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DE Chancery Enjoins Board in Potential Stockholder Dilution Scheme
Directors and officers of struggling corporations seeking capital or startups willing to trade equity for cash should carefully read the Delaware Court of Chancery's recent transcript ruling in Elite Horse Investments Ltd. v. T3 Motion, C.A. No. 10550-CB (Del. Ch. Jan. 23, 2015), and consider it a cautionary tale. If control of a business can be purchased, sitting directors and officers should not be surprised when the new controlling stockholder or control group installs its own directors and replaces management. Moreover, directors and officers should think long and hard before attempting defensive measures aimed at protecting their positions or other entrenchment motives. As discussed below, the Court of Chancery will not hesitate in enjoining such conduct.
Background
Elite Horse Investments Ltd. (EHI) is one of a group of stockholders of T3 Motion Inc., a Delaware corporation headquartered in Costa Mesa, CA, that designs, manufactures and markets electric-motor-powered personal mobility vehicles. In or around December 2014, EHI and a group of seven others invested $6 million in T3 Motion in exchange for approximately 60 million shares or roughly 60% of T3 Motion's equity. At the time of EHI's investment, T3 Motion's board of directors was composed of three members: CEO William Tsumpes, Steven Healy and Ki Nam. However, T3 Motion's bylaws authorized the company to have seven directors on the board.
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