Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-01-07175/USCOURTS-caDC-01-07175-0/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 

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Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify

the Clerk of any formal errors in order that corrections may be made

before the bound volumes go to press.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 16, 2003 Decided March 7, 2003

No. 01-7167

& No. 01-7175

CARRAMERICA REALTY CORPORATION, ET AL.,

APPELLANTS

v.

JOSEPH KAIDANOW AND ROBERT A. ARCORO,

APPELLEES

Appeals from the United States District Court

for the District of Columbia

(No. 99cv00260)

Kenneth C. Smurzynski argued the cause for appellants.

With him on the briefs were Paul Martin Wolff, Eva Petko

Esber, and Anthony T. Pierce.

Eric Seiler argued the cause for appellees. With him on

the brief was Daniel B. Rapport.

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.

USCA Case #01-7175 Document #736575 Filed: 03/07/2003 Page 1 of 14
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Before: EDWARDS and SENTELLE, Circuit Judges, and

WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge: This is an appeal from a summary judgment in favor of counterclaiming defendants asserting a shareholder derivative action in answer to a suit for

declaratory judgment. In 1998, OmniOffices, Inc. (Omni)

issued 5,535,353 non-voting common shares to its controlling

shareholder, CarrAmerica Realty Corp. (CarrAmerica), at a

price of $20.00 per share. In the face of challenges to the

fairness of the price from its then-minority shareholders

Joseph Kaidanow and Robert Arcoro, Omni and CarrAmerica

filed a complaint in District Court seeking a declaration that

the issuing price was fair. Kaidanow and Arcoro counterclaimed, alleging that Omni and CarrAmerica had violated

fiduciary duties. The parties filed cross-motions for summary judgment. The District Court denied Omni’s and

CarrAmerica’s motion, granted Kaidanow’s and Arcoro’s and

declared the contested shares void. CarrAmerica and Omni

appealed. On appeal, we hold that the District Court erred in

holding the shares void rather than voidable and because we

find both that Kaidanow’s and Arcoro’s claim was barred by

the equitable defense of laches and that Omni’s Board of

Directors properly ratified the issuance of the shares, we

reverse the decision below and grant summary judgment for

the Appellants, Omni and CarrAmerica.

Background

CarrAmerica, a Delaware corporation, is a publicly traded

real estate investment trust (REIT) that invests in commercial real estate nationwide. In 1997 CarrAmerica decided to

branch into the ‘‘executive suites’’ business. To this end,

CarrAmerica acquired Omni, an office suites corporation.

CarrAmerica acquired a 95% economic interest in Omni, and

in compliance with tax rules governing REITs, non-voting

stock. Omni’s capital included a loan from CarrAmerica. At

the time of the acquisition that loan was in the amount of $36

million. The remaining economic interest in Omni and the

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voting shares were acquired by other entities affiliated with

CarrAmerica. The total initial investment in Omni was $20

million, and the number of shares to be issued was set at 1

million, resulting in a price of $20.00 per share. Upon

acquisition, Omni and the new shareholders entered into a

Stockholders’ Agreement granting the voting stockholders

anti-dilution rights which would enable them to maintain their

proportional interest by purchasing additional shares if Omni

raised additional equity capital.

A majority of Omni’s Board consisted of officers or directors of CarrAmerica, including Thomas Carr, the CEO of

CarrAmerica as Chairman. In March 1998, Appellees Kaidanow and Arcoro sold their executive office suites business to

Omni for approximately $32.5 million and warrants to purchase, collectively, 185,000 shares of Omni non-voting stock at

$20 per share. The agreement gave them anti-dilution protection, entitling them to additional warrants if new Omni

equity was issued for less than ‘‘fair market value’’ defined in

the agreement as $20 per share through December 31, 1999.

They were permitted to exercise their options at any time.

The warrants made clear that as warrant holders they had no

shareholder rights. Kaidanow was invited to join the Omni

Board and became a director. At about the same time,

CarrAmerica increased its loan to Omni to about $111 million

at a rate of 9.5% annual interest. Additionally, each CarrAmerica affiliated shareholder invested additional capital in

March and April 1998.

On May 7, 1998, the Omni Board, including director Kaidanow, approved a resolution, hereinafter the ‘‘Conversion Resolution,’’ authorizing the amendment of the CarrAmerica loan

into a convertible loan, at a conversion price of not less than

$20 per share. The Conversion Resolution states:

WHEREAS, the Corporation has borrowed approximately $111 million from CarrAmerica Realty Corporation pursuant to a Loan Agreement and related documents dated as of March 31, 1998 (the ‘‘CarrAmerica

Loan’’); and

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WHEREAS, the Board of Directors has determined

that it is advisable and in the best interests of the

Corporation to negotiate with CarrAmerica regarding

the possible conversion of the CarrAmerica Loan to a

loan in which CarrAmerica may convert some or all of

such a loan into equity of the Corporation;

NOW, THEREFORE, IT IS RESOLVED, that the

conversion of the CarrAmerica Loan into a loan, some or

all of which may be converted into equity of the Corporation, hereby is approved; provided, that the equity value

used for conversion purposes shall not be less than $20

per share; and

RESOLVED FURTHER, that the officers of the Corporation, or any of them, be and hereby are authorized,

in the name and on behalf of the Corporation, to negotiate, execute and deliver any and all documents as they

deem necessary or advisable in order to facilitate the

conversion of the CarrAmerica loan into a convertible

loan, and to do or cause to be done any and all such

further acts and things as they may deem necessary or

advisable in order to effectuate these resolutions.

(Emphasis added.)

In August 1998, Kaidanow and Arcoro exercised their

warrants and each tendered $1.5 million to Omni for 75,000

shares of non-voting stock, in order to improve their legal

position for challenging corporate conduct. Thus, Kaidanow

and Arcoro became minority shareholders of Omni for the

first time on September 1, 1998. At this point they expressed

to the Board their position that the conversion price of $20

was unfair. The Omni Board met again on September 15,

1998. Kaidanow did not attend. However, he asked Thomas

Carr to raise concerns about the conversion price at the

meeting. Carr mentioned at the meeting that Kaidanow and

Arcoro had become minority shareholders and their rights as

such should be considered when undertaking corporate action.

On September 30, CarrAmerica and Omni executed an

amendment to the Loan Agreement making the $111 million

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CarrAmerica loan convertible, in whole or in part, into Omni

stock at a price of $20 per share. CarrAmerica immediately

exercised its rights and converted the loan into 5,535,353

Omni shares. There was no negotiation over the conversion

price. On November 5, 1998, the Board met again, this time

with Kaidanow in attendance. During the meeting, Kaidanow

stated that he and Arcoro had personal claims against the

Board and made an offer to allow the Board to purchase their

interests for between $12.5 and $25 million. This offer was

not accepted by the Omni Board.

The next Omni Board meeting took place on December 17,

1998. Kaidanow was again not present, and the Board

passed a resolution authorizing 291,334 additional shares of

common stock, in compliance with the anti-dilution provisions

of the Stockholders’ Agreement with the original Omni shareholders. This resolution, the ‘‘December Resolution,’’ states:

WHEREAS, on September 30, 1998, the Corporation

issued 5,535,353 shares of non-voting common stock to

CarrAmerica Realty Corporation at a purchase price of

$20.00 per share;

WHEREAS, under the terms of a Stockholders’

Agreement dated as of August 21, 1997 by and among

the Corporation, Security Capital Holdings S.A., Security

Capital U.S. Realty, The Oliver Carr Company, Strategic

Omni Investors LLC and CarrAmerica Realty Corporation, as amended (the ‘‘Stockholders’ Agreement’’), if the

Corporation raises equity capital, it is required to provide

each of the voting stockholders the right to contribute a

proportionate share of such capital at the same purchase

price per share so as to maintain their percentage economic interest in the Corporation;

WHEREAS, the Board of Directors desires to authorize and approve the issuance of up to 291,334 additional

shares of voting common stock at a purchase price of

$20.00 per share, in accordance with the terms of the

Stockholders’ Agreement (the ‘‘Stock Issuance’’); and

TTT

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NOW THEREFORE BE IT RESOLVED, that the

Board of Directors hereby authorizes and approves the

Stock Issuance; and TTT

RESOLVED FURTHER, that the officers of the Corporation, or any one or more of them, hereby are authorized, in the name of and on behalf of the Corporation, to

execute and deliver such documents and instruments as

they, or any one or more of them, determine to be such

instruments as they determine to be necessary or advisable in connection with the Stock Issuance or the satisfaction of the Corporation’s obligations under the Stockholders’ Agreement (such determination to be conclusively,

but not exclusively, evidenced by the execution and delivery thereof by any such officer); and

RESOLVED FURTHER, that all actions heretofore

taken by the officers of the Corporation with respect to

the Stock Issuance hereby are ratified, confirmed and

approved.

On February 4, 1999, Omni filed the present action in

District Court seeking a declaration that the $20 conversion

price was fair and that CarrAmerica was the owner of

6,850,000 shares of Omni non-voting stock. That same day,

Kaidanow resigned from the Omni Board. On March 1, 1999,

Kaidanow and Arcoro counterclaimed against Omni, CarrAmerica and all directors other than Kaidanow, alleging breach

of fiduciary duties based on the claim that the conversion

price was unfair. On November 4, 1999, CarrAmerica, Omni

and the remaining directors moved for summary judgment on

the grounds that Kaidanow and Arcoro were estopped from

challenging the conversion because (1) Kaidanow had voted in

favor of the Conversion Resolution and did not seek modification or revocation of that resolution prior to conversion;1

 (2)

Kaidanow and Arcoro lacked standing to challenge the conversion because they did not own Omni stock at the time the

1 While it is not entirely clear why the acts of Kaidanow would

estop Arcoro as well as himself, all parties have agreed that

Kaidanow ‘‘represented’’ Arcoro on the board so that issue is not

before us.

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conversion was approved; (3) the business judgment rule

applied to the conversion decision; and (4) CarrAmerica, et

al., had not breached any fiduciary duties. While this motion

was pending, on January 21, 2000, CarrAmerica announced it

was selling the bulk of its Omni stock as part of a merger

between Omni, FrontLine Capital Group and VANTAS. This

merger closed on June 1, 2000.

On November 27, 2000, Kaidanow and Arcoro moved for

leave to file a cross-motion for summary judgment based

solely on the claim, raised for the first time during this

litigation, that the issued conversion shares were, in fact, void

because they lacked statutorily required board authorization

under sections 152 and 153 of the Delaware General Corporate Law (DGCL), Del. Code Ann. tit. 8, §§ 152, 153 (2001).

The DGCL requires that the board of directors of a corporation establish the consideration to be received for stock.

Section 153(a) provides: ‘‘[s]hares of stock with par value may

be issued for such consideration TTT as determined from time

to time by the board of directors, or by the stockholders if the

certificate of incorporation so provides.’’ Del. Code Ann. tit.

8, § 153(a). Section 152 provides that consideration for issued stock ‘‘shall be paid in such form and in such manner as

the board of directors shall determine’’ and that ‘‘the judgment of the directors as to the value of such consideration

shall be conclusive.’’ Del. Code Ann. tit. 8, § 152.

On September 12, 2001, the district court issued its Opinion

and Order denying CarrAmerica’s motion for summary judgment and granting that of Kaidanow and Arcoro. Before us,

CarrAmerica challenges the District Court’s conclusion that

(1) the conversion shares issued to CarrAmerica lacked the

necessary statutory authorization and were therefore void;

and (2) the equitable defenses of ratification, estoppel, laches

and unclean hands were not applicable. The District Court

expressed no conclusion as to the fairness of the $20 conversion price or the allegations of breaches of fiduciary duty.

This Court reviews grants of summary judgment de novo.

See Goldman v. Bequai, 19 F.3d 666, 672 (D.C. Cir. 1994).

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Summary judgment is appropriate where there are no genuine issues of material facts, taking as true the evidence of the

non-moving party and drawing all inferences in its favor. See

id. Applying that standard, we hold that the District Court

erred in holding that the conversion shares were void, rather

than merely voidable. Voidable acts can be ratified and

parties may be precluded from challenging such acts based on

equitable defenses. Therefore, we reverse the District

Court’s decision and grant summary judgment for CarrAmerica because Appellee’s claims were barred by the equitable

defense of laches, and the Omni Board took the necessary

actions to ratify the issuance of the conversion shares.

Analysis

As a threshold matter, the District Court’s holding that the

conversion shares were automatically void because they were

issued in violation of the DGCL is incorrect. The District

Court first held that the plain language of the Conversion

Resolution did not support the contention that the Omni

Board had ‘‘determined’’ the $20 per share price, as required

by section 152. The District Court cited language in the

resolution which indicated that the $20 per share price was

still open to negotiation, and therefore not determined by the

Board. See OmniOffices, Inc. v. Kaidanow, 2001 WL

1701683, at *9 (D.D.C. Sept. 12, 2001). The District Court

then determined that Delaware law required that shares

issued in violation of the Delaware statute were automatically

void and thus not open to equitable challenges or ratification.

See id. at *12–*16. Assuming, as the District Court held,

that the conversion shares were not issued in compliance with

the requirements of the DGCL, we hold that Delaware law

does not compel the automatic voiding of shares issued in

such a case. We further conclude that because these shares

are merely voidable, as opposed to void, equitable defenses

are therefore available.

As in other jurisdictions, the law of Delaware distinguishes

between those improper acts of a corporate board which are

‘‘void’’ and those which are merely ‘‘voidable.’’ As the DelaUSCA Case #01-7175 Document #736575 Filed: 03/07/2003 Page 8 of 14
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ware courts have explained, the essential distinction between

voidable and void acts are that those acts which the corporation could accomplish lawfully but which it has undertaken to

accomplish in an inappropriate manner are voidable. Acts

which the corporation could not accomplish lawfully, no matter how undertaken, are void and cannot be cured. See

Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 896 (Del.

Ch. 1999). Appellees argue that both Triplex Shoe Co. v.

Rice & Hutchins, Inc., 152 A. 342 (Del. 1930), and STAAR

Surgical Co. v. Waggoner, 588 A.2d 1130 (Del. 1991), support

their contention that an act performed by a corporate board

in violation of a Delaware corporate statute, albeit an act

within the Board’s authority under its own corporate charter

and bylaws, is necessarily void and renders the resulting

shares invalid. We disagree. The two cases on which the

Appellees rely are distinguishable from the current case.

In Triplex Shoe, the corporation’s certificate of incorporation did not validly authorize the challenged stock issuance,

and thus ‘‘the corporation had no power or authority from the

State to issue the stock in question.’’ 152 A. at 347. The

court held that because the issuance was ultra vires, the

resulting shares were void and could not be saved by a

subsequent amendment to the certificate of incorporation.

Id. at 348. The court distinguished other cases in which

improperly issued stock was not found to be void on the basis

of whether the acts of the board were within or not within the

power of the corporation. Id. In this case, the Appellants do

not contend that Omni lacked the power to issue conversion

shares, only that the board’s method of issuing the shares

violated a statutory requirement. Therefore, Triplex Shoe is

not determinative of their case. Their reliance on STAAR

Surgical is similarly misplaced.

The STAAR court addressed a narrow issue regarding the

validity of convertible preferred shares issued by a corporation in violation of § 151, Del. Code. Ann. tit. 8, §§ 151(a), (g),

which mandates that in order to validly issue preferred stock,

the board must adopt a resolution and if new shares are

created by such a resolution, that the board must adopt a

certificate of designation amending the certificate of incorpoUSCA Case #01-7175 Document #736575 Filed: 03/07/2003 Page 9 of 14
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ration. See STAAR Surgical, 588 A.2d at 1135. In STAAR,

the board failed to adopt either the required resolution or the

certificate of designation, and the court stressed, when it held

the stock void, that the certificate of incorporation had never

been amended to allow the board to issue the preferred

shares: ‘‘a board’s failure to adopt a resolution and certificate

of designation, amending the fundamental document which

imbues a corporation with its life and powers, and defines the

contract with its shareholders, cannot be deemed a mere

‘technical’ error.’’ Id. at 1137. Thus, STAAR is consistent

with the principle that a void result occurs when a corporate

board acts without authorization, while the result of an authorized act improperly accomplished may be merely voidable.

See, e.g., Huizenga, 751 A.2d at 896.

This principle is highlighted in the recent Delaware case,

Kalageorgi v. Victor Kamkin, Inc., 750 A.2d 531 (Del. Ch.

1999), in which the same issue, whether issued shares were

properly authorized by the board, or issued in violation of a

provision of the DGCL. In that case, the court found that

even though the shares had not been initially authorized in

full compliance with the statute’s requirements, subsequent

board ratification cured any defect. Therefore, the resulting

shares were valid. This holding incorporates the more fundamental principle that the shares, prior to ratification, were

merely voidable, not void, because only voidable acts would be

open to ratification. See, e.g., Michelson v. Duncan, 407 A.2d

211, 219 (Del. 1979).

Because we conclude that the District Court erred in

holding the shares automatically void, as opposed to voidable,

we must now consider the Appellants’ arguments that there

are equitable defenses which bar the claims brought by

Kaidanow and Arcoro, and that the Omni Board effectively

ratified the issuance of the conversion shares.

Appellants argue that Kaidanow and Arcoro are barred in

their claims by the equitable defense of laches. Laches

applies where there has been an unfair and prejudicial delay

by a plaintiff in bringing an action. As we have noted on

other occasions, the rationale for this defense is, ‘‘[a]s claims

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become increasingly stale, pertinent evidence becomes lost;

equitable boundaries blur as defendants invest capital and

labor into their claimed property; and plaintiffs gain the

unfair advantage of hindsight, while defendants suffer the

disadvantage of an uncertain future outcome.’’ N.A.A.C.P. v.

N.A.A.C.P. Legal Def. & Educ. Fund, Inc., 753 F.2d 131, 137

(D.C. Cir. 1985). The prejudice that can result from such

delay is particularly unsettling when, as here, the claim

affects the validity of stock which is central to a merger

between the named corporation and corporate entities foreign

to the complaint.

Kaidanow and Arocoro offer no excuse for their failure to

raise the claim that the shares were void because of the

Board’s failure to comply with the Delaware statute in a more

timely manner. Neither the law nor the underlying facts had

changed since the original counterclaim was filed on March 1,

1999. However, the initial pleading alleged only that the

price for which the stock was issued was substantially below

its fair value and that the acquisition of the stock constituted

self-dealing undertaken in breach of fiduciary duties owed by

appellants to Arcoro, Kaidanow, and Omni Offices, claims

which Appellees have not undertaken to support before us,

but which apparently remain pending in parallel litigation

before the courts of Delaware. The counterclaim contained

no allegation of statutory non-compliance, even though the

record is clear that both Kaidanow and Arcoro were well

aware of the content of the Board’s Conversion Resolution,

which forms the basis of their statutory argument. They

failed to raise the issue in the course of this litigation until

November 2000. The District Court held that laches did not

apply because it determined that Appellants had suffered no

prejudice from Appellee’s delay. Upon our de novo review,

we determine that Appellants did indeed suffer prejudice.

If Kaidanow and Arcoro had raised their objections to the

issuance based on improper board authorization earlier, Omni

could immediately, and at a comparatively insignificant cost,

have remedied the alleged defect by simply voting on and

approving a resolution which was indisputably compliant with

the requirements of the statute. However, the delay has

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permitted the matter to ‘‘become entangled and the rights

and business concerns of others to intervene.’’ Updyke Assocs. v. Wellington Mgmt. Co., 1982 WL 17848, at *2 (Del. Ch.

Feb. 4, 1982). Omni and CarrAmerica continued in their

business for years under the belief that the Conversion

Resolution had successfully extinguished the $111 million

loan. Omni entered into a merger agreement based on this

premise, whereby CarrAmerica sold much of the issued stock

to a third party, which in turn sold it to other parties. These

transactions were completed months before Kaidanow or

Arcoro brought the statutory issue to the attention of any

opposing party.

As much as Appellees argue otherwise, alleging that $20

per share is an unfair price is not the same complaint as

alleging that a statutory defect existed in the issuance of the

shares. Had Kaidanow or Arcoro brought this defect to the

attention of the Omni Board, it could have easily corrected

the deficiency, and avoided the potential voiding of millions of

shares. It would have been a simple matter for the Board to

either redraft the resolution or cancel and reissue the shares

prior to the merger. The same is not true two years after

the fact. This delay was particularly egregious given that

Kaidanow was an Omni director at the time of issuance. His

position gave him ample opportunity to raise these objections

on any number of occasions, and had he done so, even after

the shares were issued, the Board would have easily been

able to cancel and reissue the shares with proper board

authorization. The prejudice suffered by Omni in this case is

the loss of an easy extrication from this problem—a loss

resulting from the delay by Appellees in bringing it to the

Board’s attention before the shares became the basis for

complex corporate dealings with third parties. Therefore, the

equitable defenses of laches may be appropriately applied to

this situation, and Kaidanow’s and Arcoro’s statutory claim is

barred.

Finally, we hold that the Board took the necessary steps to

ratify the issuance of the shares at the December 1998 Board

meeting, at least through implied ratification. Because the

shares were not void, only voidable, validity could be properly

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conferred by Board ratification. See, e.g., Kalageorgi, 750

A.2d at 539 (‘‘Where board authorization of corporate action

that falls within the board’s de jure authority is defective, the

defect in authority can be cured retroactively by board ratification.’’). Directors may ratify a corporate action either

expressly or impliedly. Ratification may be implied ‘‘if the

corporation, represented by the board of directors, who have

knowledge of the facts, accepts and retains the benefits of the

contract or act, or recognizes it as binding, or acquiesces in

it.’’ 2A WILLIAM MEADE FLETCHER ET AL., FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 762 (perm. ed., rev.

vol. 2001). Here, the December Resolution, approved by the

Board during a regular meeting stated: ‘‘on September 30,

1998 the Corporation issued 5,535,353 shares of non-voting

common stock to CarrAmerica Realty Corporation at a purchase price of $20.00 per shares [sic].’’ While the December

Resolution, in its body, did not contain language explicitly

stating the Board’s ratification of its approval of the $20 per

share price, a leading corporate law treatise teaches that

‘‘[a]n express resolution of ratification is not necessary but it

is sufficient that the board of directors, as a board, received

report or notice of the transaction requiring ratification, and,

with knowledge, not only failed to repudiate it, but treated it

the same as other obligations of like kind.’’ FLETCHER ET AL.

§ 762. The December Resolution does at least that much.

The evidence before us demonstrates that the Board was

aware of the $20 per share conversion price and that the

December Resolution was premised on the September issuance of the conversion shares. Not only does the language in

the December Resolution clearly reference the Conversion

Resolution and the $20 per share price, but the record also

shows that the Omni directors delayed voting on the December Resolution until they had an opportunity to review an

independent analysis of the $20 price for its fairness and felt

comfortable with the issuance. It is clear from the evidence

in the record that the Omni directors could not have logically

voted in favor of the December Resolution without being

aware of, and approving of, the conversion of the CarrAmerica loan at $20 per share. This is sufficient to find implied

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ratification. See In re Lukens Inc. Shareholders Litig., 757

A.2d 720, 737–38 (Del. Ch. 1999). Therefore, the Omni Board

at least impliedly ratified the Conversion Resolution by its

actions in the December board meeting and its approval of

the December Resolution.

Because we conclude that the District Court erred when it

held that the conversion shares were automatically void, and

because we hold that the shares were merely voidable, we

reverse the District Court’s grant of summary judgment for

Appellees. Because the shares were only voidable, the equitable defense of laches may be properly applied, and we

further hold that defense bars the Appellees’ claim here. In

addition, we find that the shares are valid because the Board

ratified their issuance in its December Resolution. Therefore, we reverse the District Court and grant summary

judgment in favor of Appellants.

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