Grimes v. Alteon Inc.
Del. Ch. (2002)
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Rule of Law:
Under the Delaware General Corporation Law, particularly Sections 152 and 157, an agreement that obligates a corporation to issue stock, even if contingent on a future offering, is unenforceable unless it is approved by the board of directors and memorialized in a written instrument.
Facts:
- Charles L. Grimes, along with his wife, held approximately 9.9% of the stock in Alteon Inc., a pharmaceutical company.
- Kenneth I. Moch, the President and CEO of Alteon, informed Grimes that Alteon needed to raise additional funds and was considering a private placement stock offering.
- Concerned about his holdings being diluted, Grimes told Moch he would buy 10% of any such offering.
- Moch orally promised that Grimes would be offered 10% of the future offering.
- In return, Grimes orally promised to purchase that 10% of the offering.
- Subsequently, Alteon publicly announced a private placement offering but did not permit Grimes to participate.
Procedural Posture:
- Charles L. Grimes sued Alteon Inc. in the Delaware Court of Chancery (the trial court) seeking damages and specific performance of the oral agreement.
- Alteon moved to dismiss the complaint for failure to state a claim upon which relief can be granted, arguing the agreement was invalid under 8 Del. C. § 157.
- The Court of Chancery granted Alteon's motion to dismiss, holding that the oral agreement constituted a 'right' under Section 157 and was therefore invalid because it lacked board approval and was not in writing.
- Grimes, as the appellant, appealed the judgment of the Court of Chancery to the Delaware Supreme Court.
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Issue:
Is an oral agreement between a corporation's CEO and a stockholder, providing the stockholder the right to purchase 10% of a future stock offering in exchange for the stockholder's promise to buy it, enforceable when it lacks board of director approval and is not in writing?
Opinions:
Majority - Chief Justice Veasey
No, the oral agreement is unenforceable. An agreement granting a stockholder the ability to require a corporation to issue stock to them constitutes a 'right' under Section 157 of the Delaware General Corporation Law, which requires both board of directors' approval and a written instrument for validity. The statutory scheme of Delaware corporate law, particularly Sections 152 and 157, consolidates the exclusive authority to govern a corporation's capital structure in the board of directors and requires certainty in such matters through written documentation. An oral side-agreement made by a CEO without board approval improperly encumbers the board’s business judgment regarding stock issuance and violates the fundamental policies of Delaware corporate law requiring formal board approval for all commitments related to the issuance of stock.
Analysis:
This decision strongly reinforces the principle of board centrality in Delaware corporate law, particularly concerning the issuance of stock and management of the corporate capital structure. It clarifies that even novel or bilateral agreements that obligate a corporation to issue stock in the future fall under the stringent formal requirements of the General Corporation Law. The ruling prioritizes certainty and predictability for investors and the corporation by invalidating informal, oral commitments made by executives without board oversight, thereby preventing potential entanglements that could limit the board's strategic options in future capital-raising efforts.
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