Tamika Montgomery-Reeves.

The Delaware Court of Chancery on Thursday ruled that a hurried stock issuance designed to stave off a takeover of the Roma Restaurant Holdings Inc. board was void and could not be counted in a vote to control the company.

According to court documents, the transaction came just as Southpaw Credit Opportunity Master Fund and another company stood poised to take a majority stake in the parent of Tony Roma's restaurant chain in late 2016. After hearing about Southpaw's plans, the Roma board quickly approved a new compensation plan to issue stock to 14 of the company's employees, effectively diluting Southpaw's holdings and preventing it from gaining control of the three-member board.

In a 24-page memorandum opinion, however, Vice Chancellor Tamika Montgomery-Reeves said the directors failed to obtain written agreements from the stock recipients joining them to Roma's shareholder agreement.

The oversight, she said, proved fatal to the board's attempt to argue that the issuance was voidable, and not void, as it tries to argue in related litigation that the board had ratified the transaction.

“The rushed nature of director defendants' actions likely made it impossible to obtain joinders from each restricted stock recipient before issuance. But that does not excuse noncompliance with the clear and express terms of the stockholders' agreement,” the vice chancellor said.

“All recipients of stock and stock equivalents must understand—following the opportunity to read and consult with counsel—the stockholders' agreement and then bind themselves to the stockholders' agreement at or before issuance to ensure compliance with that agreement.”

The ruling dealt a blow to Highland Capital Management, which had argued in a separate case that the company's employees had validly voted their shares to two Highland-aligned directors on the three-seat board.

Montgomery-Reeves stayed that case in favor of the Southpaw action, which went to trial in November.

Southpaw argued that the issuance was void, and the shares could not be counted in the vote.

Roma and the two directors did not contend that the issuance was valid. Instead, they countered that technical issues had frustrated their ability to obtain the joinders, and they asked for Montgomery-Reeves to declare the transaction voidable, thus giving the court discretion in how to proceed.

It would be unequitable, the defendants said, to find the issuance void solely on technical grounds.

But Montgomery-Reeves faulted Roma's directors for trying to entrench themselves, and saying that the failure to satisfy the joinder requirement was “more than a mere technical deficiency.”

“The award agreement substantively failed to comply with numerous elements of the joinder provision, including the timing under which the joinders must be completed as well as the requirements that the recipient acknowledge that they had ample time to read and consult with counsel on the stockholders' agreement,” she wrote.

“It was a failure to substantially perform the required actions. Thus, director defendants' case law is unavailing.”

Counsel for both sides declined to comment on Friday.

Southpaw was represented by Martin S. Lessner, James P. Hughes, Tammy L. Mercer and Richard J. Thomas of Young Conaway Stargatt & Taylor.

The Roma directors were represented by Kevin G. Abrams, John M. Seaman and Wade Houston of Abrams & Bayliss.

Roma was represented by Brock E. Czeschin and Anthony M. Calvano of Richards, Layton & Finger.

As of Feb. 2, the Highland case was still stayed.

The case was captioned Southpaw Credit Opportunity Master Fund v. Roma Restaurant Holdings.