Klaassen v. Allegro Dev. Corp.

• Decision Date: 14 March 2014
• Docket Number: No. 583, 2013.,583, 2013.
• Citation: 106 A.3d 1035
• Parties: Eldon KLAASSEN, Plaintiff and Counterclaim–Defendant Below, Appellant, v. ALLEGRO DEVELOPMENT CORPORATION, Raymond Hood, George Patrich Simpkins, Jr. Michael Pehl, and Robert Forlenza, Defendants and Counterclaimants Below, Appellees.
• Court: Supreme Court of Delaware

106 A.3d 1035

Eldon KLAASSEN, Plaintiff and Counterclaim–Defendant Below, Appellant

v.ALLEGRO DEVELOPMENT CORPORATION, Raymond Hood, George Patrich Simpkins, Jr. Michael Pehl, and Robert Forlenza, Defendants and Counterclaimants Below, Appellees.

No. 583, 2013.

Supreme Court of Delaware.

Submitted: Dec. 18, 2013.

Decided: March 14, 2014.

R. Judson Scaggs, Jr. (argued), Kevin M. Coen and Frank R. Martin, Esquires, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Of Counsel: George Parker Young, Anne Johnson and Kelli Larsen Walter, Esquires, Haynes and Boone, LLP, Fort Worth, Texas, for Appellant.

Peter J. Walsh, Jr., Ryan T. Costa, Potter Anderson & Corroon LLP, Wilmington, Delaware; Of Counsel: Van H. Beckwith (argued), Jonathan R. Mureen, Jordan H. Flournoy, Esquires, Baker

Botts L.L.P., Dallas, Texas for Appellees Allegro Development Corporation, Raymond Hood, and George Patrich Simpkins, Jr., Lisa A. Schmidt, Jacob A. Werrett, Adrian D. Boddie, Esquires, Richards, Layton & Finger, P.A., Wilmington, Delaware; Of Counsel: Robert B. Lovett and Karen Burhans, Esquires, Cooley LLP, Boston, Massachusetts for Appellees Michael Pehl and Robert Forlenza.

Before HOLLAND, BERGER, JACOBS, and RIDGELY, Justices and JOHNSTON, Judge,^* constituting the Court en Banc.

JACOBS, Justice:

I. INTRODUCTION

Plaintiff-below/appellant Eldon Klaassen (“Klaassen”) appeals from a Court of Chancery judgment in this proceeding brought under 8 Del. C. § 225. The judgment determined that Klaassen is not the de jure chief executive officer (“CEO”) of Allegro Development Corporation (“Allegro”). Klaassen claimed that the remaining Allegro directors (collectively, the “Director Defendants”), in removing him as CEO, violated an equitable notice requirement and also improperly employed deceptive tactics. After a trial and without addressing its merits, the Court of Chancery held that the claim was barred under the equitable doctrines of laches and acquiescence.

We affirm the Court of Chancery judgment. We hold that, to the extent that Klaassen's claim may be cognizable, it is equitable in nature. Therefore, Klaassen's removal as CEO was, at most, voidable and subject to the equitable defenses of laches and acquiescence. We further conclude that the Court of Chancery properly found that Klaassen acquiesced in his removal as CEO, and is therefore barred from challenging that removal.¹

II. FACTUAL AND PROCEDURAL BACKGROUND

A. Facts ²

Allegro,³ a Delaware corporation headquartered in Dallas, Texas, is a provider of energy trading and risk management software. From the time that Klaassen founded Allegro in 1984, he has been Allegro's CEO, and until 2007, owned nearly all of Allegro's outstanding shares.⁴

(1) The Series A Investment

In 2007, at which time Allegro was valued at approximately $130 million, Klaassen and Allegro solicited capital infusions from prospective investors. As a result, Allegro entered into transactions with North Bridge Growth Equity 1, L.P. and Tudor Ventures III, L.P. (collectively, the “Series A Investors”) in late 2007 and early 2008. In those transactions those investors received Series A Preferred Stock of Allegro in exchange for an investment of $40 million. Currently, the Series A Investors own all of Allegro's Series A Preferred Stock, and Klaassen holds the majority of Allegro's Common Stock. As part of that transaction the Series A Investors, together with Klaassen and Allegro, entered into a Stockholders' Agreement (the “Stockholders' Agreement”). In addition, Allegro amended and restated both its certificate of incorporation (the “Charter”) and its bylaws (the “Bylaws”).

Those three documents created a framework under which Klaassen and the Series A Investors would share control of Allegro's board of directors (the “Board”). Under the Bylaws, Allegro would be governed by a seven member Board. Under the Charter, the holders of Series A Preferred Stock (voting as a separate class) became entitled to elect three directors, and the holders of Common Stock (voting as a separate class) became entitled to elect one director. The remaining three directors would be elected as provided by Section 9.2 of the Stockholders' Agreement, under which Allegro's CEO would serve as a director, and in his capacity as CEO, would designate two outside directors, subject to the approval of the Series A Investors. The two outside directors would ultimately be elected by the holders of Series A Preferred Stock and Common Stock, voting together as a group.

Although the governing documents provided for a seven member Board, in actuality Klaassen and the Series A Investors settled on a five member Board. From 2010 until November 1, 2012, that Board consisted of Michael Pehl and Robert Forlenza (the “Series A Directors”), George Patrich Simpkins, Jr. and Raymond Hood (the “Outside Directors”), and Klaassen (as the CEO director). During that period, Klaassen, as the majority common stockholder, did not elect a director, nor did the Series A Investors elect a third director.

In negotiating the terms of their investment, the Series A Investors also obtained certain guarantees regarding their eventual exit from Allegro, which was to occur in 2012. At any time after December 20, 2012, the Series A Investors could require Allegro to redeem all outstanding Series A Preferred shares. The redemption price would be the greater of: (i) the Fair Market Value (as defined in the Charter), or (ii) the original issue price, plus, in either case, any accrued or declared but unpaid dividends.⁵ If the company were sold, the Series A Investors would receive an initial liquidation preference equal to two times their original $40 million investment, plus all unpaid accrued or declared dividends. The Series A Investors could not, however, force a sale of Allegro for less than $390 million without Klaassen's consent, so long as he held at least 33% of Allegro's outstanding capital stock.⁶

(2) Events Leading To Klaassen's Termination

Not long after the Series A Investors became shareholders, Allegro began falling short of its financial performance projections.⁷ A 2007 private placement memorandum circulated by Allegro had projected revenues of $61 million in 2008, $75 million in 2009, and $85 million in 2010.⁸ In fact, Allegro generated only $46 million in revenue in 2008, $37.5 million in 2009, and less than $35 million in 2010.⁹ Although Allegro met its targets for the first three quarters of 2011, the company's fourth quarter performance was a “disaster,” and the first quarter of 2012 was similarly disappointing.¹⁰

Not surprisingly, the Series A Directors, and later the Outside Directors, became discontented with Klaassen's performance as a manager. After the Series A investment transaction, Allegro hired Chris Larsen as chief operating officer to address the Series A Investors' concerns about Klaassen's management. Ten months later, Mr. Larsen resigned, citing difficulty working with Klaassen.¹¹ While Allegro's financial performance continued to falter, the Series A Directors became particularly frustrated with Klaassen's inability to provide the Board with accurate information.¹² In 2012, only four days before the end of Allegro's best sales quarter to date, Klaassen fired Allegro's senior vice president of sales—disregarding the Board's request to wait until after the quarter's end, and acting without any succession plan in place.¹³ Finally, in September 2012, Allegro's chief marketing officer resigned, citing Klaassen's leadership style as the reason.¹⁴

As frustration with Klaassen mounted, in 2012 the Board began exploring ways to address the Series A Investors' redemption right.¹⁵ At some point before the July 19, 2012 Board meeting, Klaassen proposed that Allegro buy out the Series A Investors' Preferred Stock investment for $60 million.¹⁶ Initially the Series A Investors had demanded $92 million—the approximate value of their initial liquidation preference—but at a July 31, 2012 Board meeting they reduced their demand to $80 million.¹⁷ At that same meeting, Klaassen made a presentation about Allegro's financial performance, apparently hoping to make his $60 million offer to the Series A Investors appear more attractive.¹⁸ Instead, all that Klaassen accomplished was to highlight Allegro's poor performance as compared to its industry peers.¹⁹ As a result, Mr. Forlenza (a Series A Director) concluded that the only viable path for the Series A Investors to achieve a profitable exit was to “grow” the company before exiting.²⁰

(3) Klaassen's Termination

In late summer 2012, the Board began seriously to consider replacing Klaassen as CEO. After the July 19 Board meeting, the Outside Directors discussed (with Klaassen), Klaassen's unwillingness to compromise with the Series A Investors. Mr. Hood pointedly told Klaassen that with three director votes, the Board could remove him as CEO.²¹ After Klaassen's July 31 Board meeting presentation, Messrs. Pehl and Forlenza (the Series A Directors) became more convinced that Klaassen had to be replaced.²² In an August 7, 2012 conference call, Messrs. Pehl, Forlenza, Hood, and Simpkins discussed the possibility of replacing Klaassen.²³ Shortly after that call, Mr. Hood asked Baker Botts LLP (legal counsel for the Outside Directors) for advice about the ramifications of replacing Klaassen.²⁴ On August 17, 2012, the Director Defendants spoke once again.²⁵

In mid-September 2012, Messrs. Simpkins and Hood met with Klaassen. Both warned Klaassen that his tenure as CEO was “in jeopardy.”²⁶ At some point, most likely in September, Mr. Pehl asked Mr. Hood whether he (Hood) would consider replacing Klaassen as CEO. Eventually, Hood agreed,²⁷ and by mid-October, the four Director Defendants (Pehl, Forlenza, Hood, and Simpkins) decided to replace Klaassen at the next regularly scheduled Board meeting on November 1, 2012.²⁸ Those four directors held two preparatory conference calls—on October 19 and October 26—and asked Baker Botts to...