The purported directors and majority stockholders of Corporations A and Corporation B signed written consents removing a third director from the board, after which they filed an action pursuant to 8 Del. C. § 225 asking the court to confirm that the removal was valid. Whether the written consent regarding the Corporation A was valid hinged upon whether the two directors were majority stockholders at the time of the consent. Whether the written consent pertaining to the Corporation B was valid hinged on whether the two directors’ oral resignation from the board was a valid resignation. The record-keeping for both corporations was informal, and only Corporation A had a stock ledger. Moreover, even that stock ledger was not maintained after the initial issuance. Both corporations used less formal means such as spreadsheets to track what the directors thought were valid common stock issuances given to the directors as well as various lenders and investors. The two directors claimed that subsequent common stock issuances by Corporation A that had diluted their holdings were void, such that they were able to issue a written consent to remove the third director in their capacity as majority stockholders as permitted in the bylaws. The two directors also claimed 1) that Corporation B had never validly issued stock, and 2) that because there was no written evidence they had resigned from the board, they were still directors of Corporation B entitled to remove the third director.
The Court concluded that the DGCL requires a written instrument evidencing board approval to issue common stock, and a lack of board approval by written instrument renders issued common stock void. Such a conclusion, the Court decided, was necessary to avoid uncertainty, holding that it “must ‘refuse to overlook the statutory invalidity of stock even in situations when that might generate an inequitable result,’” quoting Liebermann v. Frangiosa, 844 A.2d 992, 1004 (Del. Ch. 2002). In other words, the Court said, “for changes to the corporation’s capital structure, ‘law trumps equity,’” quoting Blades v. Wisehart, 2010 WL 4638603, at *12, (Del. Ch. Nov. 17, 2010).
Although the third director argued estoppel because the two directors had proceeded with the affairs of the corporations as if all the common stock issuances were valid, the Court agreed with the two directors who said that the application of estoppel would yield the “untenable conclusion that the proper capitalization of a company could differ depending on the person who asks the question.” The Court stated that “even a shared understanding of what was intended is insufficient to satisfy the DGCL’s strict requirement of a written instrument.” Thus, based on the stock ledger of the Corporation A, the two directors were majority stockholders who could remove the third director by written consent.Regarding the Corporation B, the Court found it had no validly issued stock, but that a preponderance of the evidence demonstrated that the two directors had orally resigned from the board some years before executing the written consent, and that oral resignations are valid per Delaware case law. Therefore, the third director was left as the sole director of Corporation B.