Under Sections 204 and 205 actions of the DGCL, Delaware corporations may petition the Court of Chancery to ratify otherwise defective corporate actions. To read prior blog post summarizing these provisions of the DGCL, click here. This is an important read for any party seeking relief under Section 205 of the DGCL and faced with a motion to dismiss.
Recently, the Court of Chancery ruled upon a motion to dismiss a complaint seeking relief under Sections 204 and 205, in the case of Knoll Capital Management L.P. v. Advaxis, Inc., C.A. No. 11417-VCN (Del. Ch. Jan. 29, 2016). There, the complaint alleged that Plaintiff Knoll Capital Management L.P. (“KCM”) and Defendant Advaxis, Inc. (“Advaxis”) orally agreed that KCM would purchase more than 1.66 million shares of unregistered Advaxis common stock for $3 per share. Instead, on December 19, 2014, Advaxis issued its stock to another group at a price of $4.25 per share. Due to the signing of a non-disclosure agreement, KCM was precluded from purchasing Advaxis publicly traded stock. By late June 2015, Advaxis stock was selling for more than $30/share.
Advaxis moved to dismiss under Rule 12(b)(6), under the premise that if there was an agreement to sell the stock to KCM, was never memorialized by a writing and that its board of directors never approved the issuance of Advaxis stock to KCM, in violation of Grimes v. Alteon, Inc., 804 A.2d 256, 266 (Del. 2002) (“[DGCL] requires board approval and a written instrument evidencing an agreement obligating the corporation to issue stock either unconditionally or conditionally.”).
Vice Chancellor Noble denied the motion to dismiss. In so doing, the Court provided:
The recent legislation empowering the Court to validate ineffective (void or voidable) corporate acts is broad in scope. Advaxis has not explained why a failure to satisfy Grimes should not be treated as any other failure to comply with the DGCL or governing common law.
The Court found that the complaint validly alleges a defective corporate act, and defendant has not explained why it is not reasonably conceivable that KCM could obtain the relief it seeks under Section 205.