Applied Energetics, Inc. v. Farley

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

APPLIED ENERGETICS, INC., a Delaware )
Corporation, )
)
Plaintiff, )
)
v. ) C.A. No. 2018-0489-JTL
)
GEORGE FARLEY, an individual, and )
ANNEMARIECO., LLC, a New Jersey )
limited liability company, )
)
Defendants. )

OPINION

Date Submitted: July 23, 2020
Date Decided: August 3, 2020

Jason C. Jowers, Elizabeth A. Powers, BAYARD, P.A., Wilmington, Delaware; Patricia
A. Winston, Ian D. McCauley, Kathleen A. Murphy, Kirsten A. Zeberkiewicz, MORRIS
JAMES LLP, Wilmington, Delaware; David A. Robinson, Benjamin P. Pugh,
ENTERPRISE COUNSEL GROUP, A LAW CORPORATION, Irvine, California;
Counsel for Plaintiff.

Kathleen M. Miller, SMITH, KATZENSTEIN & JENKINS LLP, Wilmington Delaware;
Ryan J. Whalen, GUSRAE KAPLAN NUSBAUM PLLC, New York, New York; Counsel
for Defendants.

LASTER, V.C.
 Plaintiff Applied Energetics, Inc. (the “Company”) has sued George Farley, its

former director and principal executive officer, and AnneMarieCo, LLC, an entity owned

by Farley’s wife and children. The Company has asserted a variety of claims based on

actions Farley took to issue himself twenty-five million shares of common stock and grant

himself an annual salary of $150,000 per year. Farley has filed counterclaims against the

Company for breach of contract, for unjust enrichment, and to validate his actions under

Section 205 of the Delaware General Corporation Law (the “DGCL”), 8 Del. C. § 205.

This court previously issued a preliminary injunction barring Farley and AnneMarieCo

from transferring their shares pending the final disposition of this litigation. See Applied

Energetics, Inc. v. Farley (Injunction Decision), 2019 WL 334426 (Del. Ch. Jan. 23, 2019,

revised Jan. 24, 2019).

The Company has moved for partial summary judgment. First, the Company

contends that Farley lacked authority to issue himself twenty-five million shares and grant

himself an annual salary of $150,000 per year. When Farley purported to take those actions,

he was the Company’s sole remaining director. At the time, the board had three seats.

Consistent with the default rule under Section 141(b) of the DGCL, 8 Del. C. § 141(b), the

Company’s bylaws required that a majority of the total number of directors be present at a

meeting to constitute a quorum. As a matter of Delaware law, Farley could not validly take

the challenged actions as the sole remaining director on a board with three seats. He could

not take the challenged actions at a meeting because he could not satisfy the quorum

requirement, and he could not bypass the quorum requirement by taking action by written
consent as the sole remaining director. Farley’s actions as the sole remaining director were

invalid, and the Company’s motion for summary judgment on this issue is granted.

Second, the Company contends this court lacks the ability under Section 205 of the

DGCL to validate Farley’s otherwise invalid acts. Under Section 205, the court has the

power to validate a defective corporate act that was within the power of the corporation to

take but which failed for lack of proper authorization. In its principal argument, the

Company contends that because Farley was the sole director on a board with three seats,

the corporation lacked the power to take the actions in question. This contention

misunderstands the distinction between the absence of corporate power and a failure of

authorization. The question of corporate power refers to the ability of the corporation as an

entity to engage in a particular act, regardless of what steps may be necessary to properly

authorize that act. The question of authorization refers to whether the appropriate

combination of intra-corporate actors—viz., the officers, board of directors, or

stockholders—took the proper steps to authorize the entity to exercise corporate power in

compliance with the requirements of the DGCL and the corporation’s constitutive

documents. Here, the Company had the corporate power to issue shares and compensate

its officers and directors. Farley’s attempts to cause the corporation to take those actions

failed because of defects in authorization. His acts therefore can be validated under Section

205. The Company’s motion for summary judgment on this issue is denied.

Third, the Company asserts that Farley could not have caused the Company to agree

to pay him an annual salary of $150,000, and therefore judgment should be entered in its

favor on his claim for breach of contract. This aspect of the Company’s motion rises and

2
falls based on whether the court can validate Farley’s decision to grant himself a salary.

The court has the power to validate that act, so the Company’s motion for summary

judgment on this issue is denied.

Fourth, the Company seeks summary judgment on Farley’s claim for compensation

under a theory of unjust enrichment. When the record is construed in Farley’s favor, there

is evidence which could support an award under a theory of quantum meruit. The

Company’s motion for summary judgment on this issue is denied.

I. FACTUAL BACKGROUND

The facts are drawn from exhibits submitted in connection with the Company’s

motion for partial summary judgment.1 The evidence is viewed in the light most favorable

to Farley and AnneMarieCo as the non-movant defendants, who receive the benefit of all

reasonable inferences.

Because of this standard, the facts as described in this decision differ substantially

from the factual record as described in the Injunction Decision. When issuing that decision,

the court could weigh evidence and choose among competing inferences when determining

whether the Company had satisfied the requirements for issuing a preliminary injunction.

The current procedural posture does not permit the court to weigh evidence or decide

1
The evidentiary record is relatively limited. The Company submitted thirty-nine
exhibits, and the defendants submitted seventy-eight. See Dkts. 212, 237, 244. Citations in
the form “Ex. — at —” refer to these documents.

3
among competing inferences. As a result, the facts as set forth in this decision largely

reflect the defendants’ side of the story.

A. The Company

The Company is a Delaware corporation headquartered in Tucson, Arizona.2

Founded in 2002 in response to the terrorist attacks on 9/11, the Company markets,

develops, and manufactures products for the defense and security industry.

On March 18, 2004, the Company went public through a reverse merger with a still

listed but otherwise defunct shell corporation. In connection with that transaction, the

number of directors who served on the board was expanded from five to six.

Farley joined the board as the sixth director. Ex. 15 at 13 (“Farley Dep.”). When he

joined, Farley had approximately forty years’ experience as a certified public accountant.

In 1962, he started working for a predecessor to the accounting firm now known as BDO

USA, LLP. He became a partner in 1972. While at BDO, he specialized in complex

financial transactions and advised on more than 100 initial public offerings. He established

the firm’s valuation practice, served as the national director of the firm’s mergers and

acquisitions practice, and managed the Philadelphia office. In 1995, he left BDO to become

the chief financial officer of Talk.com, Inc., where he also served as a director. Beginning

in 1999, Farley operated an independent consulting practice advising public and private

2
The Company was originally named Ionatron, Inc. For simplicity, this decision
ignores the name change.

4
companies, and he has served as a director and audit committee member for a number of

firms. See Ex. 21 at 31; Ex. A ¶¶ 3–5 (“Farley Decl.”).

B. The Company’s Roller-Coaster Ride

The Company initially enjoyed success. Starting in 2003, it received federal funding

that it used to develop intellectual property for laser-guided-energy applications. The

Company also developed intellectual property for its direct-discharge-electrical

technology, which it used to develop an anti-mine device. In May 2006, approximately two

years after the reverse merger, the Company’s stock price peaked at $14.24 per share,

giving the Company a market capitalization of nearly one billion dollars. Soon after that,

the stock price plummeted, and by December 2006, the Company’s stock was trading

around $4.00 per share. Over the next two years, the Company’s stock price continued to

decline, and by December 2008, the Company’s stock price was trading around 30¢ share.

In 2009, the Company’s laser failed to meet government specifications, and the

government cut the Company’s funding for its laser-guided-energy applications. In March

2010, the Company’s common stock briefly traded over a dollar. During that year, the

government cut the Company’s funding for its direct-discharge-electrical technology. In

December 2010, one of the Company’s six directors resigned, and the board did not appoint

a replacement.

In 2011, the Marine Corps cancelled its contract for the anti-mine device, leaving

the Company without any sources of revenue. The Company attempted unsuccessfully to

transition to the commercial market. By December 2011, the Company’s stock was trading

for less than 10¢ per share. In January 2012, the Company delisted from Nasdaq.

5
 During a meeting of the board on July 9, 2012, one of the directors suggested that

the Company could limit expenses by reducing the size of the board from six to three. The

Company’s bylaws do not fix the number of directors but rather state that the number “shall

be . . . fixed by resolution of the Board.” Ex. 1 art. IV § 3.

A set of unsigned minutes for the meeting on July 9, 2012, states that the board

adopted the following resolutions:

RESOLVED, that Mark Lister be, and hereby is appointed Chairman of the
Board; and [be it] further

RESOLVED, that the Board accept[s] the resignation [of James] Feigley
and [James] Harlan effective at the close of business on July 9, 2012; and [be
it] further

RESOLVED, that the Audit, Nominating and Governance, Compensation
and Strategic Planning Committee of the Board of Directors be suspended
and that the activities previously conducted through such committees be
conducted by the Board of Directors; and [be it] further

RESOLVED, that George Farley be moved from Class II and [sic] Class III
with his term to expire at the 2013 annual meeting of shareholders and Mr.
Lister be moved from Class I to Class II, with his term expiring at the 2015
annual meeting of shareholders and, in each case, a successor being duly
appointed.

Ex. 2 at 2. The board resolved that Farley and John Levy, the other remaining member of

the board, would receive directors’ fees of $50,000 per year. As chairman, Lister would

receive a fee of $63,750.

Although it was the board’s practice to review and approve minutes at the next

meeting, the minutes of the meeting on July 9, 2012, remained unsigned. See id.; Ex. F at

19–20 (“Levy Dep.”). Everyone appears to have acted as if the resolutions were effective.

6
 Over the next two years, the board tried to sell the Company’s patents, but third

parties did not see any value in the Company’s intellectual property. The board also tried

to market the Company as a candidate for an entity seeking to go public through a reverse

merger, but that option was unattractive because it would trigger a change-of-control

payment of $25 per share to holders of the Company’s Series A Redeemable Convertible

Preferred Stock (the “Preferred Stock”).

By the third quarter of 2014, the Company had a book value of roughly $160,000.

According to the Company’s unaudited financial statements for the period ended

September 30, 2014, the value of the Company’s assets totaled $594,708 and consisted of

primarily cash and patents with nominal value. The Company’s liabilities totaled $433,708.

On August 19, 2014, the board determined that the Company would stop paying

directors’ fees as of August 31, 2014. Ex. 8. The board suspended the Company’s business

activities and opted to continue as a shell company under Rule 12b-2 of the Securities

Exchange Act of 1934. To qualify as a shell company under Rule 12b-2, the company must

have (i) no or nominal operations, and (ii) either (1) no or nominal assets, (2) assets

consisting solely of cash and cash equivalents, or (3) assets consisting of cash and cash

equivalents plus nominal other assets. See 17 C.F.R § 240.12b-2.

Stephen Hayden was the Company’s principal executive officer. Since 2012, he had

also served as the Company’s principal financial officer and principal accounting officer.

In August 2014, the board determined that going forward, Hayden would be compensated

at $250 per hour, up to a maximum of ten hours per month.

7
C. Farley Becomes The Company’s Sole Director And Officer.

In February 2015, Hayden resigned. For his services during 2014, the Company paid

him $107,500.

During a meeting of the board on March 2, 2015, Lister resigned. Farley and Levy

appointed Farley to the positions of principal executive officer and principal financial

officer. Ex. 9 at 1; Ex. J at 2. Farley’s responsibilities included maintaining the Company’s

listing with the SEC, signing and filing its periodic reports, preserving and protecting its

assets, and examining business opportunities. Ex. J; Farley Decl. ¶ 11.

Farley testified that he expected to be compensated for his services as an officer. He

understood that the Company did not have the money to pay him and expected to be paid

if and when the Company obtained the funds. Farley Decl. ¶ 13. He believed that the terms

of his compensation were the same as Hayden’s—$250 per hour for a maximum of ten

hours per month. Farley Dep. 83.

Farley testified that during June and July 2015, he worked approximately ten hours

per week. His tasks included maintaining the Company’s financial reporting system,

preparing financial reports for the SEC, meeting with potential buyers, having discussions

with a potential licensee of Company patents, and having discussions with Levy about the

Company’s path forward. Id. at 38–39.

As of September 30, 2015, the Company had a cash balance of $216,947. In

November 2015, to make a reverse merger more attractive for the Company’s common

stockholders, the Company repurchased 93,750 shares of the Preferred Stock from two

holders. The liquidation preference of each preferred share was $28.48, but the Company

8
paid a total of $57,500, or 61¢ per share. After the repurchase, only 13,602 shares of

preferred stock remained outstanding. The transaction implied a value for the Company’s

common stock of $0.0002 per share. Farley Decl. ¶ 19; see Ex. WWW; see also Ex. Q at

13; Exs. R, U.

Farley testified that during the weeks leading up to the repurchase, he spent over 20

hours per week on the Company’s business. After the repurchase, he began working 40

hours a week. Among other things, he sought to re-engage with Steven McCahon, one of

the Company’s founders who had served as its chief technology officer. See Farley Dep.

197; Ex. CC at 14 (“McCahon Dep.”). McCahon owned a scientific advisory firm called

Applied Optical Services, Inc. (“Applied Optical”), and McCahon and Farley discussed

having the Company acquire Applied Optical. Farley Decl. ¶ 16; McCahon Dep. 14, 18.

The other remaining director, Levy, was not optimistic about the Company’s

prospects. He believed the Company should stop spending money to maintain its patents

and allow them to lapse. He also believed that the Company should stop filing reports with

the SEC and give up its registration. He thought the Company should shut down entirely

and close its books.

In January 2016, Farley met with Levy and the Company’s outside counsel. Farley

reported on a plan to work with McCahon to reactivate the Company’s business. During a

follow-up call, Farley said that he planned to issue five million shares each to Levy and

himself as compensation for their efforts. Farley Dep. 42–44.

Levy disagreed with Farley’s plan to reactivate the Company. Id. at 44–45. Levy

also disagreed with Farley’s plan to issue shares. See Ex. 6; Levy Dep. 41–45. Farley

9
disputes whether Levy disagreed with his plan to issue shares, citing evidence that he had

not yet determined how many shares to issue to Levy or himself. See Ex. Y at 2.

On February 10, 2016, Levy resigned, leaving Farley as the sole director. There is

a dispute of fact about whether Levy resigned on January 29, 2016, but it is not material.

The Company’s outside counsel also resigned, citing the Company’s financial condition.

Farley Dep. 57. The defendants cite evidence indicating that before resigning, the

Company’s outside counsel never raised any issue about Farley’s authority to act as the

sole remaining director. See Ex. D at 47–48 (“Mittman Dep.”).

Farley tried to find a second director. He asked McCahon, who declined. He asked

Hayden, who declined. So did another former director, another former Company officer,

another former Company employee, and a retired admiral who had been involved with the

Company during its early stages. See Farley Decl. ¶ 32.

D. The Reactivation Plan

Farley and McCahon decided that the Company would contract with Applied

Optical to assemble a scientific team and develop new technologies based on the

Company’s patent portfolio. Farley needed a way to pay McCahon, because the Company

had less than $100,000 in cash. Farley Dep. 50; see McCahon Dep. 17–24; see Ex. G. at

8–9, 124–25 (“Hayden Dep.”); Ex. SSS 175 (“Schultz Dep.”). Farley and McCahon agreed

that the Company would issue shares of common stock to McCahon and accrue cash

compensation for him at a rate of $150,000 per year, payable once the Company had

sufficient funds. See Ex. RRR.

10
 Farley believed that the Company also needed to pay its patent counsel to maintain

its patent portfolio. Farley decided to compensate patent counsel with shares as well. Farley

also decided to pay the Company’s accountant with shares. Farley Dep. 71, 73; see Ex. DD

at 134–137 (“McCommon Dep.”). In addition, Farley decided to issue stock to Christopher

Rahne, a long-time associate who was an expert in valuation, was “very well connected in

the private equity and hedge fund arena,” and had helped the Company in “negotiations

with some of the financing sources.” Farley Dep. 72–73.

Finally, Farley decided to issue shares to himself. He also decided to pay himself

compensation, both retroactively and prospectively.

E. Farley Works With Stein Riso.

During early February 2016, Farley caused the Company to retain Stein Riso Mantel

McDonough, LLP as its corporate counsel. Dennis Stein had acted as Farley’s personal tax

attorney for a number of years and had occasionally provided tax services to the Company.

Farley asked Stein to join the board, but he declined.

Stein’s firm would not work for the Company without a retainer. Ex. Z at 21–23

(“Stein Dep.). Stein and Farley negotiated the terms of a retainer paid in stock over the

course of several phone conversations, and Farley agreed to issue ten million shares of

common stock to Stein Riso. See id. at 35–36, 134–37; Ex. 4. At the time, the Company’s

stock was trading at approximately $0.003 per share. Ostensibly for tax purposes, Stein

demanded that the price be set at $0.001 per share. Farley Decl. ¶ 24; Stein Dep. 32–33,

41–42. Both Farley and Stein testified that they believed the value of the Company’s stock

11
was less than $0.001 per share, citing the Company’s status as a shell company and the

restrictions on the ability to sell shares. See Farley Dep. 67–68; Stein Dep. 29–38, 80–81.3

In preparing the documentation for the issuance, Farley sent Stein Riso “minutes

authorizing the issue of shares to [Stein Riso] and others.” Ex. EE at 2. Stein Riso replied:

1. If the board consists of only one person, then the form of your board
minutes would be OK. If there is more than one board member, then all board
members should sign a written consent, unless you properly called a board
meeting.

2. In terms of the content of the minutes, I have not reviewed all the
boilerplate language carefully but, in my view, a board authorization
concerning the issuance of shares should also address: (a) the price of the
shares; (b) the number of shares; and (c) the specific recipients.

Id. at 1. Farley responded: “I am the only board member. I can use par value as the price

per share since it approximates FMV. Will insert the names of the recipients and number

of shares. I am attaching a consent for the issuance of my shares.” Id.

Farley’s work with Stein Riso resulted in two documents. The first was titled

“Written Consent of Board of Directors,” dated February 15, 2016, and signed by Farley

as “the sole member of the Board.” Ex. 4 at 1, 4. This decision refers to it as the “Board

Consent.”

The Board Consent recited that the board had resolved to

offer and issue to the following named individuals or entities . . . (the
“Purchasers”), pursuant to the terms of subscription agreements

3
The Company cites evidence which, if credited, could support a finding that the
shares were not valued in good faith. See Exs. 29, 30; Farley Dep. 161. In the Injunction
Decision, the court could weigh this evidence and concluded there was little basis for using
a valuation of $0.001 per share. 2019 WL 334426, at *8.

12
 (“Agreements”) to be entered into between the Corporation and the
Purchasers, on a private basis (the “Offering”), of the number of Shares
identified below at a price of $0.001 per Share, in exchange for services
provided or to be provided to the [Company], as indicated in the respective
Agreements to be entered into with the Purchaser . . . .

Steven McCahon for technical services – 20,000,000 Shares;

Stein Riso Mantel McDonough, LLP for legal services – 10,000,000
Shares;

Stephen McCommon for accounting services – 2,000,000 Shares; and

Christopher Rhane for valuation services – 1,000,000 Shares.

Ex. 4 at 1–2. The Board Consent also stated that “Farley, the Chief Executive Officer of

the Corporation, hereby is granted as part of the Offering 20,000,000 Shares for past

services as a Director and Chief Executive Officer of the Corporation.” Id. at 2.

The second document resulting from Farley’s work with Stein Riso was titled

“Unanimous Consent of the Compensation Committee of the Board of Directors to Action

Taken Without a Meeting,” dated February 15, 2016. Ex. 6-1. It was signed by Farley as

“Chairman” and “the sole member of the Compensation Committee.” Id. This decision

refers to it as the “Committee Consent.”

The Compensation Committee was not active at that time. During the meeting of

the board on July 9, 2012, the directors had resolved that the Compensation Committee “be

suspended and that the activities previously conducted through such committees be

conducted by the Board of Directors.” Ex. 2 at 2. The record for purposes of the motion for

summary judgment contains no evidence of Farley attempting to reactivate the

Compensation Committee.

13
 According to the Committee Consent, Farley resolved to award himself “5,000,000

shares of common stock” under a “2004 Stock Incentive Plan.” Ex. 6-1. The reference to a

2004 Stock Incentive Plan was an error. The Company had created a stock incentive plan

for key employees in 2007, not 2004. See Ex. 7 (the “2007 Plan”). The 2007 Plan

authorized the Company to grant rights to a total of ten million shares, which could take

the form of stock options, restricted stock, deferred stock, or stock appreciation rights. See

id. §§ 1(t), 3, 8. A single employee could receive all ten million shares over the life of the

plan, but not more than four million shares in any single calendar year. See id. § 3. The

issuance of five million shares to Farley exceeded the annual limit.

The 2007 Plan provided that if it was administered by a committee, then the

committee had to have at least two members. See id. § 2. In the Committee Consent, Farley

purported to take action as the sole member of the Compensation Committee.

At some point after executing the Board Consent, Farley authorized the Company

to issue five million shares to the Company’s patent counsel. Ex. O at 30–32 (“Fettig

Dep.”). Farley contends that he issued these shares through a unanimous written consent

executed on March 11, 2016. See Dkt 174 ¶ 72 (the “Counterclaims” or “Ctrcl.”).4

4
The Company cites evidence suggesting that patent counsel did not ask for
compensation, only to be reimbursed for out-of-pocket expenses. See Fettig Dep. 34–37.
Farley also entered into a consulting agreement on behalf of the Company with McCahon
in which the Company agreed to issue twenty million shares and “accrue monthly
payments” to McCahon “at an annual rate of $150,000.” Ex. RRR § 2.

14
 When Farley purported to take these actions, the Company had 91,785,520 shares

of common stock issued and outstanding. The Board Consent, the Committee Consent, and

the issuance to patent counsel comprised another sixty-three million shares, bringing the

total number of issued and outstanding shares to 154,785,520. The Company’s certificate

of incorporation only authorized a total of 125 million shares.

To increase the number of authorized shares, Farley relied on an amendment to the

Company’s certificate of incorporation which the Company’s stockholders had approved

four years earlier, on April 10, 2012, but which the Company had never implemented. The

Board Consent resolved

that the authorized number of shares of Common Stock of the Corporation .
. . be increased from 125,000,000 Shares to 500,000,000 Shares pursuant to
the April 10, 2012 stockholder resolution that approved an amendment to the
Corporation’s certificate of incorporation to increase its authorized common
stock from 125,000,000 to 500,000,000 Shares at such time as the Board
determined that effecting such amendment would be in the best interests of
the Corporation and its stockholders. The Board believes that such
amendment is in the best interests of the Corporation and its stockholders and
hereby directs the Chief Executive Officer to file with the Secretary of State
of the State of Delaware a certificate of amendment to its certificate of
incorporation increasing our authorized common stock to 500,000,000
Shares.

Ex. 4 at 1.

F. Farley Works With Griffitts O’Hara.

Stein Riso recommended that Farley consult with additional counsel to ensure that

the Board Consent and Committee Consent were properly drafted. In March 2016, Farley

caused the Company to retain Mary O’Hara of Griffitts O’Hara LLP to opine on the validity

of the Committee Consent. See Ex. LL at 17–18, 33–37 (“O’Hara Dep.”). Her fee for this

15
work was $1,000. Id. at 29–30. O’Hara reviewed the Company’s records, including the

2007 Plan, the Board Consent, and the Committee Consent. Id. at 20–22, 45–52, 63–65.

After O’Hara’s review, Farley executed a document titled “Unanimous Consent of

the Compensation Committee of the Board of Directors to Action Taken Without a

Meeting,” dated March 25, 2016, and signed by Farley as “the sole member of the

Compensation Committee.” Ex. 6-2. This decision refers to it as the “Revised Committee

Consent.”

The Revised Committee Consent corrected the erroneous reference to a 2004 plan

by referring to the 2007 Plan. O’Hara did not catch the fact that Farley was being issued

more shares than the 2007 Plan permitted. She also did not catch the requirement that if

the 2007 Plan was administered by a committee, then the committee had to have at least

two members.

The Revised Committee Consent purported to award two million shares to the

Company’s accountant and one million shares to Rahne under the terms of the 2007 Plan.

As drafted, these issuances were in addition to the shares they received under the Board

Consent.

Meanwhile on March 21, 2016, the Company filed a Form 8-K disclosing that the

Company had amended its certificate of incorporation to increase the amount of authorized

shares from 125 million to 500 million. On March 22, 2016, Stein Riso issued a legal

opinion to the Company’s transfer agent stating that the Company could validly issue a

stock certificate to each recipient of shares. On March 28, 2016, Griffitts O’Hara issued a

16
legal opinion to the Company’s transfer agent stating that the shares contemplated by the

Revised Committee Consent “will be validly issued.” Ex. SS.

O’Hara never had any concerns about Farley’s authority to issue shares, and she

never raised any issue with Farley about his authority. See O’Hara Dep. 41–43; Farley

Decl. ¶ 15. Stein Riso never raised any issue with Farley about his ability to issue shares.

See Stein Dep. 48–51, 59, 69–71, 88–90.

G. The Company Discloses The Issuances.

On March 30, 2016, the Company filed its annual report for the year ended

December 31, 2015 (the “2015 Annual Report”). The Company disclosed that it was

“planning to reactivate its previous business activities.”5 The Company also disclosed that

in March 2016, “Farley was granted 5,000,000 shares of common stock under the 2007

Plan,” “two contractors were granted a total of 3,000,000 shares of common stock under

the 2007 Plan,” and “the Company sold 35,000,000 shares of its common stock to

[McCahon] and 20,000,000 common shares to [Farley] for $0.001 per share.” Id. at 7, F-

19; see id. at 18–19. Although not material to the outcome of this decision, the disclosure

appears to have mistakenly included the shares issued to Stein Riso and the Company’s

patent counsel in the total number of shares issued to McCahon.

5
Applied Energetics, Inc., Annual Report (Form 10-K) 1 (Mar. 30, 2016),
https://www.sec.gov/Archives/edgar/data/879911/000114420416091316/v435626_10k.ht
m.

17
 On March 31, 2016, the Company filed a current report on Form 8-K disclosing that

on March 30, 2016, 5,000,000 shares of common stock were issued to Farley under the

2007 Plan. The Form 8-K also reported that the Company had accrued $150,000 in

compensation for Farley, to be paid when the Company had sufficient funds. Ex. 5. As of

January 2016, the Company had begun accruing compensation for Farley at $12,500 per

month. Farley Dep. 81.

It is not clear whether Farley viewed his compensation as payment for his services

as an officer or as a director. The terms are more consistent with how the Company had

been paying its officers. In his declaration, however, Farley averred that he contemplated

being compensated as a director, explaining that “[w]hile [the Company] suspended

director’s [sic] fees in or about October 2014, I understood that the directors would receive

compensation for the time period they served without compensation if and when [the

Company] was able to do so.” Farley Decl. ¶ 27. For purposes of the current motion, the

distinction does not matter.

In April 2016, Farley decided to transfer some of his shares to a trust for his children.

On April 8, he sent a draft trust indenture to Stein Riso. On April 26, he gifted twenty

million shares to AnneMarieCo, a company owned by Farley’s wife and six children. For

purposes of the transfer, Farley used a valuation of $0.004 per share, reflecting the current

trading price.6

6
In the Injunction Decision, the court found that the Company had established a
reasonable likelihood of success on the claim that the gift of stock to AnneMarieCo was a

18
H. Stockholders Object To The Issuances.

Meanwhile, on April 5, 2016, Jim Hudgins called Farley and left a voicemail asking

to discuss the issuances. See Ex. XX; Ex. WW ¶ 4 (“Hudgins Decl.”). Hudgins was the

CEO of Superius Securities Group, Inc., a stockholder of the Company.

On April 12, 2016, Farley called Hudgins back, and they discussed Farley’s plan to

reactivate the Company. Hudgins told Farley that he “was troubled” by the issuances.

Hudgins Decl. ¶ 6. Four weeks later, Farley and Hudgins held a follow-up call, and Hudgins

reiterated his concerns. See Ex. ZZ.

Hayden had also called Farley. Hayden said that he “was disappointed with the

issuance because it diluted the existing shareholders.” Ex. VV ¶ 4 (“Hayden Decl.”). Farley

fraudulent transfer. 2019 WL 334426, at *10. The Company acknowledges that for
purposes of its motion for summary judgment, Farley’s intent is not at issue. See Dkt. 212
at 14–15. The defendants nevertheless attempted to respond to the court’s finding by citing
testimony from Stein that when Farley made the transfer, there did not appear to be any
threat of litigation over the issuances. Stein Dep. 91–95; Ex. TT. Farley also submitted a
declaration in which he described the transfer as part of the “regular pattern of conduct that
I have engaged in for approximately the last twenty years as an estate planning practice.”
Farley Decl. ¶ 25. And the defendants pointed out that McCahon also gifted shares to his
children. McCahon Dep. 86–90.

In the Injunction Decision, the court observed that when disclosing the transfer of
shares to AnneMarieCo, the Company initially failed to disclose the relationship between
Farley and AnneMarieCo. 2019 WL 334426, at *3. The propriety of the Company’s
disclosures is not at issue on this motion. The defendants nevertheless attempted to respond
to the court’s observation by citing O’Hara’s testimony that she advised Farley that the
Company filing only had to identify any beneficial owners of 10% or more of
AnneMarieCo who also lived in the same household as Farley. O’Hara Dep. 134–37; see
Ex. GGG. Farley’s wife owned less than 10% of AnneMarieCo, and the children were
grown and lived on their own. Farley also cited evidence supporting the inference that his
son, Matt Farley, controlled AnneMarieCo, not his wife. See Ex. HHH.

19
testified that he had discussed the issuances with Hayden before he took action, and Hayden

had not expressed any disapproval. Farley Dep. 100–01.

On January 13, 2017, Superius and three other stockholders sued Farley, claiming

that he breached his fiduciary duties by engaging in the stock issuances. Eight months later,

the action was dismissed without prejudice. See Superius Secs. Gp., Inc. v. Farley, 2017

WL 3919581, at *1 (Del. Ch. Sept. 6, 2017). The lawsuit did not contend that Farley lacked

authority to act as the sole remaining director.

In March 2017, the Company retained Griffitts O’Hara to assist with a Form S-1

Registration Statement and the Company’s annual report for the year ended December 31,

2016 (the “2016 Annual Report”). O’Hara reviewed the Company’s books and records,

including minutes dating back to 2012 and a questionnaire that Farley completed about the

Company’s directors and officers. See O’Hara Dep. 77–84, 94–98; Exs. CCC, DDD, EEE.

O’Hara believed Farley had authority to make securities filings as the Company’s sole

director. O’Hara Dep. 90–92, 94–98.

On April 25, 2017, the Company exited from shell-company status. On October 31,

2017, the Company filed a Form S-1 that registered 99,053,068 shares of Company

common stock for sale. At the time, the shares were trading over the counter at $0.03 per

share. The selling stockholders included AnneMarieCo, McCahon, members of

McCahon’s family, Hayden, and Stein Riso.

I. The Proxy Contest

Meanwhile, in September 2017, a group of Company stockholders approached

Farley with a different reactivation plan. They offered the Company a financing package

20
that was conditioned on Farley resigning and the Company repurchasing his shares. Farley

“refused to agree to any financing unless he remained on the Board and maintained his

then-existing salary.” Ex. 22 at 11.

The insurgent group solicited consents to remove Farley from the board and elect

three new directors. On March 8, 2018, the insurgent group delivered consents from

holders of 58% of the outstanding common stock. The consents removed Farley and filled

the three vacancies on the board with three new directors. The insurgent group’s proxy

materials did not contend that Farley lacked authority to act as the sole remaining director.

Farley subsequently resigned as principal executive officer. He observes that

between his appointment as principal executive officer and subsequent resignation, the

Company’s common stock price rose from $0.009 to $0.076 per share, an increase of

844%. Farley Decl. ¶ 33. Farley attributes the increase to his “efforts to reactivate [the

Company].” Id. Farley maintains that he was not paid all of the compensation he was due,

receiving only $69,500 out of approximately $300,000 in salary he believes he was owed

from March 2016 through March 2018. Farley Decl. ¶ 34.

J. This Litigation

On July 3, 2018, the Company filed this action against Farley and AnneMarieCo,

asserting claims for breach of fiduciary duty, aiding and abetting breaches of fiduciary

duty, conversion, and fraudulent transfer. The Company sought cancellation of the

defendants’ shares, an award of damages, and any other relief deemed fair or equitable.

The original complaint did not assert that Farley lacked authority to act as the Company’s

sole remaining director.

21
 As interim relief, the Company sought a preliminary injunction prohibiting Farley

and AnneMarieCo from transferring their shares. On January 23, 2019, Justice

Montgomery-Reeves, then a Vice Chancellor, granted the injunction. In the Injunction

Decision, she held that the Company had demonstrated a reasonable probability of success

on the merits of its claims that Farley (i) lacked authority to issue himself twenty-five

million shares, (ii) breached his duty of loyalty by issuing himself the shares and setting

his own compensation, and (iii) fraudulently transferred twenty million shares to

AnneMarieCo. See generally Injunction Decision, 2019 WL 334426, at *5–13.

After the issuance of the Injunction Decision, the Company filed the currently

operative complaint. It contains nine counts.

• Count I asserts that Farley breached his fiduciary duty of loyalty by engaging in
self-interested transactions, failing to appoint or have the stockholders elect
additional directors, executing the Board Consent, the Committee Consent, and
the Revised Committee Consent, entering into a stock subscription agreement
with the Company, directing the transfer agent to issue sixty-three million
shares, issuing stock at a valuation of $0.001 per share, failing to obtain an
independent valuation of the shares, and causing the Company to enter into a
consulting agreement with Applied Optical.

• Count II asserts that Farley breached his fiduciary duty of loyalty by causing the
Company to forego certain financing arrangements and enter into loans with
unfavorable interest rates, prepayment penalties, and redemption terms.

• Count III asserts that Farley breached his fiduciary duty of care when taking the
actions described in Count I.

• Count IV asserts that Farley breached his fiduciary duty of care when entering
into the loans described in Count II.

• Count V asserts that all of the actions Farley took in his capacity as the
Company’s sole director from February 10, 2016, through his removal on March
9, 2018, were invalid, including Farley’s issuance of twenty-five million shares
to himself and his compensation of $150,000 per year.

22
 • Count VI asserts that AnneMarieCo aided and abetted Farley’s breach of
fiduciary duty.

• Count VII asserts that Farley converted the Company’s corporate records.

• Count VIII asserts that Farley fraudulently transferred twenty million shares of
Company stock to AnneMarieCo.

• Count IX seeks an injunction prohibiting Farley and AnneMarieCo from
transferring, selling, registering, or otherwise disposing of any shares.

The Company also sued Stein Riso in the United States District Court for the Southern

District of New York, asserting claims for legal malpractice and aiding and abetting breach

of fiduciary duty.

On July 19, 2019, Farley and AnneMarieCo answered the Complaint and asserted

fifteen affirmative defenses. Farley asserted a counterclaim with four counts.

• Count I asserts that Farley caused the Company to agree to pay him an annual
salary of $150,000, that he is due at least $230,000, and that he is entitled to
recover for breach of contract.

• Count II asserts that Farley conferred benefits on the Company through his
actions as a director such that the Company would be unjustly enriched if Farley
was not awarded some form of damages.

• Count III asserts that Farley performed services for the Company with the
reasonable expectation of compensation such that the Company would be
unjustly enriched if Farley did not receive compensation for his services.

• Count IV asserts that the court should exercise its authority under Section 205
of the DGCL to validate the actions that Farley took between February 10, 2016,
and March 9, 2018, including Farley’s issuance of twenty-five million shares to
himself and his compensation of $150,000 per year.

AnneMarieCo joined in Count IV of the Counterclaims. During oral argument on the

motion for summary judgment, Farley’s counsel agreed that there was no appreciable

difference between Counts II and III of the Counterclaims.

23
 While the litigation was pending, the Company entered into a new consulting

agreement with McCahon. The Company agreed to pay him a consulting fee of $180,000

for the first year and $250,000 during each of the second and third years. In a section titled

“Further Considerations,” the parties reached the following agreements regarding

McCahon’s shares:

a. . . . In exchange for the consideration set forth in Section 4.b., below,
the Company agrees that [McCahon] shall be entitled to retain the 20,000,000
shares, and the Company agrees that it will not challenge the initial issuance
of such 20,000,000 shares to [McCahon] or any provisions of the Prior
Consulting Agreement.

b. The parties shall enter into a separate agreement pursuant to which the
Company shall purchase 5,000,000 shares of the 20 million shares referenced
in 4.a from [McCahon] at a price of $0.06 per share in alignment with recent
equity offerings conducted by the Company. . . .

c. The Company agrees to use its best efforts to have the restrictive
legend removed from the remaining 15,000,000 shares, so that they may be
transferred or sold without restriction . . . .

d. The parties agree that 5,000,000 shares of the 15,000,000 shares
referred to in Section 4.c. will be subject to a lock-up on their sale and should
be released from the lock-up at a rate of 5,000,000 / 36 = 138,889 shares per
month for the 36-month duration of this Agreement. . . .

Ex. 25 § 4.a, b, c, & d.

On December 6, 2019, Justice Montgomery-Reeves was elevated to the Delaware

Supreme Court, and the action was reassigned.

II. LEGAL ANALYSIS

The Company has moved for partial summary judgment on Count V of the

Complaint and on Counts I–IV of the Counterclaims. Summary judgment may be granted

only when “there is no genuine issue as to any material fact” and the “moving party is

24
entitled to a judgment as a matter of law.” Ct. Ch. R. 56(c). “The role of a trial court . . . is

to identify disputed factual issues whose resolution is necessary to decide the case, but not

to decide such issues. In discharging this function, the court must view the evidence in the

light most favorable to the non-moving party.” Merrill v. Crothall-Am., Inc., 606 A.2d 96,

99 (Del. 1992) (citation omitted). Summary judgment “must be denied if there is any

reasonable hypothesis by which the opposing party may recover, or if there is a dispute as

to a material fact or the inferences to be drawn therefrom.” Vanaman v. Milford Mem’l

Hosp., Inc., 272 A.2d 718, 720 (Del. 1970).

A. Count V Of The Complaint: The Validity Of The Actions Farley Took As The
Sole Remaining Director

In Count V of the Complaint, the Company asserts that the actions Farley took as

the sole remaining director after Levy resigned on February 10, 2016, until Farley’s

removal on March 9, 2018, were not properly authorized and therefore invalid. Although

the Company challenges all of Farley’s actions, it targets his issuance to himself of twenty-

five million shares and his approval of his own compensation of $150,000 per year. The

Company is entitled to summary judgment on this count.

1. Statutory Invalidity

The validity of the actions Farley took after February 10, 2016, until his removal on

March 9, 2018, turns on his ability to act as the sole remaining director. Although Farley

was the sole remaining director, the board had three seats, and the Company’s bylaws

required the presence of a majority of the total number of directors to constitute a quorum

for action at a meeting. As the sole remaining director, Farley could not meet the quorum

25
requirement and therefore could not take action at a meeting. Farley also could not act by

unanimous written consent without a meeting, because Delaware law requires that the

number of directors acting unanimously by written consent be sufficient to constitute a

quorum if the action was taken at a meeting. The actions Farley took as the sole remaining

director, including his approval of the Board Consent and the Revised Committee Consent,

are therefore invalid as a matter of law.

Section 141 of the DGCL provides that “[t]he business and affairs of every

corporation . . . shall be managed by or under the direction of a board of directors . . . .” 8

Del. C. § 141(a). A board of directors can take action in two ways. One way is through a

resolution adopted at a meeting. See id. § 141(b). Another is through unanimous action by

written consent without a meeting. See id. § 141(f). The same rules apply to committees.

See id. § 141(c)(4), (f).

To take action at a meeting, there must be a sufficient number of directors present

to constitute a quorum. Section 141(b) states that “[t]he vote of the majority of the directors

present at a meeting at which a quorum is present shall be the act of the board of directors

unless the certificate of incorporation or bylaws shall require a vote of a greater number.”

Id. § 141(b). The same provision states,

A majority of the total number of directors shall constitute a quorum for the
transaction of business unless the certificate of incorporation or the bylaws
require a greater number. Unless the certificate of incorporation provides
otherwise, the bylaws may provide that a number less than a majority shall
constitute a quorum which in no case shall be less than 1/3 of the total
number of directors.

26
Id. This oddly drafted couplet establishes a default rule under which a majority of the total

number of directors is required for a quorum, but where the number of directors required

for a quorum can be set higher or lower, although not lower than one-third of the total

number of directors. The “universal construction” of the phrase “total number of directors”

is “that it refers to directorships, not directors actually in office.” Crown EMAK P’rs LLC

v. Kurz, 992 A.2d 377, 400 (Del. 2010) (internal quotation marks omitted).

Under this statutory scheme, if the number of directors in office is less than the

number of directors necessary for a quorum, then the directors in office cannot take action

at a meeting. To address the resulting risk of deadlock, Section 223(a)(1) of the DGCL

authorizes “a majority of the directors then in office, although less than a quorum” or “a

sole remaining director” to fill vacancies.7 It is thus a matter of blackletter law that

“vacancies in the board reducing the number to less than a quorum of the number fixed by

statute or otherwise preclude action by the remaining directors other than to fill the

7
8 Del. C. § 223(a)(1) (“Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the stockholders having
the right to vote as a single class may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director.”). There are additional rules
for committees. The board may appoint additional members to the committee, or the board
may designate alternative members who may replace any absent or disqualified member.
See id. § 141(c)(1) & (2). In addition, “[t]he bylaws may provide that in the absence or
disqualification of a member of a committee, the member or members present at any
meeting and not disqualified from voting, whether or not the member or members present
constitute a quorum, may unanimously appoint another member of the board of directors
to act at the meeting in the place of any such absent or disqualified member.” See id. §§
141(c)(1) & (2). None of the special rules for committees applies in this case.

27
vacancies.” 2 Fletcher Cyclopedia of the Law of Corporations § 419, Westlaw (database

updated Sept. 2019).

A board or committee may also take action by unanimous written consent without

a meeting. Section 141(f) states that “any action required or permitted to be taken at any

meeting of the board of directors or of any committee thereof may be taken without a

meeting if all members of the board or committee, as the case may be, consent thereto in

writing, or by electronic transmission.” 8 Del. C. § 141(f).

Section 141(f) does not state explicitly that the number of directors executing the

written consent must be sufficient to satisfy a quorum, but that result is implicit in the

statutory reference to “any action required or permitted to be taken at any meeting.” For

action to be “taken at any meeting,” a quorum must be present, and a sufficient number of

directors must vote in favor of the action to be taken to satisfy the applicable voting

threshold. By statute, that voting threshold is a majority of a quorum, “unless the certificate

of incorporation or the bylaws require a greater number.” Id. § 141(b). When action is taken

without a meeting, Section 141(f) raises the voting threshold from a majority of a quorum

(or greater number as required by the charter or bylaws) to unanimity. Section 141(f) does

not dispense with the basic requirement that the number of directors acting unanimously

must be sufficient to constitute a quorum.

This interpretation finds support in other sections of the DGCL which authorize a

number of directors that is less than a quorum to act in special situations. The most obvious

is Section 223(a)(1). As noted, it authorizes “a majority of the directors then in office,

although less than a quorum” or “a sole remaining director” to fill vacancies or newly

28
created directorships See id. § 223(a)(1). Another example is the recently amended Section

110, which provides that during an emergency, the board of directors may adopt emergency

bylaws, operative during the emergency, “irrespective of whether a quorum of the board

of directors or a standing committee thereof can readily be convened for action.” H.B. 341,

150th Gen. Assem. § 4 (2020); see 8 Del. C. § 110(a). The provision further states that the

emergency bylaws may provide that the “director or directors in attendance at the meeting,

or any greater number fixed by the emergency bylaws, shall constitute a quorum.” 8 Del.

C. § 110(a). In the 2020 amendments, the General Assembly adopted Section 110(i), which

states that during any emergency condition, “the board of directors (or, if a quorum cannot

be readily convened for a meeting, a majority of the directors present) may” take action

that it determines to be practical and necessary to address the circumstances of such

emergency with respect to either a meeting of stockholders or a dividend that has been

declared as to which the record date has not yet occurred.8

Except for specific provisions that authorize action by directors comprising less than

a quorum in particular situations, the DGCL operates on the principle that the number of

directors taking action must always satisfy the requirement for a quorum. Once the quorum

requirement is met, a sufficient number of directors must approve the action to satisfy the

8
H.B. 341, 150th Gen. Assem. § 4 (2020). As noted, Sections 141(c)(1) and (c)(2)
authorize a corporation’s bylaws to provide that “the member or members present at any
meeting and not disqualified from voting, whether or not the member or members present
constitute a quorum, may unanimously appoint another member of the board of directors
to act at the meeting in the place of any such absent or disqualified member.” 8 Del. C. §
141(c)(1) & (2).

29
applicable voting threshold. For action at a meeting, the voting threshold is a majority of

the quorum (or a greater number if specified in the charter or bylaws). For action without

a meeting, Section 141(f) sets the requisite voting threshold at unanimity.

The defendants argue that as long as the remaining directors then in office acted

unanimously, even if less than a quorum, then Section 141(f) is satisfied. That

interpretation is contrary to the structure of the statute, and it would permit directors to act

by unanimous written consent even if they could not satisfy a quorum requirement and

therefore take action at a meeting. Id. § 141(f). It would also render superfluous provisions

like Section 223(a)(1) and 110(a). There would be no need to authorize the remaining

directors in those settings to take action, even though their number was less than a quorum,

because the remaining directors in office could simply act by written consent.

Section 141(f) is not a vehicle for directors to avoid the requirements of a meeting.

It is a vehicle for directors to use when they could satisfy the requirements for action at a

meeting but the consensus is unanimous and thus a meeting is unnecessary. “The policy

underlying board action by written consent is that ‘meetings should be required except

where the decision is so clear that the vote is unanimous and in writing.’”9 Meetings are

9
Solstice Cap. II, Ltd. P’ship v. Ritz, 2004 WL 765939, at *1 (Del. Ch. Apr. 6, 2004)
(quoting what is now 1 R. Franklin Balotti & Jesse A. Finkelstein, Balotti and Finkelstein’s
Delaware Law of Corporations and Business Organizations § 4.8[F] (3d ed. Supp. 2020-
2), Westlaw (database updated 2020)); cf. Ernest L. Folk, III, Review of the Delaware
General Corporation Law for the Delaware Corporation Law Revision Committee 1965–
67, at 61 n.2 (1964), https://delawarelaw.widener.edu/files/resources/folkreport.pdf (“It is
occasionally suggested that non-unanimous written consents should be as effective as
unanimous consents. On this theory, a written consent by a majority of directors would be

30
intended to provide directors with “forums in which ideas are exchanged and (hopefully) a

consensus reached.” Folk, supra, at 61 n.2. To further this policy, each director is entitled

to know when a board meeting is taking place (either as a regular meeting or as a properly

noticed special meeting), and action taken at a secret or improperly noticed meeting can be

invalidated in equity. See generally Klaassen v. Allegro Dev. Corp., 2013 WL 5967028, at

*4–17 (Del. Ch. Nov. 7, 2013).

The reason and principle underlying these decisions is this: Each member of
a corporate body has the right to consultation with the others and has the right
to be heard upon all questions considered, and it is presumed that if the absent
members had been present they might have dissented and their arguments
might have convinced the majority of the unwisdom of their proposed action,
and thus have produced a different result. If, however, they had notice and
failed to attend they waived their rights; likewise if they signed a waiver of
notice prior to the meeting . . . .10

The defendants’ interpretation would permit the remaining directors in office, although less

than a quorum, to avoid reconstituting the board and bypass meetings by taking action by

as effective as majority action taken at a duly called meeting. This could, however, raise
serious questions as to whether the non-consenting directors had received notice, whereas
unanimous written consent ipso facto proves notice actually received. Besides raising more
questions that it would solve permitting non-unanimous written consents would make
serious inroads upon the concept of meetings as forums in which ideas are exchanged a[n]d
(hopefully) a consensus reached.”).
10
Lippman v. Kehoe Stenograph Co., 95 A. 895, 11 Del. Ch. 80, 89 (Del. Ch. 1915)
(quoting Holcombe v. Trenton White City Co., 86 A. 618, 624 (N.J. Ch. 1912), aff’d, 91 A.
1069 (N.J. 1913)); see also In re Acadia Dairies, Inc., 135 A. 846, 847 (Del. Ch. 1927)
(noting that a director cannot act qua director by proxy); Lippman, 11 Del. Ch. at 85
(explaining that the reason a director cannot act by proxy is that “his associates are entitled
to his judgment, experience and business ability, just as his associates cannot deprive him
of his rights and powers as director”).

31
written consent. That approach runs counter to Delaware’s policy in favor of collective

deliberation and decision-making.

In this case, Farley purported to act as the sole remaining director. During the time

he acted, the board had three seats.11 The Company’s certificate of incorporation and

bylaws did not lower the default rule that a majority of the total number of directors was

necessary for a quorum. To the contrary, the Company’s bylaws provided that “[a]t all

meetings of the Board of Directors, the presence in person of a majority of the total number

of directors shall be necessary and sufficient to constitute a quorum for the transaction of

business . . . .” Ex. 1 art. VII § 3. As a result, a quorum required a majority of the total

number of directorships. For a board with three seats, a quorum required two directors, and

Farley could not meet it.

Farley therefore could not take action at a meeting because he could not meet the

requirements for a quorum. For the same reason, Farley could not take action by written

consent without a meeting.

The Board Consent was not validly approved by the unanimous consent of all of the

directors then in office at a time when the number of directors in office was sufficient to

11
There is arguably a dispute of fact as to whether the board had three or six seats,
because the minutes memorializing the resolution on July 9, 2012, to reduce the number of
directorships from six to three remain unsigned. The evidence that the board took that
action is sufficiently one-sided that the court could likely grant summary judgment on this
issue in any event, but the dispute is immaterial. In either case, Farley could not satisfy the
quorum requirement as the sole remaining director.

32
constitute a quorum for action at a meeting. The actions taken in the Board Consent were

therefore invalid, including Farley’s issuance of twenty million shares to himself.

For the same reason, Farley could not validly take action to approve his own salary.

Directors have the authority to set their own compensation. See 8 Del. C. § 141(h). And a

corporation has the power to pay suitable compensation to its officers and agents. See id. §

122(5). To take these actions, however, the board must have sufficient members to

constitute a quorum. As the sole remaining director, Farley could not satisfy the quorum

requirement.

The Revised Committee Consent was also invalid. There is no evidence in the

record that the Compensation Committee was ever reconstituted after the board suspended

its operations on July 9, 2012. As the sole remaining director, Farley could not satisfy the

quorum requirement, and he therefore could not reactivate or populate the committee.12

12
See id. § 141(b), (c)((1) & (2), & (f). Technically, the analysis at the committee
level is more nuanced because the voting standard that governs when a board takes action
regarding a committee depends on whether the corporation was formed before or after July
1, 1996. See id. § 141(c)(1). The default rule for corporations formed before July 1, 1996,
is that the vote of a majority of the whole board is required to “designate 1 or more
committees.” Id. The default rule for corporations formed after July 1, 1996, is that only a
majority of a quorum is necessary to designate a committee. Id. § 141(c)(2). The Company
was formed after July 1, 1996, but it went public through a reverse merger with and into
an existing shell corporation that was formed before July 1, 1996. See Ionatron, Inc.,
Current Report (Form 8-K) (Mar. 18 2004),
https://www.sec.gov/Archives/edgar/data/879911/000114420404003455/v02210_8-k.txt
(describing merger); see also Ex. FF (attaching the shell corporation’s original certificate
of incorporation filed on January 6, 1992); US Home & Garden Inc, Notification of Late
Filing (Form 12b-25) (Sept. 27, 1996),
https://www.sec.gov/Archives/edgar/data/879911/0000891554-96-000621.txt (shell
corporation’s filing with the SEC that reports of “its results of operations for the fiscal year

33
Farley was a member of the Compensation Committee before its operations were

suspended, but he was one of two members of the Compensation Committee; the other was

James Harlan.13 To conduct business under a standard that requires a majority of the

members for a quorum, a committee with two members needs the presence of both

members. As the sole remaining member of the Compensation Committee, Farley could

not satisfy the quorum requirement.

Farley also did not have authority under the 2007 Plan to award shares as the sole

member of a committee. The 2007 Plan provided that if a committee administered the plan,

then it had to have at least two members. See Ex. 7 § 2.

Farley’s issuance to himself of twenty-five million shares was therefore invalid. So

too was his determination to pay himself $150,000 per year. Summary judgment on these

issues is granted in favor of the Company.

2. An Implied Amendment To The Bylaws

To avoid the implications of the quorum requirement, the defendants argue that the

bylaws were amended implicitly, either to reduce the size of the board to one director or to

ended June 30, 1996” would be delayed). It therefore appears that the affirmative vote of
directors sufficient to constitute a majority of the whole board was required to re-activate
the Compensation Committee, rather than just a majority of a quorum. See Ex. FF
(attaching the Company’s certificate of incorporation and amendments, none of which alter
the requirement under 8 Del. C. § 141(c)(1)). The outcome is the same: Farley lacked
authority to act as the sole remaining director.
13
See Applied Energetics, Inc., Annual Report (Form 10-K) 24 (Mar. 29, 2012),
https://www.sec.gov/Archives/edgar/data/879911/000114420412018030/v307134_10k.ht
m.

34
keep its size at three and reduce the quorum requirement to one-third so that Farley could

take action by written consent. The defendants contend that “there is a triable issue of fact

as to whether [the Company’s] by-laws were implicitly amended to reduce the number of

directors seats to one; and/or to permit [Farley], as sole director, to act on behalf of the

board.” Dkt. 237 at 53. The defendants’ arguments only address board-level action. They

do not make any arguments regarding implied amendments for committee-level action. In

any event, their evidence is insufficient to create a material dispute of fact. Judgment on

this issue is granted in the Company’s favor.

“Ordinarily, a corporate by-law may be amended by implication and without any

formal action being taken by clear proof of a definite and uniform custom or usage, not in

accord with the by-laws regularly adopted, and by acquiescence therein . . . .” In re Ivey &

Ellington, Inc., 42 A.2d 508, 509 (Del. Ch. 1945); accord In re Osteopathic Hosp. Ass’n

of Del., 195 A.2d 759, 762 (Del. 1963); see also Star Loan Ass’n v. Moore, 55 A. 946, 946

(Del. Super. 1903). “[T]he course of conduct relied on to effect the change must have

continued for such a period of time as will justify the inference that the stockholders had

knowledge thereof and impliedly consented thereto.” Ivey & Ellington, 42 A.2d at 509;

accord Osteopathic Hops., 195 A.2d at 762.

By definition, bylaws can only be amended by implication through a course of

action by intra-corporate actors who otherwise would have the authority to amend the

bylaws. Under the Company’s certificate of incorporation, both the stockholders and the

board of directors had the authority to adopt, repeal, or amend bylaws. See 8 Del. C. §

109(a); Ex. FF attach. 1 art. VIII. Once Farley became the sole remaining director, he

35
lacked the authority to amend the bylaws, because he could not satisfy the quorum

requirement. His actions are therefore insufficient to support an amendment by implication.

Even if Farley had authority to amend the bylaws, his actions were insufficient to

create a material dispute of fact as to whether an amendment by implication took place.

Farley became the sole remaining director on February 10, 2016. He executed the Board

Consent five days later on February 15, 2016. He purported to execute the Revised

Committee Consent just thirty-nine days later on March 25, 2016. Neither period of time

was sufficient to create a dispute of material fact about a custom and practice or course of

conduct that could support an amendment by implication. And during these brief interim

periods, Farley did not engage in any actions that would have supported a constructive

amendment of the bylaws. The actions that the defendants cite occurred later, over the

subsequent two years. That course of conduct cannot retroactively amend the bylaws by

implication so that Farley could have taken the actions he immediately took after becoming

the sole remaining director.

Because Farley lacked authority as the sole remaining director to amend the bylaws,

the stockholders were the only intra-corporate actor with the power to amend the bylaws

between February 10, 2016, until March 9, 2018. The precedents on implicit bylaw

amendments consistently apply the doctrine to favor stockholder rights, not to favor

incumbent director rights. See, e.g., Dousman v. Kobus, 2002 WL 1335621, at *5 (Del. Ch.

June 6, 2002); Ivey & Ellington, 42 A.2d at 509; Belle Isle Corp. v. MacBean, 49 A.2d 5,

8 (Del. Ch. 1946) (Seitz, V.C.).

36
 Dousman illustrates this principle. There, the corporation’s bylaws required a two-

thirds majority of a quorum for stockholders to take action at a meeting. Dousman, 2002

WL 1335621, at *2. For three years, however, the corporation disclosed that stockholders

could take action with a simple majority of a quorum. Id. Stockholders assembled sufficient

proxies to remove the incumbent directors under a simple majority standard, but not under

the two-thirds standard. Id. at *3. The court found it reasonably conceivable that the board’s

conduct had amended the bylaws to eliminate the supermajority requirement and permit

the stockholders to act by a simple majority of a quorum. Id. at *4–5.

The court again favored stockholders in Ivey & Ellington. There, the corporation’s

bylaws provided for a board of three directors, but the controlling stockholders elected two

additional directors and seated a board of five. Ivey & Ellington, 42 A.2d at 508. Over the

next two years, the board met only four times. The controlling stockholders then notified

the directors that the bylaws only contemplated three seats. Id. at 509. The directors

declined to step aside, and in the ensuing litigation, argued that the bylaws had been

impliedly amended. Id. The court rejected this argument, explaining that “[w]here, as here,

but one inconsistent act is relied on and it does not appear that the stockholders were

actually aware of the by-law provision, an intent to amend is not demonstrated.” Id. at 510.

Finally, in Belle Isle, then-Vice Chancellor Seitz considered whether a corporation

had validly issued 75,000 shares of common stock at a board meeting held in 1944. 49

A.2d at 7. In 1939, the stockholders had increased the number of directors from seven to

ten. Id. No additional directors were ever appointed, and only four of the seven directors

in office attended the meeting in 1944. Id. at 8. The court held that the issuance was invalid

37
for lack of a quorum and rejected the argument that the absence of any board or stockholder

action in the interim resulted in an implied amendment. Id. In language applicable to the

current case, then-Vice Chancellor Seitz could not “conceive how total stockholder and

director inaction can form the basis for a custom inconsistent with a written by-law

provision.” Id. The court also questioned whether the existence of vacancies could ever be

considered inconsistent with the bylaws, since having less than the maximum number of

directors did not give rise to any conflict. Id. at 9.

Under these precedents, the evidence is insufficient to create a dispute of material

fact regarding whether the stockholders implicitly amended the bylaws. As a threshold

matter, the defendants cannot even say how the bylaws were amended. They suggest that

the bylaws were implicitly amended to reduce the size of the board to one director or,

alternatively, to keep the size of the board at three and reduce the quorum requirement to

one-third. Both implicit amendments address board-level action. Neither addresses

committee-level action. To encompass Farley’s efforts to act at the committee level, the

defendants would have to come up with still more possible amendments. As this court

explained in Ivey & Ellington, an amendment by implication requires “clear proof of a

definite and uniform custom or usage.” 42 A.2d at 509. The defendants have proffered

alternative customs and usages, not a definite and uniform custom and usage.

The defendants also have not pointed to any action by the stockholders that would

suggest acquiescence. To support some form of amendment by conduct, the defendants

cite the following public filings:

38
 • A current report on Form 8-K, filed on February 10, 2016, which disclosed that
Levy resigned.

• A current report on Form 8-K, filed on March 21, 2016, which disclosed that the
Company amended its certificate of incorporation to increase the amount of
authorized shares from 125 million to 500 million.

• The 2015 Annual Report, filed on March 30, 2016, which disclosed that Farley
was the Company’s sole director and officer and that the Company issued Farley
twenty million shares of common stock.

• A current report on Form 8-K, filed on March 31, 2016, which disclosed that the
Company issued five million shares to Farley under the 2007 Plan and that his
salary was $150,000 per year payable when the Company had sufficient funds.

• The 2016 Annual Report, filed on March 31, 2017, which identified Farley as
the Company’s sole director and officer.

• The five Form S-1’s filed for comment with the SEC between April 21, 2017,
and October 31, 2017, which identified Farley as the Company’s sole director
and officer.

There are several problems with the defendants’ reliance on these filings.

First, none of the filings suggests anything about an amendment to the bylaws to

either reduce the size of the board or lower the quorum requirement. None of the filings

addresses action at the committee level. The filings thus did not put the stockholders on

notice that any course of conduct contrary to the existing bylaws was underway.

Second, each of the filings was made by Farley. None of the filings reflects action

by the stockholders. During the period of time when Farley purported to act as the sole

remaining director, there were no meetings of stockholders and no attempts by stockholders

to take action by written consent. At most, there was stockholder inaction, which is the

opposite of a definite custom and usage. The only instance of affirmative stockholder

action was inconsistent with an implicit amendment. When a stockholder majority acted to

39
remove Farley by written consent, they proceeded in accordance with the existing charter

and bylaws, and they filled the resulting vacancies with three nominees.

Third, the defendants’ reliance on these public filings runs contrary to their

representations to this court. After the hearing on the Company’s application for a

preliminary injunction, the court asked the parties to supplement the record with an answer

to the question: “What was the total number of directors fixed by, or in the manner provided

in, the bylaws of [the Company] operative on February 15, 2016?” Dkt. 112 at 2. The

defendants responded as follows:

The bylaws in effect February 15, 2016, provide . . . in relevant part: “The
number of directors comprising the Board of Directors shall be such number
as may be from time to time fixed by resolution of the Board of Directors.”

At the July 9, 2012 Board meeting, the number of directors was set at three.
As of March 2015, the Board was comprised of [sic] Mark Lister, Jonathan
Levy, and George Farley. On February 23, 2015, Mark Lister resigned. On
February 10, 2016, Jonathan Levy resigned. After these resignations, Farley
sought out others to fill the vacancies, but no one was willing to serve as a
director. Even McCahon refused to serve.

Dkt. 115 at 1–2 (citations omitted). Farley thus recognized that the bylaws set the size of

the board at three, that two of the three directors resigned, and that he was the sole

remaining director on a board of three. He also noted that he sought out others to fill the

vacancies. He did not argue that the bylaws had been amended in any way.

The most that the defendants can point to in an effort to create a material dispute of

fact is that neither the complaint in the Superius action, the stockholders in the proxy

contest, nor the initial complaint in this action asserted that Farley lacked authority to act

as a sole remaining director. There is a fundamental difference between stockholders

40
knowingly consenting over an extended period of time to action contrary to the bylaws,

and stockholders not taking any action. The evidence in this case at most suggests the latter.

There is no evidence of the former.

The evidence is not sufficient to create a disputed issue of material fact as to whether

the bylaws were amended by implication. Summary judgment on this issue is granted in

favor of the Company.

3. Ratification

The. defendants separately argue that even if Farley did not validly authorize the

issuances of stock to himself, then the Company’s motion for summary judgment on Count

V should be denied because the Company ratified all of the issuances that Farley approved

by not seeking to invalidate the shares of common stock received by McCahon, Stein Riso,

the Company’s patent counsel, or the Company’s accountant. Citing the Company’s

settlement with McCahon, the defendants contend that the Company must have ratified the

issuances because it would otherwise have had to either “(1) ‘properly’ issue McCahon 20

million shares in 2019 and then effect the agreement . . . , or (2) ratify the 2016 issuance to

McCahon [under Section 204 of the DGCL].” Dkt. 237 at 58–59 (footnote omitted).

The Company quite obviously has claims against all of the recipients of the shares

that Farley issued. A cause of action belonging to a corporation is a corporate asset that a

board of directors can determine whether or not to assert. Aronson v. Lewis, 473 A.2d 805,

811 (Del. 1984) (subsequent history omitted); Zapata Corp. v. Maldonado, 430 A.2d 779,

782 (Del. 1981). When deciding whether or not to assert a corporate claim, a board of

41
directors can take into account a range of factors.14 The fact that a board of directors

chooses not to assert a particular claim does not mean that the corporation has ratified the

transaction giving rise to the claim.

The Company’s decision to reach a settlement with McCahon and its decision not

to pursue claims against other recipients of shares does not mean that the Company has

ratified the issuances. It means that the Company’s duly authorized representatives have

made decisions about whether to pursue those claims. Cf. TR Inv’rs, LLC v. Genger, 2010

WL 2901704, at *17 (Del. Ch. July 23, 2010) (“Of course, the Trump Group received a

benefit when it purchased the Sagi Shares from the Sagi Trust and TPR, but that benefit is

not an indication of the Trump Group’s ratification of the 2004 Transfers. Rather it is

consideration of a settlement that resolved the very problem Genger had created. In other

words, Genger’s argument confuses the benefits that come from compromising claims

away in return for a settlement with taking a benefit from a voidable transaction that

indicates ratification.”), aff’d, 26 A.3d 180 (Del. 2011).

14
See La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313, 339 (Del. Ch. 2012)
(“[T]he board can take into consideration and balance the interests of multiple
constituencies when determining what outcome best serves the interests of stockholders.”),
rev’d on other grounds, 74 A.3d 612 (Del. 2013); see also 1 Balotti & Finkelstein, supra,
§ 13.15 (listing factors that special litigation committee should consider whether to assert
a corporate claim or take other action, including the “magnitude and merit of the claims,”
the “size and likelihood of a recovery of damages or other relief,” the “possible detriment
to the company from the assertion of any claims, as well as the indirect costs, such as the
effect upon other potential litigation to which the company is a party, and relationships
with customers or suppliers,” and the “remedial steps already taken and that, in the future,
could be taken by the corporation to prevent a reoccurrence of the challenged actions”).

42
 The evidence is not sufficient to create a disputed issue of material fact as to whether

the issuances were ratified. Summary judgment on this issue is granted in favor of the

Company.

4. The Status Of The Shares Owned By AnneMarieCo

Farley’s transfer of twenty million shares to AmneMarieCo does not change the

analysis for purposes of those shares. Under Delaware law, invalid shares in the hands of

innocent third parties remain invalid (absent ratification or validation). See Blades v.

Wisehart, 2010 WL 4638603, at *1, *12 (Del. Ch. Nov. 17, 2010), superseded by statute

on other grounds, 8 Del. C. §§ 204, 205.

Delaware’s version of the Uniform Commercial Code provides a defense against

invalidity to a bona fide purchaser for value:

A security other than one issued by a government or governmental
subdivision, agency, or instrumentality, even though issued with a defect
going to its validity, is valid in the hands of a purchaser for value and without
notice of the particular defect unless the defect involves a violation of a
constitutional provision. In that case, the security is valid in the hands of a
purchaser for value and without notice of the defect, other than one who takes
by original issue.

6 Del. C. § 8-202(b)(1); see id. § 8-205 (providing that “[a]n unauthorized signature placed

on a security certificate before or in the course of issue is ineffective” except against a

“purchaser for value . . . without notice of the lack of authority”).

The statute defines “value” as follows:

Except as otherwise provided in Articles 3, 4, and 5, a person gives value for
rights if the person acquires them:

43
 (1) In return for a binding commitment to extend credit or for the extension
of immediately available credit, whether or not drawn upon and whether or
not a charge-back is provided for in the event of difficulties in collection;

(2) As security for, or in total or partial satisfaction of, a preexisting claim;

(3) By accepting delivery under a preexisting contract for purchase; or

(4) In return for any consideration sufficient to support a simple contract.

Id. § 1-204.

Under these provisions, AnneMarieCo was not a purchaser for value. AnneMarieCo

received the shares as a gift. Unless otherwise ratified or validated, the shares remain

invalid notwithstanding the transfer to AnneMarieCo. The defendants do not dispute this

point. Summary judgment on this issue is granted in favor of the Company.

B. Count IV Of The Counterclaims: Whether The Issuances Can Be Validated
Pursuant To Section 205 Of The DGCL.

In Count IV of the Counterclaims, the defendants ask the court to exercise its

authority under Section 205 of the DGCL to validate the actions that Farley took between

February 10, 2016, and March 9, 2018, including Farley’s issuance of twenty-five million

shares to himself and his compensation of $150,000 per year. Ctrcl. ¶ 80. The Company

seeks summary judgment on this claim, contending that (i) Farley did not take any

“corporate acts” and (ii) whatever Farley may have attempted to do cannot be validated

because the board lacked sufficient members to muster a quorum at the time the acts were

performed. Contrary to the Company’s arguments, this court has the power under Section

205 to validate Farley’s acts. Whether the court will exercise that power can only be

determined after trial.

44
 1. The Scope Of Sections 204 And 205

Effective April 1, 2014, the Delaware General Assembly enacted Sections 204 and

205 of the DGCL. See 8 Del. C. §§ 204, 205 (the “Validation Provisions”). The substantive

purpose of the Validation Provisions was “to overrule the existing precedents requiring that

defective stock and acts be found void.” C. Stephen Bigler & John Mark Zeberkiewicz,

Restoring Equity: Delaware’s Legislative Cure for Defects in Stock Issuances and Other

Corporate Acts, 69 Bus. Law. 393, 394 (2014) [hereinafter “Restoring Equity”].

Procedurally, the Validation Provisions established two statutory methods that parties can

use to fix defective corporate acts that otherwise might be void. Section 204 is “a ‘self-

help’ provision that allows the board of directors, by following specified procedures, to

validate a defective corporate act.” Id. at 402. Section 205 is a judicial mechanism under

which identified parties can “petition the Delaware Court of Chancery to enter an order

validating or invalidating, as the case may be, the defective act.” Id.

The “keystone” provision is Section 204(a). Id. It states that “no defective corporate

act or putative stock shall be void or voidable solely as a result of a failure of authorization

if ratified as provided in this section or validated by the Court of Chancery in a proceeding

brought under § 205 of this title.” 8 Del. C. § 204(a). This provision “legislatively

overturns” precedents which held “that stock issued or acts taken in contravention of the

DGCL are void and not voidable and thus not susceptible to ratification or validation on

equitable grounds or otherwise.” Restoring Equity, supra, at 402.

Other subsections in Section 204 establish procedures that a board of directors can

use to ratify defective corporate acts. 8 Del. C. § 204(b)–(d), (g). No one in this case

45
invokes these provisions. The Company brought this lawsuit to invalidate actions that

Farley purported to take, and Farley is no longer in control of the Company and therefore

cannot use Section 204.

Section 205 confers standing on certain parties to seek relief from the Court of

Chancery if self-help is unavailable or itself subject to challenge. Section 205(a) provides

that

upon application by the corporation, any successor entity to the corporation,
any member of the board of directors, any record or beneficial holder of valid
stock or putative stock, any record or beneficial holder of valid or putative
stock as of the time of a defective corporate act ratified pursuant to § 204 of
this title, or any other person claiming to be substantially and adversely
affected by a ratification pursuant to § 204 of this title, the Court of Chancery
may:

(1) Determine the validity and effectiveness of any defective corporate act
ratified pursuant to § 204 of this title;

(2) Determine the validity and effectiveness of the ratification of any
defective corporate act pursuant to § 204 of this title;

(3) Determine the validity and effectiveness of any defective corporate act
not ratified or not ratified effectively pursuant to § 204 of this title;

(4) Determine the validity of any corporate act or transaction and any stock,
rights or option to acquire stock; and

(5) Modify or waive any of the procedures set forth in § 204 of this title to
ratify a defective corporate act.

Id. § 205(a). Item (3) “gives parties the opportunity to seek a determination regarding the

effectiveness of an act that the corporation has not yet ratified or has not ratified effectively

under Section 204.” Restoring Equity, supra, at 417. The defendants request for relief falls

within the scope of item (3) because the defendants have asked the court to validate the

46
defective corporate acts that Farley purported to take and which have neither been ratified

under Section 204 nor by other means.15

Section 204(h)(1) defines the term “defective corporate act” as follows:

[(i)] an overissue, an election or appointment of directors that is void or
voidable due to a failure of authorization, or

[(ii)] any act or transaction purportedly taken by or on behalf of the
corporation that is, and at the time such act or transaction was purportedly
taken would have been, within the power of a corporation under subchapter
II of this chapter (without regard to the failure of authorization identified in
§ 204(b)(1)(D) of this title), but is void or voidable due to a failure of
authorization.

Id. § 204(h)(1) (emphasis added and formatting altered). The definition thus describes two

categories of defective corporate acts. The first embraces overissues, elections of directors,

or an appointment of directors. The second encompasses “any act or transaction

purportedly taken by or on behalf of the corporation that is, and at the time such act or

transaction was purportedly taken would have been, within the power of a corporation

under subchapter II of this chapter.” In both cases, the definition requires that the act in

question be “void or voidable due to a failure of authorization.”

Section 204(h)(2) defines a “failure of authorization” to mean

(i) the failure to authorize or effect an act or transaction in compliance with

15
The current action also falls within the scope of item (4), which gives the court
the power to “[d]etermine the validity of any corporate act or transaction and any stock,
rights or options to acquire stock.” 8 Del. C. § 205(a)(4). As discussed below, Farley
engaged in corporate acts. Because Farley was the sole remaining director when he
purported to take those acts, the resulting shares and compensation is invalid. See Part II.A,
supra. Under item (4), the court has the power validate those acts.

47
 (A) the provisions of this title,

(B) the certificate of incorporation or bylaws of the corporation, or

(C) any plan or agreement to which the corporation is a party or the
disclosure set forth in any proxy or consent solicitation statement, if
and to the extent such failure would render such act or transaction void
or voidable; or

(ii) the failure of the board of directors or any officer of the corporation to
authorize or approve any act or transaction taken by or on behalf of the
corporation that would have required for its due authorization the approval
of the board of directors or such officer.

Id. § 204(h)(2) (formatting altered). A failure of authorization is thus a failure to comply

with the requirements for the exercise of corporate power.

2. A Corporate Act

The Company maintains that validation under Section 205 is unavailable because

Farley did not engage in any “corporate acts.” According to the Company, a corporate act

only exists if the intra-corporate actor that purported to take the corporate act had the

authority to act and could have taken it, but erred in properly exercising their authority.

Contrary to the Company’s position, the requirement of a “corporate act” addresses a

different issue: the necessity that there have been a bona fide effort to exercise corporate

power, rather than a backward-looking wistfulness for a past event that never took place.

“Embedded within the definition of defective corporate act is the premise that an

act, albeit defective, had occurred.” Restoring Equity, supra, at 403. This embedded

premise preserves the common law expectation that there must have been an actual attempt

to exercise corporate power. See Liberis v. Europa Cruises Corp., 1996 WL 73567, at *8

(Del. Ch. Feb. 8, 1996) (“[T]he complete absence of board action is not an irregularity

48
correctible by routine ratification.”), aff’d, 702 A.2d 926 (Del. 1997) (TABLE). Consistent

with this rule, the Validation Provisions “may not be used to authorize retroactively an act

that was never taken but the corporation now wishes had occurred, or to ‘backdate’ an act

that did occur but that the corporation wishes had occurred as of an earlier date.” Restoring

Equity, supra, at 403. Parties attempting to invoke the Validation Provisions cannot pretend

that an attempt to act took place when it really did not.

Once it is understood that there must have been a historical attempt to take corporate

action, the next question is what level of evidence is necessary to demonstrate that the

attempt took place. In In re Numoda Corp. Shareholders Litigation, this court considered

whether to validate a series of contested actions under Section 205 in a dispute involving

the principals of a privately held company and various recipients of putative stock. 2015

WL 402265 (Del. Ch. Jan. 30, 2015), aff’d, 128 A.3d 991 (Del. 2015) (TABLE). The

principals “had a default policy of not issuing stock certificates and used informal

processes.” Id. at *3. “Generally speaking, board meetings did not involve prior notice,

minutes, or other features familiar to our corporate law.” Id. As a result, the evidence of

the contested acts “largely exist[ed] in the form of testimony, documents prepared by [an]

independent contractor . . . , and representations by agents of the corporation (such as tax

filings) not formally adopted by the board.” Id.

In determining whether there had been a corporate act that could be validated, the

Numoda court distinguished between “a bona fide effort bearing resemblance to a corporate

act but for some defect that made it void or voidable” on one hand, and those acts that

“extend far beyond failures of corporate governance features” on the other. Id. at *10.

49
While recognizing that Delaware law permits boards to conduct their business with some

degree of informality, the court stressed that

there must be a difference between corporate acts and informal intentions or
discussions. Our law would fall into disarray if it recognized, for example,
every conversational agreement of two or three directors as a corporate act.
Corporate acts are driven by board meetings, at which directors make formal
decisions. The Court looks to organizational documents, official minutes,
duly adopted resolutions, and a stock ledger, for example, for evidence of
corporate acts.

Id. at *9.

Applying this standard in a post-trial decision, the court found sufficient evidence

to support a corporate act involving the issuance of what it called “the 2004 Exchange

Stock,” including a formal ratification attempt, entries in the stock ledger and share

register, and other evidence. Id. at *10. The court also found sufficient evidence of a

meeting of the board at which the directors approved and directed the issuance of some

5,725,000 shares of stock. Id. at *11. And the court found that a stock certificate and a later

attempt at ratification plus testimony and other documents were sufficient to support a

corporate act involving the separate issuance of 5,100,000 shares of stock. Id. at *12. But

the court found insufficient evidence of a corporate act to establish an issuance of 400,000

shares of stock, noting that the record consisted only of “testimony and sundry documents,

none of which replaces official stock ledgers or effective resolutions.” Id.

On the facts of this case, Farley’s attempts to cause the Company to issue stock

easily satisfy the evidentiary requirements for a corporate act. Farley purported to take

action by executing the Board Consent and the Revised Committee Consent. He had two

separate law firms (Stein Riso and Griffitts O’Hara) review the consents before they were

50
executed. Both rendered opinions for the benefit of the Company’s transfer agent

addressing the issuances. Farley also caused the Company to issue a stock certificate for

his shares, and he caused the Company to make filings with the SEC that disclosed the

issuances. The record clearly reflects bona fide efforts to take corporate action.

The record is more sparse regarding Farley’s decision to award himself a salary.

The strongest evidence is a Form 8-K which disclosed that “the Company’s board of

directors . . . directed the Company to accrue $150,000 annually as compensation to Mr.

Farley, to be paid when the company has sufficient funds.” Ex. 5. Another reference

appears in the Company’s 2016 Annual Report, which recorded Farley’s salary as an

accrued expense. Ex. NNN at 19, F-6, F-17. Farley also averred in his declaration that he

granted himself a salary. Farley Decl. ¶ 34. But there are no minutes of a purported meeting,

nor any document purporting to represent a unanimous consent of the sole remaining

director. Cf. Ex. 6.

Under the court’s approach in Numoda, this scant evidence calls into question

whether Farley can establish the existence of a corporate act involving his salary that could

be validated under Section 205. Numoda, however, was a post-trial decision, and this case

is currently before the court on a motion for summary judgment. The defendants have

presented some evidence which, if credited, could support a finding in their favor. Equally

important, as a matter of policy, the Validation Provisions seek to authorize the curing of

defects which, if incurable, might destabilize a company’s capital structure. See Restoring

Equity, supra, at 402 (citing the “domino effect” that can result from a defective corporate

act that infects subsequent acts); Olsen v. ev3, 2011 WL 704409, at *11 (Del. Ch. Feb. 21,

51
2011) (same). It is easy to imagine settings in which a corporate act took place years ago,

perhaps during the formative days of the corporation, and the issue was not identified or

addressed until years later, perhaps when the company is cleaning up its records for an

initial public offering or an acquisition. At that point, the documentary evidence of the

corporate act might well be incomplete or unavailable, yet a critical flaw in the capital

structure would still need to be fixed. Because there are readily conceivable situations in

which the equities might convince a court to act based on an abbreviated evidentiary record,

it would be dangerous to hold categorically that validation under Section 205 requires more

than just witness testimony, or even a combination of testimony and some form of

corroborating evidence, such as a securities filing. If that rule were adopted, the Fates

would likely conspire promptly to put the proposition to the test in a scenario where its

application appeared inequitable. This court will not rule as a matter of law that a corporate

act susceptible of validation could not have taken place. It will determine at trial, after

evaluating Farley’s credibility, whether the evidentiary record is sufficient to support the

existence of a corporate act regarding his salary.

The Company’s request for summary judgment based on the absence of any

corporate acts is denied. The Board Consent and the Revised Committee Consent were

clearly attempts at corporate acts. The evidence on Farley’s salary is less certain, but could

support a finding of a corporate act.

3. A Defective Corporate Act

In its principal argument in favor of summary judgment, the Company maintains

that the court cannot validate Farley’s acts because they were not “within the power of a

52
corporation.” 8 Del. C. § 204(h)(1). According to the Company, because the board lacked

a sufficient number of directors to supply a quorum, the Company lacked the “raw

corporate power” to take any acts. Dkt. 212 at 5. This argument misunderstands the

distinction between the power of the corporation and a failure of authorization.

a. The Concept Of Corporate Power

Properly understood, the concept of corporate power refers to whether the entity has

been granted the ability to engage in a given act. The concept of authorization refers to

whether the proper intra-corporate actors or combination of actors, such as the

corporation’s officers, directors, or stockholders, have taken the steps necessary to cause

the corporation to take the given act.16

16
The distinction between power and authorization has a lengthy pedigree.
Questions about corporate power were an “oft-recurring theme” in the “formative years of
corporation law in the 19th and early 20th centuries,” when parties frequently invoked the
ultra vires doctrine to challenge the validity of corporate action. 1 David A. Drexler et al.,
Delaware Corporation Law and Practice § 11.01, at 11-10 (2019). The desire to preempt
ultra vires challenges “led the old school of corporate draftsmen to include page after page
of boiler-plate corporate powers in the ‘purpose’ sections of their certificates of
incorporation.” Id. This practice resulted in “[c]orporate charters of stultifying length and
complexity,” but without them, drafters feared that a corporate action could be held invalid
on the theory that the corporation lacked the power to take it. Id. One of the goals of the
major revision to the DGCL that took place in 1967 was to eliminate questions about
corporate power by

(i) removing from Section 102(b)(2) any requirements that a certificate of
incorporation set out explicitly the specific business or purposes for which a
corporation is organized, thereby removing the statutory requirement that
charters set forth express or implicit limitations upon what business a
corporation might pursue; (ii) eliminating from Section 121 all implications
that the corporate powers and authority granted to Delaware corporations are
strictly limited to those powers expressly granted by the statute or their

53
 The definition of “defective corporate act” adopts this distinction. The definition

first frames a defective corporate act in terms of an act that is and was at the time it was

purportedly taken “within the power of a corporation under subchapter II of this chapter .

. . .” 8 Del. C. § 204(h)(1). It then refers to the “failure of authorization” that makes the act

void or voidable absent ratification or validation. Id.

The reference to “subchapter II of this chapter” points to subchapter II of the DGCL,

entitled “Powers.” That subchapter contains seven sections. The first three (§§ 121, 122,

and 123) identify the powers possessed by every Delaware corporation. The last three (§§

125, 125, and 127) identify the powers which, with certain narrow exceptions, are denied

to Delaware corporations. The intervening section, titled “Effect of lack of corporate

capacity or power; ultra vires,” limits the effect of the ultra vires doctrine by providing

generally that “[n]o act of a corporation and no conveyance or transfer of real or personal

property to or by a corporation shall be invalid by reason of the fact that the corporation

was without capacity or power to do such act or to make or receive such conveyance or

transfer . . . .” Id. § 124; see generally Carsanaro, 65 A.3d at 648–54 (discussing Section

certificates of incorporation; and (iii) abolishing through enactment of
Section 124 whatever vestiges of the ultra vires doctrine may have remained
with respect to the corporation’s dealings with third parties . . . .

Id. § 11.01, at 11-1. These steps “have for virtually all intents and purposes obviated
inquiries into whether or not Delaware corporations as a matter of their fundamental power
or authority can undertake otherwise lawful acts.” Id. See generally Carsanaro v.
Bloodhound Techs., Inc., 65 A.3d 618, 648–54 (Del. Ch. 2013) (discussing ultra vires
doctrine), abrogated on other grounds by El Paso Pipeline GP Co. v. Brinckerhoff, 152
A.3d 1248, 1264 (Del. 2016).

54
124). Illustrating that the reference to subchapter II is an intentional cross-reference to these

sections, the Restoring Equity article contains a modified definition of “defective corporate

act” that replaces the reference to subchapter II with a specific reference to “[sections 121

through 127 of the DGCL, which deal with the general and specific powers granted to

Delaware corporations, and the specific limits on those powers].” Restoring Equity, supra,

at 402–03.

Section 121(a) is the principal section of the DGCL addressing corporate power.

Titled “General powers,” it states:

In addition to the powers enumerated in § 122 of this title, every corporation,
its officers, directors and stockholders shall possess and may exercise all the
powers and privileges granted by this chapter or by any other law or by its
certificate of incorporation, together with any powers incidental thereto, so
far as such powers and privileges are necessary or convenient to the conduct,
promotion or attainment of the business or purposes set forth in its certificate
of incorporation.

8 Del. C. § 121(a).

Notably, Section 121(a) confers corporate power collectively on “every corporation,

its officers, directors and stockholders.” By using this terminology, Section 121(a)

intentionally avoids any implication as to which intra-corporate actors or combinations of

actors could cause the corporation to exercise its powers. The DGCL “elsewhere ascribes

to each of these groups specific powers and authority with respect to specific types of

transactions. It is to these latter provisions that one must look to determine which group or

groups can exercise, singly or jointly, particular powers.” 1 Drexler et al., supra, § 11.02,

at 11-3. To reinforce this distinction, Section 121(b) provides that when exercising the

powers conferred by Section 121(a), the corporation “shall be governed by the provisions

55
and be subject to the restrictions and liabilities contained in this chapter.” 8 Del. C. §

121(b).

The two subsections of Section 121 thus distinguish between the presence of

corporate power (Section 121(a)) and the steps intra-corporate actors must follow to

authorize the corporation to exercise its powers (Section 121(b)). Section 121 does not

itself specify the requirements that intra-corporate actors must follow to authorize the

corporation to exercise its powers.

Which of the groups is to exercise specific powers, and the manner in which
the group is to exercise such powers, is either set forth in the various sections
of the General Corporation Law (relating to such matters as amendments to
the certificate of incorporation, mergers, sales of assets, etc.), the certificate
of incorporation or by-laws, or is allocated according to traditional common
law concepts of exercise of corporate power.

1 Balotti & Finkelstein, supra, § 2.1 (footnotes omitted); accord 1 Drexler et al., supra, §

11.02, at 11-3.

In addition to the general grant of power in Section 121(a), Section 122 enumerates

seventeen specific powers a Delaware corporation can exercise.17 The existence of these

17
See 8 Del. C. § 122. The powers enumerated in Section 122 are “a curious
mixture.” 1 Drexler et al., supra, § 11.03[1], at 11-4.

Some of them deal exclusively with the organic structure of the corporation
itself. A second group addresses the internal functioning of the corporation,
while a third group deals with the power to conduct various aspects of
corporate business. The inclusion of a specific power on the list appears to
have been a matter of historical accident, with additions having been made
from time to time by amendment to address a perceived problem, without

56
specific powers helps illustrate the distinction between the existence of corporate power

and the ability of intra-corporate actors to authorize the corporation to exercise that power.

For example, Section 122(6) grants a Delaware corporation the power to “[a]dopt,

amend and repeal bylaws.” 8 Del. C. § 122(6). Another section of the DGCL—Section

109—governs how particular intra-corporate actors can authorize the corporation to

exercise this power. See id. § 109. Section 109(a) states that for a corporation with capital

stock, the following intra-corporate actors can authorize the exercise of that corporate

power: (i) the incorporators until a board of directors is designated, (ii) the board of

directors until the corporation has received any payment for any of its stock, (iii) the

stockholders after the corporation has received any payment for any of its stock, and (iv)

the board of directors concurrently with the stockholders if the certificate of incorporation

so provides, except where otherwise limited by the DGCL. Id. § 109(a); see 1 Drexler et

al., supra, § 9.02. Section 109(b) places an additional limitation on the ability of these

intra-corporate actors to authorize the exercise of that corporate power by providing that

any overall concept or plan as to which corporate powers or types of powers
ought to be specifically enumerated.

Id. One additional power—the power to deal in securities—is addressed specifically in
Section 123. See 8 Del. C. § 123. A plausible argument can be made that Section 121 in its
current form eliminates the need for Sections 122 and 123. See 1 Drexler et al., supra, §
11.03[1], at 11-3 to 11-4; see also id. § 11.04, at 11-9. As someone who has had the
opportunity to read many late nineteenth and early twentieth century ultra vires cases, I
have the sense that the General Assembly largely granted the specific powers enumerated
in Sections 122 and 123 in response to specific court decisions, often in other jurisdictions,
which held that a corporation lacked the power in question.

57
“[t]he bylaws may contain any provision, not inconsistent with law or with the certificate

of incorporation, relating to the business of the corporation, the conduct of its affairs, and

its rights or powers or the rights or powers of its stockholders, directors, officers or

employees.” 8 Del. C. § 109(b); see also 1 Drexler et al., supra, § 9.04. Sections 109(a)

and (b) thus limit the extent to which intra-corporate actors can authorize the exercise of

the corporate power to adopt, amend, or repeal bylaws. Under Section 122(6), however,

the corporate power to adopt, amend, or repeal bylaws always exists. 8 Del. C. § 122(6).

Questions about whether the relevant intra-corporate actors have complied with the

requirements of Section 109 when adopting, amending, or repealing bylaws raise issues of

authorization, not power. The same is true for questions about whether the relevant intra-

corporate actors have complied with the corporation’s charter or bylaws. If, for example,

the charter provides that directors can adopt, amend, alter, or repeal bylaws only by the

unanimous vote of a quorum consisting of all members of the board then in office, the fact

that a majority of directors then in office purported to adopt a bylaw at a meeting attended

only by those directors renders the bylaw invalid, but that is due to a failure of

authorization, not a lack of corporate power. Cf. Frantz Mfg. Co. v. EAC Indus., 501 A.2d

401, 407 (Del.1985) (determining the validity of a bylaw requiring a unanimous director

vote and the validity of non-compliant action). The power to amend the bylaws invariably

exists.

Today, the DGCL retains only three limitations on corporate power. See 1 Balotti

& Finkelstein, supra, §§ 2.4–2.6. First, with specified exceptions, no corporation formed

under the DGCL after April 18, 1945, may confer academic or honorary degrees. 8 Del. C.

58
§ 125. Second, no corporation formed under the DGCL can exercise banking power. Id. §

126(a). Third, a Delaware corporation that is designated as a private foundation under the

Internal Revenue Code cannot fail to comply with certain tax provisions, unless its charter

provides that the restriction is inapplicable. Id. § 127. That said, a corporation retains the

ability to introduce uncertainty about its capacity or power by including provisions in its

charter that disavow particular powers or forbid the corporation from entering into

particular lines of business or engaging in particular acts. See 1 Balotti & Finkelstein,

supra, § 2.1.

b. Corporate Power In This Case

The plain language of the definition of “defective corporate act” thus uses the

concept of “corporate power” in the sense of the powers granted under subchapter II of the

DGCL, and it distinguishes the concept of corporate power from a “failure of

authorization.” The latter definition deploys the concept of authorization to refer to whether

the relevant intra-corporate actors have properly authorized the corporation to exercise its

power in compliance with the DGCL and the entity’s constitutive documents. As the

definition makes clear, a failure of authorization may arise because the intra-corporate

actors have failed to comply with (i) “the provisions of this title,” i.e., Title 8 of the

Delaware Code, which includes the DGCL, (ii) “the certificate of incorporation or bylaws

of the corporation,” or (iii) “any plan or agreement to which the corporation is a party . . .

.” 8 Del. C. § 204(h)(2). A failure of authorization can also encompass a simple failure of

the board or of an officer to authorize or approve an act that otherwise requires the approval

of that intra-corporate actor. Id.

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 In this case, the Company claims it lacked the “raw corporate power” to engage in

any of the acts that Farley purported to take because there were insufficient directors in

office to constitute a quorum. See Dkt. 212 at 5. That is incorrect. The absence of a quorum

is not a question of corporate power. It is a failure to comply with “a provision of this title”

(§ 141(b) of the DGCL) and the Company’s charter and bylaws. It is therefore a failure of

authorization within the meaning of Section 204(h)(2).

For purposes of Farley’s attempt to issue stock, the question of corporate power is

answered by Section 121 of the DGCL, under which “every corporation, its officers,

directors and stockholders shall possess and may exercise all the powers and privileges

granted by this chapter or by any other law or by its certificate of incorporation . . . .” 8

Del. C. § 121. The reference to “this chapter” is a reference to the DGCL. One of the

powers “granted by this chapter” is the power to issue shares. Section 151(a) states:

Every corporation may issue 1 or more classes of stock or 1 or more series
of stock within any class thereof, any or all of which classes may be of stock
with par value or stock without par value and which classes or series may
have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as shall be stated
and expressed in the certificate of incorporation or of any amendment
thereto, or in the resolution or resolutions providing for the issue of such
stock adopted by the board of directors pursuant to authority expressly vested
in it by the provisions of its certificate of incorporation . . . .

Id. § 151(a). The Company had the raw corporate power to issue shares.

For purposes of Farley’s attempt to grant himself a salary as an officer, the question

of corporate power is answered generally by Section 121 of the DGCL and specifically by

Section 122(5), which grants every corporation the power to “[a]ppoint such officers and

60
agents as the business of the corporation requires and to pay or otherwise provide for them

suitable compensation.” Id. § 122(5). The Company had the raw corporate power to pay

Farley as an officer.

To the extent Farley contends that he also granted himself compensation as a

director, the question of corporate power is answered by Section 121 and Section 141(h),

which states that “[u]nless otherwise restricted by the certificate of incorporation or bylaws,

the board of directors shall have the authority to fix the compensation of directors.” Id. §

141(h). The Company had the raw corporate power to pay Farley as a director.

This court has the authority to validate Farley’s issuance of shares and his approval

of his compensation because those acts are within the power of the corporation but are void

or voidable due to a failure of authorization. The acts fall squarely within the grant of

authority provided by Section 205(a)(3).

c. The View Decisions

To argue against this settled understanding of corporate power, the Company relies

on this court’s decisions in Nguyen v. View, Inc. (View I), 2017 WL 2439074 (Del. Ch.

June 6, 2017), reargument denied, Nguyen v. View, Inc. (View II), 2017 WL 3169051 (Del.

Ch. July 26, 2017). Properly read, the View decisions are consistent with the distinction

between the existence of corporate power and a failure of authorization that the Validation

Provisions establish. Moreover, to eliminate any potential implication that the View

decisions support a different interpretation, the General Assembly amended the statute.

The View decisions concerned the validity of what the decision called the “Series B

Financing”—a recapitalization that dramatically reduced the voting power of Paul Nguyen,

61
the ousted founder of View, Inc., and the holder of 70% of its common stock. View I, 2017

WL 2439074, at *2–4. As part of a settlement between View and Nguyen, View asked

Nguyen to consent to the Series B Financing. Id. at *4. The transaction documents included

provisions that would have adversely affected Nguyen, including a provision that would

have eliminated his ability as the holder of a majority of the common stock to protect

himself against increases in the number of authorized shares. Id. The settlement gave

Nguyen the right to rescind his consent within seven days. Id.

Nguyen initially executed the consent, but subsequently exercised his right to

rescind it. Id. In the interim, View completed the Series B Financing. Id. at *5. Nguyen

commenced an arbitration to invalidate the Series B Financing, and the arbitrator

eventually ruled in his favor. Id. By the time the arbitrator issued his ruling, View had

completed four additional financings that raised over $500 million. Id. The arbitral award

called into question the validity of the original Series B Financing and each subsequent

financing, putting at risk the company’s entire capital structure. Id.

In an effort to fix these problems, two venture capital firms who controlled View

converted shares of Series A preferred stock into enough shares of common stock to

constitute a majority of that class. The venture capital firms and their board representatives

then proceeded to attempt to ratify the Series B Financing and subsequent transactions

under Section 204. Id. Nguyen filed suit under Section 205, contending that the transactions

could not be ratified because he had withheld his consent. Id. at *6. View moved to dismiss

Nguyen’s complaint. Id.

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 The central legal question on the motion to dismiss was “whether an act that the

majority of stockholders entitled to vote deliberately declined to authorize, but that the

corporation nevertheless determined to pursue, may be deemed a ‘defective corporate act’

under Section 204 that is subject to later validation by ratification of the stockholders.” Id.

Citing the definition of “defective corporate act,” the court agreed that View had the

corporate power under Sections 121 and 151 of the DGCL to issue the Series B stock as

part of the Series B Financing. Id. at *8. But the court did not regard that as the end of the

matter. Noting that “the defective corporate acts that a corporation purports to ratify must

be within the corporation’s power ‘at the time such act was purportedly taken,’” id. at *9

(quoting 8 Del. C. § 204(h)(1)), the court observed that when View engaged in the Series

B Financing, “Nguyen enjoyed class voting protections as the holder of the majority of the

common stock” and “had deliberately withheld his consent for the transaction—consent

that was required for the transaction to be valid as a matter of law.” Id. The court concluded

that “at the time the defective corporate acts at issue here were taken, the Company did not

have the power to take these acts because its majority common stockholder had declined

to approve them.” Id.

Despite having treated the issue in terms of “the power to take these acts,” the court

explained that what was really at stake was the distinction between a defective corporate

act and an act that a relevant intra-corporate actor had properly rejected:

What occurred when Nguyen revoked his consent to the Series B Financing
was much more than a mere ‘failure of authorization’ as contemplated by
Section 204. It was the classic exercise of the stockholder franchise to say
‘no’ to a Board-endorsed proposal. . . . The plain meaning of “failure” in
[Section 204] is distinct from a “no” vote or outright rejection of the proposal

63
 by the majority of stockholders entitled to vote. The reason the Series B
Financing was declared void was not that View failed to comply with the
[DGCL] or its own governance documents in securing the stockholders’
approval of the transaction; the transaction was void because the majority
common stockholder deliberately rejected it.

Id. To further emphasize this point, the court stated:

Lest there be any lingering doubt regarding the distinction between a
“failure” to authorize and a “rejection” of a corporate proposal, the plain
meanings of these terms brings the matter into inescapable focus. “Failure”
has been defined as “omission of occurrence or performance”; “a lack of
success”; “deficiency; lack; want”; “[a]n omission of an expected action,
occurrence, or performance.” In contrast, to “reject” means “to refuse to
accept, consider, submit to, take for some purpose, or use.”

Id. (citations and footnotes omitted). The court therefore denied the motion to dismiss,

holding that Nguyen had “pled facts that support his prayers for declaratory judgments that

the 2016 Ratifications cannot be sanctioned under any reading of Section 204.” Id. at *11.

View moved for reargument, and the court denied the motion, reaching the same

conclusion. The court initially framed the analysis in terms of corporate power, stating that

“[w]hen Nguyen withdrew his consent . . . and the arbitrator then determined that the

properly withdrawn consent rendered the Series B Financing void, the ruling confirmed

that View did not have the ‘power’ to undertake the Series B Financing at the time it

closed.” View II, 2017 WL 3169051, at *3. But the court immediately returned to the

distinction between a defective authorization and a legitimate rejection, reiterating that

what had taken place was a rejection, not a failure of authorization. Id. at *3 & n.26.

The core holdings of the View decisions were thus that a corporation cannot claim

that an act was defectively authorized when in fact it was rejected by an intra-corporate

actor whose consent was needed for approval. The View decisions nevertheless contained

64
language which could be read to suggest that a corporate act was not subject to validation

even if the corporation had the power under subchapter II to take the action in question,

simply because the proper intra-corporate actors had not approved it. To eliminate the latter

implication, the General Assembly responded by amending the definition of “defective

corporate act” to add the clause “(without regard to the failure of authorization identified

in § 204(b)(1)(D) of this title)” after the requirement that the act must be “within the power

of a corporation.” See S.B. 180, 149th Gen. Assem. § 7 (2018) (the “2018 Amendment”).

The full definition now reads

an overissue, an election or appointment of directors that is void or voidable
due to a failure of authorization, or any act or transaction purportedly taken
by or on behalf of the corporation that is, and at the time such act or
transaction was purportedly taken would have been, within the power of a
corporation under subchapter II of this chapter (without regard to the failure
of authorization identified in § 204(b)(1)(D) of this title), but is void or
voidable due to a failure of authorization.

8 Del. C. § 204(h)(1). The “failure of authorization identified in § 204(b)(1)(D)” is “the

nature of the failure of authorization in respect of each defective corporate act to be

ratified.” Id. § 204(b)(1)(D). For View, the failure of authorization would have been the

failure to obtain approval from the holders of a majority of the common stock, had the

absence of approval resulted from a failure of authorization, rather than an explicit

rejection.

Through the 2018 Amendment, the General Assembly confirmed that the nature of

the failure of authorization does not determine whether or not the defective corporate act

is within the corporation’s power and hence capable of validation. Whether the corporation

has the corporate power to take the action in question is determined by the scope of

65
subchapter II of the DGCL. The synopsis accompanying the 2018 Amendment emphasized

this point:

The amendments to Section 204(h)(1) are intended to eliminate any
implication from [the View decisions] suggesting that an act or transaction
may not be within the power of a corporation—and therefore may not
constitute a “defective corporate act” susceptible to cure by ratification—
solely on the basis that it was not approved in accordance with the provisions
of the Delaware General Corporation Law or the corporation’s certificate of
incorporation or bylaws. The amendments would not, however, disturb the
power of the Court of Chancery to decline to validate a defective corporate
act that had been ratified under Section 204, or to declare invalid any
defective corporate act, on the basis that the failure of authorization that
rendered such act void or voidable involved a deliberate withholding of any
consent or approval required under the Delaware General Corporation Law,
the certificate of incorporation or bylaws, nor would it limit, eliminate,
modify or qualify any other power expressly granted to the Court of
Chancery under Section 205 of the Delaware General Corporation Law.

S.B. 180 syn., 149th Gen. Assem. (2018). Two commentators have addressed the same

issue, explaining that the 2018 Amendment

overturn any implication from [the View decisions] that an act or transaction
may not be within the power of a corporation solely on the basis that it was
not approved in accordance with the provisions of the DGCL or the
corporation’s certificate of incorporation or bylaws. Indeed, defective
corporate acts require ratification because originally they were not so
approved. The amendments attempt to clarify that the failure to approve an
act in accordance with the DGCL or the certificate of incorporation or bylaws
may not, of itself, serve as a basis for excluding the act from the scope of the
statute.

John Mark Zeberkiewicz & Stephanie Norman, 2018 Proposed Amendments to the

General Corporation Law of the State of Delaware, INSIGHTS: Corp. & Secs. L. Advisor,

Apr. 2018, at 14, 24–25.

Relying on the View decisions, the Company makes two arguments. First, the

Company contends that the absence of sufficient directors to constitute a quorum meant

66
that, as in View, the Company lacked the ability “at the time” to take corporate action. In

context, the definition states that a defective corporate act is

any act or transaction purportedly taken by or on behalf of the corporation
that is, and at the time such act or transaction was purportedly taken would
have been, within the power of a corporation under subchapter II of this
chapter (without regard to the failure of authorization identified in §
204(b)(1)(D) of this title), but is void or voidable due to a failure of
authorization.

8 Del. C. § 204(h)(1) (emphasis added). Read in context, the reference to “at the time”

simply means a power that the DGCL granted a corporation “at the time” of the purported

corporate act. The phrase ensures that the analysis considers whether the corporation had

the power to act both historically, when the act was taken, and at the time of ratification or

validation.18

It is true that the View decisions relied on the phrase “at the time” to create

conceptual space for the requirement that Nguyen have consented to the Series B

Financing, but the thrust of those decisions was the distinction between a defective

18
Other sections of the DGCL use the phrase “at the time” similarly. See, e.g., H.B.
341, 150th Gen. Assem. § 2 (2020) (amending 8 Del. C. § 102(b)(7) by adding the
language: “An amendment, repeal or elimination of such a provision shall not affect its
application with respect to an act or omission by a director occurring before such
amendment, repeal or elimination unless the provision provides otherwise at the time of
such act or omission” (emphasis added)); 8 Del. C. § 145(f) (prohibiting elimination of
right to indemnification or advancement “after the occurrence of the act or omission that is
the subject of . . . [a] proceeding for which indemnification or advancement of
expenses is sought, unless the provision in effect at the time of such act or omission
explicitly authorizes such elimination or impairment after such action or omission has
occurred” (emphasis added)); id. § 145(d) (providing mechanisms for determining whether
to indemnify “a director or officer of the corporation at the time of such determination”).

67
corporate act and a rejection. The 2018 Amendment made clear that the phrase “at the

time” was not intended to introduce concepts of authorization into the question of corporate

power. Rather, corporate power is to be analyzed “without regard to the failure of

authorization” that otherwise renders the act void or voidable. What survives this

amendment is the well-reasoned distinction in View between a failure of authorization and

an affirmative rejection.

In this case, Farley’s acts are voidable because of a failure of authorization. Under

Sections 121, 122, 141, and 151, the Company had the raw corporate power under

subchapter II to take those acts. The absence of sufficient directors to constitute a quorum

resulted in a failure of authorization, not a lack of corporate power. The View decisions do

not help the Company in this respect.

Pivoting nimbly, the Company next argues that this case is analogous to View

because there was a real-world rejection of Farley’s proposal to issue shares. The Company

points out that before Levy resigned, he opposed Farley’s plan to issue the two of them

shares. The Company contends that this was a rejection comparable to Nguyen’s

withdrawal of his consent in View.

If Farley relied on action taken while Levy was still a director, then the Company’s

reasoning would be sound. As long as Levy was a director, his refusal to accede to the

issuance of shares was a rejection within the meaning of the View decisions, and any effort

by Farley to document the issuance of shares and seek validation would be improper. Once

Levy resigned, however, he left Farley as the sole remaining director. From that point on,

Farley was the only individual clothed with the trappings of corporate authority who could

68
purport to cause the Company to act. After resigning, Levy no longer had the ability to

deprive Farley of authority. When Farley purported to act as the sole remaining director,

the only obstacle to the effectiveness of his actions was the quorum requirement under

Section 141(b) and the Company’s charter and bylaws. The definition of “failure of

authorization” makes clear that Farley’s inability to satisfy those requirements was just

that—a failure of authorization that can be validated under Section 205, not an absence of

corporate power that cannot.

d. The Floodgates Argument

In its final argument, the Company contends that if validation is available to Farley,

then it will be available “to anyone claiming to have the power to act on a corporation’s

behalf, even if the person lacks such power,” and “chaos will result.” Dkt. 212 at 6.

According to the Company,

Anyone could purportedly act on a corporation’s behalf and ask the Court to
validate an act under Section 205. Such a usurper would be entitled to a full
trial, including discovery, on whether Section 205(d)’s equitable factors tilt
in his or her favor, even though the person had no power to act on the
corporation’s behalf, and even when the individuals actually vested with the
power to control the corporation disagree with the action. The door would be
opened to resentful directors, disgruntled CEOs, conniving employees, and
minority shareholders who could lay claim to a “corporate” act in order to
drag any corporation into court for an equitable analysis.

Id. at 6–7.

Nothing about the current case opens the door to that dystopian scenario. For

starters, the General Assembly established the universe of claimants entitled to seek relief

under Section 205. Those parties are

69
 the corporation, any successor entity to the corporation, any member of the
board of directors, any record or beneficial holder of valid stock or putative
stock, any record or beneficial holder of valid or putative stock as of the time
of a defective corporate act ratified pursuant to § 204 of this title, or any other
person claiming to be substantially and adversely affected by a ratification
pursuant to § 204 of this title.

8 Del. C. § 205(a). Parties outside this circle do not have standing to invoke the statute.

Second, as explained above, a Section 205 claimant must identify a bona fide

attempt to exercise power sufficient to qualify as a corporate act. A random usurper

claiming to have acted on behalf of the corporation will not be able to meet this standard.

Third, granting standing to Farley to seek to validate his defective corporate acts

does not stray beyond the confines of Section 205 as framed by the General Assembly.

Section 205 grants standing to “any member of the board of directors” or “any record or

beneficial holder of valid or putative stock.” Farley was the sole remaining director who

attempted to take the defective corporate acts, and he is a holder of putative stock. For the

reasons discussed previously, he is able to point to evidence of corporate acts that could be

validated.

This case is the classic scenario where a disputed corporate act is potentially subject

to validation. Chaos will not result from Farley invoking Section 205.

e. The Conclusion Regarding Validation

Validation under Section 205 is potentially. Once its legal positions are rejected, the

Company does not argue that the facts of the case are so extreme that the court could not

potentially validate Farley’s acts. And appropriately so, because there is evidence which,

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if accepted and construed in the defendants’ favor, could support validation. The

Company’s motion for summary judgment on Count IV of the Counterclaims is denied.

C. The Remaining Counterclaims

The Company also seeks summary judgment on Counts I, II, and III of the

Counterclaims. In Count I, Farley seeks to recover past due compensation at a rate of

$150,000 per annum. In Counts II and III, Farley advances claims for unjust enrichment.

1. Count I Of The Counterclaims: Breach Of Contract

Count I of the Counterclaims asserts that the Company and Farley “agreed . . . that

Farley would receive an annual salary of $150,000 ‘to be paid when the company has

sufficient funds.’” Ctrcl. ¶ 47. The Company seeks summary judgment on this count on the

theory that as the sole remaining director, Farley could not have validly caused the

Company to agree to pay him $150,000.

The Company is right that Farley did not validly act to approve his compensation,

but that does not entitle the Company to summary judgment. Farley may be able to

convince the court to validate this defective corporate act, at which point that legal defense

will no longer be available.

Validating the contract itself will not lead automatically to its enforcement, because

validation “only removes the taint of voidness or voidability that stems from the ‘failure of

authorization.’” Restoring Equity, supra, at 414. Defective corporate acts, even if ratified

or validated, “are subject to traditional fiduciary and equitable review.” H.B. 127 syn.,

147th Gen. Assem. (2013) (“Ratification of a defective corporate act under § 204 is

designed to remedy the technical validity of the act or transaction; it is not intended to

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modify the fiduciary duties applicable to either the approval or effectuation of a defective

corporate act or transaction or any ratification of such act or transaction.”). Nevertheless,

assuming Farley prevails on his claim to validate his authorization of his salary and proves

that the self-interested compensation was entirely fair, then he can pursue his claim for

non-payment. The Company’s motion for summary judgment on this count is denied.

2. Counts II And III Of The Counterclaims: Unjust Enrichment

Count II of the Counterclaims assert that the Company was unjustly enriched

because Farley achieved “significant improvements [in the Company’s] business at his own

considerable expense,” including “Farley’s significant financial and/or other

contributions.” Ctrcl. ¶ 53. Count III asserts that Farley served as an officer and director

with the expectation of compensation and provided benefits to the Company, such that the

Company will be unjustly enriched if Farley does not receive compensation. Id. ¶ 59. At

oral argument, Farley’s counsel acknowledged that the two counts were substantively

indistinguishable. This decision treats Count II as abandoned and only considers Count

III.19

The elements of unjust enrichment are: (1) an enrichment, (2) an impoverishment,

(3) a relation between the enrichment and impoverishment, (4) the absence of justification,

19
If Farley’s counsel had not made this concession, then this decision would have
granted summary judgment on Count II. In that count, Farley seems to suggest that if his
actions as a fiduciary benefitted the corporation, then he should get a cut of the
corporation’s increased value. To the extent Farley seeks the fair value of his services, that
claim is covered by Count III. To the extent Farley maintains that he is equitably entitled
to a piece of the upside, he has not articulated a cognizable theory of recovery.

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and (5) the absence of a remedy provided by law. Nemec v. Shrader, 991 A.2d 1120, 1130

(Del. 2010). The Company raises a series of arguments in support of its motion for

summary judgment.

First, the Company argues that Farley agreed to serve as a director without pay. See

Ex. 8 at 1. Farley testified that he agreed to serve without pay because the Company lacked

the money, but that he expected to be paid if and when the Company received funds. The

conflicting evidence creates a dispute of material fact. Summary judgment on this theory

is denied.

Second, the Company argues that under Delaware law, directors are presumed to

work without pay absent evidence to the contrary. See Cahall v. Lofland, 114 A. 224, 231

(Del. Ch. 1921), aff’d, 118 A. 1 (Del. 1922). There is evidence in this case to the contrary.

Until the Company suffered reversals, the directors received fees. They agreed to stop

taking fees because of the Company’s financial situation. Farley testified that he expected

to be paid if and when the Company received funds. The conflicting evidence creates a

dispute of material fact. Summary judgment on this theory is denied.

Third, the Company argues that Farley may not maintain a claim for unjust

enrichment regarding his compensation as an officer or director because the relationship is

governed by contract. The Company notes that a corporation’s bylaws are interpreted as a

contract among the corporation and its officers, directors, and stockholders. The Company

then argues that under the bylaws, officer pay is to be determined by the board. See Ex. 1

art. VIII § 2 (“The salaries of all officers of the Corporation shall be fixed by the Board of

Directors, or in such manner as the Board may prescribe.”). The Company further notes

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that the resolution appointing Farley to the positions of principal executive officer and

principal financial officer did not provide for compensation. Ex. 9 at 1. The Company

concludes that under Farley’s contract with the Company, i.e., the bylaws, Farley is not

entitled to any pay.

This is a clever argument that deploys authority from different contexts to create a

logical syllogism. The reality is that the Company’s bylaws are not the exclusive means by

which a director or officer can receive compensation. Moreover, in the absence of a valid

contract, principles of quantum meruit come into play and can support a recovery under a

theory of unjust enrichment. See Boulden v. Albiorix, Inc., 2013 WL 396254, at *14 (Del.

Ch. Jan. 31, 2013, revised Feb. 7, 2013); Bakerman v. Sidney Frank Importing Co., Inc.,

2006 WL 3927242, at *18 (Del. Ch. Oct. 10, 2006, revised Oct. 16, 2006); Heimer, Aber

& Goldlust v. Ingram, 1999 WL 1240904, at *2–3 (Del. Super. Aug. 18, 1999), aff’d, 748

A.2d 913 (Del. 2000) (TABLE). Viewing the evidence in the light most favorable to Farley,

a claim for unjust enrichment could exist. Summary judgment on this theory is denied.

III. CONCLUSION

The Company’s motion for partial summary judgment is granted in part. Farley

could not validly take action as the sole remaining director between February 10, 2016,

and March 9, 2018. The stock that he issued to himself is invalid, as is the compensation

that he attempted to grant to himself. The shares that he gifted to AnneMarieCo remain

invalid, notwithstanding their transfer to AnneMarieCo. Summary judgment is granted in

the Company’s favor on these issues. The Company’s motion for partial summary

judgment is otherwise denied.

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