Paul Nguyen v. View, Inc.

Citation: Not availableDocket: CA 11138-VCS

Court: Court of Chancery of Delaware; June 6, 2017; Delaware; State Appellate Court

Original Court Document: View Document

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In the case of Paul Nguyen v. View, Inc., the plaintiff, Nguyen, who owned approximately 70% of the company’s common stock, initially consented to a Series B preferred stock financing. However, he later revoked his consent, citing concerns that the new governance documents would significantly reduce his rights as a stockholder. View, contesting this revocation, proceeded with the financing as if Nguyen had not revoked consent. Nguyen subsequently initiated binding arbitration, seeking a declaration that his revocation was valid and that the Series B Financing was void. The arbitrator ruled in Nguyen’s favor, declaring the financing invalid, which subsequently jeopardized the capital structure of View, which had raised around $500 million in later financing rounds.

In response to the arbitration ruling, View attempted to retroactively ratify the Series B Financing and subsequent financing rounds under Delaware law (8 Del. C. § 204). This effort included converting Series A preferred stock to common stock, effectively removing Nguyen's voting protections and majority status. Nguyen filed an Amended Verified Complaint seeking a declaration that View's ratification attempts were improper under 8 Del. C. § 205. View moved to dismiss the complaint, arguing that Nguyen did not provide sufficient facts to support a claim that the ratification was technically invalid or inequitable. The court identified a central issue regarding whether the Series B Financing constituted a "defective corporate act" eligible for ratification under Section 204, ultimately concluding that it did not, as Section 204 was deemed inapplicable to the situation.

View's decision to proceed with the Series B Financing was unauthorized because Paul Nguyen had effectively revoked his consent prior to the transaction's closure. Consequently, View cannot claim ratification to legitimize this unauthorized action, leading to the denial of the motion to dismiss. 

In evaluating the motion, the court relies on the factual allegations in the Complaint, relevant documents, and matters subject to judicial notice, presuming the truth of the well-pled allegations at this stage. 

Paul Nguyen, a California resident and founder of View, owns 4,537,500 shares of common stock. He previously held various executive roles, including President and Chairman, but was terminated and removed from the board before this litigation commenced. View, incorporated in Delaware and originally named Echromics, Inc., specializes in "switchable electrochromatic glass" aimed at reducing energy consumption and enhancing comfort.

In 2007, View secured investments from Sigma Partners Ventures and Kholsa Ventures, resulting in a Series A Financing based on a $5 million pre-money valuation. Following this, Sigma and KV acquired a significant equity stake, comprising 50% of View's equity on a fully-diluted basis. After subsequent investments, their ownership increased to 56% of the equity. A voting agreement established by Nguyen, Scobey, Sigma, and KV dictated the board's composition, CEO selection, and voting procedures, granting Sigma and KV substantial control over View's corporate governance while providing Nguyen with limited protective measures as a founder.

View adopted an Amended and Restated Certificate of Incorporation on May 22, 2007, to accommodate Series A Financing, which granted Sigma and KV significant approval and veto rights over key corporate actions, including dividend declarations, securities redemptions, bylaws amendments, and mergers. Post-financing governance established a five-person Board, with Sigma and KV controlling four seats, while Nguyen held the remaining seat. Nguyen's protections included a class vote provision under Delaware law requiring majority approval for certain amendments and rights under a voting agreement that allowed him to influence Board size and access company information.

In December 2008, Raul Mulpuri became CEO, subsequently excluding Nguyen from Board meetings and access to materials. Nguyen was removed as Chief Technology Officer on January 9, 2009, and terminated from employment and Board membership shortly thereafter, without Board or stockholder votes. Despite his entitlement to a Board seat as a majority common stockholder, Nguyen challenged his removal and threatened litigation, leading to a mediation agreement.

During the ongoing dispute, on June 5, 2009, View amended its charter to allow the issuance of convertible notes to Sigma and KV and to increase the number of authorized shares, actions taken without Nguyen's consent as required. A subsequent amendment on August 27, 2009, continued this trend. Despite these changes, Nguyen maintained majority ownership of the common stock. Ahead of scheduled mediation on September 18, 2009, View sought Nguyen's consent for documents related to Series B Financing, which, while providing essential capital, was disadvantageous to Nguyen.

Holders of common stock lost the right to appoint Board members, while Nguyen's consent for amendments to the Voting Agreement was eliminated. Additionally, View planned to file a Certificate of Incorporation that waived Nguyen’s majority common stockholder approval rights for amendments affecting authorized shares. Despite these unfavorable changes, View pressured Nguyen for his vote to proceed with the Series B Financing transaction, linking it to the resolution of his termination claims. During mediation on September 18, 2009, Nguyen expressed concerns about the financing, but ultimately consented to the transaction, which allowed for rescission within seven days. Upon reviewing the transaction documents post-mediation, Nguyen realized they would strip him of voting rights and his Board seat, contrary to prior representations. On September 24, 2009, he rescinded his consent to the Series B Financing before the revocation period expired, but View closed the financing anyway. This action significantly reduced Nguyen’s equity stake from 23% to about 3%. Following this, on January 11, 2010, Nguyen filed a lawsuit in California challenging his termination and the Series B Financing's validity, which was later moved to arbitration by JAMS. He amended his claims to include invalidity of subsequent financing rounds (Series C through F) initiated during arbitration, which raised over $500 million. Respondents sought to enforce the Settlement Agreement to contest Nguyen's revocation, but in January 2011, the arbitrator upheld Nguyen's right to rescind the agreement.

The revocation of the Settlement Agreement and its impact on Nguyen's consent to the Series B Financing remained unresolved until a JAMS arbitrator ruled on December 18, 2015, that Nguyen had properly revoked his consent, thereby invalidating the Series B Financing and all related transaction documents, including the Second Amended and Restated Certificate of Incorporation. This ruling also led to the invalidation of subsequent financing rounds (Series C through Series F) and reinstated a Voting Agreement from February 21, 2008, which designated that View's Board would consist of five members, one of whom Nguyen could designate.

Following the arbitrator's decision, holders of Series A preferred stock converted their shares to common stock in early 2016, displacing Nguyen as the majority common stockholder and resulting in the cancellation of the Voting Agreement due to fewer than 1 million Series A preferred shares. On February 26, 2016, View filed numerous certificates of correction and validation to ratify previously defective charter amendments, including attempting to reinstate the invalidated Series B Financing and subsequent rounds. This led to a reconstitution of the Board from five to eleven members, excluding Nguyen.

In April 2016, View ratified and corrected its earlier ratifications due to irregularities in Board composition. Nguyen filed an Amended Verified Complaint on May 10, 2016, challenging these 2016 certificates of validation and seeking to compel arbitration. View subsequently moved to dismiss the complaint under Court of Chancery Rule 12(b)(6), and after oral arguments, the court allowed for supplemental submissions regarding compliance with Section 204, with the final submission filed on March 6, 2017.

View has filed a motion to dismiss Count I, which seeks to compel arbitration, and Counts II through VIII, where Nguyen seeks to declare the 2016 Ratifications invalid. Nguyen appears to have abandoned his arbitration claim, leading to its dismissal with prejudice. Regarding the 2016 Ratifications, View asserts compliance with Section 204 and argues that Nguyen's challenges should be dismissed as a matter of law under Section 205. A key issue is whether corporate acts, declined by the majority of stockholders but subsequently pursued by the corporation, can be classified as "defective corporate acts" eligible for ratification under Section 204. Section 204 states that defective corporate acts are not void or voidable if ratified or validated by the Court of Chancery, defining a "defective corporate act" as actions taken without proper authorization, which may include overissues, void appointments, or other unauthorized transactions. "Failure of authorization" encompasses non-compliance with statutory provisions or corporate governance documents. The interpretation of these statutory provisions is crucial for determining the validity of the 2016 Ratifications.

Section 204 serves as a "safe harbor procedure" enabling corporations to validate acts that would otherwise be void or voidable, counteracting previous case law that deemed corporate acts or transactions void due to noncompliance with the General Corporation Law or organizational documents. The legislative intent behind Section 204 was to allow ratification of such acts on equitable grounds, addressing issues where statutory formalities for stock issuance were treated as essential to validity. This legislative intervention aimed to create a practical framework for corporations to correct errors without severe repercussions.

The 2016 Ratifications attempted to validate numerous charter amendments and equity issuances following the conversion of Series A preferred stock to common stock. The context reveals that prior to the Series A Financing, Nguyen, as the majority common stockholder, had rights under Section 242(b)(2) to approve amendments to the certificate of incorporation and the Voting Agreement. After revoking his consent to the Series B Financing, which was subsequently validated by an arbitrator, the financing documents were deemed invalid, reinstating the Voting Agreement and Nguyen’s rights.

For the 2016 Ratifications to be effective under Section 204, they must relate to acts that were within the corporation's power but rendered void or voidable due to a lack of authorization. While the Company had the authority to issue stock and options, and Section 204 allows for the ratification of such acts, the argument for the validity of the 2016 Ratifications under Section 204 ultimately fails.

Section 204 stipulates that a corporation can only ratify defective corporate acts that were within its power at the time those acts were purportedly taken. In this case, when the 2016 Ratifications were made, Nguyen, as the majority common stockholder, had class voting protections and the right to appoint a Board member under the Voting Agreement. Therefore, View's attempt to proceed with the Series B Financing was invalid because Nguyen had withheld his consent, which was legally required for the transaction.

Nguyen's revocation of consent was not merely a "failure of authorization" as defined by Section 204; it constituted a clear rejection of the Board's proposal. The distinction between a "failure" to authorize and a "rejection" is critical: a "failure" implies an omission or lack of success, while a "rejection" indicates an active refusal to accept a proposal. View's argument that a stockholder’s decision not to consent does not constitute a rejection misinterprets these terms and undermines the importance of stockholders’ voting rights.

The Series B Financing was declared void not due to non-compliance with legal or governance requirements, but because the majority stockholder explicitly rejected it. This emphasizes the significance of the stockholder vote, reinforcing that a "no" vote is a legitimate exercise of rights, rather than a mere failure to act.

View's interpretation of Section 204 allows a corporation to retroactively ratify actions that stockholders previously rejected, effectively certifying these acts as effective from the date of rejection. This construction lacks support in the statute's text or legislative history, which does not indicate an intention to permit such retroactive validation. View contends that its right to convert Series A preferred stock to common stock prior to Series B Financing provides grounds for considering the Series B Financing as if the conversion had occurred beforehand. This argument represents a significant departure from established case law, specifically the precedents set in STAAR Surgical Co. v. Waggoner and Blades v. Wisehart, which assert that corporate acts deemed void due to noncompliance with statutory requirements cannot be ratified on equitable grounds. In STAAR Surgical, the failure to adopt necessary board resolutions invalidated a stock issuance, while Blades highlighted the lack of adherence to statutory formalities in a stock split. These cases illustrate failures to authorize actions rather than rejections of actions as seen in View's situation. Section 204 cannot be used to retroactively authorize actions that were never completed or to backdate actions that were rejected, which is precisely what View is attempting by converting preferred stock to common stock after the fact, despite the majority shareholder's opposition.

Sigma and KV converted their Series A Preferred Stock into common stock, a right they exercised during the initial approval of the Series B Charter and maintained through the Series B financing. They voted for the 2016 Ratifications to safeguard View's capital structure. Throughout the six-year dispute concerning the Series B Financing, KV and Sigma, as Series A preferred stockholders, held various management rights including board management, participation, registration, and veto rights on significant corporate actions. The court has not previously applied Sections 204 or 205 to alter a stockholder vote through statutory ratification. Instead, these sections have been invoked to rectify corporate acts resulting from authorization failures, technical discrepancies, or improper notifications. The decisions cited do not endorse Section 204 for reversing stockholder votes against board-proposed transactions. Consequently, Nguyen has presented facts supporting his claim that the 2016 Ratifications cannot be validated under Section 204. The court does not need to address View's arguments concerning alleged non-compliance with Section 204 or inequity under Section 205(d). Additionally, the 2016 Ratifications did not validate Nguyen's removal from the Board, rendering that issue moot.

The 2016 Ratifications did not validate a stockholder vote, making the question of whether such a vote is a 'defective corporate act' irrelevant. The court recognizes that granting Nguyen's requested declarations could severely harm View, which faces this predicament due to its aggressive financing strategy amid uncertain arbitration outcomes. However, Section 204 of Delaware law fully addresses the issues at hand, contrasting with prior rulings where courts maintained some discretion over the decisional space. Section 204 was enacted to rectify situations where prior attempts to correct defective corporate acts were invalidated by the Supreme Court. Despite the temptation to act equitably, courts cannot create new substantive rights under the pretense of equity. Therefore, any effort to uphold View's attempted ratification on equitable grounds would likely be rejected upon appeal. The court concludes that Section 204 is not applicable in this case, and it cannot substitute a statutory remedy with an equitable one. Consequently, the motion to dismiss is granted for Count I of the Amended Verified Complaint but denied for the remaining counts, and the parties are instructed to confer on a case scheduling order.