In this action brought under 8 Del. C. § 225, Michael Flaa (the “Plaintiff”) sought to confirm the removal of certain members (the “Defendants”) of the board of CardioVascular BioTherapeutics, Inc. (“Cardio”) by action taken by written stockholder consent. The Court granted the Defendants’ motion for summary judgment, finding that the written stockholder consents delivered on behalf of Vizier Investment Capital Limited (the “Vizier Consents”), which represented 16.6% of the outstanding Cardio shares, were invalidly executed. As a result, the action by written stockholder consent failed because the holders of less than a majority of the voting power of the shares of Cardio’s stock delivered properly executed consents.
The stockholder written consent action to remove the Defendants from the Cardio board (the “Consent Action”) was initiated by Calvin Wallen after the Cardio board rejected a financing proposal made on behalf of Wallen and others. The proposal was conditioned on the immediate resignation of Daniel Montano as CEO of Cardio, and the immediate resignation of the Defendants from the Cardio board, to be replaced with designees of Wallen and his associates. The Consent Action sought to (1) amend the Cardio bylaws with respect to the removal of directors and appointment of directors to vacancies, (2) remove the Defendants as directors of Cardio, and (3) direct the remaining board to consider and act on Wallen’s financing proposal.
Vizier Investment Capital Limited (“Vizier”) was formed in 1998 for the sole purpose of holding the 30 million shares of Cardio jointly owned by Daniel Montano and his wife at the time, Vicki Montano. The Defendants claim that at the initial meeting of the Vizier board, for which no minutes could be produced, Daniel Montano, as President of Vizier, was given sole voting and investing power over Vizier’s shares of Cardio. An undated Register of Officers for Vizier indicates that Vicki Montano served as Vice President and director of Vizier, and no evidence was presented indicating that Vicki Montano ever resigned from these roles. The Vizier Articles of Association provide that, “it shall be the responsibility of…the President to manage the day to day affairs of the Company, [and] the Vice Presidents to act in order of seniority in the absence of the President.”
Daniel and Vicki Montano divorced in 2001, and their divorce agreement entitled Vicki to receive the first $2 million, after taxes, generated from a sale of Vizier stock. The divorce agreement did not address Daniel and Vicki’s relative voting rights with respect to the Cardio shares held by Vizier. In a hearing on April 22, 2013 relating to a default judgment action against Daniel Montano in Nevada, Mr. Montano testified that his only assets were his joint interest in the Cardio stock held by Vizier, but that according to his divorce agreement, he did not have access to the stock held by Vizier until after Vicki Montano first received $2.5 million dollars, and until that time the Vizier shares were under his ex-wife’s control.
In anticipation of the Consent Action, Vicki Montano had the Vizier mailing address in Cardio’s records updated such that the Vizier Consents were redirected to herself. The Vizier address in Cardio’s records was a previous residence of Daniel Montano at which he had not lived for at least two years. Vicki Montano did not inform Daniel Montano that she had changed Vizier’s mailing address, or that she was in possession of the Vizier Consents. Vicki Montano also did not call a meeting of the Vizier board to determine whether it was in Vizier’s interests to vote the Vizier Consents. On June 8, 2013, a paper copy of the Vizier Consents was hand-delivered to Cardio’s registered agent, signed by Vicki Montano as Vice President. Including the Vizier Consents, written consents representing 51.22% of the outstanding shares of Cardio stock were effectively delivered to Cardio, and the Defendants were removed from the Cardio board. On June 8, 2013, the Plaintiff filed suit under 8 Del. C. § 225 to confirm the effectiveness of the Vizier Consents, and consequently the Consent Action.
The Plaintiff argued that the Vizier Consents were valid on four grounds. First, the Plaintiff argued that the Court should apply to this challenge to the Vizier Consents the same standard the Court applies to the validity of a proxy, which would require the Court to exclude extrinsic evidence of the Vizier Consents’ validity because they were facially valid. The Court acknowledged that a proxy valid on its face is entitled to a presumption of validity, but stated that Delaware case law is clear that extrinsic evidence is admissible to challenge a facially valid written consent.
Next, the Plaintiff argued that, as Vice President of Vizier, Vicki Montano had actual authority to execute the Vizier Consents. The Court acknowledged that there was a genuine issue of fact with respect to whether Vicki Montano was a Vice President of Vizier at the time, but explained that it did not need to reach this question because, even if Vicki Montano held the position of Vice President, in that role she did not have actual authority to vote the written consents on behalf of Vizier. With reference to The Restatement (Third) of Agency, the Court concluded that the office of vice president does not inherently carry actual or apparent authority to bind a corporation, and that some independent source of authority must grant such power. The Court determined that, while the Vizier Articles of Association were silent with respect to the specific authority to vote stock held by Vizier, the Articles of Association granted the President the authority to manage the day-to-day affairs of Vizier, which included the authority to vote shares held by the company since Vizier’s only day-to-day operations involved managing and voting its Cardio shares. Thus, Daniel Montano, as President, had the authority to vote the shares held by Vizier, and Vicki Montano, as Vice President, was only authorized to do so in the President’s absence. The Court acknowledged that Daniel Montano did not maintain a current address with Vizier’s registered agent, and took no action upon learning of the Consent Action as a faithful fiduciary should have done, but determined that Daniel Montano was not “absent” from Vizier such that a Vice President would have been justified to usurp his responsibilities, especially since Vicki Montano and other Vizier directors could have easily communicated with Daniel Montano about the opportunity to vote the Vizier Consents. Because Daniel Montano was not absent, the Court concluded that Vicki Montano did not have actual authority to vote the Vizier Consents.
The Plaintiff next argued that, even if Vicki Montano did not have the actual authority to vote the Vizier Consents, she had apparent authority to vote the Vizier Consents, and Vizier should be bound by that authority. The Court rejected this argument because the Plaintiff failed to show that Cardio relied on the consent card’s representation that Vicki Montano was Vizier’s Vice President, and the record showed that Cardio had reason to doubt Vicki Montano’s authority to vote Vizier’s shares because of Daniel Montano’s history of exercising exclusive voting power.
Finally, the Plaintiff asserted that Defendants should be estopped from arguing that Vicki Montano did not have authority to execute the Vizier Consents because of the statements made by Daniel Montano in the Nevada debt collection action. The Court explained that, under the doctrine of judicial estoppel, a party may be precluded from asserting in a legal proceeding a position inconsistent with a position previously taken by him or her in the same or in an earlier legal proceeding. The Court determined that this principle did not apply because Daniel Montano’s statements in the debt collection action, which referred to he and Vicki’s relative rights to transfer ownership of the shares, did not amount to an unambiguous declaration that Vicki Montano had authority to vote the Vizier Consents. As such, Defendants were not foreclosed from arguing that Vicki Montano lacked authority to vote the Vizier Consents.
Finding that Vicki Montano lacked authority to execute the Vizier Consents, and that the Defendants were not judicially estopped from challenging her authority to vote the Vizier Consents, the Court granted Defendants’ motion for summary judgment.
The full opinion is available here.
