Document: Keyser v. Curtis, C.A. No. 7109-VCN (Del. Ch. July 31, 2012)
The Delaware Court of Chancery held invalid the creation and issuance of super-voting preferred stock by the sole director of Ark Financial Services, Inc. (“Ark”), an affiliate of Dawson James Securities, Inc. (“Dawson James”), because the director issued the stock to himself for nominal consideration and for the primary purpose of preventing Ark’s stockholders from electing a new board.
This action arose from a dispute over control of Ark by its founders: Robert D. Keyser (“Keyser”) and Albert Poliak (“Poliak”). In 2009, Keyser stepped down as CEO of Dawson James and as a director of its parent company, Ark, at the request of Ark’s creditors. Poliak became the sole director of Ark and also replaced Keyser as CEO of Dawson James. Subsequently, Keyser developed a plan to remove Poliak and elect himself and his allies to the Ark board by purchasing notes and an option to acquire a substantial portion of Ark’s common stock from Ark’s creditors. In response, Poliak created and issued himself a sufficient number of shares of a new series of super-voting, Series B preferred stock to dilute the stockholdings of Keyser and his allies below a majority of the outstanding voting power. After settlement negotiations failed, the Keyser faction purported to remove Poliak by an action by written consent of the holders of a majority of the outstanding common stock. Keyser and his allies then initiated an action pursuant to Section 225 of the General Corporation Law of the State of Delaware to determine the lawful directors of Ark.
In this post-trial decision, the Court determined that plaintiffs’ action by written consent was effective to remove Poliak as a director because the Series B preferred stock was void and plaintiffs’ consent therefore represented a majority of the outstanding voting power of Ark. In reaching the conclusion that the Series B preferred stock was void, the Court found that the issuance was the product of self-dealing. Poliak argued that the dilutive issuance was justified because Ark faltered under Keyser’s leadership and would suffer even greater financial distress if Keyser regained control of the company. The Court held that even if true, these facts failed to establish the entire fairness of Poliak’s decision to give control of the company to himself for nominal consideration and intentionally deprive Ark’s stockholders of the right to determine who should comprise the Ark board.