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In a recent opinion, the Delaware Court of Chancery considered a summary judgment motion in an action by Applied Energetics, Inc. against George Farley, who at the time of the challenged actions was the sole member of the company’s board of directors and compensation committee as well as an officer. The suit sought to undo certain actions taken by Farley on behalf of Applied and recover certain amounts the company paid him. The company sought a declaration that Farley’s actions on behalf of Applied were invalid for lack of authorization. The Court granted the company summary judgment on the issue of whether Farley’s actions were invalid for a lack of authorization but denied summary judgment on the other claims, including on the issue of whether Farley’s actions could potentially be validated under §205 of the Delaware General Corporation Law and that Farley could potentially recover damages from Applied for allegedly unpaid compensation.

Applied was founded in 2002 in response to the terrorist attacks on 9/11. The company markets, develops, and manufactures products for the defense and security industry. At its peak in 2006, the company achieved a market capitalization of nearly $1 billion. However, things went downhill for the company after that and just two years later, the company’s share price had fallen by nearly 98%. The company continued its decline over the next decade shedding employees and directors until five of the company’s six directors had resigned, leaving Farley as Applied’s only remaining director.

Alone at the helm of the company which had ceased all operations by that time, Farley attempted to revive Applied with the help of Steven McCahon, one of the company’s founders who had previously served as its chief technology officer. McCahon had left Applied to form his own company. Farley and McCahon decided that Applied would contract with McCahon’s new company to assemble a scientific team and develop new technologies based on Applied’s patent portfolio. To pay McCahon, Farley and McCahon agreed that Applied would issue shares of common stock to McCahon and accrue cash compensation for him at a rate of $150,000 per year, payable once the company had sufficient funds to make the payments. Continue reading ›