Klaassen v. Allegro Dev. Corp.
| Decision Date | 11 October 2013 |
| Docket Number | C.A. No. 8626-VCL |
| Parties | ELDON KLAASSEN, Plaintiff and Counterclaim-Defendant, v. ALLEGRO DEVELOPMENT CORPORATION, RAYMOND HOOD, GEORGE PATRICH SIMPKINS, JR., MICHAEL PEHL, and ROBERT FORLENZA, Defendants and Counterclaimants. |
| Court | Court of Chancery of Delaware |
ELDON KLAASSEN, Plaintiff and Counterclaim-Defendant,
v.
ALLEGRO DEVELOPMENT CORPORATION, RAYMOND HOOD,
GEORGE PATRICH SIMPKINS, JR., MICHAEL PEHL,
and ROBERT FORLENZA, Defendants and Counterclaimants.
C.A. No. 8626-VCL
COURT OF CHANCERY OF THE STATE OF DELAWARE
Date Submitted: September 27, 2013
Date Decided: October 11, 2013
R. Judson Scaggs, Jr., Kevin M. Coen, Frank R. Martin, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; George Parker Young, Kelli Larsen Walter, HAYNES AND BOONE, LLP, Fort Worth, Texas; Attorneys for Plaintiff and Counterclaim-Defendant Eldon Klaassen.
Peter J. Walsh, Jr., Ryan T. Costa, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Van H. Beckwith, Jonathan R. Mureen, Jordan H. Flournoy, BAKER BOTTS L.L.P., Dallas, Texas; Attorneys for Defendants/Counter-Plaintiffs Allegro Development Corporation, Raymond Hood, and George Patrich Simpkins, Jr.
Lisa A. Schmidt, Jacob A. Werrett, Adrian D. Boddie, RICHARD LAYTON & FINGER, P.A., Wilmington, Delaware; Robert B. Lovett, Karen Burhans, COOLEY LLP, Boston, Massachusetts; Attorneys for Defendants/Counter-Plaintiffs Michael Pehl and Robert Forlenza.
LASTER, Vice Chancellor.
Page 2
Plaintiff Eldon Klaassen brought this action pursuant to Section 225 of the Delaware General Corporation Law (the "DGCL") to obtain a determination that he remains CEO of Allegro Development Corporation ("Allegro" or the "Company"). He further contends that as the holder of virtually all of the Company's common stock, representing a majority of Allegro's outstanding voting power, he acted by written consent to remove two incumbent directors, fill the two resulting vacancies, and fill a preexisting vacancy. The defendants respond that the Allegro board of directors (the "Board") properly removed Klaassen as CEO and replaced him with defendant Raymond Hood. They regard Klaassen's consent as ineffective such that Klaassen and the four individual defendants currently constitute the Board.
This post-trial decision holds that (i) Klaassen cannot challenge his removal as CEO, (ii) Klaassen continues to serve as a director, (iii) Klaassen validly removed defendant George Patrich Simpkins from the Board but did not validly remove Hood, (iv) Klaassen did not validly fill the vacancy created by Simpkins's removal, and (v) Klaassen validly filled a vacant directorship with non-party John Brown. To sum up, Hood is Allegro's CEO, and Klaassen, Hood, Brown, and defendants Michael Pehl and Robert Forlenza are its directors.
The following facts were proven at trial by a preponderance of the evidence. The parties commendably stipulated to a number of facts in the pre-trial order. Klaassen bore the burden of proof on his claims, and the defendants bore the burden of proof on their counterclaims and affirmative defenses.
Page 3
A. Allegro And The Series A Transaction
Allegro is a privately held Delaware corporation headquartered in Dallas, Texas. The Company is a leading provider of software for energy trading and risk management ("ETRM"). Klaassen founded the Company in 1984, and for over twenty years he operated it as an S corporation and owned nearly 100% of the stock.
In 2007, Klaassen solicited funds from outside investors to monetize a portion of his holdings. The best terms came from North Bridge Growth Equity 1, L.P. ("North Bridge"), which proposed a total investment of $40 million in Allegro at a pre-money valuation of $130 million with North Bridge supplying at least $30 million of the capital. Pursuant to a Stock Purchase Agreement dated December 20, 2007, North Bridge invested $30 million in return for shares of Series A Preferred Stock (the "Series A Preferred"). On January 18, 2008, Tudor Ventures III, L.P. ("Tudor") supplied the remaining $10 million, also in return for Series A Preferred. Under the terms of the deal, Allegro used the $40 million to repurchase common stock and options that Klaassen and certain other executives held. Klaassen received the bulk of the $40 million. Post-transaction, Klaassen continued to hold virtually all of Allegro's common stock, initially representing approximately 70% of the Company's fully diluted equity. North Bridge and Tudor (together, the "Series A Investors") owned all of the Series A Preferred, initially representing approximately 30% of the Company's fully diluted equity.
As part of the Series A transaction, Allegro amended and restated its certificate of incorporation (JX 11, the "Charter") and bylaws (JX 12, the "Bylaws"). Klaassen and the Series A Investors also entered into a Stockholders' Agreement dated as of December 20,
Page 4
2007, to which Allegro was made a party. JX 10 (the "Stockholders' Agreement"). These documents established a corporate governance structure in which Klaassen and the Series A Investors shared control at both the director and stockholder levels.
At the director level, Klaassen and the Series A Investors agreed on a Board of seven members and specified this number in the Bylaws. See JX 12 Art. II § 2. The Charter provided the holders of a majority of the Series A Preferred, voting together as a separate class, with the right to elect three directors (the "Series A Directors"). JX 11 § 3.3.1. The Charter provided holders of a majority of the common stock, voting together as a separate class, with the right to elect one director (the "Common Director"). Id. The holders of a majority of Allegro's outstanding voting power, with all shares voting together and on an as-converted basis, elect the remaining three directors (the "Remaining Directors"). Id.
Post-closing and at all times relevant to this case, Klaassen controlled a majority of Allegro's outstanding voting power through his ownership of the common stock, which nominally gave him the right to elect the Remaining Directors. Under the Stockholders' Agreement, however, Klaassen and the Series A Investors agreed to vote their shares to maintain the composition of the Board as follows: one Remaining Director seat would be filled by the CEO (the "CEO Director"), and the other two Remaining Directors seats would be filled by outsiders who were neither stockholders nor affiliated with any stockholder, such individuals to be designated by the CEO and approved by the Series A Investors (the "Outside Directors"). See JX 10 § 9.2(c)-(d). For convenience, this decision refers to the Series A Directors and the Outside Directors
Page 5
collectively as the "Non-Management Directors." The term excludes the Common Director only because that seat remained vacant until June 2013, just before Klaassen filed this lawsuit.
As suggested by the absence of a Common Director, Klaassen and the Series A Investors never fully implemented the seven-director arrangement. Instead, the Board reached stasis at five directors. In 2012, when the events giving rise to this litigation took place, the Series A Investors had filled two of the Series A Director seats with Pehl, a managing director from North Bridge, and Forlenza, a managing director from Tudor. Klaassen served as one of the Remaining Directors in the CEO Director seat. In his capacity as CEO, Klaassen had designated two Outside Directors, and the Series A Investors had approved both. As noted, Klaassen never elected the Common Director. Although Klaassen considered it, he reasoned that the Series A Investors would respond by filling their additional Series A Director seat. Klaassen and the Series A Investors ended up sharing control over the Board essentially as planned, with neither Klaassen nor the Series A Directors designating a majority of the seats and the Outside Directors furnishing the swing votes.
At the stockholder level, Klaassen and the Series A Investors similarly shared control. In the Charter, Klaassen and the Series A Investors enjoyed the benefit of the same protective consent rights, such as the right to block (i) "any Liquidation Event or Deemed Liquidation Event," (ii) any amendments to the Charter or Bylaws, (iii) the creation, authorization, or issuance of any additional class or series of capital stock, (iv) the issuance of any additional shares or any increase in the authorized number of
Page 6
shares of the common stock or Series A Preferred, or (v) any increase in the number of directors or change in the election procedure for the Board. JX 11 § 3.4. The Charter provided that "so long as Eldon Klaassen is the record owner of at least 33% of the outstanding shares of capital stock" on a fully diluted basis, Allegro could not engage in any of these actions (plus others not referenced here), without both Klaassen's consent and the separate consent of the holders of a majority of the Series A Preferred. Id. In addition, as long as Klaassen held shares representing a majority of Allegro's outstanding voting power, he could control the outcome of any vote in which all of the shares voted together as a single class, without resort to his Charter-based consent right.
In negotiating the Series A transaction, the parties contemplated means by which the Series A Investors could exit from their investment. When they bought into the Company, the Series A Investors anticipated a five-year holding period. At trial, all of the witnesses, including Pehl and Forlenza, stressed that fact. To...
To continue reading
Request your trial