Grant v. Mitchell

Facts

The founders of Epasys were P, D, and non-party Jack Meltzer. D and Meltzer were seeking to bring a computer software program, 'Monitor,' to market. Monitor was designed to help businesses keep track of the federal and state environmental requirements (e.g., discharge limits) that apply to their facilities and operations. P was then working for a systems integration business and had cash resources he could invest. They named the business Phoenix Environmental, LLC. P agreed to invest $500,000 as an initial matter, in exchange for one-third of Phoenix's stock. D and Meltzer, who are romantic as well as business partners, held the remaining two-thirds interest. In 1999, P invested another $500,000 into Phoenix for 9% more stock and the right to use all of the tax losses generated by Phoenix. P owned 42% of Phoenix's equity, and D and Meltzer held 29% apiece. The founders converted the LLC into a corporation and sought venture capital financing for the new corporation, Epasys, Inc. (Epasys). They relocated the business from Phoenix to Boston. They consulted John Egan, a corporate partner at McDermott, Will & Emery. He informed them that it was typical for a party putting in cash equity, to get a preferred or priority equity position, and for sweat equity investors like D and Meltzer to get equity positions that were earned over time. Egan claims that the founders discussed the fact that P would have control of the corporation until the new investors came on board. Egan also says that the founders discussed the fact that P would be the incorporator of the new corporation, which the founders agreed to call Epasys. Egan says that the founders agreed that there would eventually be a five-person board comprised of P and D, and three representatives of the new outside investors. D denies that she was advised by Egan that P was to have sole power to select the board by virtue of his status as incorporator. D also contends that she and Meltzer never assented to giving P any type of priority on investment return. On December 23, 1999, Epasys's certificate of incorporation was filed with the Secretary of State's office. The certificate named P as incorporator. A director's consent document adopted the bylaws, and it also elected P as President, and D as Treasurer and Secretary of Epasys. The directors' consent also ratified actions taken by P as incorporator in a consent dated December 22, 1999. The directors' consent was never executed. Nor has the incorporator's consent of December 22, 1999. On January 7, 2000, the McDermott, Will firm delivered a Massachusetts Foreign Corporation Certificate to the offices of Epasys. P signed the document. So did D. There is no evidence that P and D ever met formally as a board of directors nor was any stock actually issued. P provided continuing cash infusions into the company while the company sought outside investors. D and Meltzer did receive salaries of $160,000 each, far more than either had ever made in a previous job. The working relationship among the founders deteriorated. P was set on removing D and Meltzer from their offices. P enlisted the help of the McDermott, Will firm. P decided to claim that no board of Epasys had been named as of August 2000. McDermott, Will prepared a written consent of the sole incorporator in which P named himself as the sole director. P then executed a later consent as sole director naming himself to all the statutory offices at Epasys. He thereafter removed D and Meltzer from their jobs. P sought to have Epasys put into bankruptcy, under terms which would have effectively assured his control of the company. P then sought a declaration that he is the sole director of Epasys. He also filed suit in Arizona for a declaration that Phoenix was dissolved and that its assets were transferred to Epasys as of the time of Epasys's creation. The court was asked to decide who were the members of Epasys's initial board of directors.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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