Fake Corporate Records, No Control: Court of Chancery Rejects Control Claim Under Section 225

In Berg v. Bar Lavi, the Delaware Court of Chancery rejected a claim of control in a Section 225 proceeding where the plaintiff relied on documents the Court found were fabricated. After trial, the Court concluded that the purported stock ledger and written consent were not authentic and could not establish ownership. Instead, the Court looked to forensic evidence and the parties’ conduct over time to determine whether the plaintiff had proven that he owned or controlled the company. The takeaway: corporate records carry weight in control disputes only if they are credible.

The case arose out of a failed business relationship involving a company that marketed tracking devices. The plaintiff claimed that he had been issued all the company’s shares at formation and had documentation to prove it. Years later, after the relationship deteriorated, he relied on those documents to remove the existing directors and appoint himself in their place.

At trial, the Court credited expert testimony showing that the supposed formation documents had been created using a later document as a template. Differences in font, formatting, and text appearance indicated that key provisions, including those granting ownership to the plaintiff, were added after the fact. The metadata was not persuasive. The Court found that it could have been manipulated and did not reliably establish when the documents were created. On that record, the documents were not treated as contemporaneous or reliable evidence of ownership.

The plaintiff’s own conduct over time pointed in the same direction. He had signed agreements, reviewed financial materials, and communicated with third parties on the understanding that another entity owned the company. He did not claim personal ownership until shortly before filing suit. The Court viewed those contemporaneous statements as more credible than documents that surfaced only when control became contested.

There was also a basic problem with the company’s formation. The certificate of incorporation did not name any initial directors, and the incorporator never held an organizational meeting or acted by written consent to elect them. As a result, the defendant could not have validly acted as the company’s sole director to issue stock to the plaintiff, even if the disputed documents had otherwise been genuine. That corporate-process defect provided an independent reason the ownership claim could not succeed.

Once the plaintiff’s claim to ownership was determined invalid, the Court also determined that the plaintiff lacked authority to remove directors, his written consents were ineffective, and that he lacked standing to pursue the Section 225 claim because he was neither a stockholder nor a director of the company. Defendants were awarded 50% of their reasonable attorney’s fees and costs incurred in the litigation.

A few practical points come out of the decision.

• Corporate records are not self-proving. Stock ledgers and written consents can be central in control disputes, but only if they can be trusted. If there are legitimate questions about authenticity, the Court will examine how the documents were created.
• Technical evidence can be outcome-determinative. Formatting inconsistencies, document comparisons, and metadata analysis may carry significant weight when assessing the validity of one’s claim.
• Course of conduct matters. How ownership is reflected in agreements, financial statements, and communications over time can be more persuasive than documents produced later.
• Basic corporate formalities should not be overlooked. Failing to follow formation requirements can create issues that surface years later in litigation.

Berg v. Bar Lavi shows that control disputes may not be resolved by documents alone. Those documents, and the surrounding record, must withstand scrutiny.

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