A Delaware Chancery Court decision from September underscores the potential profound risk of a corporation’s not observing strict corporate formalities.
Foley v. Session Corp. turned on a chief executive officer’s unilateral attempt to cancel and redeem shares of the company’s four co-founders. Such an act of “fundamental legal significance” under Delaware law demands strict board authorization, the court found.
Corporate records and trial testimony revealed there were four directors, not one. That rendered the CEO’s solo written consent and the purported stock redemption and stock cancellation agreements ineffective, even though all four founders signed the agreements.
Sessions Corp., a cannabis accessories company, was founded by four friends who each contributed startup capital in exchange for 25% of the company’s shares. One founder became CEO and worked for the company full time; the others kept their day jobs.
Believing that equal ownership with only one founder working full time would deter investors, the CEO pushed for an equity restructuring. The two dissenting founders agreed to give up their equity in exchange for a founder’s agreement that would protect their minority shares.
The CEO and her supporter failed to follow through with the founder’s agreement. The CEO terminated the employment of the minority co-founders, and the company repurchased their shares for $19.50 each.
The Delaware Chancery Court rescinded the transactions, underscoring a simple takeaway: Corporate formalities and strict compliance matters. Entrepreneurs need to know who is on the board and ensure that the board affirmatively approves corporate action before they act, even when all parties sign transaction documents.
This corporate failure occurred despite engaging experienced startup counsel, yielding another lesson—the need to review the corporation’s charter documents and not accept a lay person’s understanding of the corporate structure.
Legal Underpinnings
Under Delaware law, acts of “fundamental legal significance” demand adherence to proper corporate formalities. Issuing stock is a striking example of an act of fundamental significance under STARR Surgical Co. v. Waggoner, which states that a “board’s failure to adopt a resolution and certificate of designation, amending the fundamental document that imbues a corporation with its life and powers, and defines the contract with its shareholders, cannot be deemed a mere ‘technical’ error.”
In STAAR Surgical, the Delaware Supreme Court held that a defective stock issuance was void and impossible to fix. The Delaware General Assembly eventually established avenues for validating failures of authorization, STAAR Surgical remains good law, particularly with respect to the importance of corporate formalities.
Under the Delaware General Corporation Law (8 Del. C. Section 141(f)), valid board action can take two forms. Unless otherwise restricted by the certificate of incorporation or bylaws:
- Any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee consent in writing, or by electronic transmission
- A consent may be documented, signed, and delivered in any manner permitted by Section 116 of the law
In Foley, the Delaware Chancery Court rescinded the transaction by which the dissenters lost their shares because the company was never authorized to enter into the stock cancellation and restriction agreements and therefore not authorized to exercise its purported cancellation rights.
Why was the company never authorized to engage in these acts? The issuance of corporate stock is an act of fundamental legal significance having a direct bearing upon questions of corporate governance, control, and the capital structure of the enterprise. Only the board has the authority to issue stock, unless it passes a resolution delegating a person or body the concurrent authority. The same rule applies to repurchasing or redeeming shares.
Due Diligence Matters
To the company’s credit, it hired experienced counsel to help document the reorganization, but counsel evidently accepted the CEO’s understanding of the board structure, failed to review the corporation’s organic documents, and consequently acquiesced in a board process that omitted three of the four directors.
The CEO advanced several legal theories in support of upholding the share cancellation and repurchase, claiming that:
- The agreements were authorized by the shareholders’ unanimous written consent, so board approval was unnecessary
- The mediation agreement constituted sufficient board action
- The amended stock cancellation and stock restriction agreements didn’t need subsequent board approval
- As a Hail Mary, the company’s overall failure to adhere to corporate formalities established a practice that waived the necessity for strict corporate approval.
Foley illustrates the real risks that arise from the all-too-common problem of confused corporate formation in startups. Founders understandably focus their efforts on building the business and, as business challenges arise, rethink corporate governance.
Here, the parties reached agreement after tough negotiations; however, despite working with an experienced startup attorney, a failure to follow the fundamentals of governance doomed the corporation’s efforts to reorganize despite the unanimous agreement of the shareholders.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
The case is Foley v. Session Corp., Del. Ch., C.A. No. 2023-0186-JTL, decided 9/9/25.
Author Information
Tod Northman is a partner at Tucker Ellis focused on mergers and acquisitions, corporate governance, aviation, and emerging technology.
Catherine Mandry is an associate at Tucker Ellis focused on corporate, finance, and real estate matters.
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