Dismissed Members of Board Win Dispute With Chairman in Suit for Libel, Breach of Fiduciary Duty

After a dispute occurred between Chairman and members of the board of directors of closely held corporation, Chairman removed several members from the board and sued them for civil conspiracy, tortious interference, libel, and breach of fiduciary duty. The Delaware Court of Chancery granted the defendants’ motion to dismiss, finding that the plaintiffs failed to allege facts sufficient to prove civil conspiracy, breach of fiduciary duty, or tortious interference. The court also determined that the Chairman was a limited-purpose public figure and the plaintiffs therefore did not meet the heightened pleading standard for their libel claim.

In 2010, Todd O’Gara founded Wanu, a Delaware corporation based in California that produces nutrient-infused water. In 2014, O’Gara stepped down as CEO, but continued as Wanu’s President, Chairman, and largest stockholder. In 2017 O’Gara executed voting agreements and irrevocable proxies with a number of Wanu stockholders. The voting agreements, combined with his shares, gave O’Gara control over approximately fifty-two percent of the voting power in Wanu.

In March 2018, a majority of Wanu’s board of directors voted to remove Wanu’s CEO, Steve Dollase. In April 2018, Dollase and two Wanu stockholders, Jay Binkley and Greg Hunter, raised allegations against O’Gara. The three alleged that O’Gara had inhibited Dollase’s ability to perform as Wanu’s CEO in a variety of ways. The three also alleged that O’Gara’s business expenses and spending were excessive and unsustainable and that O’Gara had executed an unauthorized certificate issuing several hundred thousand shares to himself.

In May 2018, Wanu engaged independent counsel to investigate the allegations. The investigation concluded in July 2018 and its findings, that Dollase was informed or had the ability to be informed about many of the issues he complained about; that his allegations were motivated by his dislike of O’Gara’s management style and personality; that he was generally not well-liked as a leader; and that his management style created tension within the office, were reported to the board. After this, the Dollase faction raised new allegations against O’Gara, namely that O’Gara made misstatements about his educational background in various documents prepared for prospective investors in 2014 and 2015. Wanu engaged another investigator to look into the new allegations. This investigator summarized his findings in August 2018, stating that he was unable to confirm that O’Gara had in fact received degrees from the various educational institutions he claimed to have attended.

By this point, Wanu was in dire need of cash. O’Gara and the board disagreed on the best way to raise capital. O’Gara opposed the board’s plan because it would have diluted his voting shares and reduced the post-money valuation of the company from approximately $40 million to $12 million. Tensions continued to escalate between O’Gara and members of the board. In response, O’Gara removed three members from the board. In September 2018, O’Gara and Wanu sued the previously removed directors as well as several organizations that held stock in Wanu. The plaintiffs asserted counts for breach of fiduciary duty, tortious interference with business relations, tortious interference with contract, libel, and civil conspiracy. The plaintiffs also sought a declaratory judgment that one of the director defendants, Sheldon Coleman, was properly removed from the board.

The defendants moved to dismiss for failure to state a claim and lack of personal jurisdiction. The Chancery Court began by finding that the complaint failed to state claims against Coleman. The court began with the count of civil conspiracy. The court noted that the complaint identified a number of communications sent in August and September 2018 in which Coleman and others criticized or raised concerns regarding O’Gara. The court found that the allegations did not supply a reasonably conceivable basis for the court to infer the existence of a conspiracy, rather they supported an inference that Coelman, Hunter, and Binkley shared significant concerns regarding O’Gara’s leadership and the implications that his perceived misconduct would have for Wanu. Next, the court concluded that the complaint failed to state claims for breach of fiduciary duty and tortious interference. The court found the complaint devoid of non-conclusory allegations concerning Coleman’s alleged self-interest in the financing plan for Wanu. The court further found that the plaintiffs had failed to allege any breach of the Voting Agreement, and therefore the complaint did not state a claim for tortious interference with contract. Finally, the court found that O’Gara is a limited-purpose public figure, and therefore a heightened pleading standard applied to the claim for libel. The court determined that the plaintiffs did not adequately plead the elements of falsity and actual malice and the claim could not be sustained as a result. The court then granted the motion to dismiss.

You can read the Court’s opinion here.

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