• Delaware Court of Chancery
  • D66311
  • May 21 2014 (Date Decided)

DELAWARE COURT OF CHANCERY

Oracle Partners, L.P. v. Biolase, Inc., DeFAX Case No. D66311 (Del. Ch. May 21, 2014) Noble, V.C. (46 pages).

In proceedings involving 1) an action brought by an investor against a corporation seeking a determination as to the proper composition of the board, and 2) counterclaims alleging fraud and negligent misrepresentation, the court determined by a preponderance of evidence that one of the board members verbally resigned from the board during a meeting and that the investor's efforts to reconstitute the board and improve the company's management did not give rise to a claim for fraud or negligent misrepresentation.

Larry Feinberg was a managing member of Oracle Partners, L.P., an investment firm. Oracle owned a significant share of the common stock of Biolase, Inc., a publicly traded Delaware corporation. Federico Pignatelli was one of the directors of Biolase. Pignatelli had been associated with Biolase since 1991, first as director and then as chairman of the board.

Feinberg became interested in investing in Biolase. Feinberg met with Pignatelli. Feinberg expressed misgivings about the company's corporate governance. He suggested the company needed "a real CEO" to run the company. Feinberg emphasized he was not seeking to control the company - he simply wanted strong, independent directors to manage the company. They also discussed the possibility that Pignatelli might eventually be replaced as CEO. Feinberg did not suggest that he wanted to be the CEO or that he had in mind any other specific candidate in mind.

Oracle did not directly invest in Biolase. Instead, Oracle purchased Biolase stock in the public markets. In private discussions with an investor friend, Paul Clark, Feinberg said he thought the company needed "new management, two board seats, and to recapitalize." Feinberg anticipated that the board might support his views.

Oracle continued buying Biolase stock. Feinberg spoke to Clark, who said he would be happy to serve on the board. No steps were taken toward initiating a proxy contest. Feinberg and Pignatelli met and agreed on two persons to add to the board - Paul Clark and Jeffrey Nugent. Pignatelli met with two board members, Alexander Arrow and Samuel Low, advising them they should plan to resign. Both were reluctant, but they agreed.

A board meeting was convened. Pignatelli urged Arrow to go along with their earlier "handshake deal." Low, however, never spoke during the meeting, intending that his resignation become effective when he submitted it in writing. The board voted to appoint Clark and Nugent as directors. Later, Arrow and Low both submitted email resignations.

Shortly therafter, Clark and Nugent made requests for information from other directors. They also met with Feinberg, who came to understand they believed "the situation was much worse" than they had thought before. There were no indications that Feinberg controlled or directed their actions or decisions after the meeting.

Several days later, Biolase issued a press release, advising that Arrow and Low had resigned and been replaced by Clark and Nugent. On the same day, Clark and Nugent met with Pignatelli, advising him they thought he should "step down." Pignatelli was angry. He refused to quit. Pignatelli met with Arrow and Low, asking them to rescind their resignations. Arrow and Low purported to rescind on March 3.

Pignatelli scheduled another board meeting on March 7. Invitees included four directors whose membership was not in dispute, and Clark, Nugent, Arrow, and Low. Nugent moved to remove Pignatelli as chairman and CEO. The meeting was continued.

Oracle initiated a statutory action to determine the proper composition of the board, seeking a declaration that the board consisted of the four undisputed members and Clark and Nugent. Biolase responded by seeking a declaration that only the four undisputed members were current board members. Biolase also counterclaimed for fraud and negligent misrepresentation.

The Chancery Court considered the evidence and found that the current members were the undisputed directors and Clark. Arrow's oral statement at the meeting was sufficiently clear to establish his resignation. However, the evidence did not establish that Low resigned at the meeting; he resigned later, when he tendered his resignation by email. Applying a parallel reading of the minutes, the court found that Clark was appointed to replace Arrow. Thus, only Clark was appointed to fill a vacancy.

The court rejected Biolase's counterclaims. Oracle, through Feinberg, had openly sought to add independent directors and change the management from the very beginning. There was no fraud or misrepresentation. Nor was there any evidence that Oracle had ever made any agreement with Clark and Nugent to terminate Pignatelli.

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