Tony Roma’s Restricted Stock Issuance Voided by Del. Court

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By Jacob Rund

The parent of restaurant chain Tony Roma’s issued invalid stock in its 2016 compensation plan, and those securities can’t be counted in a vote on the composition of the holding company’s board, the Delaware Chancery Court said.

The court Feb. 1 voided 38,500 restricted shares issued by Roma Restaurant Holdings Inc.'s former directors. The issuance was allegedly meant to prevent Southpaw Credit Opportunity Master Fund LP and another fund from acquiring majority ownership in the company and replacing two of its three board members.

The decision clarifies the difference between “void” and “voidable” stock issuances under Delaware law. The chancery court must cancel void offerings, but it has more discretion on how to proceed for voidable offerings.

Southpaw agreed in 2016 to buy a 2.5 percent stake in Roma from the company’s former CEO, which would have brought its collective ownership with an allied fund to 51.4 percent. Southpaw received a chunk of shares in 2006, when Roma reorganized after filing for bankruptcy.

Upon hearing of Southpaw’s stock purchase plans, Roma’s board put together and approved a new compensation plan that allowed them to issue stock to 14 employees — enough to dilute the company’s pool of shares and prevent Southpaw from gaining control. This spurred Southpaw and its allied fund to file suit accusing the former directors of fiduciary duty breaches.

The directors, in their rush to issue the stock to select employees, failed to have the recipients sign the appropriate joinders to Roma’s stockholders’ agreement, according to the court.

Void, Not Voidable

The two former directors being sued argued that the language in the 2016 compensation plan complied with Delaware law and Roma’s stockholders’ agreement.

“Defendants add that fiduciary duties are equitable in nature and, thus, stock issued in violation of fiduciary duties is voidable as opposed to void,” Vice Chancellor Tamika Montgomery-Reeves said in her opinion.

Because Roma didn’t obtain the completed joinder forms from the employees who received the restricted stock, the issuance violated the company’s stockholders’ agreement, Reeves wrote.

The former directors also claimed that finding the issuance void is “an inequitable outcome because the breach of the stockholders’ agreement was on technical grounds.”

However, Reeves found the former directors’ "failure to satisfy the joinder provision was more than a mere technical deficiency; it was a failure to substantially perform the required actions.”

The case is Southpaw Credit Opportunity Master Fund LP v. Roma Restaurant Holdings Inc. , Del. Ch., No. 2017-0059, 2/1/18 .

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