This case summary was prepared by Marielle MacMinn.
In CertiSign Holding, Inc. v. Kulikovsky
the Delaware Court of Chancery exercised its equitable powers to find a former director (Kulikovsky) in breach of his fiduciary duty of loyalty and imposed damages totaling the legal costs the company incurred to circumvent his obstruction. In an 83-page decision, Vice Chancellor Slights reiterated the standard for the fiduciary duty of loyalty, the remedy for a breach of that duty, and disposed of Kulikovsky’s counterclaims asserting the validity of certain grant options and an assumption of debt.
The entire first half of the decision weaved a complicated web of facts, with particular emphasis on Kulikovsky’s refusal to cooperate with the company’s attempts to correct defects with its capitalization and board—issues addressed in an earlier DGCL §205 case, In Re CertiSign Hldg., Inc.
Briefly, the essential facts of this opinion begin when Kulikovsky’s personal corporation paid a debt owed by the Company’s subsidiary, though there was no formal debt instrument executed to record the details of repayment. Next, Kulikovsky and other directors of the Company negotiated for stock options. The grants were discussed, orally and via email, but nothing was ever officially decided. In 2012, the Company identified a certain stock issuance as a potentially defective corporate act under §204 of the DGCL. In trying to correct the defect, the Company solicited Kulikovsky’s signature, which he withheld. The three most essential points to the opinion are: (1) Kulikovsky stonewalled the company’s attempts to rectify its deficiencies “in order to obtain leverage to advance his personal interests;”
(2) the parties utterly failed to comply with any aspects of Sections 157(a) and (b) regarding granting stock options;
and (3) there was a complete lack of legal consideration and compliance with the Statute of Frauds regarding the assumption of debt.
CertiSign wins its breach of fiduciary duty of loyalty and damages claims against Kulikovsky
Kulikovsky breached his fiduciary duty of loyalty as a director by prioritizing personal gain over the company’s best interests.
The most widely applicable issue in the CertiSign case centers on the fiduciary duty of loyalty, which the Chancery described as follows:
A public policy, existing through the years… demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous of observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation.
Kulikovsky refused to sign documents that would help rectify the corporation’s “invalid issuance of millions of shares of stock for which CertiSign’s stockholders paid valuable consideration,”
effectively holding hostage these shares unless CertiSign agreed to his ransom of stock options and an immediate repayment of a personal debt owed to him. Vice Chancellor Slights held that this self-interested failure to act “perpetuated the defective constitution of the CertiSign board which, in turn, rendered every single board act over a period of years invalid.”
The Court went on to denounce Kulikovsky’s actions saying he “single-handedly and knowingly jeopardized CertiSign’s existence and operations” which is the “quintessential breach of the duty of loyalty.”
Damages for Kulikovsky’s breach of fiduciary duty of loyalty
In the instant case, CertiSign also sought damages and interest based on Kulikovsky’s breach. Notably, the court stated that although “damages must be logically and reasonably related to the harm or injury, […] concerns of equity and deterrence justify loosening normally stringent requirements of causation and damages when a breach of the duty of loyalty is shown.”
Ultimately, the court awarded fees and interest to CertiSign for the cost of bringing the 2015 action to remedy its capitalization and board defects, but denied any fee shifting for the purposes of the present litigation defending against the counterclaims due to Defendant’s legitimate question of fact regarding the debt assumption and lack of bad faith.
Kulikovsky fails to make a case for his stock options and the assumption of debt
Despite both parties’ acknowledgment that the grant of stock options to Kulikovsky and certain other directors was discussed and generally met with approval, the court found the evidence supported CertiSign’s position denying validation of a corporate act not taken. A grant of stock options, as required by Sections 157(a) and (b) of the DGCL, must be manifested with specificity either in its “certificate of incorporation, or in a resolution adopted by the board of directors.”
In the instant case, the alleged option grants were not approved in the certificate of incorporation, the amended and restated certificate, nor by a board resolution. Additionally, the grants, evidenced by email exchanges produced by Kulikovsky, lacked specificity as to material terms, “including maturity, [recipients,] exercise price and vesting,” thus failing to qualify as a corporate act. The court concluded, despite its powers as a court of equity, that without an underlying corporate act to analyze, it cannot determine the validity of a defective corporate act.
Assumption of debt
Again, the parties agree that a debt is owed to Kulikovsky’s corporation that must be repaid, but there is no agreement as to who owes the debt between CertiSign and one of its Brazilian subsidiaries. Regardless of whether the question is to be decided pursuant to Brazilian law or Delaware law, the court found that there was no legitimate contract to evidence CertiSign assuming the debt on behalf of its subsidiary. The court found only circumstantial expressions of intent to assume the debt, and a complete lack of specificity of the terms or legal consideration of the assumption.
Finally, the Chancery points to the utter failure of Kulikovsky to produce evidence to overcome Delaware’s statute of frauds under 6 Del. C. §2714(a). Kulikovsky tried to claim that CertiSign and its Brazilian subsidiary accounted for the debt assumption in their financial statements, general ledgers, and tax returns. The court dismisses these “writings” as inadequate under the Delaware statute of frauds and simultaneously dismisses any claim of detrimental reliance for lack of a fraudulently induced forbearance.
 In Re CertiSign Hldg., Inc.
, 2015 WL 5136336 (Del. Ch. Aug. 31, 2015) (granting motion for partial judgment on the pleadings, validating the Company’s outstanding stock, and approving a proffered stock ledger)
at 77 (internal quotations withheld).
 8 Del. C.
§157(b); see also Id.
 See, e.g., In re Numoda Corp. S’holder4s Litig.
, 2015 WL 402265, at *9, 11 (Del. Ch. Jan. 30, 2015) (finding no corporate act to validate where the party seeking validation had “not been able to establish when any board approved an issuance of 400,000 shares to her”), aff’d sub nom. In re Numoda Corp.
, 128 A.3d 991 (Del. 2015); see also CertiSign
“No action shall be brought to charge any person to answer for the debt of another, in any sum of the value of $25 and upwards, unless the contract is reduced to writing, or some memorandum, or notes thereof, are signed by the party to be charged therewith, or some other person thereunto by the party lawfully authorized in writing…”).