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Delaware Court Of Chancery Finds Cancellation And Repurchase Of Shares Unauthorized For Failure To Adhere To Corporate Formalities
09/23/2025On September 9, 2025, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued a post-trial decision in favor of plaintiffs with respect to a conversion claim in an action brought by two co-founders of a startup who alleged that defendants, two other co-founders, including the CEO, and the Company wrongfully deprived them of their shares. Foley v. Session Corp., C.A. No. 2023-0186-JTL (Del. Ch. Sept. 9, 2025). The Court found that defendants and the Company effectuated the cancellation and repurchase of shares held by plaintiffs pursuant to agreements with plaintiffs that were not formally authorized by the Company’s board at a proper meeting or by unanimous written consent. Accordingly, the Court held that defendants had committed the tort of conversion and ordered rescission—i.e., reissuance of the canceled and repurchased shares. The Court explained, “[p]articularly where stock is concerned, Delaware law demands adherence to proper corporate formalities.”
The Court found that the four co-founders were the Company’s only directors. During a corporate restructuring, believing that they would be protected by a “founders agreement”—which would protect their rights as minority shareholders—plaintiffs agreed to relinquish some of their equity. Specifically, defendants, on behalf of the Company, and plaintiffs entered into (i) a stock cancellation agreement that provided for the cancellation of a small percentage of plaintiffs’ shares and (ii) a stock restriction agreement that provided the Company the right to repurchase plaintiffs’ remaining shares for a nominal amount if plaintiffs’ employment was terminated. Thereafter, the Company purported to cancel the first tranche of shares and subsequently terminated plaintiffs’ employment and purported to repurchase their remaining shares.
The Court explained that only the board has the authority to issue or repurchase stock, unless that authority is properly delegated by the board. The Court thus held that “[g]iven their subject matter and significance, formal board action was required to authorize” the Company to enter into the agreements, as well as to exercise the repurchase right. Here, there was “no valid board action”—i.e., “[a] quorum of the Board never convened and approved a resolution authorizing those agreements” and there was no unanimous written consent of all directors. Because the board did not approve the agreements or repurchase at a proper meeting or act by unanimous written consent, the Court held that the agreements were “nullities,” and thus by acting as if plaintiffs no longer held their shares, defendants committed conversion.
However, the Court decided in favor of defendants on plaintiffs’ additional claims for fraud and breach of fiduciary duty, each of which was premised on plaintiffs’ allegations that defendants had made misrepresentations during the course of the restructuring and subsequent events. The Court found that defendants had not made any intentional misrepresentations and, specifically, that it was more likely than not that defendants had intended to follow through on the anticipated “founders agreement,” but it “fell by the wayside and was never finalized.”
Nevertheless, the Court expressly rejected defendants’ argument on the conversion claim that the Court should overlook the lack of formal board action because the Company generally did not follow corporate formalities. The Court explained that defendants’ “appeal to equity misunderstands the difference between review at law and review in equity” and that “formality matters when assessing compliance with the technical rules having to do with the existence and proper exercise of [corporate] power.” As such, “[n]ot following corporate formalities is a problem, not a defense.”
