When friends go into business, their ties may fray if the business experiences difficulty and the parties have different views of how to proceed and who is responsible. If the principals are directors of a Delaware corporation, however, their duty of loyalty requires them to eschew self-interest and to do what is best for the corporation and its stakeholders. Moreover, when conflict arises, vague promises among friends do not supplant the requirements for binding agreements. The recent case of CertiSign Holdings v. Kulikovsky, C.A. No. 12055-VCS (Del. Ch., June 7, 2018), well illustrates these principles. The court found after a four-day trial that the defendant had breached his duty of loyalty in refusing to do as a director what was best for the corporation to try to gain leverage in other disputes. The court also found that defendant had failed to establish that the parties had entered into binding agreements regarding the issuance of options and the payment of a debt owed the defendant.

Factual Background

CertiSign underwent a recapitalization in 2005 in which it issued substantial amounts of stock. Among other things, the recapitalization would have clarified the entities that owed a debt to Defendant Kulikovsky for a payment Kulikovsky’s holding company made on behalf of the company several years earlier. Kulikovsky, who was then CEO and a director, approved the recapitalization. In 2012, when the parties decided to sell the company, they discovered that the 2005 stock issuance was invalid. The company sought to fix the problem through self-help measures designed by company counsel. Implementation of the self-help plan required Kulikovsky’s signature as a director on certain corporate documents. He refused unless the parties agreed to dissolve the entity, which held two-thirds of the shares of CertiSign. Kulikovsky held a one-third interest in that entity and, if the entity were dissolved and the stock distributed, he would have had a 23 percent equity interest and potentially been able to ally with other stockholders against his former friends. The company refused. It then filed an action under Section 205 of the Delaware General Corporation Law to validate the 2005 recapitalization. Kulikovsky intervened and filed a counterclaim seeking a declaratory judgment validating over 1 million options as having been issued to him and validating that the company had assumed a debt obligation to his holding company of over $4 million. The court entered an order validating the 2005 recapitalization and thereafter the company claimed that it was entitled to damages for Kulikovsky’s failure as a director to sign certain corporate documents necessary to validate the 2005 stock issuance. The court stayed its order while the parties litigated the breach of fiduciary claim and Kulikovsky’s claim for the issuance of options and payment of the debt obligation. The court rejected Kulikovsky’s claims regarding the stock issuance and the debt obligation for a failure of proof but most interesting was the court’s findings regarding the company’s duty of loyalty claim.

The Court’s Ruling

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