Delaware Supreme Court Invalidates Board Meeting “Ambush”

Alex Bäcker did not like to wait in line.  Nor did he want to give up control of the company he co-founded and led, QLess, which produces a “virtual queue management system that reduces the time that retail customers must wait in line for services.”  The Delaware Supreme Court’s rejection of Bäcker’s apparent subterfuge in an effort to maintain that control is a reminder that director actions are subject to equitable review.

As recounted in the Delaware Supreme Court’s recent decision in Bäcker v. Palisades Growth Capital II, L.P., QLess’s board removed Bäcker as CEO following an internal investigation into his workplace conduct.  Bäcker is alleged to have acted “increasingly withdrawn and unhinged, either totally absent and disconnected or hyper micromanaging and combative.”

After initially fighting to maintain his role as CEO, Bäcker “eventually relented” and seemed to offer support for his successor, Kevin Grauman.  But in a plot worthy of “Succession” (great show, highly recommended), Bäcker then “devis[ed] a secret counter agenda to fire Grauman and lock-in” his control of the company.

Specifically, on the eve of the scheduled board meeting in which Grauman would be appointed CEO, the company’s sole independent director resigned giving Bäcker a board majority.  The board had previously circulated a resolution that would appoint a new director at the outset of the board meeting, thereby preventing Bäcker from taking “aggressive action” that certain board members feared he would take.  Bäcker helped distribute this resolution and other board materials, while at the same time selectively sharing a set of “alternative resolutions.”

One of the board members initially told Bäcker that he would not attend the meeting, and thus deprive it of a quorum, if Bäcker did not sign a board consent adopting the original resolutions.  Nonetheless, that director eventually attended the meeting without Bäcker’s signature, falsely believing that Bäcker would continue to support Grauman.  At the meeting, Bäcker executed the counter agenda, firing Grauman and hiring himself as CEO and CFO and appointing himself to an open board seat.

Palisades Growth Capital, the majority owner of QLess’s preferred stock, commenced a lawsuit in the Court of Chancery, seeking to reverse Bäcker’s actions.  The Court of Chancery sided with Palisades after a bench trial, holding that “even if technically legal, the board’s actions were invalid as a matter of equity because [Bäcker] affirmatively deceived a fellow director to establish a quorum.”

On appeal, the Supreme Court considered whether the trial court erred by (i) relying on an erroneous interpretation of evidence regarding Bäcker’s “deception,” (ii) imposing an “equitable notice” requirement for a regular board meeting, (iii) applying a rule to a regularly-scheduled board meeting that was intended only to apply to special meetings, and (iv) finding a de facto breach of a stockholder voting agreement.  The Supreme Court ruled as follows:

First, with respect to whether Bäcker engaged in affirmative deception, the Court first held that a “clear error” standard applied because the question was one of fact, not law.  The Court then rejected Bäcker’s argument that the trial court erred in finding that Bäcker falsely represented his support for Grauman’s appointment.  (This included, among other things, Bäcker’s assertion that the trial court improperly interpreted an email using the term “bod” to mean the Company’s board of directors, as opposed to a listserv that included the directors; the Court found that the trial court’s interpretation may have been imprecise, but that it was at most harmless error.)

Second, the trial court had held that Bäcker’s “ambush” was inequitable because, had the truth of Bäcker’s motives been known, one of the directors would have chosen not to participate in the board meeting and would thereby have defeated a quorum and “thwart[ed] the coup.”  Bäcker argued on appeal that this effectively created a “notice” requirement that is contrary to Delaware law.  The Court rejected this argument, noting that Bäcker’s wrongful conduct involved an affirmative misrepresentation of his support for Grauman, not a mere failure to provide notice of the agenda for the board meeting.

Third, Bäcker argued that rules against deception apply only to special meetings, not regularly-scheduled meetings.  As asserted by Bäcker, “[a] director cannot be deceived into attending a regular meeting for purposes of voiding action taken at the meeting.”  The Court disagreed “that equity provides no remedy where a director has the misfortune of being tricked into attending a regular, as opposed to special, board meeting.”

The Court also rejected the argument that the deceived director, by remaining and participating at the board meeting, precluded invalidation of the actions taken at that meeting.  Notably, the Court acknowledged case law suggesting that this argument may have merit, but found that Bäcker had waived it by failing to raise the argument with the trial court.

Fourth, and finally, the Court rejected Bäcker’s argument that the trial court had improperly used its equitable power where a contract – specifically, a voting rights agreement – governed the parties’ rights and obligations.  The Court found that the trial court’s award related to Bäcker’s deceptive conduct as a director, not as a stockholder.

The Supreme Court ultimately affirmed the trial court’s opinion in its entirety.  It is interesting, however, that despite the trial court’s finding that Bäcker had affirmatively deceived his fellow directors, it took the waiver of a critical argument to seal his fate.  We will see if this is the end of the line for Bäcker, but in the meantime this is also a good reminder that the Court of Chancery is a court of equity; what works on “Succession” won’t necessarily fly in The First State.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.