; JX 290 § 6.5.
164
See In re Nat’l Collegiate Student Loan Trs. Litig., 251 A.3d 116, 144 n.126 (Del. Ch.
2020) (noting “no party has identified, and the Court is unaware of, a substantive difference
between New York and Delaware law regarding the rules of contract construction” and
compiling New York cases).
165
In re IBP, Inc. S’holders Litig., 789 A.2d 14, 54 (Del. Ch. 2001) (compiling sources).
166
Sayers v. Rochester Tel. Corp. Supplemental Mgmt. Pension Plan, 7 F.3d 1091, 1094
(2d Cir. 1993) (internal quotation marks omitted) (quoting Seiden Assocs., Inc. v. ANC
Hldgs., Inc., 959 F.2d 425, 428 (2d Cir. 1992)); see also Slatt v. Slatt, 477 N.E.2d 1099,
1100 (N.Y. 1985) (“Where the intention of the parties is clearly and unambiguously set
forth, effect must be given to the intent as indicated by the language used[.]”).
167
Bijan Designer For Men, Inc. v. Fireman’s Fund Ins. Co., 705 N.Y.S.2d 30, 33 (App.
Div. 2000) (citations, alterations, and internal quotation marks omitted) (citing William C.
Atwater & Co. v. Panama R.R. Co., 159 N.E. 418 (N.Y. 1927), and Becker v. Peter A.
32
In applying these principles to the substantially similar ERAs, I quote the more
current and cleaner 2020 ERA.
Haart repeatedly points to a single clause in Section 1 of the ERAs:
“FREEDOM shall be owned 50% by each shareholder[.]”168 Consistent with New
York law, it is important to view that clause in context. Reading Section 1 in its
entirety reveals it to be nonsense, and the clause Haart relies on to be a meaningless
incorrect recital.
1. Transfer.
1.1 The Shareholders agree to transfer all of their Membership
Interests in ELITE [EWG] to their wholly [sic] Delaware corporation
known as FREEDOM, and thus change the structure of ownership such
that FREEDOM shall be owned 50% by each shareholder, and
FREEDOM shall own all of the Membership Interests in ELITE
[EWG], which in turn shall own all of the stock in the ENTITIES.
1.2 Each Shareholder shall execute their appropriate assignment of
Membership interests in ELITE [EWG] in order to effectuate a transfer
of the complete ownership of all Membership Interests in FREEDOM.
1.3 FREEDOM shall execute all necessary documents to complete
the transfer of its stock ownership in the ENTITIES to ELITE
[EWG].169
Frasse & Co., 173 N.E. 905 (N.Y. 1930), and Eighth Ave. Coach Corp. v. City of New
York, 35 N.E.2d 907, 909 (N.Y. 1941)).
168
JX 290 § 1.1; see also JX 38 § 1.1; JX 47 § 1.1.
169
JX 290 § 1; see also JX 38 § 1; JX 47 § 1.
33
I begin with the plain language of Section 1. Section 1.1 recites that the final
“structure of ownership” shall be (1) Haart and Scaglia each owning 50% of
Freedom, (2) Freedom owning EWG, and (3) EWG owning the Entities. But Section
1 only prescribes transfers to accomplish the second and third parts of the structure.
Section 1 promises Haart and Scaglia will transfer their EWG interests to Freedom,
Section 1.1 includes an “agree[ment] to transfer” EWG shares, and Section 1.2
mandates an “assignment of Membership interest” in EWG. (As an aside, this
language transferring EWG interests from Haart and Scaglia to Freedom has no
practical effect: Haart and Scaglia do not own any interests in EWG.) Transferring
Haart’s and Scaglia’s interests in EWG to Freedom would not “change the structure
of ownership such that” each owned half of Freedom. Section 1 does not otherwise
promise or effectuate any transfer of Freedom shares. I therefore read the clause
Haart relies on to be an inaccurate recital that Haart and Scaglia already each own
50% of Freedom, in describing the final intended structure. 170
170
This is consistent with an earlier recital, which stated, “WHEREAS: The Shareholders
by and between them own One Hundred (100%) Percent of the stock of all classes of capital
stock in Freedom Holding, Inc. (hereinafter ‘FREEDOM’).” JX 290 at 1 see also JX 38
at 1; JX 47 at 4. Of course, even if the parties were not equal partners, their unequal
membership interests would still add up to 100%.
34
It is unusual and undesirable to construe contractual language to mean
something that is both meaningless and false.171 But this inaccuracy is only one of
several in in the ERAs, which appear designed more for show than substance.172 The
2019 ERA repeatedly confused EWG and Freedom, necessitating an updated and
backdated version in 2020.173 While the 2020 ERA corrected some mistakes, it did
not correct them all.174
Reading the ERAs as a whole also supports reading the clause Haart relies on
as an inaccurate recital. The ERAs were meant to reflect a transfer of the Elite-
branded “Entities” from Freedom to EWG, and to ensure that EWG was fully owned
by Freedom. The 2020 ERA explains:
WHEREAS: The Shareholders, FREEDOM and ELITE [EWG]
wish to restructure their business asset holdings such that the limited
liability company, ELITE [EWG], shall: (a) assume ownership of One
Hundred (100%) Percent of the Stock FREEDOM owns of the
ENTITIES; and (b) become a wholly owned subsidiary of
FREEDOM; 175
171
Cf. Two Guys from Harrison-N.Y., Inc. v. S.F.R. Realty Assocs., 472 N.E.2d 315, 318
(N.Y. 1984) (“In construing a contract, one of a court’s goals is to avoid an interpretation
that would leave contractual clauses meaningless.”).
172
The 2019 and 2020 ERAs contain numerous theatrical formatting choices, including the
use of Comic Sans and WordArt or an equivalent. E.g., JX 38 at 1–3, 5–6; JX 47 at 4–6,
8–9; JX 290 at 1, 6–7.
173
See JX 73 at 3–4; see also JX 83.
174
See JX 73.
175
JX 290 at 1. The 2019 ERA makes a similar recital but does not use the defined term
“Entities,” and therefore does not discuss a transfer of the “Entities” in this recital. See JX
38 at 1 (“WHEREAS: The Shareholders, FREEDOM and ELITE wish to restructure
35
Other recitals also refer to this transaction as a “restructuring” or a
“reorganization.”176 Sections 1.2 and 1.3 ensure that the documents necessary to
accomplish those purposes will be executed.177 In short, the ERAs’ function is
consistent with their title: restructuring the business by transferring the Entities from
Freedom to EWG, and ensuring EWG was fully owned by Freedom. These tasks do
not require any particular ownership of Freedom by Haart and Scaglia. The ERAs
did not intend or accomplish any transfer of Freedom stock between Haart and
Scaglia.
I conclude the ERAs are unambiguous on this point: their plain text simply
does not transfer any Freedom shares. Under New York law, if a contract’s meaning
is plain and unambiguous, it will be given full effect and the Court will not consider
extrinsic evidence.178 My conclusion would therefore be the end of the inquiry.
That said, the ERAs contain many errors. If one were to conclude that those
errors render the ERAs ambiguous, 179 the extrinsic evidence in the record proves the
their business asset holdings such that the limited liability company, ELITE, shall become
a wholly owned subsidiary of FREEDOM;”); JX 47 at 4 (same).
176
JX 290 at 1–2; see also JX 38 at 2; JX 47 at 5.
177
JX 290 §§ 1.2–1.3; see also JX 38 § 1.2; JX 47 § 1.2.
178
See In re IBP, 789 A.2d at 54–55.
179
Given the choice between reading out “nonsensical” language as meaningless, and
concluding it is ambiguous, New York courts have avoided surplusage and concluded the
language at issue is ambiguous. See LDIR, LLC v. DB Structured Prods., Inc., 99 N.Y.S.3d
327, 331 (N.Y. App. Div. 2019).
36
parties did not intend them to transfer any Freedom shares. Both ERAs were
executed against the backdrop of potential going-public transactions.180 Scaglia and
Barbieri credibly testified that the Elite business needed to be restructured to support
such a transaction, creating a formal holding company and excluding certain entities
Freedom owns (like holding companies for Haart and Scaglia’s home and cars).181
The ERAs were also sent to auditors inquiring about the corporate structure behind
the Elite brand,182 and to government entities inquiring about the corporate structure
behind other Elite-affiliated entities.183 And the handwritten edits and
accompanying emails focus on reorganizing the entities’ structure, not Haart and
Scaglia’s interest in them.184 The ERAs were drafted by nonlawyers, which helps
explain their errors and inconsistencies.185
Haart’s own narrative is extrinsic evidence that the 2019 ERA did not transfer
half of Freedom’s equity to her. Haart signed the 2019 ERA in November 2019,186
but was “devastated” in March 2020 to discover the preferred stock and the fact that
180
See Scaglia Tr. 266–67, 270–71, 383–84.
181
Scaglia Tr. 257–58; Barbieri Tr. 592–93.
182
See, e.g., JX 177; JX 182 (attaching JX 183); see also JX 186.
183
See JX 85 at 2.
184
See JX 73; see also JX 83. The file name of the 2019 ERA also supports this
interpretation: “Scaglia-Freedom-above-Elite Restructure-Agr.wpd.” See JX 38; JX 47.
185
See Barbieri Tr. 524, JX 291 at 18–19; JX 83; JX 73.
186
JX 38 at 6; JX 47 at 1, 9; see Scaglia Tr. 266, 268.
37
she did not own any preferred shares.187 The 2019 ERA she signed could not have
been the instrument she and Scaglia used to transfer half of Freedom’s equity to
Haart. The Stock Power followed in June 2020, transferring Haart slightly less than
half of Freedom’s preferred shares.188 That Stock Power would not have been
necessary if the 2019 ERA transferred Haart half of Freedom’s stock. And when
Haart asked Feinman for documents evidencing her ownership in the shadow of a
potential divorce, Feinman sent the Stock Power, and Haart focused on that
document to the exclusion of the ERAs.189
The only extrinsic evidence suggesting the ERAs transferred Freedom stock
to Haart are the insurance questionnaires Barbieri prepared and Haart and Scaglia
signed.190 The questionnaires state, “In April 2019 50% of Freedom Holding shares
have been transferred from Silvio Scaglia (who owned previously 100%) to Julia
Hendler (now Julia Haart).”191 The 2019 and 2020 ERAs were backdated to
April 1, 2019,192 so facially, this statement suggests the ERAs effectuated this
transfer. But Haart does not contend Scaglia transferred her any preferred shares in
187
Haart Tr. 130–31.
188
See JX 61 at 5–6.
189
See supra nn. 88–100 and accompanying text.
190
JX 129 at 11; JX 115 at 11.
191
JX 129 at 11; JX 115 at 11.
192
JX 290 at 1, 6–7; see also Haart Tr. 133.
38
April 2019. In fact, Haart testified that the couple delayed transferring even the
common shares to Haart until after they married in June 2019 for tax reasons.193
Haart did not know in April 2019 that Freedom had issued preferred shares.194 The
preponderance of the extrinsic evidence proves the ERAs were intended to
restructure the Elite modeling business, not reconcile the ownership of Freedom as
between Haart and Scaglia. The ERAs were not intended to effectuate any transfer
of Freedom shares.
Beyond the ERAs, Haart points to a series of documents that state or imply
that Haart and Scaglia own Freedom in equal one-half shares.195 To the extent Haart
presents these documents to prove an unmemorialized transfer of preferred shares, I
find they are insufficient to carry her burden. Documents indicating Scaglia and
Haart were equal or fifty-fifty partners in Freedom appear in the record as early as
2018 and October 2019,196 when both sides agree that statement was false. While
Scaglia had transferred common shares to Haart by then,197 he held all the preferred
shares. The preponderance of the evidence indicates this trend continued
uncorrected. Barbieri and other EWG employees prepared statements for Haart and
193
See Haart Tr. 90.
194
Id. 129–32.
195
E.g., JX 174; JX 281; JX 146; JX 172; JX 160; JX 219; JX 169; JX 115; JX 129; JX 202.
196
JX 44 at 16.
197
See JX 279; JX 289; Haart Tr. 133–34; Scaglia Tr. 238–39, 245.
39
Scaglia to review that mimicked the even split language.198 It appears the myth that
Haart and Scaglia equally owned Freedom was widespread enough that it was
repeated by EWG employees. But these statements alone do not persuade me that
Scaglia ever actually transferred any preferred stock.
Beyond those documents, some of which Scaglia signed or acknowledged,
Haart also argues Scaglia directly admitted her equal share in his own words. She
points to an email where Scaglia told a Jefferies representative: “Julia and I own an
equal share of EWG through own [sic] common holding company. Julia is the CEO
and the real force behind EWG success and stature in the industry. I am the non
executive Chairman.”199 But Haart drafted and urged Scaglia to make this statement;
Scaglia was trying to appease his wife in the shadow of looming marital problems.200
It is not surprising that Scaglia would seek to present Haart positively in front of
potential investors,201 especially considering her upcoming Netflix show, which
198
See JX 219 (Feinman); JX 114 (Barbieri); JX 115 (Barbieri); JX 126 (Barbieri); JX 127
(Barbieri); JX 129 (Barbieri); JX 168 (Barbieri); JX 169 (Barbieri); JX 202 (Zaffiris);
JX 160 (Zaffiris).
199
JX 151 at 1.
200
See JX 4 at 596. At this point, Haart knew about the preferred share imbalance and thus
knew the statement she was asking Scaglia to make was untrue. See JX 140 at 1.
201
See Scaglia Tr. 396–97 (“Q. Were you lying to the bankers or telling the bankers the
truth? A. I was positioning Julia as the counterpart for this process. . . . And that’s what
you do. I mean, when you are introducing somebody and this somebody is still trusted at
that level, even if you have doubts and you’re starting to accumulate issues, is you position
this person as the best person in the world, to any external counterpart.”).
40
Scaglia hoped would help facilitate a deal.202 In any case, Scaglia telling a potential
investor that Haart was an equal partner was not far from the truth, assuming the
Stock Power transferred half the preferred minus one share. And at bottom, that
statement to a third party does not transfer any stock. The preponderance of the
credible evidence in the record shows that Scaglia did not transfer Haart half his
preferred shares.
Finally, Haart has known she was not an equal owner since January 15, 2021.
As discussed, she sent the Stock Power to an EWG attorney, asked for his opinion,
and was told the document transferred her “slightly less than 50%” and that “[t]his
will likely prove to be significant once we review the corporate operating
documents.”203 Haart panicked and texted Feinman, asking “Does that give him
more power than me ? That he has one more share than me?”204 Later, Haart
acknowledged that Scaglia had the power to fire her from EWG.205 Haart understood
the discrepancy the Stock Power created; she cannot tip the balance of shares in her
favor by pointing to inaccuracies and puffery.
If effective, the June 2020 Stock Power transferred Haart one share less than
Scaglia retained, leaving Scaglia with the power to bind Freedom by written consent.
202
JX 4 at 606; Scaglia Tr. 472–73.
203
JX 140 at 1.
204
JX 139 at 2; JX 3 at 12.
205
E.g., JX 135 at 3.
41
(If the Stock Power was not effective, Scaglia held all the preferred and the power
to bind Freedom.) And the 2019 and 2020 ERAs, around which Haart builds her
case, do not transfer any Freedom shares. Without the ERAs, Haart is left to rely on
a string of miscellaneous documents that fail to persuade me Scaglia transferred half
of Freedom’s preferred shares to her in those or any other transactions. In view of
the preponderance of the credible evidence in the record, I conclude Haart does not
own half of all classes of Freedom stock. At most, she owns half the common and
less than half of the preferred.
B. Haart’s Equitable Defenses Do Not Rescue Her Claims.
Haart also asserts she is a fifty percent owner of Freedom because equitable
defenses bar Scaglia from arguing otherwise. In particular, she claims: (1) Scaglia
ratified agreements establishing Haart’s equal ownership; (2) Scaglia acquiesced to
Haart’s equal ownership; and (3) Scaglia’s unclean hands bar him from denying
Haart’s equal ownership. These principles are inapplicable here.
Haart’s defenses of ratification and acquiescence both fail because there was
nothing to ratify or to which Scaglia could acquiesce. “Under Delaware law,
ratification is an equitable defense that precludes a party who has accepted the
benefits of a transaction from thereafter attacking it.”206 Acquiescence is a closely
206
Braga Inv. & Advisory, LLC v. Yenni Income Opportunities Fund I, L.P., 2020 WL
3042236, at *11 (Del. Ch. June 8, 2020) (alterations and internal quotation marks omitted)
(quoting Genger v. TR Inv’rs, LLC, 26 A.3d 180, 195 (Del. 2011)).
42
related doctrine.207 It applies when a party “has full knowledge of his rights and the
material facts and (1) remains inactive for a considerable time; or (2) freely does
what amounts to recognition of the complained of act; or (3) acts in a manner
inconsistent with the subsequent repudiation, which leads the other party to believe
the act has been approved.”208
Haart argues that by signing the ERA, and by his other statements, Scaglia
ratified or acknowledged the parties’ agreement to evenly split Freedom’s shares.209
Her position is built on her incorrect reading of the ERA and other documents. Haart
has not proven any agreement to evenly split Freedom’s shares or voting power.210
Haart has failed to carry her burden to show that Scaglia ever transferred her half of
207
See, e.g., Frank v. Wilson & Co., 32 A.2d 277, 283 (Del. 1943).
208
Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1047 (Del. 2014) (emphasis added)
(quoting Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 582 (Del. Ch. 1998)).
209
See D.I. 108 at 40–41; D.I. 129 at 46–48.
210
Haart has not met her burden to prove that such an oral contract existed. Whether an
oral contract exists is a question of fact. E.g., Cole v. State, 922 A.2d 354, 359 (Del. 2005).
“Under Delaware law, a party asserting a breach of an oral agreement must prove the
existence of an enforceable contract by a preponderance of the evidence.” Pulieri v.
Boardwalk Props., LLC, 2015 WL 691449, at *5 (Del. Ch. Feb. 18, 2015) (citing Grunstein
v. Silva, 2014 WL 4473641, at *16 (Del. Ch. Sept. 5, 2014) aff’d, 113 A.3d 1080 (Del.
2015) (ORDER)). “[T]he formation of a contract requires a bargain in which there is a
manifestation of mutual assent to the exchange and a consideration.” Sarissa Cap.
Domestic Fund LP v. Innoviva, Inc., 2017 WL 6209597, at *21 (Del. Ch. Dec. 8, 2017)
(internal quotation marks omitted) (quoting Wood v. State, 2003 WL 168455, at *2 (Del.
Jan. 23, 2003) (ORDER)). Haart has not proven she and Scaglia definitively agreed he
would transfer her fifty percent of his Freedom preferred shares.
43
Freedom’s preferred shares or made an actionable promise to do so. She offers no
transaction that Scaglia could ratify or acknowledge.
Haart falls back on the argument that Scaglia should be prohibited from
arguing Haart does not own fifty percent of Freedom’s stock because he has unclean
hands. She contends he concealed the existence of the preferred shares,
surreptitiously held back one-half share in the Stock Power, and then assured Haart
and others that he and she owned Freedom equally. The equitable doctrine of
unclean hands “provides that ‘a litigant who engages in reprehensible conduct in
relation to the matter in controversy . . . forfeits his right to have the court hear his
claim.’”211 “[I]t is designed primarily to protect courts of equity from being misused
by a party who has not acted fairly and without fraud or deceit as to the controversy
in issue.”212 “The doctrine should not be seen as a means to aid a party who faces
an unscrupulous opponent . . . .”213 Rather, the operative question is “whether [a
party’s] conduct is so offensive to the integrity of the court that his claims should be
211
Portnoy v. Cryo-Cell Intern., Inc., 940 A.2d 43, 80–81 (Del. Ch. 2008) (quoting
Nakahara v. NS 1991 Am. Tr. (Nakahara I), 739 A.2d 770, 791–92 (Del. Ch. 1998)).
212
Patel v. Dimple, 2007 WL 2353155, at *12 (Del. Ch. Aug. 16, 2007) (citing Skoglund
v. Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976)); see also Portnoy, 940 A.2d
at 81 (“‘[T]he purpose of the clean hands maxim is to protect the court against misuse by
one who, because of his conduct, has forfeited his right to have the court consider his claims
. . . .’” (quoting Skoglund, 372 A.2d at 213))).
213
Nakahara v. NS 1991 Am. Tr. (Nakahara II), 718 A.2d 518, 522 (Del. Ch. 1998).
44
denied, regardless of their merit.”214 “[T]he inequitable conduct must have an
‘immediate and necessary’ relation to the claims under which relief is sought.”215
“This court has consistently refused to apply the doctrine of unclean hands to bar an
otherwise valid claim of relief where the doctrine would work an inequitable
result.”216
The unclean hands doctrine does no work here. As an initial matter, Scaglia
has not meaningfully brought claims before the Court that he could forfeit. Haart
initiated this matter. While Scaglia has counterclaimed for declaratory judgments,
Haart acknowledges these are mirror images of her claims.217 In other words, even
denying Scaglia relief under his counterclaims on unclean hands grounds would not
change the conclusion that Haart has failed to carry the burden of proof on her
claims.
And the exercise of looking at the litigants’ hands reveals dirt on Haart’s. She
was long aware of the Stock Power and the fact that Scaglia had one more preferred
share than she did, going so far as to consult a lawyer who confirmed as much.218
214
Portnoy, 940 A.2d at 81 (internal quotations omitted) (quoting Gallagher v. Holcomb
& Salter, 1991 WL 158969, at *4 (Del. Ch. 1991)).
215
Nakahara II, 718 A.2d at 523.
216
Portnoy, 940 A.2d at 81 (internal quotation marks omitted) (quoting Dittrick v.
Chalfant, 948 A.2d 400, 408 n.18 (Del. Ch. 2007)).
217
See D.I. 108 at 39 n. 22.
218
JX 140 at 1; see JX 139 at 2.
45
While litigation loomed, she attempted to pressure Feinman into falsely stating
Scaglia intended to transfer her fifty percent.219 Thereafter, she filed a petition in
this Court, claiming she held half of Freedom’s common shares, but neglected to
mention preferred shares to her original counsel or the Court.220 The Amended
Petition, filed by new counsel, indicated she owned half of “all classes of Freedom’s
stock.”221 Haart testified she did not initially tell her replacement counsel about the
Stock Power, on the theory that it was “irrelevant” until she found a copy of it.222
At bottom, nothing about Scaglia’s path to this Court forecloses consideration
of his claims or awarding judgment in his favor.
C. Scaglia’s Removal Of Haart As A Freedom Director Was
Valid.
In Count I, Haart asserts that Scaglia could not remove her from her position
as a director of Freedom “because Scaglia and Haart were 50-50 owners of Freedom,
and thus Scaglia did not control a majority of Freedom’s stockholder voting
power.”223 She seeks a declaration to that effect under Section 225.224 Under that
provision, this Court:
219
See JX 165 at 4–5.
220
See Haart Tr. 185–88.
221
Am. Pet. ¶ 12; see Haart Tr. 188–91.
222
Haart Tr. 190.
223
Am. Pet. ¶ 106.
224
Id. ¶ 107.
46
may hear and determine the validity of any . . . removal . . . of any
director or officer of any corporation, and the right of any person to
hold or continue to hold such office, and, in case any such office is
claimed by more than 1 person, may determine the person entitled
thereto[.]225
Haart’s only theory is that Scaglia could not bind Freedom because he did not have
sufficient voting control.226 As I have explained, I disagree. Because Scaglia owned
at least one more preferred share than Haart, he controlled the majority of Freedom’s
voting power. Haart is not entitled to a declaration that Scaglia’s removal of her as
a director at Freedom, to the extent she ever was one, was invalid.
For the same reasons, Scaglia is entitled to a declaration under Section 225,
as set forth in his first counterclaim. Judgment is entered for Scaglia on Count I of
Haart’s petition and on Count I of his counterclaim.
D. The Removal Of Haart As EWG’s Director And CEO Was
Valid.
In Count II, Haart asserts that her removal as EWG’s CEO was ineffective.
“This Court has the authority under 6 Del. C. § 18-110(a) to hear and determine . . .
the right of any person to become or continue to be a manager of a limited liability
company.”227 This Court has read Section 18-110 “sensibly to sweep in sufficiently
225
8 Del. C. § 225(a).
226
See Am. Pet. ¶¶ 104–08; D.I. 108 at 20–35; D.I. 129 at 52–53.
227
MPT of Hoboken TRS, LLC v. HUMC Holdco, LLC, 2014 WL 3611674, at *8 (Del. Ch.
July 22, 2014) (internal quotation marks omitted) (quoting 6 Del. C. § 18-110).
47
related claims,” like whether a disputed manager was properly removed from other
corporate offices, “so long as there would be no constitutional offense.”228 Haart
contends that because Freedom was EWG’s managing member, Scaglia and Barbieri
were Freedom’s agents in their positions as EWG directors; and because Freedom
was deadlocked, Scaglia and Barbieri exceeded their agency authority by removing
Haart.229 Regardless of the cogency of Haart’s agency theory, it is built on a
factually inaccurate premise. Because Scaglia maintained voting control over
Freedom, that entity was not deadlocked as Haart contends. Without such deadlock,
Haart’s “disabled principal” theory fails. Freedom, as EWG’s managing member,
and Scaglia and Barbieri, as the majority of the EWG Board, had the power to fire
Haart as CEO. Haart knew this in the days before her firing, as she repeatedly baited
Scaglia with removing her and asked if she was going to be fired.230 Haart is not
entitled to a declaration that her removal was invalid, and Scaglia is entitled to a
declaration that it was valid, as set forth in his second counterclaim. Judgment is
entered for Scaglia on Count II of Haart’s Amended Petition and on Count II of his
counterclaim.
228
Cornerstone Techs., LLC v. Conrad, 2003 WL 1787959, at *11 (Del. Ch.
Mar. 31, 2003). Here, as in Cornerstone, there is a “close nexus” between Haart’s removal
as EWG’s CEO and her removal from the EWG Board. Id.229
See Am. Pet. ¶ 112; D.I. 108 at 36–38; D.I. 129 at 53–55.
230
JX 135 at 3; JX 4 at 421–25, 520–21, 535; JX 136 at 1–2; JX 141 at 2.
48
E. Haart Is Not Entitled To Declaratory Judgments Mirroring
Her Section 225 And Section 18-110 Claims.
In Count IV, Haart seeks three declaratory judgments, largely mirroring her
claims under Sections 225 and 18-110:
a. Scaglia’s written consent purporting to remove Haart as a
director of EWG was and is unlawful and without legal effect;
b. The purported removal of Haart and installation of Barbieri as
the CEO of EWG was and is unlawful and null and void; and
c. Haart remains a director of EWG, and that actions taken without
proper notice to Haart, proper voting, or otherwise material
compliance with the Company’s corporate governance were and
are unlawful and null and void.231
These declarations mostly rehash Haart’s Counts I and II. For the same reasons
Haart is not entitled to relief in Counts I and II, she is similarly not entitled to
declaratory judgments stating Scaglia’s actions were invalid. As to Count IV’s
additional requested declaration that Haart was not validly removed as an EWG
director, Freedom’s written consent as EWG’s sole and managing member removing
Haart as an EWG director was effective because Scaglia had control over Freedom.
Judgment is entered for Scaglia on Count IV.
231
Am. Pet. ¶¶ 124(a)–(c).
49
F. Haart Is Not Entitled To Relief Under 8 Del. C. § 226 Because
Freedom Is Not Deadlocked.
Count III seeks an order appointing a custodian to manage Freedom under
Section 226(a).232 “Appointing a receiver for a solvent corporation is a radical
remedy and should only be taken when the petitioning party has rather plainly shown
his entitlement to it.”233
Haart argues a custodian should be appointed over Freedom because Haart
and Scaglia each own fifty percent of its stock and it is thus hopelessly deadlocked.
As I have explained, Haart does not own fifty percent of Freedom’s preferred shares,
so voting control over that entity is not evenly split. Because Freedom is not
deadlocked,234 Haart is not entitled to relief under Section 226. Judgment is entered
for Scaglia on Count III.
III. CONCLUSION
For the foregoing reasons, judgment is entered in Scaglia’s favor on Counts I
through IV of Haart’s Amended Petition and on his counterclaims. The parties shall
232
Id. ¶¶ 115–21.
233
In re Seneca Invs. LLC, 970 A.2d 259, 265 (Del. Ch. 2008) (internal quotation marks
omitted) (quoting Giancarlo v. OG Corp., 1989 WL 72022, at *3 (Del. Ch. June 23, 1989).
234
See 2 David A. Drexler et al., Delaware Corporation Law and Practice § 30.01, at 30-
1 (2021) (defining deadlock as “the inability of the directors or stockholders to function
effectively because of dissension among evenly divided interests.”); see also Mehra v.
Teller, 2021 WL 300352, at *17–19 (Del. Ch. Jan. 29, 2021) (discussing different meanings
of the word “deadlocked”).
50
confer on a plan to advance Haart’s Count V and submit a proposed schedule to the
Court within twenty days. Each side will bear its own costs.
51