   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

KEITH A. FOTTA, TELEMARK                   )
TECHNOLOGY, INC., GERALD A.                )
CLARK, JAMES B. RICH, ILENE                )
RICH, DIANE JURMAIN, and PETER             )
JURMAIN,                                   )
                                           )
                   Plaintiffs,             )
                                           )
       v.                                  ) C.A. No. 8230-VCG
                                           )
CHARLES D. MORGAN, individually            )
and as Trustee of the CHARLES D.           )
MORGAN REVOCABLE TRUST, and                )
JEFFERSON D. STALNAKER,                    )
                                           )
                   Defendants,             )
                                           )
       and                                 )
                                           )
FIRST ORION CORP.,                         )
                                           )
                   Nominal Defendant.      )

                         MEMORANDUM OPINION

                      Date Submitted: November 16, 2015
                       Date Decided: February 29, 2016

Evan O. Williford and Andrew J. Huber, of THE WILLIFORD FIRM, LLC,
Wilmington, DE; OF COUNSEL: Grant E. Fortson and Roger D. Rowe, of LAX,
VAUGHAN, FORTSON, ROWE & THREET, P.A., Little Rock, AR, Attorneys for
the Plaintiffs.

Andrew L. Cole, William A. Crawford, Daniel A. O’Brien, and Theodore J. Segletes,
III, of FRANKLIN & PROKOPIK, Wilmington, DE; OF COUNSEL: Chad W.
Pekron, of QUATTLEBAUM, GROOMS, TULL & BURROW PLLC, Little Rock,
AR, Attorneys for Defendants Charles D. Morgan, individually and as Trustee of the
Charles D. Morgan Revocable Trust, and Jefferson D. Stalnaker.
GLASSCOCK, Vice Chancellor
         This matter involves what I perceive to have become a common scenario in

this Court:1 plaintiff stockholders allege that a significant creditor to the company

has used its control over the corporate board together with contractual rights it has

been granted to divert corporate wealth or equity to itself, in breach of fiduciary or

statutory duties owed the common stockholders. Here, the Plaintiffs—stockholders

in First Orion Corp.—contend that the Defendants used the method described above

to inequitably seize from them control of the company, and seek a declaration

rescinding the issuance of stock, together with damages and other relief. The matter

is before me on cross motions for summary judgment. Because the issues so

presented turn on contested issues of fact, those motions are largely denied. With

respect to one claim brought derivatively, however, demand on the board was neither

made nor excused, and I find that the Plaintiffs lack standing under Rule 23.1. My

reasoning follows.

                                     I. BACKGROUND

         A. The Parties

         Nominal Defendant First Orion Corp. (“First Orion” or the “Company”) is a

privately held Delaware corporation,2 which developed and sells Privacy Star, a

mobile smartphone application that blocks unwanted calls and reports the caller to a




1
    Of course, my perception may merely reflect the Baader-Meinhof fallacy.
2
    Verified Second Amended Complaint (“Compl.”) ¶¶ 9, 19.
                                                1
regulatory body.3

        Plaintiff Keith Fotta is the founder of First Orion.4 Fotta owns approximately

98.3% of the outstanding stock of Plaintiff Telemark Technology, Inc. (“Telemark”

and together with Fotta, the “Fotta Plaintiffs”), a Delaware Corporation.5 The Fotta

Plaintiffs are stockholders of First Orion. Plaintiffs Gerald Clark, James B. Rich,

Illene Rich, Diane Jurmain, and Peter Jurmain (collectively, the “Individual

Plaintiffs”) are also common stockholders of First Orion.

        Defendant Charles Morgan is the current Chairman of the Board of First Orion

(the “Board”) and is the Trustee of the Charles D. Morgan Revocable Trust, through

which Morgan holds various interests in First Orion.6 Defendant Jefferson D.

Stalnaker was hired by First Orion in 2008 and has held multiple executive positions,

including President and CEO, and was a director of the Company from January 27,

2010 through July 18, 2013.7

        B. Morgan’s Initial Investment in First Orion

        Fotta founded First Orion in 2007 to develop and market technology for

blocking unwanted callers and filing complaints against unwanted callers with the

Federal Trade Commission.8 All of the Plaintiffs have been stockholders of the


3
  Id. at ¶ 31.
4
  Id. at ¶ 19.
5
  Id. at ¶ 5.
6
  Id. at ¶ 10.
7
  Id. at ¶ 11.
8
  Id. at ¶ 19.
                                           2
Company since 2007.9 In 2008, Morgan entered into a stock purchase agreement

(the “SPA”) with First Orion that allowed Morgan to invest in the Company’s Series

A Convertible Preferred Stock (“Preferred Stock”).10 In addition, Morgan was

appointed to the Company’s Board.11 Each share of Preferred Stock was convertible

into one share of common stock.12 By the end of September 2009, Morgan had

invested $1,100,000 in exchange for 1,100,000 shares of Preferred Stock,13 which at

that time represented approximately 70% of the then-outstanding Preferred Stock of

the Company.14

      In October 2009, Fotta informed Morgan that the Company needed to raise

additional capital to fund its operations.15 In response, Morgan agreed with Fotta

and First Orion to advance the Company $500,000 (the “2009 Letter Agreement”).16

Pursuant to the 2009 Letter Agreement, the Fotta Plaintiffs agreed to provide

Morgan irrevocable voting proxies (the “Proxies”) for their common shares of stock

in the Company.17 According to the 2009 Letter Agreement, the Proxies were to

become effective in the event First Orion failed to repay the balance of the advanced


9
  Id. at ¶ 20.
10
   Id., Ex. 4, at 1.
11
   Id.
12
   Id.
13
   Id.
14
   Id. at ¶ 24.
15
   Defs.’ Br. in Supp. of Mot. to Dismiss the Second Am. Compl. and/or for Summ. J. (“Defs’
Opening Br.”), Ex. 17, at 71–72; Compl., Ex. 4, at 1–2.
16
   Compl., Ex. 1.
17
   Id., Ex. 1, at 2.
                                            3
funds by January 15, 2010.18 When effective, the Proxies granted Morgan the right

to “exercise all of the Grantor’s rights as a shareholder of [First Orion],” and were

to remain effective until the Company experienced a “net positive cash flow” for

three consecutive quarters.19 At the time of the 2009 Letter Agreement, Fotta owned

3,880,597 shares of common stock and 100 shares of Preferred Stock, and Telemark

owned 2,940,122 shares of common stock.20 Together, the Fotta Plaintiffs’ stock

ownership represented 72.8% of the outstanding capital stock. Conversely, the

Individual Plaintiffs owned approximately 2.86% of the outstanding capital stock,

collectively.21

       The 2009 Letter Agreement also provided Morgan other valuable incentives.

For each dollar Morgan advanced the Company pursuant to the 2009 Letter

Agreement, Morgan was to receive a specified number of warrants to purchase

common shares of First Orion for $1.50 per share.22 In addition, if the Company

failed to repay the advance in full by January 15, 2010, Morgan would receive one

Preferred Share for each dollar advanced. Between October 15, 2009 and January

15, 2010, Morgan advanced $400,000 to the Company pursuant to the 2009 Letter

Agreement.23 Accordingly, Morgan received 1,500,000 warrants to purchase shares


18
   Id.
19
   Id. at Attachments 2, 3.
20
   Id. at ¶ 30.
21
   Id.
22
   Id., Ex. 1, at 2; Defs’ Opening Br., Ex. 2E, at 1.
23
   Compl., Ex. 4, at 2.
                                                  4
of common stock for $1.50 per share (the “Morgan Warrants”).24

       First Orion failed to repay the advanced funds by January 15, 2010.25

Consequently, the Proxies became effective immediately, and First Orion was forced

to issue Morgan 400,000 additional shares of Preferred Stock in satisfaction of the

2009 Letter Agreement.26 According to the Plaintiffs, through the “combination of

his stock ownership, his possession of the Proxies, and his position as one of the

Company’s two Directors, Morgan was on and after January 15, 2010 the sole

controlling stockholder of First Orion.”27

       C. Morgan Solidifies his Control of First Orion

       On January 27, 2010, Morgan, acting via written consent, voted his shares and

the newly-obtained Proxies to remove Fotta as a director and officer of the Company,

and to select Stalnaker to succeed Fotta as director and CEO.28 Weeks later, on

February 16, 2010, Morgan and Stalnaker, as sole directors of First Orion, declared

a dividend (the “2010 Stock Dividend”) whereby holders of Preferred Stock would

receive 73.9901 shares of common stock for each share of Preferred Stock.29 On

that same day, in order to facilitate the 2010 Stock Dividend, Morgan, again acting

via written consent, voted his shares and the Proxies to authorize an amendment to


24
   Defs’ Opening Br., Ex. 2E.
25
   Compl. ¶ 32.
26
   Id.
27
   Id. at ¶ 34.
28
   Defs’ Opening Br., Ex. 2B, at 3020.
29
   Compl., Ex. 4.
                                             5
the Company’s Certificate of Incorporation to increase the number of authorized

shares of common stock from 25,000,000 to 275,000,000 shares and to increase the

number of shares of authorized Preferred Stock to 100,000,000 shares.30

       Immediately prior to the 2010 Stock Dividend, Morgan held 1,500,000 shares

of Preferred Stock, representing approximately 76% of the Preferred Stock then-

outstanding.31 A total of 145,541,519 common shares were issued in the 2010 Stock

Dividend.32     As a result, Morgan’s “total ownership” interest increased from

approximately 15% to 72% and the Plaintiffs’ collective “ownership interest”

decreased from approximately 72.5% to 4.5%.33 In addition, Morgan’s Warrants—

which originally provided Morgan the right to purchase 1,500,000 shares of common

stock for $1.50 per share—were adjusted, in accordance with their terms,34 to give

Morgan the right to purchase 110,985,175 shares of common stock for $.02030 per

share.35 The Plaintiffs characterize this adjustment as an issuance of additional

warrants (the “Additional Warrants”).

       On February 19, 2010, three days after the 2010 Stock Dividend was declared,

Stalnaker sent the Company’s stockholders, including the Plaintiffs, a letter (the


30
   Id., Ex. 5. Stalnaker filed with the Delaware Secretary of State a Certificate of Amendment to
the Certificate of Incorporation reflecting the increase in authorized shares of stock. Id., Ex. 6.
31
   Id. ¶ 51.
32
   Pls.’ Opening Br. in Supp. of Mot. for Partial Summ. J. and Answering Br. in Opp. to Defs.’
Mot. to Dismiss and/or for Summ. J. (“Pls’ Answering Br.”), Ex. 10, at ¶ 7.
33
   Compl. ¶ 55.
34
   Defs’ Opening Br., Ex. 2E, at 3–5.
35
   Compl. ¶ 68; Pls’ Opening Br., Ex. 1.
                                                6
“Stalnaker Letter”) that enclosed (1) the Written Consent of the Shareholders, dated

January 27, 2010, to remove Fotta as officer and director of the Company and elect

Stalnaker in his place; (2) the Written Consent of the Board, dated February 16,

2010, to authorize the 2010 Stock Dividend; and (3) the Written Consent of the

Shareholders, also dated February 16, 2010, to approve an amendment to the

Company’s Certificate of Incorporation to increase the number of authorized shares

of capital stock and to approve the 2010 Stock Dividend.36

       D. Morgan Leads Subsequent Funding of First Orion

       In the years following the 2010 Stock Dividend, the Company completed four

rounds of equity financing through the private placement of Series B Convertible

Preferred Stock: (1) the Company raised approximately $600,000 shortly after the

2010 Stock Dividend;37 (2) the Company raised $4,000,000 starting October 2010;38

(3) the Company extended the second issuance to raise an additional $2,000,000

starting September 2011;39 and (4) the Company raised more than $3,500,000

starting in July 2012.40 The majority of each investment was provided by Morgan

and a small group of other individual investors, most of whom had prior relationships




36
   Defs’ Opening Br., Ex. 2B; id., Ex. 2C.
37
   Id., Ex. 2, at ¶ 14; id., Ex. 2H.
38
   Id., Ex. 2P.
39
   Id., Ex. 2R.
40
   Id., Ex. 2S.
                                             7
with Stalnaker.41 In addition to equity financing, the Company entered into a line of

credit agreement with Arvest Bank for $250,000, which was personally guaranteed

by Morgan and Stalnaker.42

       For each round of funding, the Company sent Fotta a private placement

memorandum providing details of the offering. Furthermore, for at least the first

and second rounds of funding, the Company sent Fotta a “Preemptive Rights Notice”

pursuant to the “Preemptive Rights Agreement,” dated August 4, 2008, which

entitled certain investors “preemptive rights upon the issuance of certain securities

by First Orion.”43 In addition to receiving the formal notices sent by the Company,

Fotta periodically communicated with the Company, at times via email, to request

additional financial information and to obtain the status of the Company’s

offerings.44 Notably, Fotta did not object to the 2010 Stock Dividend or the 2010

Amendment to the Certificate of Incorporation before or during the rounds of

financing culminating in 2012.




41
   Stalnaker avers that the large majority of financing was provided by Morgan, Rodger Kline,
Jerry Adams, James Womble, and Kenneth Lee, most of whom Stalnaker has known for many
years through other business ventures. See id., Ex. 2, at ¶ 14. Nearly 90% of the first round of
funding and nearly 75% of the second and third round of funding was provided by that group of
investors. Id. at ¶ 14, 22. Further, of the $3,500,000 raised in the fourth round of financing, over
80% was provided by the same group of investors, with the addition of Kent Burnett. Id. at ¶ 23.
I note that, with the exception of Morgan, none of these investors are parties to the action.
42
   The Company’s line of credit is described in the Company’s private placement memorandum
dated October 29, 2010. Id., Ex. 2P, at 3557.
43
   Id., Ex. 2B; id., Ex. 2N.
44
   Id., Ex. 2J; id., Ex. 2K; id., Ex. 2L; id., Ex. 2M; id., Ex. 2Q.
                                                 8
       E. Stalnaker is Granted Stock Options

       When Stalnaker was first hired as President of First Orion in 2008, he believed

that the Company was going to grant him stock options that represented between

3.5% and 5% of the Company’s outstanding shares.45 The Company failed to grant

Stalnaker stock options when he started, however. Years later, on September 30,

2011, the First Orion Board, which then consisted of Stalnaker and Morgan, adopted

the 2011 Nonqualified Stock Option Plan (the “2011 Stock Option Plan”) that

authorized the Board to issue stock options to its members. 46 On that same day,

Morgan, in his capacity as majority stockholder, voted to approve the 2011 Stock

Option Plan.47 With the 2011 Stock Option Plan in place, the Company granted two

series of stock options to Stalnaker (together, the “Stalnaker Options”). The first,

which the Company granted to Stalnaker on the day the 2011 Stock Option Plan was

approved, provided Stalnaker the right to purchase 19,797,879 shares of common

stock for $0.01553 per share.48 The second stock option grant, dated November 28,

2011, gave Stalnaker the right to purchase an additional 37,488,121 shares of




45
   Stalnaker avers that Fotta presented to him an offer letter containing the terms of the
contemplated stock options but that Fotta failed to execute the offer. Id., Ex. 18, at 292–94; see
also id., Ex. 26.
46
   Compl., Ex. 9. According to the Written Consent of the Board of September 30, 2011, the
Company reserved 20% of its common stock for stock issued pursuant to the 2011 Stock Option
Plan. Id.
47
   Defs’ Opening Br., Ex. 31.
48
   Compl., Ex. 9.
                                                9
common stock for $0.0203 per share.49 In total, the Stalnaker Options represent

between 8% and 8.5% of the ownership of the Company.50

       On December 11, 2014—nearly three years after the Stalnaker Options were

granted and two days after the Plaintiffs filed their Second Amended Complaint—

First Orion directors James Womble and Kent Burnett, who are not parties to this

action, purported to ratify the Stalnaker Options.51

       F. Procedural History and Contentions of the Parties

       The Fotta Plaintiffs filed a Verified Complaint on January 17, 2013 (the

“Original Complaint”) and a First Amended Complaint on May 23, 2013, which

added the Individual Plaintiffs. The Plaintiffs filed a Second Amended Complaint

on December 9, 2014, in which they allege seven derivative claims on behalf of

Nominal Defendant First Orion, four direct claims on behalf of all of the Plaintiffs,

and three direct claims on behalf of the Fotta Plaintiffs. In general, the Plaintiffs

challenge the 2010 Stock Dividend, the Additional Warrants, and the Stalnaker

Options by asserting “claims for breach of fiduciary duty, gift and waste against

Morgan and Stalnaker, for conversion and unjust enrichment against Morgan, for

aiding and abetting against Stalnaker, and for a declaratory judgment that the stock




49
   Id. at ¶ 97; Defs’ Opening Br., Ex. 18, at 303–09.
50
   Compl. ¶ 97; Defs’ Opening Br., Ex. 18, at 303–09.
51
   Defs’ Opening Br., Ex. 27.
                                              10
issued as the dividend is void ab initio.”52 The Fotta Plaintiffs also “assert[] claims

against Morgan for breach of fiduciary duty and of the implied covenant of good

faith and fair dealing.”53

         The Defendants filed a Motion to Dismiss the Second Amended Complaint

and/or for Summary Judgment on January 23, 2015. Pursuant to their motion, the

Defendants argue that the Plaintiffs’ claims regarding the 2010 Stock Dividend are

barred by the doctrine of acquiescence; that the Plaintiffs’ equitable claims are time-

barred by the doctrine of laches; and that the Plaintiffs’ claims regarding the

Stalnaker Options must fail because the Plaintiffs failed to make a demand on the

First Orion Board and because the Stalnaker Options were ratified by a disinterred

majority of the Board.

         In addition to opposing the Defendants’ motion, the Plaintiffs filed a Motion

for Partial Summary Judgment on March 13, 2015. The Plaintiffs assert that the

stock issued in the 2010 Stock Dividend is void as a matter of law because it was

issued in violation of the Delaware General Corporation Law (“DGCL”).

Furthermore, the Plaintiffs argue that the Defendants cannot avoid a finding that this

stock is void despite the Defendants’ assertion of the defenses of acquiescence and

laches.



52
     Compl. ¶ 3.
53
     Id.
                                           11
                             II. STANDARD OF REVIEW

       All of the motions, except for the Defendants’ motion regarding the Plaintiffs’

failure to make a demand, rely upon matters that are outside the pleadings, and

therefore are analyzed pursuant to Court of Chancery Rule 56. In accordance with

Rule 56, a party is entitled to summary judgment if the evidence demonstrates that

“there is no genuine issue as to any material fact and that the moving party is entitled

to judgment as a matter of law.”54

       I treat the portion of the Defendants’ motion challenging the Plaintiffs’ failure

to make a demand as a motion to dismiss pursuant to Rule 23.1. Generally, if a

stockholder wishes to initiate an action on behalf of the corporation, she must make

a demand on the board to assert the rights of the corporation or explain why such a

demand would be futile.55 If the stockholder wishes to pursue an action on behalf of

the corporation, Rule 23.1 requires that the plaintiff stockholder “allege with

particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff

desires from the directors or comparable authority and the reasons for the plaintiff's

failure to obtain the action or for not making the effort.”56 The standard articulated

in Rule 23.1 “imposes a more arduous pleading standard than Rule 8(a), and a

plaintiff must allege sufficient particularized facts showing that demand on the board


54
   Ct. Ch. R. 56(c).
55
   See Seinfeld v. Sager, 2012 WL 2501105, at *2 (Del. Ch. June 29, 2012).
56
   Ct. Ch. R. 23.1.
                                              12
would have been futile.”57

                                        III. ANALYSIS

          I address the parties’ motions separately below and find that both motions are

denied, with one exception: I grant the portion of the Defendants’ motion seeking

dismissal for failure to comply with Rule 23.1 for the claims challenging the

Stalnaker Options.

          A. The Plaintiffs’ Motion for Summary Judgment

          The Plaintiffs moved for summary judgment with respect to their claims that

the common stock issued pursuant to the 2010 Stock Dividend and the related

Additional Warrants are void as in violation of the DGCL.             Specifically, the

Plaintiffs refer to their allegations in Counts I, V, and VI of their Second Amended

Complaint. These counts raise both equitable and statutory claims; the Plaintiffs’

motion is addressed only to the statutory claims and, in the alternative, claims of

waste. Notwithstanding the resolution of the Plaintiffs’ motion, the equitable claims

for breach of duty will remain for trial. The Plaintiffs also note that they move for

summary judgment on only the liability portion of their claims and do not request

that the Court fashion a remedy at this stage in the litigation. Essentially, the

Plaintiffs in this motion seek a declaration that the 2010 Stock Dividend did not

comply with the DGCL.


57
     Seinfeld, 2012 WL 2501105, at *2 (citations omitted).
                                                 13
       In Counts I and V, the Plaintiffs allege that the 2010 Stock Dividend and

issuance of the Additional Warrants amount to waste of corporate assets. In Count

I, which is asserted as a derivative claim against Morgan and Stalnaker for breaches

of fiduciary duty, the Plaintiffs allege that “First Orion received no consideration of

any kind in exchange for the issuance of the dividend shares of common stock,” and

that “the issuance of [the] Additional Warrants was not approved by Board action

nor by a vote of the shareholders.” In sum, in Count I the Plaintiffs allege that “[t]he

2010 Stock Dividend and the issuance of the Additional Warrants were self-dealing,

bad faith transactions which benefited Morgan personally and amounted to a gift or

waste of corporate assets.” In Count V, which is asserted as a derivative claim

against Morgan for violation of various provisions of the DGCL, 58 the Plaintiffs

allege that “shares of common stock issued by the Company . . . [were] issued to

Morgan and the other preferred shareholders for no consideration”—in violation of

Section 153—and that the “Defendants granted Morgan the Additional Warrants . . .

without any action by the Board to approve the issuance . . . and for no

consideration,” in violation of Sections 152 and 153. In their opening brief, the

Plaintiffs clarified that Counts I and V are relevant to this motion only to the extent


58
   Specifically, the Plaintiffs allege that “8 Del. C. §§ 151, 152, 153, 157, 161 and 166 govern the
issuance of stock in First Orion, and require Board approval of the issuance of stock, including of
any transaction that binds the corporation to issue stock in the future.” Compl. ¶ 133. Additionally,
the Plaintiffs allege that “8 Del. C. § 153 provides that stock with par value may be issued for
consideration having a value not less than the par value thereof.” Id. at ¶ 134 (emphasis in the
original).
                                                14
the 2010 Stock Dividend is “characterized as an issuance of stock pursuant to a

recapitalization rather than a dividend.”59 Although the 2010 Stock Dividend has

been characterized as a recapitalization at times in this litigation,60 both parties have

represented in their briefs and at oral argument that the 2010 Stock Dividend was a

dividend transaction. For the purposes of this Memorandum Opinion, I will treat the

2010 Stock Dividend as a dividend transaction and, therefore, I do not address

Plaintiffs’ Motion for Summary Judgment as it pertains to Counts I and V.

       That leaves Plaintiffs’ allegations in Count VI that the 2010 Stock Dividend

violated Sections 170 and 173 of the DGCL and that, therefore, the common stock

issued therein is void.61 I address each section of the DGCL and find that issues of

material fact exist such that summary judgment is inappropriate.

       The Plaintiffs allege that the 2010 Stock Dividend is void because the

Company did not have sufficient capital surplus nor net profits in accordance with

Section 170 of the DGCL. Section 170 states, in part, the following:

       (a) The directors of every corporation, subject to any restrictions
       contained in its certificate of incorporation, may declare and pay

59
   The Plaintiffs argue that “[i]f characterized as an issuance of stock pursuant to a recapitalization
rather than a dividend, the Dividend Stock is nevertheless void because the issuance of stock in
exchange for no consideration violates section 153 of the DGCL and constitutes waste.” Pls’
Opening Br. 21.
60
   The Plaintiffs point to deposition testimony in which Morgan and Stalnaker refer to the 2010
Stock Divided as a “recapitalization.” Id. at 21 n.7.
61
   In the alternative, the Plaintiffs seek damages pursuant to 8 Del. C. § 174. I do not address
Section 174 here since the Plaintiffs’ Motion for Summary Judgment is limited to the issue of
liability only, nor do I address whether a finding that stock was issued as a dividend in violation
of statute should result in a determination that the stock so issued is void.
                                                 15
       dividends upon the shares of its capital stock either:

              (1) Out of its surplus, as defined in and computed in accordance
              with §§ 154 and 244 of this title; or

              (2) In case there shall be no such surplus, out of its net profits
              for the fiscal year in which the dividend is declared and/or the
              preceding fiscal year.62

As a threshold matter, the Defendants contend that Section 170, based on their

understanding of the purpose of the statue, does not apply to dividends paid in stock.

The actions of the General Assembly indicate, however, that it did intend Section

170 to apply to stock dividends.63 Therefore, for the purposes of the Plaintiffs’

Motion for Summary Judgment, I assume that Section 170 applies here.

       The Plaintiffs assert that the 2010 Stock Dividend violated Section 170

because, at the time of the dividend, the Company’s balance sheet indicated a

deficient surplus.64 By that measure, the surplus was indeed inadequate to absorb



62
   8 Del. C. § 170(a)(1)–(2).
63
   Folk on the General Corporation Law explains that the General Assembly amended Section 173
in 1985 and, in doing so, indicated that the restrictions provided in Section 170 pertain to stock
dividends:
        The 1985 amendment replaced references to transfers from surplus to the capital
        account in respect of dividend shares with references to designation as capital of
        the par or stated value of such shares. The amendment was designed to make clear
        that stock dividends may be distributed by a corporation even when it has no
        surplus, so long as it has net profits for the fiscal year in which the dividend is
        declared and/or the preceding fiscal years, as provided by Section 170.
Edward P. Welch et al., Folk on the Delaware General Corporation Law § 173.02 (6th ed. 2015)
(citing S. 116, 133d Gen. Assembly 4–5, 65 Del. Laws, c. 127, § 5 (1985)).
64
   According to the Plaintiffs, First Orion’s balance sheet revealed a surplus of approximately
$83,000, which is less than the aggregate par value of the common stock issued in the 2010 Stock
Dividend of over $1.4 million.
                                               16
the dividend declared.          However, when calculating a corporation’s surplus in

accordance with Section 154, as instructed by Section 170, the directors are not

constrained by the balances of assets and liabilities as stated on the balance sheet.

Instead, a corporation may revalue its assets and liabilities to reflect market

conditions.65 Since the Plaintiffs solely rely on First Orion’s balance sheet as an

indication of surplus, and since the record does not adequately reflect the Company’s

revalued net surplus, I find that material issues of fact remain, and cannot determine

as a matter of law that the 2010 Stock Dividend violated Section 170.

       The Plaintiffs also contend that the 2010 Stock Dividend is illegal because the

Board failed to cause the Company to designate the issued stock as capital in

accordance with Section 173 of the DGCL. Section 173 states, in part, the following:

       If the dividend is to be paid in shares of the corporation's theretofore
       unissued capital stock the board of directors shall, by resolution, direct
       that there be designated as capital in respect of such shares an amount
       which is not less than the aggregate par value of par value shares being
       declared as a dividend and, in the case of shares without par value being
       declared as a dividend, such amount as shall be determined by the board
       of directors.66

The Plaintiffs argue that the Company failed to designate as capital the aggregate

par value of the common shares issued in the 2010 Stock Dividend and, therefore,




65
   See e.g., Klang v. Smith’s Food & Drug Ctrs., Inc., 702 A.2d 150, 154 (Del. 1997) (“Allowing
corporations to revalue assets and liabilities to reflect current realities complies with the statue and
serves well the policies behind the statute.”).
66
   8 Del. C. § 173.
                                                  17
the issued shares are void. I note that in the board resolution declaring the dividend,

the Board indicated that it complied with Section 173.67                  However, financial

statements produced after the 2010 Stock Dividend reveal an inconsistent accounting

of the dividend and, therefore, it remains an issue of fact whether or when the

Company designated as capital the aggregate par value of the common stock issued.

       Finally, the Plaintiffs argue that the adjustment to the Morgan Warrants

triggered by the 2010 Stock Dividend—referred to as the “Additional Warrants”—

must be void because the 2010 Stock Dividend is void. I have already determined

that issues of material fact remain and that I cannot conclude that the 2010 Stock

Dividend is void as a matter of law. Likewise, I am unable to conclude that the

Additional Warrants are void.

       Based on my findings above, I conclude that issues of material facts exist and

that the Plaintiffs are not entitled to judgment as a matter of law. Therefore, the

Plaintiffs’ Motion for Partial Summary Judgment is denied.

       B. The Defendants’ Motion to Dismiss and/or for Summary Judgment

       The Defendants moved for summary judgment on two theories. First, the

Defendants argue that all of the Plaintiffs’ claims regarding the 2010 Stock Dividend




67
   In an action by unanimous written consent on February 16, 2010, the Board adopted a resolution
that stated that, “in accordance with Section 173 of the Delaware General Corporation Law, there
is designated as capital of the Company an amount which is not less than the aggregate par value
of the shares being issued as a dividend by the Company.” Defs’ Opening Br., Ex. 2B, at 3025.
                                               18
are barred by the doctrine of acquiescence. Second, the Defendants assert that the

Plaintiffs’ equitable claims are barred by laches. I find that the resolution of these

arguments requires further factual development and deny that portion of the

Defendants’ motion. Finally, the Defendants argue that the Plaintiffs’ claims that

challenge the Stalnaker Options—raised for the first time in the Second Amended

Complaint—should be dismissed pursuant to Rule 23.1 for failure to make a demand

on the Board. I find that the Plaintiffs failed to sufficiently plead demand futility as

to those claims. Therefore, I grant the Defendants’ motion to the extent it seeks

dismissal of the Plaintiffs’ claims challenging the Stalnaker Options.

               1. Acquiescence

       According to the Defendants, the Plaintiffs learned of the 2010 Stock

Dividend on February 19, 2010 and remained silent for nearly three years, thereby

acquiescing to the 2010 Stock Dividend.                   The Plaintiffs’ acquiescence, the

Defendants argue, now bars their legal and equitable claims. At the outset, I note

that the doctrine of acquiescence has not been applied in a consistent manner.68


68
   See Lehman Bros. Holdings Inc. v. Spanish Broad. Sys., 2014 WL 718430, at *9 (Del. Ch. Feb.
25, 2014). In Lehman Brothers, the Court identified three separate species of acquiescence. In
the first, which is inapplicable here, a stockholder is said to have acquiesced to a merger and cannot
challenge the transaction if the stockholder accepted the merger consideration. Id. at *9 n.54.
Second, the doctrine of acquiescence has been used to estop a claimant from seeking equitable
relief where the claimant has unreasonably delayed in silence, thereby prejudicing the defendant.
Id. (citing 3 Pomeroy’s Equity Jurisprudence § 817 (5th ed. 1941)). In Klaassen v. Allegro Def.
Corp., 106 A.3d 1035, 147 (Del. 2014), the Delaware Supreme Court explicitly noted that, in order
to show acquiescence in Delaware, a defendant is not required to allege that it suffered prejudice
as the result of the plaintiff’s delay. Finally, the doctrine of acquiescence has been applied, as it
                                                 19
However, this Court has noted that “inaction or silence on the part of a plaintiff, in

certain circumstances, can bar a plaintiff from relief both equitable and legal.”69

The Delaware Supreme Court has established a clear test which states that the

doctrine of acquiescence applies where a claimant

       has full knowledge of his rights and the material facts and (1) remains
       inactive for a considerable time; or (2) freely does what amounts to
       recognition of the complained of act; or (3) acts in a manner
       inconsistent with the subsequent repudiation, which leads the other
       party to believe the act has been approved.70

In order to show that a claimant acquiesced, a defendant need not prove a “conscious

intent to approve the act,”71 nor a “change of position or resulting prejudice.”72

Unlike the doctrine of laches, which is addressed below, acquiescence centers on the

“[d]efendant and its understanding that complained-of acts were acquiesced in.”73

In sum, the doctrine of acquiescence focuses on “why the plaintiff must be adjudged

complicit in the very breach for which she seeks damages.”74

       In this case, the Defendants argue that the Individual Plaintiffs were fully




was in Lehman Brothers, as an “estoppel by silence” or “inaction,” where a claimant, with full
knowledge of the facts, stands by while the defendant commits the alleged wrongdoing. See 2014
WL 718430, at *9 n.56.
69
   Lehman Bros., 2014 WL 718430, at *9 (citations omitted).
70
   Klaassen, 106 A.3d at 1047 (quoting Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 582 (Del.
Ch. 1998)).
71
   Id. (citing Frank v. Wilson & Co., 9 A.2d 82, 87 (Del. Ch. 1939), aff’d, 32 A.2d 277 (Del. 1943)).
72
   Id. (citations omitted).
73
    Brevan Howard Credit Catalyst Master Fund Ltd. V. Spanish Broad. Sys., Inc., 2015 WL
2400712, at *2 (Del. Ch. May 19, 2015) (emphasis in the original).
74
   Id.
                                                20
informed of the 2010 Stock Dividend by the Stalnaker Letter of February 19, 2010,

only three days after the dividend was declared, and that the Plaintiffs remained

silent until the filing of this action, evidencing that they had acquiesced in the

transaction. The Defendants note that one of the Individual Plaintiffs, Ms. Jurmain,

contacted the Company in 2012, but did not express an objection to the 2010 Stock

Dividend. The Defendants argue that the Fotta Plaintiffs were similarly fully

informed by the Stalnaker Letter and that, in addition, they received private

placement memorandums, sent in conjunction with the Company’s subsequent

financing efforts, which again disclosed the critical facts surrounding the 2010 Stock

Dividend. In addition to the Fotta Plaintiffs’ silence regarding the 2010 Stock

Dividend, the Defendants point to periodic communications between Fotta and

Stalnaker in which Fotta acknowledges Stalnaker and Morgan as controlling First

Orion and makes comments on the Company’s successes.               According to the

Defendants, the Fotta Plaintiffs’ silence regarding the 2010 Stock Dividend amongst

ongoing communication is evidence of their acquiescence.

         The Defendants argue that Lehman Brothers Holdings, Inc. v. Spanish

Broadcasting Systems, Inc.75 and Klaassen v. Allegro Development Corp.,76 in which

the Court found that the claimants had acquiesced, support their theory. I find,



75
     2014 WL 718430 (Del. Ch. Feb. 25, 2014).
76
     106 A.3d 1035 (Del. 2014).
                                                21
however, that the factual circumstances in this case are dissimilar to the cases relied

on by the Defendants.

         In Lehman Brothers, the plaintiffs held preferred stock that entitled holders to

accrued dividends quarterly. If the dividends were not paid for four consecutive

quarters, the preferred stockholders were entitled to certain rights, including the right

to fill seats on the board and to constrain the company from acquiring certain

additional debt. Eventually, the company failed to pay dividends to preferred

stockholders for four consecutive quarters, thereby triggering those additional rights.

The plaintiffs did not immediately assert their rights to designate a board member,

however, and later, when the company’s board publicly announced its intention to

acquire debt, the plaintiffs again remained silent. Almost three years after the

preferred stockholders’ rights were triggered, and one year after the latest debt

incurrence, the plaintiffs filed suit challenging the debt transactions. The Court

found that the plaintiffs were estopped under the doctrine of acquiescence because

they knowingly stood by, witnessed a breach, and permitted the accrual of damages

that could have been prevented had the plaintiffs not stood silent.77

         In Klaassen, the defendant directors intended to fire the plaintiff CEO and

director at the next regularly scheduled board meeting. During the meeting, the

defendant directors initiated an executive session, for which the CEO was asked to


77
     Lehman Bros., 2014 WL718430, at *12.
                                            22
leave the room. During the executive session, the defendant directors agreed to

terminate the CEO’s employment. Upon the CEO’s return to the board meeting, the

board voted to terminate his employment.                The CEO failed to challenge his

termination at the meeting, however. About seven months after his termination—

during which time the then-former CEO initially offered to help train the new CEO

and also began negotiating a consulting agreement with the company—the former

CEO filed suit alleging that his removal was invalid.

       Based on the circumstances in both Lehman Brothers and Klaassen, the

plaintiff had the ability to challenge the breach at the time of the alleged wrongdoing,

or as damages were incurred thereby, such that the plaintiff was adjudged complicit

in the very breach for which it sought relief.78 Here, however, the Defendants have

made no assertions regarding their own view of the Plaintiffs’ knowledge of the 2010

Stock Dividend and their inaction at the time it was declared. Nor have the

Defendants sufficiently explained how the Plaintiffs’ inaction led them to believe

the 2010 Stock Dividend had been approved. Instead, the Defendants largely focus

on the Plaintiffs’ knowledge after the alleged wrongdoing and have merely asserted



78
   See id. at *9. In Espinoza v. Zuckerberg, this Court noted that it appeared that the standard
articulated in Klaassen could be applied to the claimant’s action after the fact and, therefore,
implicated conduct that had been traditionally characterized as ratification. 124 A.3d 47, 60 n.68
(Del. Ch. 2015) (referring to the form of “ratification” explained in Frank, 32 A.2d 277). I note,
however, that Klaassen involved the type of facts typically present where estoppel by acquiescence
is involved. Although Klaassen referenced behavior occurring after the alleged breach, the case
involved an actor who was present and able to acquiesce from the time of the alleged wrongdoing.
                                               23
that they were aware of the Plaintiffs’ inaction. Although Fotta affirmatively acted

in a way that could potentially give rise to estoppel by acquiescence—including

standing mute while Morgan and third parties participated in the several financing

rounds after the 2010 Stock Dividend—a more developed record would be helpful

to assess the Defendants’ understanding of the Fotta Plaintiffs’ actions. There

remain questions of fact, the resolution of which is required to determine if the

Plaintiffs may be adjudged complicit in the 2010 Stock Dividend. The Defendants’

Motion for Summary Judgment based on acquiescence is, accordingly, denied.

       Before turning to the defense of laches, I note that many of the facts and

circumstances discussed in the laches analysis overlap with those discussed in the

acquiescence analysis above.79 This reverberation is an artifact of what appears to

me a misapplication of the acquiescence doctrine: where the claimants are informed

of the alleged wrong after its completion and thereafter fail to take action for an

extended period. That set of circumstances, to me, implicates a ratification or laches

defense, the latter of which I discuss below.

               2. Laches

       The Defendants allege that laches bars the Plaintiffs’ request for equitable

relief because the Plaintiffs unreasonably delayed in bringing a claim. The equitable


79
  The Defendants concede the similarities in their opening brief: “The facts and analysis set forth
in the preceding section demonstrate the defense of laches as readily as they demonstrate the
defense of acquiescence.” Defs’ Opening Br. 45.
                                                24
doctrine of laches is rooted in the maxim that “equity aids the vigilant, not those who

slumber on their rights.”80 Fundamentally, laches protects a defendant when a

plaintiff has unreasonably delayed in seeking relief and the defendant thereby suffers

prejudice. Generally, in order to establish a laches defense, a defendant must show:

(1) that the plaintiff had knowledge of a legal claim; (2) that the plaintiff

unreasonably delayed in bringing the claim; and (3) that the defendant has suffered

a resulting prejudice.81

                      a. The Plaintiffs’ Knowledge of an Equitable Claim

       The Defendants assert that the Plaintiffs first attained knowledge of their

equitable claims upon receipt of the Stalnaker Letter on February 19, 2010, which

purports to inform the Plaintiffs of the 2010 Stock Dividend. According to the

Defendants, upon receipt of that letter, the Plaintiffs were given actual notice of the

self-dealing nature of the 2010 Stock Dividend and inquiry notice as to any other

claims that may arise from the 2010 Stock Dividend. The Plaintiffs, however, assert

that the Stalnaker Letter did not provide the Plaintiffs adequate knowledge to pursue

their claims because its contents misrepresented the nature of the transaction, 82 and

because it omitted facts material to their claims.83 I disagree.


80
   Whittington v. Dragon Grp., LLC, 991 A.2d 1, 8 (Del. 2009) (citing Adams v. Jankouskas, 452
A.2d 148, 157 (Del. 1982)).
81
   See, e.g., Reid v. Spazio, 970 A.2d 176, 182–83 (Del. 2009).
82
   Pls’ Opening Br. 47.
83
   The Plaintiffs list eight omitted facts that they assert were omitted: (1) “The current list of
shareholders in First Orion”; (2) “The number of common and preferred shares owned by each
                                               25
       On the face of the letter, Stalnaker, as President and CEO of the Company,

stated the following:

       As a shareholder of First Orion Corp. I have enclosed copies of the
       following:
         1. Written Consent of the shareholders of First Orion dated January
             27, 2010.
         2. Unanimous Written Consent of the Board of Directors of First
             Orion dated February 16, 2010.
         3. Written Consent of the shareholders of First Orion dated February
             16, 2010. 84
Accordingly, each stockholder received copies of the three documents listed above.

The Written Consent of the Shareholders dated January 27, 2010, was an action by

Morgan, acting as a stockholder and pursuant to the proxies received from Fotta, to

remove Fotta as officer and director and to install Stalnaker in his place.85

       The Written Consent of the Board of Directors dated February 16, 2010, was

an action by Morgan and Stalnaker, as sole directors of the Company, to declare the

2010 Stock Dividend and to propose an amendment to the Certificate of

Incorporation to increase the number of authorized shares needed to complete the

dividend.86 Included in the preamble is a chronological summary of First Orion that


shareholder”; (3) “The total number of shares of Dividend Stock being issued”; (4) “The
percentage of the Dividend Stock that was given to Charles Morgan”; (5) “The percentage of
outstanding shares of First Orion that Charles Morgan would own after the issuance of the
Dividend Stock”; (6) “The percentage of outstanding shares of First Orion that the common
shareholders would own after the issuance of the Dividend Stock”; (7) “The balance of First
Orion’s surplus”; and (8) “The balance of First Orion’s capital accounts.” Pls’ Opening Br. 33–
34.
84
   Defs’ Opening Br., Ex. 2C.
85
   Id., Ex. 2B, at 3020.
86
   Id. at 3021–25.
                                              26
states the initial capital structure of the Company; describes Morgan’s investment in

the Company’s Preferred Stock; and provides details of the 2009 Letter Agreement

between Morgan and the Company that resulted in the transfer of majority voting

control to Morgan.87 Furthermore, in the preamble the directors expressed the

Company’s desperate need of additional capital; it noted the Company’s intention to

raise $600,000 in the near future; and it listed the objectives necessary to attract

potential investors.88 Finally, the directors endorsed the 2010 Stock Dividend as in

the best interest of the Company:

       In order to accomplish these objectives, the Board has determined that
       it is in the best interest of the Company and its common and preferred
       shareholders to issue a Common Stock dividend to current holders of
       Preferred Stock which will result in a restructuring of the capital and
       stock ownership of the Company to reflect stock ownership among the
       common and preferred stockholders in proportion to each shareholder’s
       total cash contribution to the Company since its inception, . . .89

Following the preamble, the Board resolved and recommended to stockholders that

the Company adopt the 2010 Stock Dividend, which entitled preferred stockholders

to 73.9901 shares of common stock for each share of Preferred Stock.90

       The third and final enclosure was the Written Consent of the Shareholders

dated February 16, 2010. Morgan, again acting as a stockholder and pursuant to the




87
   Id. at 3021–23.
88
   Id. at 3024.
89
   Id.
90
   Id. at 3025.
                                         27
Proxies received from the Fotta Plaintiffs, approved the recommendations of the

Board to amend the Certificate of Incorporation and declare the 2010 Stock

Dividend.91

        In addition to the three enclosures described above, Fotta, as a party to the

“Preemptive Rights Agreement of First Orion Corp.,” received a Preemptive Rights

Notice with the Stalnaker Letter on February 19, 2010. The Preemptive Rights

Notice notified Fotta that the Company planned to offer newly authorized Series B

Convertible Preferred Stock, which stock Fotta had a preemptive right to purchase.92

Attached to the Preemptive Rights Notice was a Term Sheet providing details of the

upcoming offering.93

        Upon reading the documents enclosed with the Stalnaker Letter, I find that the

Plaintiff stockholders had sufficient information to bring a claim challenging the

2010 Stock Dividend. The Written Consent of the Board of Directors of February

16, 2010, described the events leading up to the 2010 Stock Dividend and provided

enough facts for a stockholder to conclude that Morgan, while temporarily in control

of the corporate machinery by virtue of the Proxies, had transferred permanent

control of First Orion to himself. Specifically, the document disclosed that Fotta and

Telemark together owned approximately 87% of the Company when it was formed;


91
   Id. at 3026.
92
   Id. at 3015.
93
   Id. at 3016.
                                          28
that Morgan later contributed $1,100,000 to the Company in exchange for 1,100,000

shares of Preferred Stock; that Fotta, Morgan, and the Company entered into the

2009 Letter Agreement, through which Morgan obtained the Proxies representing

voting control of the Company; that Morgan utilized the Proxies to remove Fotta as

an officer and director of the Company; that the Board had recommended a stock

dividend that would give preferred stockholders 73.9901 shares of common stock

for each outstanding share of Preferred Stock; that the proposed stock dividend

would result in a restructuring of the capital and stock ownership of the Company

by transferring control to the current holders of preferred stock; and that Morgan and

Stalnaker, representing the sole directors of First Orion, had approved the resolution.

In addition, the Actions by Consent of the Shareholders of February 27, 2010 and of

February 16, 2010, indicated that Morgan, via the Proxies granted by the Fotta

Plaintiffs and also as a Preferred Stockholder, had enough voting power to control

the Company. Therefore, as of February 19, 2010, the Plaintiffs held sufficient

information to pursue an equitable claim regarding the 2010 Stock Dividend.

      The Plaintiffs stress that the Stalnaker Letter did not provide sufficient

information regarding the Company’s capital accounts and thus the Plaintiffs were

unable to evaluate First Orion’s surplus at the time of the 2010 Stock Dividend. This

information, however, is pertinent only to their legal claims against the Defendants,

which claims have not been challenged under the statute of limitations and are not

                                          29
subject to the equitable defense of laches.94

                       b. The Reasonableness of the Plaintiffs’ Delay and Resulting
                       Prejudice to the Defendants

       Once the claimants are charged with sufficient knowledge of a potential claim,

the Court must determine if the claimant’s delay was reasonable. The Fotta Plaintiffs

filed the Original Complaint on January 17, 2013, nearly three years after the

Stalnaker Letter. Over five months later, on May 23, 2013, the Plaintiffs filed their

Amended Complaint, which for the first time included the Individual Plaintiffs. To

determine the bounds of unreasonable delay, the Court typically refers to the statute

of limitation by analogy.95 However, Courts in equity are not confined by the statute

of limitation; where unusual conditions or extraordinary circumstances are present,

the Court may assess unreasonable delay as equity requires.96 In sum, the “length of

delay is less important than the reasons for it.”97

       The Defendants argue that the Plaintiffs have failed to articulate a reasonable

justification for their delay, pointing mostly to deposition testimony taken as part of

this litigation. For example, when asked why he waited until 2013 to bring this

action, Fotta averred that he was busy working for another company and that he did



94
   Laches in that context could have an effect on any equitable remedy for disregard of the statutes,
however.
95
   See Bean v. Fursa Capital Partners, LP, 2013 WL 755792, at *4 (Del. Ch. Feb. 28, 2013).
96
   See IAC/InterActiveCorp v. O’Brien, 26 A.3d 174, 177–78 (Del. 2011) (citing Wright v. Scotton,
21 A. 69, 73 (Del. 1923)).
97
   Id. at 177 (citing Whittington, 991 A.2d at 8).
                                                30
not have the necessary financial resources to engage legal representation.98

Similarly, the Individual Plaintiffs were each asked why they failed to file suit

shortly after receiving the Stalnaker Letter, and each averred that either they did not

truly understand that they had a potential claim or that the size of their investment

in First Orion could not justify the expense of a suit.99 It is the Defendants not-

inconceivable theory that in 2010, the Plaintiffs were content to see Morgan take the

reins of a failing, near worthless First Orion, an attitude that only changed years

later, after Morgan’s effort and investment had made the Company valuable.

       The Plaintiffs failed to deny or further explain their reasons for delay in their

briefing.    Instead, the Plaintiffs argue that their claims were filed within the

analogous statute of limitation. The parties agree that the analogous statute of

limitation for a claim of breach of duty is three years; the Plaintiffs, however,

contend that their “illegal dividend claims” are subject to the analogous six-year

statute of limitation set out in Section 174.100 To the extent the Plaintiffs refer to

their claims based on violations of Sections 170 and 173 of the DGCL, I need not

determine the analogous statute of limitation because those claims are legal in nature

and uncontested by the Defendants in their laches defense. Otherwise, to the extent


98
   Defs’ Opening Br., Ex. 17, at 224:18–225:12.
99
   See id., Ex. 12, at 60–61; id., Ex. 13, at 28, 43–44; id., Ex. 14, at 30–31; id., Ex. 15, at 38, 55.
100
    Section 174 states, in part: “In case of any willful or negligent violation of § 160 or § 173 of
this title, the directors under whose administration the same may happen shall be jointly and
severally liable, at any time within 6 years after paying such unlawful dividend.” 8 Del. C. §
174(a).
                                                 31
the Plaintiffs intend to use the statutory violations as support for their breach of duty

claims, the appropriate analog is the three-year statute of limitation.

       The Court’s application of laches is not a rigid test under which I must

evaluate the Plaintiffs’ delay in isolation. Instead, like most equitable doctrines,

laches requires a balancing, where the claimant’s delay, and the reasons for it, are

balanced against the resulting prejudice to the defendant under the specific factual

circumstances in each case.101 Here, the Plaintiffs have failed to assert a sufficient

reason why they waited until the analogous statute of limitation had nearly run—or

had already run, in the case of the Individual Plaintiffs case. I therefore turn to

resulting prejudice.

       The final inquiry in a laches analysis is whether the Defendants suffered

prejudice as the result of the Plaintiffs’ unreasonable delay. The Defendants argue

that they and third-party investors would be prejudiced by the Plaintiffs’ delay if

relief is granted. The Defendants assert that, since the Stalnaker Letter of February

19, 2010, the Defendants have raised additional capital from new investors who

would not have invested if the Defendants had not controlled the Company.


101
    See Quill v. Malizia, 2005 WL 578975, at *14 (Del. Ch. Mar. 4, 2005) (“Incorporating the
concept of ‘unreasonable’ delay, laches seeks to equitably balance the factual circumstances of
each case.”) (citing Fed. United Corp. v. Havender, 11 A.2d 331, 343 (Del.1940) (“What
constitutes unreasonable delay is a question of fact dependent largely upon the particular
circumstances. No rigid rule has ever been laid down.”)); see also Houseman v. Sagerman, 2015
WL 7307323, at *5 (Del. Ch. Nov. 19, 2015) (“[L]aches entails a balancing: has a plaintiff's
dilatory approach to litigation disadvantaged the defendant so that equity should deny the plaintiff
the right to a decision on the merits?”).
                                                32
Furthermore, in reliance on that additional capital, the Defendants contend that they

transformed First Orion from a marginal business to a successful enterprise. To

illustrate the increase in value, the Defendants point to the implied valuations

resulting from equity raised after the 2010 Stock Dividend. According to the

Defendants, shortly after the 2010 Stock Dividend, the Company raised capital based

on a valuation of $3 million. Conversely, over two years later, the Company initiated

an offering that valued the Company at more than $26 million. The Defendants

argue that, had the Plaintiffs sought relief sooner, the Defendants would not have

continued to control First Orion and would, therefore, lack sufficient incentive to

oversee its success. Moreover, the Defendants argue that third-party investors would

not have supplied the capital necessary to drive First Orion’s growth had Defendants

not controlled the Company. In sum, the Defendants argue that the Plaintiffs’ “wait

and see” approach has prejudiced the Defendants because as the value of First Orion

increased over time, the amount of rescission damages that the Plaintiffs now seek

have also increased.

      The Plaintiffs argue that cancellation of the common stock issued in the 2010

Stock Dividend, or rescission damages that emulate a cancellation, will not harm

third parties because their stock ownership can be weighted retroactively to maintain

the same percentage ownership of the Company. To the extent the Defendants suffer

financial loss as the result of the cancellation of the 2010 Stock Dividend, the

                                         33
Plaintiffs argue, that loss is the sole result of their breaches of fiduciary duty.

      Given the facts and circumstances in this case, it is clear to me that the

Plaintiffs were aware of the facts necessary to bring an equitable claim in February

2010 and that as the result of their delay, the Defendants and third parties have

suffered some quantum of prejudice. What is unclear to me, however, is the extent

to which those parties suffered prejudice; the extent to which equity requires me to

disregard such prejudice as resulting from those parties’ breaches of duty; and to

what extent the Plaintiffs should have known that their active delay was causing the

Defendants that resulting prejudice. These questions of fact are also interwoven with

the remedy, if any, that will ultimately be crafted in this case. Therefore, the second

and third inquiries required in consideration of laches can only be determined on a

more developed record. The Defendants’ Motion for Summary Judgment for laches

is, accordingly, denied.

             3. The Claims Challenging the Stalnaker Options

      The Defendants argue that the Plaintiffs’ claims regarding the Stalnaker

Options should be dismissed because the Plaintiffs failed to make a demand on the

Company’s Board and have not sufficiently pled that its failure is excused. In their

Second Amended Complaint, filed December 9, 2014, the Plaintiffs, for the first

time, challenged the grant of the Stalnaker Options. In their derivate claim against

Morgan and Stalnaker in Count I, the Plaintiffs added in the Second Amended


                                           34
Complaint that “[t]he grant of the Stalnaker Options was a self-dealing, bad faith

transaction which benefited Stalnaker personally and amounted to a gift or waste of

corporate assets.”102 The Plaintiffs also added Count VII, a derivative claim against

Stalnaker for “Declaratory Judgment that the Second Stalnaker Options are Void Ab

Initio.”

       Generally, when claims are already properly before the Court, Rule 23.1 does

not require a plaintiff to reevaluate compliance with the rule merely because the

composition of the board has changed before the filing of an amended complaint.103

Such a rule avoids an undue pleading burden and inefficient inquiry, and allows

litigation to proceed in an orderly fashion. However, where the composition of a

board changes after the complaint is filed, and then a plaintiff amends her complaint

to challenge a transaction that is not “already in litigation,” the plaintiff may be

required to excuse (or make) a demand on the board as then constituted regarding

the new claim.104 In other words, an amendment to assert a claim based on a new

and distinct cause of action derivatively—made after the board composition has

changed—implicates the same interests as any derivative claim, and is subject to

compliance with Rule 23.1. Therefore, where a plaintiff amends to add a new


102
    Compl. ¶ 109.
103
    Harris v. Carter, 582 A.2d 222, 231 (Del. Ch. May 4, 1990) (“When claims have been properly
laid before the court and are in litigation, neither Rule 23.1 nor the policy it implements requires
that a court decline to permit further litigation of those claims upon the replacement of the
interested board with a disinterested one.”).
104
    See id. (citing Kaufman v. Beal, 1983 WL 20295 (Del. Ch. Feb. 25, 1983)).
                                                35
derivative claim after a change in the composition of the board, in order to avoid

renewed review under Rule 23.1, the plaintiff must show that:

       [F]irst, the original complaint was well pleaded as a derivative action;
       second, the original complaint satisfied the legal test for demand
       excusal; and third, the act or transaction complained of in the
       amendment is essentially the same as the act or transaction challenged
       in the original complaint.105

       The Defendants concede that the Original Complaint was well pleaded as a

derivative action and that demand was excused at the time of the Original Complaint,

when the Board was composed of Morgan and Stalnaker. However, the Defendants

argue that the Stalnaker Options represent a distinct transaction that was not

challenged in the Original Complaint. I examine the claims relating to the Stalnaker

Options in light of the following rubric: In order to constitute a new claim such that

a plaintiff is charged with again establishing demand futility, the amended complaint

must not merely “elaborate upon facts relating to acts or transactions” alleged in the

initial complaint, nor simply “assert new legal theories of recovery based upon the

acts or transactions that formed the substance of the original pleading;”106 instead, it

will only trigger review under Rule 23.1 where it is based on an independent cause

of action.

       In this case, the Original and First Amended Complaints alleged facts and


105
    Braddock v. Zimmerman, 906 A.2d 776, 786 (Del. 2006) (citing Uni-Marts, Inc. v. Stein, 1996
WL 466961, at *12 (Del. Ch. Aug. 12, 1996)).
106
    Harris, 582 A.2d at 231.
                                              36
claims surrounding the 2010 Stock Dividend, which occurred in February 2010. The

Stalnaker Options, however, were issued almost two year later, in late 2011. In order

to complete the Stalnaker Options transaction, the Board approved the 2011 Stock

Options Plan and Morgan, acting as majority stockholder, approved the stock option

issuances that, together, form the Stalnaker Options. I find that the 2010 Stock

Dividend and the Stalnaker Options are two discrete transactions. The 2010 Stock

Dividend involved Morgan’s cementing control of the Company; the Stalnaker

Options rewarded a corporate executive with stock in 2011. While either, or both,

may be wrongful, they are distinct temporally, factually, and in motivation. The

mere fact that the 2010 Stock Dividend possibly enabled Morgan and Stalnaker to

issue the Stalnaker Options does not merge the two as one “act or transaction.”

Therefore, at the time of the Second Amended Complaint, the Plaintiffs were

required to plead the additional claims challenging the Stalnaker Options in

compliance with Rule 23.1.

      According to the Defendants, at the time of the Second Amended Complaint,

the Board was composed of Morgan, Womble, and Burnett—Stalnaker was

allegedly removed from the Board in July 2013. The Plaintiffs’ Second Amended

Complaint, mirroring the two complaints filed before it, alleges only that a demand

would be futile because First Orion’s Board consisted of Morgan and Stalnaker. The

Second Amended Complaint thus fails to mention that the composition of the Board

                                         37
had changed, and fails to assert why Womble and Burnett could not apply business

judgment in consideration of any demand relating to the Stalnaker Options; it,

therefore, fails to properly plead that demand is futile in accordance with Rule

23.1.107

       I note that the Plaintiffs have not disputed that the Board composition has

changed, or that the two new directors were capable of considering a demand that

Morgan and Stalnaker be sued for breaches of duty. Instead, the Plaintiffs point to

this Court’s holdings in Seinfeld v. Slager,108 which, according to the Plaintiffs,

states that demand is excused if a claimant properly pleads a waste claim. The

Plaintiffs misunderstand Seinfeld. In Seinfeld, the plaintiff, without making a

demand on the board, filed a derivative suit that challenged multiple compensation

decisions by the board and asserted that many of the challenged decisions constitute




107
    The parties have not reached the issue of whether I should employ either the Aronson or Rales
test to determine whether the Plaintiffs’ demand is futile. I need not make that determination here.
The Court has recognized that “the Rales test functionally covers the same ground as the Aronson
test in determining the impartiality of directors” for the purpose of assessing demand futility.
Sandys v. Pincus, WL 2016 —, (Del. Ch. Feb. 29, 2016) (citations omitted). The Plaintiffs have
made no attempt to argue that Womble and Burnett were beholden to someone interested in the
issuance of the Stalnaker Options such that they would be unable to consider the demand
impartially. See Sandys v. Pincus, WL 2016 —, (Del. Ch. Feb. 29, 2016) (citing Beam v. Stewart,
845 A.2d 1040, 1050 (Del. 2014)). Furthermore, even if I assume that, for the purpose of the
Defendants’ motion, Morgan was a controller at the time of the Second Amended Complaint, the
presence of a controller is not itself sufficient to overcome the directors’ presumption of
independence. See Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 66 (Del.
Ch. 2015) (citing Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984), overruled in part on other
grounds by Brehm v. Eisner, 746 A.2d 244, 253 (Del. 2000)).
108
    2012 WL 2501105 (Del. Ch. June 29, 2012).
                                                38
corporate waste.109 The plaintiff, implicating the second prong of the well-known

Aronson test, argued that demand was excused because the challenged transactions

were not the product of business judgment. Under Aronson, to show that demand is

futile under Rule 23.1, the plaintiff must allege particularized facts that raise a reason

to doubt that “(1) the directors are disinterested and independent [or] (2) the

challenged transaction was otherwise the product of a valid exercise of business

judgment.”110 At the time of the complaint, the board in Seinfeld was the same as

that against whom waste was pled. In assessing the plaintiff’s compliance with

Aronson’s second prong, the Court stated that, “[d]emand may be excused under the

second prong of Aronson if a plaintiff properly pleads a waste claim.”111 The Court

then described the stringent requirements of pleading a waste claim.

       Seinfeld, unremarkably, held that a particularized pleading of waste

committed by the board on whom demand would otherwise be made may excuse

demand under Aronson, but that circumstance is absent here: the Second Amended

Complaint does not allege that waste was committed by Womble or Burnett, who

constituted the majority of the Board when the claim based on the Stalnaker Options

was filed.




109
    Id. at *1.
110
    Id. at *2 (citing Brehm, 746 A.2d at 253 (Del. 2000) (quoting Aronson, 473 A.2d at 814 (Del.
1984))).
111
    Id. at *3 (citing Orloff v. Shulman, 2005 WL 3272355, at *11 (Del. Ch. Nov. 23, 2005)).
                                              39
        Since the Plaintiffs have failed to plead particularized facts excusing demand

on the Board as constituted at the time of their Second Amended Complaint, I find

that they have not complied with Rule 23.1. Therefore, the Plaintiffs’ claims

challenging the Stalnaker Options are dismissed.112

                                    IV. CONCLUSION

       Based on the reasons stated above, the Plaintiffs’ Motion for Summary

Judgment is denied. Likewise, the Defendants’ Motion to Dismiss and/or for

Summary Judgment is denied, with the exception that the claims challenging the

Stalnaker Options in Counts I and VII are dismissed. To the extent the foregoing

requires an Order to take effect, IT IS SO ORDERED.




112
    Because of this determination, I do not address the Defendants’ argument that summary
judgment is appropriate because the Stalnaker Options were ratified by a disinterested majority of
the Board.
                                               40
