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 T rustee of the CHARLES D. MOR G AN 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 FI RM, LLC , Wilmington , DE ; OF COUNSEL: Grant E. Fortson and Roger D. Rowe, of LAX, VAUGH A N, FORTSON, ROWE & THREET, P.A., Little Rock, AR, Attorney s 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, L ittle Rock, AR , Attorneys for Defendants Charles D. Morgan, individually and as T rustee of the Charles D. Morgan Revocable Trust, and Jefferson D. Stalnaker

.GLASSCOCK, Vice Chancellor1

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 stock holders. Here, the Plaintiffs

— sto ckholders 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 s ummary judgment. Because the issues so presented turn on contested issues of fact, those motions are largely denied. With respect to one claim brought deriva tively, however, demand on the board was neither made nor excused, and I find that the P laintiffs 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, 19.2

regulatory body

. 3
Plaintiff Keith Fotta is the founder of First Orion. 4 Fotta owns approx imately 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. R ich, Illene Rich, Diane Jurmain, and Peter Jurmain (collectively, the “Individual
Plaintiffs ”) are also common stockholders of First Orion

. Defendant Charles Morgan is the current C hairman of the B oard of First Orion (the “Board”) and is the T rustee of th e 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 d irector 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 ¶ 19.3

C ompany since 2007. 9 In 2008 , Morgan entered into a s tock p urchase 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 B oard. 11 Each share of Preferred Stock was convertible
into one share of common stock. 12 B y the end of September 2009, Morgan had invested $1,100,000 in e xchange for 1,100,000 shares of Preferred Stock , 13 which at that time represented approximately 70% of the then

- outstanding Preferred S tock 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 “P roxies”) for the ir common shares of stock in the Company. 17 According to the 2009 Letter Agreement, t he 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. C ompl. and/or for Summ. J. (“Def s ’ Opening Br.”), Ex. 17, at 71

– 72; Compl., Ex. 4, at 1

– 2. 16 Compl., Ex. 1. 17 Id. , Ex. 1, at 2.4

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 th e 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 purs uant 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 receiv e 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 2.5

of common st ock 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 Prefer red Stock in satisfaction of the 2009 Letter Agreement

. 26 According to the Plaintiff s , 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 Pre ferred Stock would
receive 73.9 901 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 Def s ’ Opening Br., Ex. 2E. 25 Compl. ¶ 32. 26 Id. 27 Id. at ¶ 34. 28 Def s ’ Opening Br., Ex. 2B, at 3020. 29 Compl., Ex. 4.6

the Compa ny’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 S tock 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 res ult, Morgan’s “total ownership” interest incre ased from approximately 15% to 72% and the Plaintiffs’ collectiv e “ 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, t hree 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 M ot

. for Partial S umm. J. and A nswering Br. in Opp. to Defs .’ Mot. to Dismiss and/ or for Summ. J. (“Pls’ Answering Br.”), Ex. 10, at ¶ 7. 33 Compl. ¶ 55. 34 Def s ’ Opening Br., Ex. 2E, at 3

– 5. 35 Compl. ¶ 68; Pl s ’ Opening Br., Ex. 1.7

“Stalnaker Letter”) that enclose d (1) the W ritten C onsent 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 W ritten C onsent of the B oard, dated February 16, 2010, to authorize the 2010 Stock Divid end; and (3) the W ritten C onsent 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 mor e than $3, 5 00,000 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 Def s ’ Opening Br., Ex. 2B; i d. , Ex. 2C. 37 Id. , Ex. 2, at ¶ 14; id. , Ex. 2H. 38 Id. , Ex. 2P

. 39 Id. , Ex. 2R

. 40 Id. , Ex. 2S

.8

with Stalnaker

. 41 In addition to equity financing, the Company entered i nto 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 “ P reemptive Rights Agreement,” dated August 4, 2008, which entitled certain investors “preemptive rights upon the issuance of certain secu rities 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.9

E. Sta lnaker 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 option s when he started , however

. Years later, o n September 30, 2011, the First Orion B oard, which then consisted of Stalnaker and Morgan, adopted the 2011 Nonqualified Stock Option Plan (the “2011 Stock Option Plan”) that
authorized the B oard 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 fa iled to execute the offer. Id. , Ex. 18 , at 292

– 94; see also id. , Ex. 26. 46 Compl., Ex. 9. According to the Written Conse nt 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. 9.10

common stock for $0.0203 per share. 49 In total, the Stalnaker Options represent between 8% and 8.5% of the ownership of the Co mpany. 50 On December 11, 2014

— nearly th ree 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, purp orted 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 Indivi dual 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 o n 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 conversi on 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. 27.11

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, t he 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 B oard. 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 t hat the Defendants cannot avoid a finding that this stock is void despite the Defendants’ assertion of the defense s of acquiescence and
laches

.

52 Compl. ¶ 3. 53 Id.12 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 i ssue 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’ m otion challenging the Plaintiff s ’ failure to make a demand as a motion to dismiss pursuant to Rule 23.1. Generally , i f a
stockholder wishes to initiate an action on behalf of the corporation, s he 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 behal f 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 plai ntiff's failure to obtain the action or for not making the effort. ” 56 The standard articulated in Rule 23.1 “ imposes a more arduous pl eading standard than Rule 8(a), and a plaintiff must allege sufficient particularized facts showing that demand on the boa rd

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. 23.1.13

would have been futile. ” 57
III. ANALYSIS I address the partie s ’ motions separately below and find that b oth 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 Plaintiff

s’ 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 o nly to the statutory claims and, in the alternative, claims of

waste. Notwithstanding the resolution of the Plaintiffs’ motion, t he 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).14

In Co unts 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 sh areholders .” In sum, in Count I the Plaintiffs allege that “[t]he
2010 Stock Di vidend and the issuance of the A dditional Warrants were self

- dealing, bad faith transactions which benefited Morgan personally and amounted to a gift or waste of corporate asset s.” 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 sh areholders 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).15

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 Dividen d
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 n or 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 an y restrictions contained in its certificate of incorporation, may declare and pay

59 Th e 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 DG CL 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 “recapitaliza tion.” Id. at 21 n.7. 61 In the alternative, the Plaintiffs seek damages pursua nt to 8 Del. C. § 174. I do not address Section 174 here since the Plaintiffs’ Motion for Summary J udgment 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 res ult in a determination that the stock so issued is void.16

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 th ere 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 th e statue , does not apply to dividends paid in stock.
The actions of the General A ssembly indicate , however, that it did intend Section
170 to apply to stock dividends

. 63 T herefore, 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 Sect ion 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 wa s 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.17

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.
I nstead, 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
revalue d 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
B oard 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 director s 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 declar ed 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. § 173.18

the issued shares are void. I note that in the board resolution declaring the dividend,
the B oard 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. Li kewise, 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 unan imous 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 aggrega te par value of the shares being issued as a dividend by the Company.” Def s ’ Opening Br., Ex. 2B, at 3025.19

are barred by the doctrine of acquiescence. Second, the Defendants assert that the Plaintiffs’ equ itable claims are barred by laches. I find that the resolution of these arguments requires further factual development and deny that portion of the Defendants’ m otion

. Finally, the Defendants argue that the Plaintiffs’ claims that challenge the Stalnaker Options

— raised for the first time i n the Second Amended Complaint

— should be dismissed pursuant to Rule 23.1 for failure to make a demand
on the B oard. 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 acquies cing to the 2010 Stock Dividend. T he 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 applie d 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 t hree 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 (5 th ed. 1941) ) . In Kla assen 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 dela y. Finally, the doctrine of acquiescence has been applied, as it20

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
T he Delaware Supreme Court has established a clear test whic h 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) a cts 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 “chang e 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 Bro s . , 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.21

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,

conta cted the Company in 2012, but did not express an objection to the 2010 Stock
Dividend. T he 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 surrou nding the 2010 Stock
Dividend. In addition to the Fotta Plaintiffs’ silence regarding the 2010 Stock Dividend, the Defendants point to per iodic communications between Fotta and Stalnaker in which Fotta acknowledge s Stalnaker and Morgan as controlling First
Orion and mak e s commen ts 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).22

however, that the factual circumstances in th is case are dissimilar to the cases relied on by the Defendants

. In Lehman Brothers , the plaintiffs held preferred st ock 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 de sign ate a board member, however, and l ater, 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 lat est debt incurrence, the plaintiff s 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 damage s that could have been prevented had the plaintiff s not stood silent. 77
In Kla ass en , the defendant directors intended to fire the plaintiff CEO and director at the next regularly scheduled board meeting. During the meeting, the
defendant directors initiat ed an executive session, for which the CEO was asked to

77 Lehman Bros. , 2014 WL718430 , at *12.23

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 m onths 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 i n 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 Defendant s have made no assertions regarding their own view of the Plaintiffs ’ knowledge of the 2010
Stock Dividend an d their inaction at the time it was declared

. Nor have the
Defendants sufficiently explained how the Plaintiffs’ inaction le d 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 i d. 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. A lthough Klaassen reference d behavior occurring after the alleged breach, the case involved an actor who was present and able to acquiesc e from the time of the alleged wrongdoing.24

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 thir d 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 t he 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. T he Defendants’ Motion for Summary Judgment based on acquiescence is , accordingly, denied. Before turning to the defense of laches, I note that many o f 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 do ctrine: where the claimants are in fo rmed 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 t hat laches bars the Plaintiffs’ request for equitable
relief because the Plaintiffs unreasonably delayed in bringing a claim

. The equitable

79 The Defendants concede the similari ties in their opening brief: “T he facts and analysis set forth in the preceding section demonstrate the defense of laches as readily as they demonstrate the defense of acquie scence.” Defs’ Opening Br. 45.25

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, i n order to establish a laches defense , a defendant must show : (1) that the plaintiff had know ledge 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 att ained 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 t hat letter , the Plaintiffs were given ac tual notice of the
self

- dealing natur e 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 know ledge 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 each26

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 According ly , each stockholder received copies of th e three documents listed above.
T he 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 C onsent 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 bein g 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 sha res 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.” Pl s ’ Opening Br. 33

– 34. 84 Defs’ Opening Br., Ex. 2C. 85 Id. , Ex. 2B, at 3020. 86 Id. at 3021

– 25.27

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 t he 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 C ompany: 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 sto ck 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 B oard resolved and recomm ended 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 P referred S tock. 90
The third and final enclosure was the Written Consent of the Shareholders
dat ed 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 3025.28

P roxies received from the Fotta Plaintiffs , approved the recommendations of the
B oard to amend the Certificate of Incorporation and declare the 2010 Stock
Dividend. 91
In addi tion to the three enclosures described above, Fotta , as a party to t h e “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 wa s 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. T he Writ te n 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 t he P roxies, 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 3016.29

that Morgan later contributed $1,100,00 0 to the Compa ny 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 re move Fotta as an officer and director of the Company; that the Board had recommended a stock dividend that would give preferred stockholders 7 3.9901 shares of c ommon s tock for each outstanding share of P referred S tock ; that the proposed stock dividend
woul d 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 P roxies 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,

w hich claims have not been challenged under the statute of limitations and are not30

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 suffi cient 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, t he Plaintiffs filed their Amended Complaint, which for the first time inc luded 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 equi ty 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
T he 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, w hen 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).31

not have the necessary financial resources to engage legal representation. 98
Similar ly , t he Individual Plaintiffs were each asked why they failed to file suit shortly after receiving the Stalnaker L etter, 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 Ori on 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 Mo rgan’s effort and investment had made the Company valuable.
The Plaintiffs fail ed 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 di vidend 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, t o 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).32

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.
T he Court’s application of laches is not a rigid tes t 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

rea son 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 th e 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 di latory approach to litigation disadvantaged the defendant so that equity should deny the plaintiff the right to a decision on the merits? ”).33

Furthermore, i n reliance on that additional capital, the Defendants contend that they
transformed First Orio n from a marginal business to a successful enterprise. To
illustrate the increase in value , the Defendants point to the implied valuati ons resulting from equity raised after the 2010 Stock Dividend. According to the Defendants, shortly after the 2010 Stock Dividend, the Co mpany raised capital based

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

an offering that valued the C ompany 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 su ccess. 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 Plaintiff s now seek
have also increase d

. T he 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 owners hip of the Company. T o the extent the Defendants suffer
financial loss as the result o f the cancellation of the 2010 Stock D ividend, the34

P laintiffs argue, that loss is the sole result of their breach es of fiduciary dut y . Given the facts an d circumstances in this case, it is clear to me that the
Plaintiffs were aware of the fact s 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 un clear 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 th ose parties’ breaches of duty; and to what extent the Plaintiffs should have known that th eir active delay was causing the
D efendants that resulting prejudice. These questions of fact are also interwoven with the remedy, if any, that will ultimately be crafted in this case. Theref ore, the second and third inquiries required in consideration of laches c an 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 Def endants argue that the Plaintiffs’ claims regarding the Stalnaker Options should be dismissed because the Plaintiffs failed to make a demand on the Company’s B oard and have not sufficiently pled that its failure is excused. In their Second Amended Complai nt, filed December 9, 2014, the Plaintiffs , for the first time, challenged the grant of the Stalnaker Options. In their d erivate claim against Morgan and Stalnaker in Count I, the Plaintiffs added in the Second Amended35

Complaint that “[t]he grant of the S talnaker 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, w hen 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 t hen 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 asse rt 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) )

.36

derivative claim after a change in the composition of the board, in order to avoid renewed review under Rule 23.1, the p laintiff 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 O riginal C omplaint was w ell pleaded as a
derivative action and that demand was excused at the time of the O riginal C omplaint , when the Board was composed of Morgan and Stalnaker . However, the Defendants argue that the Stalnaker Options represent a distinct transaction that was n ot challenged in the O riginal C omplaint. I examine the claims relating to the Staln a ker Option s 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 c omplaint, nor simply “assert new legal theories of recovery based upon the
acts or transactions that formed the sub stanc e 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 O riginal and F irst A mended C omplaint s 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 231.37

claims surrounding the 2010 Stock Dividend, wh ich 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 B oard approved the 2011 Stock Options Plan and Morgan, acting as majority stockhol der, approved the stock option
issuances that, together, form the Stalnaker Options

. I find that t he 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 c orporate e xecutive 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 t o 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, a t the time of the Second Amended Complaint,
the B oard was composed of Morgan, Womble , and Burnett

— Stalnaker was allegedly removed from the B oard in July 2013. The Plaintiffs’ Second Amended Complaint , mirroring the two complaints filed before it , alleges only that a demand

wou ld be futile because First Orion’s B oard consisted of Morgan and Stalnaker . The Second Amended Complaint thus fails to mention that the composition of the B oard38

had changed , and fails to asser t 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 t he Plaintiffs have not dis puted that the B oard composition has changed, or that the two new directors were capable of considering a demand that Morgan and Stalnaker be sued for breach es of duty . Instead, the Plaintiffs point to this Court’s holding s in Seinfeld v. Slager , 108 which, according to the Plaintiffs,
states that demand is excused if a claimant properly pleads a waste claim. T he
Plaintiffs misunderstand Seinfeld . In Seinfeld , the p laintiff , without making a demand on the board, filed a derivative suit that challenge d 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 directo rs’ 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).39

corporate waste. 109 The plaintiff , implicating the second prong of the well

- known
Aronson test, argued that demand was excused because the challenge d transactions

w ere not t he product of business judgment. Under Aronson , to s how that demand is futile under Rule 23.1, the p laintiff 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, t he board in Seinfeld was the same as that against whom waste was ple d. In assessing the p laintiff’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 , unremarkab ly, held that a particularized pleading of waste committed by the board on whom demand would otherwise be made may excuse
demand un der A ronson , but that circumstance is absent here: the Second Amended Complaint does not allege that waste was committed by Womble or Burnett , who
constitu t e d the majority of the B oard 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) ).40

Since the Plaintiffs have failed to plea d particularized facts excusing demand

on the B oard as constituted at the time of their Second Am ended C omplaint, I find that they have not complied with Rule 23.1

. T herefore, 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 a nd 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.