In an opinion issued June 6, Nguyen v. View, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery ruled that Section 204 of the Delaware General Corporation Law, which allows a “defective corporate act” to be ratified, cannot be used to validate an “unauthorized” corporate act. In a case of first impression, the plaintiff, Paul Nguyen, held a majority of the corporation's common stock and was entitled to a class vote when the company sought to issue new rounds of preferred stock. Although Nguyen vetoed the first new round, the company issued that round and several more anyway, to the tune of over $500 million. Years later, when the transactions were invalidated, the company's initial preferred stockholders converted their shares to common stock and voted as a majority of the common to ratify the transactions under Section 204.

Nguyen brought an action in the Court of Chancery under Section 205 of the DGCL, which allows the court to “determine the validity and effectiveness of any defective corporate act ratified pursuant to Section 204 of this title.” Although the court recognized that rejecting the ratifications would be “problematic if not potentially devastating for View”—because it would turn the company's capital structure “upside down”—the court concluded that Section 204 may not be used to alter the outcome of a stockholder vote. View Inc. “placed itself in this bind by aggressively pursuing multiple rounds of financing” despite questions about their validity.

Factual Background

Nguyen was View's founder and former president, chief technology officer and chairman. In 2007, two venture capital funds, Sigma Ventures Partners and Kholsa Partners, invested $5 million in View in return for Series A preferred shares representing 50 percent of the company's equity on a fully diluted basis. Nguyen retained 70 percent of the company's common stock and the right to a class vote on any amendment to the company's certificate of incorporation that would affect the rights or preferences of the common stock, as well as the right to a board seat.

In January 2009, the company, at the behest of Sigma and Kholsa, terminated Nguyen as an officer and employee and purported to remove him from the board of directors. In June and again in August 2009, without Nguyen's approval, the company issued convertible notes to Sigma and Kholsa and amended its charter to increase the number of authorized common shares. In September 2009, the parties entered into mediation to resolve Nguyen's employment claims. View sought Nguyen's approval for the issuance of a Series B financing, which it tied to any settlement in the mediation. Although Nguyen initially consented to the proposed settlement agreement, he subsequently exercised a right under the agreement to withdraw his consent within seven days. In the meantime, View had already rushed to close the Series B financing which, if valid, would have severely diluted Nguyen's interest and eliminated his class voting right.