What California Lawyers Can Learn From Genelux

Written by Keith P. Bishop | Jan 8, 2018 9:02:00 AM

Last October, Vice Chancellor Parsons of the Delaware Court of Chancery issued a lengthy post-trial decision in Genelux Corp. v. Roeder (In re Genelux Corp.), 126 A.3d 644, 2015 Del. Ch. LEXIS 270, 2015 WL 6390232. A large part of the Vice Chancellor's decision addresses the question of whether a corporation may petition the Court of Chancery to invalidate the issuance of shares pursuant to Section 205 of the Delaware General Corporation Law. Because California does not have validating statute analogous to Section 205, this part of the opinion is not presently relevant to the California General Corporation Law.

The ultimate issue in Genelux was the validity of the election of two directors who won their seats by virtue of the disputed shares being voted. Genelux initially brought the suit only under Section 205 but it later filed an amended complaint under Section 225 that included a stockholder/director as a plaintiff. Section 225, which empowers the Court of Chancery to determine the validity of any election, appointment, removal or resignation of a director, is analagous to Section 709 of the California Corporations Code.

In considering Section 225, the Vice Chancellor was chary of the plaintiff's role:

There is a good possibility, however, that Simus [the plaintiff] is a shill for Genelux, who the Company pushed forward to pursue the Section 225 claim on its behalf. Simus is an accomplished individual in his own right, and I understand from his testimony that he has invested a significant portion of his life as a Genelux stockholder and director, but it does not appear that Simus is paying for this litigation out of his own pocket. His Board seat is not subject to dispute. And, Plaintiffs admit that, although Simus does not have an engagement letter with any of the lawyers in this action, Genelux is paying all of the necessary legal fees and expenses. Furthermore, as discussed above, Simus filed carelessly (or worse) a sworn verification stating that he read the Complaint, but later admitted that he had not read the whole thing and disclaimed knowledge of many of its core facts. Then, when Defendants sought production of his laptop computer to verify that he had, in fact, read it, he admitted to having disposed of the computer after this litigation began and after a litigation hold had been disseminated. Simus also admitted that Vandeman selected him to be the Plaintiff in the Section 225 action and at one point acknowledged that Genelux was driving this litigation.

Because the Vice Chancellor decided the Section 225 claim in favor of the defendants on the merits, he did not dismiss the action on this basis.

Section 709, like Section 225, authorizes only certain categories of persons to determine the validity of an election. Although the corporation arguably has an interest in obtaining certitude, it is not on either statute's list of plaintiffs. Genelux is a cautionary decision for California lawyers for corporations tempted to use a "shill" plaintiff to get relief under Section 709.

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