Downing v. Cycle Holdings, Inc.

Downing v. Cycle Holdings, Inc., 2023 NCBC 10.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
WAKE COUNTY 22 CVS 10511

ADAM J. DOWNING,

Plaintiff,

v. ORDER AND OPINION ON CROSS-
MOTIONS FOR PARTIAL SUMMARY
CYCLE HOLDINGS, INC., a North JUDGMENT
Carolina corporation; and CYCLE [PUBLIC]1
LABS, INC., a Delaware corporation,

Defendants.

THIS MATTER comes before the Court on the parties’ cross-motions for partial

summary judgment. The Court, having considered the motions, the parties’ briefs,

the arguments of counsel, the applicable law, and all appropriate matters of record,

CONCLUDES that partial summary judgment should be GRANTED for

Defendants.

Narron Wenzel, P.A., by Benton Sawrey, for Plaintiff Adam J. Downing.

Ellis & Winters LLP, by Steven Scoggan and James M. Weiss, for
Defendants Cycle Holdings, Inc. and Cycle Labs, Inc.

INTRODUCTION

1. Plaintiff Adam J. Downing, a shareholder of Cycle Holdings, Inc. (“Cycle

Holdings”), a North Carolina corporation, filed this action pursuant to N.C.G.S. § 55-

1 Recognizing that this Order and Opinion cites and discusses the subject matter of
documents that the Court has allowed to remain filed under seal in this action, the Court
elected to file this Order and Opinion under seal on 12 January 2023. The Court then
permitted the parties an opportunity to propose redactions to the public version of this
document. The Court has accepted the redactions jointly proposed by the parties.
16-04 seeking an order allowing him to inspect the corporate records of a separate—

but related—entity, Cycle Labs, Inc. (“Cycle Labs”), a Delaware corporation.2 This

matter is presently before the Court on the parties’ joint request for a determination

by the Court of a key threshold issue that is highly relevant (and potentially

dispositive) to the relief Downing is seeking in this action—namely, whether Cycle

Holdings actually has the power to elect, appoint, or designate a majority of Cycle

Labs’ directors for purposes of N.C.G.S. § 55-16-02(h).3 The resolution of that issue

requires the Court to apply Delaware law regarding the enforceability of a voting

agreement between a company’s shareholders that purports to restrict the majority

shareholder’s exercise of its right to appoint directors as set out in the company’s

certificate of incorporation.

FACTUAL AND PROCEDURAL BACKGROUND

2. “The Court does not make findings of fact on motions for summary

judgment; rather, the Court summarizes material facts it considers to be

uncontested.” McGuire v. Lord Corp., 2021 NCBC LEXIS 4, at *3 (N.C. Super. Ct.

Jan. 19, 2021).

3. Cycle Holdings is a corporation organized under the laws of the State of

North Carolina with its principal place of business in Wake County, North Carolina.

(Compl. ¶ 2, ECF No. 3; Answer ¶ 2, ECF No. 7.)

2 Cycle Holdings and Cycle Labs are the two named Defendants in this action.

3As discussed below, the Court—with the agreement of the parties—elects to treat the
parties’ joint request as cross-motions for partial summary judgment.
4. Cycle Labs is a foreign corporation organized under the laws of the State

of Delaware. (Compl. ¶ 8; Answer ¶ 8.) Cycle Labs develops and markets test

automation software for commercial enterprise systems. (Compl. ¶ 8; Answer ¶ 8.)

5. Downing is one of three shareholders of Cycle Holdings. (Compl. ¶ 7;

Answer ¶ 7.) Downing “owns more than 5% of the shares of stock in Cycle Holdings

and has been a shareholder for at least six months prior to the initial inspection

demand being made on March 17, 2022.” (Compl. ¶ 7; Answer ¶ 7.)

6. Cycle Holdings’ other shareholders are Jeffrey Williams and Joshua

Owen. (Compl. ¶ 10; Answer ¶ 10.) Williams is a member of the board of directors of

both Cycle Holdings and Cycle Labs. (Compl. ¶ 10; Answer ¶ 10.) Owen is the

majority shareholder of Cycle Holdings, serves on the board of directors of both Cycle

Holdings and Cycle Labs, and serves as the chief executive officer of both Cycle

Holdings and Cycle Labs. (Compl. ¶ 10; Answer ¶ 10.)

7. Cycle Holdings is a shareholder of Cycle Labs. (Compl. ¶ 8; Answer ¶

8.) The Complaint asserts that “Cycle Holdings exists, for all intents and purposes,

as an entity to hold shares of stock in Cycle Labs.” (Compl. ¶ 8.) In their Answer,

Defendants “[a]dmitted that Cycle Holdings’ only asset is its shares of stock in Cycle

Labs.” (Answer ¶ 16.)

8. The Complaint alleges that until January 2022, Cycle Holdings was the

sole shareholder of Cycle Labs. (Compl. ¶ 9.)

9. On 14 January 2022, Downing received notice from Cycle Holdings that

it had taken action to convert Cycle Labs from a North Carolina corporation to a
Delaware corporation in contemplation of an investment in Cycle Labs by an entity

called Jurassic Growth Fund I (“Jurassic Capital”). (Pl.’s Initial Br., at 2, ECF No.

12.)

10. Downing learned through a U.S. Securities and Exchange Commission

filing that, at some point in January 2022, Jurassic Capital invested $2,500,000 in

Cycle Labs in exchange for an equity interest in the company. (Compl. ¶ 13; Answer

¶ 13.) In addition, Downing alleges that additional stock (or stock options) have been

sold or issued to other third parties since July 2021. (Compl. ¶ 14.)

11. Downing asserts that “[b]ecause Cycle Holdings’ shares of stock in Cycle

Labs are its sole asset, any third-party investment into Cycle Labs will have a

substantive effect on the value of the company and ultimately the value of Plaintiff’s

shares of stock in Cycle Holdings.” (Compl. ¶ 16.) In his Complaint, Downing states

that “[i]t is possible that the investment [by Jurassic Capital] created some form of

preferred equity or obligation for repayment that may have a materially adverse

future effect on Cycle Holdings.” (Compl. ¶ 16.)

12. As a result of Jurassic Capital’s investment, “Cycle Holdings’ ownership

percentage in Cycle Labs is less today than it was prior to Jurassic Capital’s

investment in January 2022.” (Answer ¶ 16; Compl. ¶ 16.)

13. After learning of Jurassic Capital’s investment, Downing sent Cycle

Holdings a letter dated 17 March 2022 requesting inspection of certain records of

Cycle Holdings and Cycle Labs (“Inspection Demand”).4 (Compl. ¶¶ 17–18; Answer

4 Downing’s Inspection Demand included the following categories of records: (a) a list of all of

Defendants’ officers and directors, with name, position, and contact information (address,
¶¶ 17–18.) Downing asserts that the Inspection Demand was made in good faith and

for a proper purpose—i.e., “to understand the nature of a third-party investment in

Cycle Labs, to determine the value of Plaintiff’s shares of stock in Cycle Holdings,

and determine the present financial condition of Defendants.” (Compl. ¶ 19.)

14. On 12 May 2022, counsel for Defendants—pursuant to a nondisclosure

agreement between Downing and Defendants—provided Downing with some (but not

all) of the documents requested in the Inspection Demand. (Compl. ¶¶ 22–23; Answer

¶¶ 22–23.) Specifically, Defendants informed Downing of their refusal to provide the

documents requested regarding both Cycle Labs and Jurassic Capital’s investment

in Cycle Labs. (Compl. ¶ 23; Answer ¶ 23.)

15. As a result, Downing “raised his concern about the omitted items and

restated his demand and sought to informally resolve the issue directly with

phone number, email); (b) certain financial statements of Defendants from 1 January 2021
forward; (c) any of Defendants’ financial projections that may be available for the next twelve
(12) months, by month, and annual projections for 2023, 2024, and 2025 (if available); (d)
minutes of all meetings and records of any action taken by the board of directors or any
committee of Defendants; (e) minutes of all Defendants’ stockholder meetings and records of
any action taken by Defendants’ shareholders; (f) all transaction documents, presentations,
and any other materials associated with raising and completing the funding by any additional
investors, including, but not limited to, Jurassic Capital’s investment closed in or around
January 2022; (g) a table reflecting Defendants’ current stock capitalization, including
names, share count, and share class; (h) a current list of all stock options issued by
Defendants, including optionee name, share count, strike price, share class, and date of grant;
(i) a summary/transaction ledger of all Defendants’ stock transactions since formation of the
Defendant corporations, including detail of the stockholder, share count, transaction type,
purchase/sale price, and date of transaction; (j) a list of customers and its related reseller (if
applicable), with revenue summarized by type (software, services, reimbursed expenses, etc.),
that (i) account for Cycle Labs’ top ten (10) customers or (ii) any customer that attributes
more than five percent (5%) of revenue, and have conducted business with Cycle Labs in the
prior twelve (12) months; (k) any stock valuation reports of Defendants; (l) Defendants’
bylaws or restated bylaws and all amendments currently in effect; and (m) Defendants’
articles of incorporation and any amendments to them currently in effect. (Compl. ¶ 18.)
Defendants and Defendants’ other shareholders and directors.” (Compl. ¶ 24.)

Downing asserts that, “[i]n spite of his efforts, Defendants have refused to provide

additional information and have taken the position that [Defendants are] not

obligated to provide any records regarding Cycle Labs to the Plaintiff.” (Compl. ¶ 24;

Answer ¶ 24.)

16. On 10 August 2022, Downing, through counsel, sent a letter “to

Defendants restating the demand for records relating to Cycle Labs and making a

discrete written shareholder inspection demand for Cycle Labs’ corporate records.”

(Compl. ¶ 27; Answer ¶ 27.) The 10 August letter largely reiterated Downing’s

previous Inspection Demand and sought additional information about any changes to

previously disclosed information, as well as updated financial information from

Defendants. (Compl. ¶¶ 27–28; Answer ¶¶ 27–28.)

17. However, the Complaint alleges that Defendants did not allow Downing

to inspect any additional documents in response to the 10 August letter. (Compl. ¶

29.)

18. Downing initiated this action by filing a Complaint on 19 August 2022

in Wake County Superior Court. (Compl., ECF No. 3.)

19. The Complaint alleges that Downing is a qualified shareholder of Cycle

Holdings pursuant to N.C.G.S. § 55-16-02(g) and, as such, “is entitled to a complete

accounting of the finances and business affairs of Cycle Holdings pursuant to

N.C.G.S. § 55-16-01, et seq.[,]” including “a complete accounting of the finances and

business affairs of Cycle Labs, which is an entity controlled by Cycle Holdings because
it is able to appoint, elect, or nominate a majority of the board of directors of Cycle

Labs, pursuant to N.C.[G.S. §] 55-16-02(h).” (Compl. ¶ 38.)

20. Defendants filed an Answer to the Complaint on 12 October 2022.

(Answer, ECF No. 7.)

21. On 24 October 2022, Defendants filed a Consent Motion to Establish

Schedule on Plaintiff’s Requests for Records Inspection. (ECF No. 9.) In that motion,

Defendants—with the consent of Downing—asked the Court to establish a bifurcated

briefing schedule with the first issue to be briefed concerning whether Cycle Holdings

does, in fact, possess the ability to elect, appoint, or designate a majority of the board

of directors of Cycle Labs.

22. The North Carolina General Statutes require the Court to resolve

shareholder inspection requests “on an expedited basis.” N.C.G.S. § 55-16-04(b)

(2021). As a result, the Court promptly held a Webex conference with counsel on 26

October 2022. Following the conference, the Court entered an order granting the

motion and setting out a briefing schedule. (ECF No. 11.)

23. Following full briefing by the parties, the Court held a hearing on 8

December 2022. At the hearing, the parties asked that their joint request for a ruling

on this threshold issue be treated by the Court as cross-motions for partial summary

judgment pursuant to Rule 56 of the North Carolina Rules of Civil Procedure. The

parties have also represented that no factual disputes exist with regard to this issue.
24. The Court is satisfied that the material facts relating to the issue as to

which the parties seek resolution are undisputed and that it is appropriate to treat

the parties’ respective contentions as cross-motions for partial summary judgment.

LEGAL STANDARD

25. It is well established that “[s]ummary judgment is proper ‘if the

pleadings, depositions, answers to interrogatories, and admissions on file, together

with the affidavits, if any, show that there is no genuine issue as to any material fact

and that any party is entitled to a judgment as a matter of law.’ ” Morrell v. Hardin

Creek, Inc., 371 N.C. 672, 680 (2018) (quoting N.C. R. Civ. P. 56(c)). “[A] genuine

issue is one which can be maintained by substantial evidence.” Kessing v. Nat'l

Mortg. Corp., 278 N.C. 523, 534 (1971). “Substantial evidence is such relevant

evidence as a reasonable mind might accept as adequate to support a conclusion and

means more than a scintilla or a permissible inference.” Daughtridge v. Tanager

Land, LLC, 373 N.C. 182, 187 (2019) (citation and internal quotation marks omitted).

26. On a motion for summary judgment, “[t]he evidence must be considered

‘in a light most favorable to the non-moving party.’ ” McCutchen v. McCutchen, 360

N.C. 280, 286 (2006) (quoting Howerton v. Arai Helmet, Ltd., 358 N.C. 440, 470

(2004)). “[T]he party moving for summary judgment ultimately has the burden of

establishing the lack of any triable issue of fact.” Pembee Mfg. Corp. v. Cape Fear

Constr. Co., 313 N.C. 488, 491 (1985) (citation omitted).

27. The party moving for summary judgment may satisfy its burden by

proving that “an essential element of the opposing party’s claim does not exist, cannot
be proven at trial, or would be barred by an affirmative defense, or by showing

through discovery that the opposing party cannot produce evidence to support an

essential element of [the] claim[.]” Dobson v. Harris, 352 N.C. 77, 83 (2000) (citations

omitted). “If the moving party satisfies its burden of proof, then the burden shifts to

the non-moving party to ‘set forth specific facts showing that there is a genuine issue

for trial.’ ” Lowe v. Bradford, 305 N.C. 366, 369–70 (1982) (quoting N.C. R. Civ. P.

56(e)). If the nonmoving party does not satisfy its burden, then “summary judgment,

if appropriate, shall be entered against [the nonmovant].” United Cmty. Bank (Ga.)

v. Wolfe, 369 N.C. 555, 558 (2017) (quoting N.C. R. Civ. P. 56(e)).

ANALYSIS

28. North Carolina’s General Statutes provide that “[a] qualified

shareholder of a corporation that has the power to elect, appoint, or designate a

majority of the directors of another domestic or foreign corporation . . . has the

inspection rights provided in this section with respect to the records of that other

corporation.” N.C.G.S. § 55-16-02(h) (2021). The inspection rights provided by

Section 55-16-02 include the following:

(a) A qualified shareholder of a corporation is entitled to inspect and
copy, during regular business hours at the corporation’s principal
office, any of the records of the corporation described in G.S. 55-16-
01(a), excluding minutes of meetings of, and records of actions taken
without a meeting by, the corporation’s board of directors and board
committees established under G.S. 55-8-25, if the qualified
shareholder gives the corporation written notice of the qualified
shareholder’s demand at least five business days before the date on
which the qualified shareholder wishes to inspect and copy.

(b) A qualified shareholder of a corporation is entitled to inspect and
copy, during regular business hours at a reasonable location specified
by the corporation, any of the following records of the corporation if
the qualified shareholder meets the requirements of subsection (c) of
this section and gives the corporation written notice of the qualified
shareholder’s demand at least five business days before the date on
which the qualified shareholder wishes to inspect and copy:

(1) Records of any final action taken with or without a meeting by
the board of directors, or by a committee of the board of directors
while acting in place of the board of directors on behalf of the
corporation maintained in accordance with G.S. 55-16-01(a).

(2) Accounting records of the corporation.

(3) The record of shareholders maintained in accordance with G.S.
55-16-01(c).

(4) The financial statements of the corporation maintained in
accordance with G.S. 55-16-01(b).

A shareholder of a public corporation is not entitled to inspect or copy
any accounting records of the corporation or any records of the
corporation with respect to any matter which the corporation
determines in good faith may, if disclosed, adversely affect the
corporation in the conduct of its business or may constitute material
nonpublic information at the time the shareholder’s notice of demand
to inspect and copy is received by the corporation.

(c) A qualified shareholder may inspect and copy the records described
in subsection (b) only if all of the following apply:

(1) The qualified shareholder’s demand is made in good faith and
for a proper purpose.

(2) The qualified shareholder describes with reasonable
particularity the qualified shareholder’s purpose and the
records the qualified shareholder desires to inspect.

(3) The records are directly connected with the qualified
shareholder’s purpose.

N.C.G.S. § 55-16-02(a)–(c).

29. Accordingly, if Downing is (i) a qualified shareholder of Cycle Holdings;

and (ii) Cycle Holdings has the power to elect, appoint, or designate a majority of the
directors of Cycle Labs, then Downing possesses the inspection rights provided in

Section 55-16-02 with respect to the records of Cycle Labs.

30. A “qualified shareholder” is “[a] person who has been a shareholder in

the corporation for at least six months immediately preceding the shareholder’s

demand for inspection of records or who holds at least five percent (5%) of the

corporation’s outstanding shares of any class.” N.C.G.S. § 55-16-01.1(3) (2021).

31. It is undisputed that Downing meets the statutory definition of

“qualified shareholder” because he has both been a shareholder of Cycle Holdings for

at least six months immediately preceding his demand for inspection and holds at

least 5% of the corporation’s outstanding shares of common stock. (Compl. ¶ 7;

Answer ¶ 7.)

32. The parties’ dispute instead concerns whether Cycle Holdings possesses

the power to elect, appoint, or designate a majority of Cycle Labs’ directors.

33. The parties agree that because Cycle Labs is a Delaware corporation,

Delaware law controls this issue. See Technik v. WinWholesale, Inc., 2012 NCBC

LEXIS 5, at *9 (N.C. Super. Ct. Jan. 13, 2012) (applying Delaware law where

corporation central to dispute was incorporated under the laws of Delaware).

34. Overall, there are 2,170,418 shares authorized of all classes of stock of

Cycle Labs. (Certificate of Incorporation [“Certificate”], at 1, ECF No. 12.1.)

Pursuant to Cycle Labs’ Certificate, “[t]he total number of shares of all classes of stock

which [Cycle Labs] shall have authority to issue is (i) 1,850,000 shares of Common

Stock, $0.0001 par value per share (“Common Stock”) and (ii) 320,418 shares of
Preferred Stock, $0.0001 par value per share (“Preferred Stock”). (Certificate, at 1

(emphasis in original).) The 320,418 shares of Preferred Stock are designated in the

Certificate as “Series A Preferred Stock.” (Certificate, at 2.)

35. As of 21 January 2022, ownership of Cycle Labs’ stock was as follows:

Cycle Holdings owned [REDACTED] shares of Common Stock, representing a [REDACTED]

ownership interest on a fully-diluted basis; Jurassic Capital owned [REDACTED] shares of

Series A Preferred Stock, representing an [REDACTED] ownership interest on a fully-

diluted basis; and “Other Investors” or “Individual Stock Holders” owned [REDACTED]

shares of Common Stock, representing a [REDACTED] ownership interest on a fully-diluted

basis. (Capitalization Table, at 1, ECF No. 12.3 (sealed), ECF No. 19.3; Valuation

Report, at 42, ECF No. 12.2 (sealed), ECF No. 19.4.)

36. The two key documents that are relevant to the issue currently before

the Court are (1) Cycle Labs’ Certificate, which was filed with the Delaware Secretary

of State on 5 January 2022 (ECF No. 12.1.); and (2) a Voting Agreement entered into

between Cycle Labs and its shareholders on 11 January 2022. (Voting Agreement,

ECF No. 12.4 (sealed), ECF No. 19.5.)

37. The Certificate provides, in pertinent part, that Cycle Labs’ directors

will be elected as follows:

3.2 Election of Directors. The holders of record of the shares of
Series A Preferred Stock, exclusively and as a separate class on an as
converted basis, shall be entitled to elect one (1) director of the
Corporation (“the Series A Director”) and the holders of record of the
shares of Common Stock, exclusively and as a separate class, shall be
entitled to elect three (3) directors of the Corporation[.]

...
The holders of record of the shares of Common Stock and of any other
class or series of voting stock (including the Series A Preferred Stock),
exclusively and voting together as a single class, shall be entitled to elect
the balance of the total number of directors of the corporation.

(Certificate, at 5–6.) Finally, the Certificate also provides that “[s]ubject to any

additional vote required by this Certificate of Incorporation, the number of directors

of the Corporation shall be determined in the manner set forth in the Bylaws of the

Corporation.” (Certificate, at 21.)

38. Accordingly, had the Voting Agreement not been subsequently entered,

the present dispute would not exist. By the plain language of Section 3.2 of the

Certificate, Cycle Holdings (as a result of its status as the holder of a majority of Cycle

Labs’ common stock) would be entitled to elect three of Cycle Labs’ directors, which

would constitute a majority.

39. However, the Voting Agreement contains additional language regarding

the selection of Cycle Labs’ directors. The Voting Agreement was executed on 11

January 2022 and was signed by the following: (i) Cycle Labs, Inc., by Joshua Owen,

President and CEO; (ii) Cycle Holdings, Inc., by Joshua Owen, President, and Evan

Edwards; and (iii) Jurassic Capital Growth Fund I, L.P., by Jurassic Capital Growth

Fund I GP, LLC, its General Partner, by Joe Colopy, Manager. (Voting Agreement,

at 16–19.)

40. Initially, the Recitals in the Voting Agreement reference the above-

quoted provisions from the Certificate, stating in relevant part as follows:

B. The Certificate of Incorporation of the Company (as the
same may be amended and/or restated from time to time, the
“Certificate of Incorporation”) provides that (a) the holders of record of
the shares of the Series A Preferred Stock, exclusively and as a separate
class on an as converted basis, shall be entitled to elect one (1) director
of the Company (the “Series A Director”); (b) the holders of record of the
shares of common stock, $0.0001 par value per share, of the Company
(“Common Stock”), exclusively and as a separate class, shall be entitled
to elect three (3) directors of the Company (the “Common Director”); and
(c) the holders of record of the shares of Common Stock and the Series A
Preferred Stock, voting together as a single class on an as-converted
basis, shall be entitled to elect the balance of the total number of
directors of the Company (each, a “Joint Director”).

(Voting Agreement, at 1.)

41. The Voting Agreement then proceeds to fix the size of the board at five
directors:

1.1 Size of the Board. Each Stockholder agrees to vote, or
cause to be voted, all Shares (as defined below) owned by such
Stockholder, or over which such Stockholder has voting control, from
time to time and at all times, in whatever manner as shall be necessary
to ensure that the size of the Board shall be set and remain at five (5)
directors, and cannot be increased or decreased without the written
consent of the holders of at least a majority of the shares of Common
Stock then issued or issuable upon conversion of shares of Series A
Preferred Stock, voting as a separate class on an as converted basis. For
purposes of this Agreement, the term “Shares” shall mean and include
any securities of the Company that the holders of which are entitled to
vote for members of the Board, including without limitation, all shares
of Common Stock and Series A Preferred Stock, by whatever name
called, now owned or subsequently acquired by a Stockholder, however
acquired, whether through stock splits, stock dividends,
reclassifications, recapitalizations, similar events or otherwise.

(Voting Agreement, at 1–2.)

42. The provisions of the Voting Agreement that are most relevant to the

issue currently before the Court state as follows:

1.2 Board Composition. Each Stockholder agrees to vote, or
cause to be voted, all Shares owned by such Stockholder, or over which
such Stockholder has voting control, from time to time and at all times,
in whatever manner as shall be necessary to ensure that at each annual
or special meeting of stockholders at which an election of directors is
held or pursuant to any written consent of the stockholders, subject to
Section 5, the following persons shall be elected to the Board:

(a) One person designated from time to time by Jurassic
Capital Growth Fund I, L.P. (“Jurassic”), for so long as such
Stockholder and its Affiliates (as defined below) continue to own
beneficially shares [REDACTED] of Common
Stock (including shares of Common Stock issued or issuable upon
conversion of Series A Preferred Stock), which individual shall
initially be Kevin Mosley, and which director shall be the Series
A Director;

(b) Two (2) persons designated from time to time by the
record holders of a majority of the shares of outstanding Common
Stock then held by Key Holders who are then providing services
to the Company as officers, employees, or consultants (provided,
however, that Cycle Holdings, Inc. (“Holdings”), shall be deemed
to be a Key Holder providing services to the Company in
satisfaction of the foregoing requirement so long as the
individuals holding at least a majority of Holdings’ outstanding
capital stock are then providing services to the Company as
officers, employees or consultants), which individuals shall
initially be Jeffrey Williams and Evan Edwards, and which
directors shall be two (2) of the Common Directors;

(c) As the third (3rd) Common Director, the Company’s
Chief Executive Officer, who as of the date of this Agreement is
Joshua Owen (the “CEO Director”), provided that if for any reason
the CEO Director shall cease to serve as the Chief Executive
Officer of the Company, each of the Stockholders shall promptly
vote their respective Shares (i) to remove the former Chief
Executive Officer of the Company from the Board if such person
has not resigned as a member of the Board; and (ii) to elect such
person’s replacement as Chief Executive Officer of the Company
as the new CEO Director.

(d) One person who is not otherwise an Affiliate of the
Company or any Investor, and who is mutually acceptable to the
other directors, which seat shall initially be vacant, and which
director shall be a Joint Director.

To the extent that any of clauses (a) through (d) above shall not
be applicable, any member of the Board who would otherwise
have been designated in accordance with the terms thereof shall
instead be voted upon by all the Stockholders of the Company
entitled to vote thereon in accordance with, and pursuant to the
Certificate of Incorporation.

(Voting Agreement, at 2.)

43. Thus, the Voting Agreement (like the Certificate) provides for three

“Common Directors.” However, the Agreement requires Cycle Holdings to vote its

shares so that the Chief Executive Officer of Cycle Labs is the third Common

Director—a requirement that is not contained in the Certificate.

44. The heart of the parties’ disagreement concerns the effect of this

provision on Cycle Holdings’ power to elect, appoint, or designate a majority of Cycle

Labs’ directors.

45. Downing argues that Cycle Holdings—as the majority shareholder of

Cycle Labs’ common stock—“retains the right to elect or designate three of the five

members of Cycle Labs’ board of directors pursuant to [Cycle Labs’] Certificate of

Incorporation . . . .” (Pl.’s Initial Br., at 1.) Furthermore, Downing contends that the

Voting Agreement “ratifies and recognizes that the holders of the Common Stock have

the exclusive right to select three directors.” (Pl.’s Initial Br., at 5.) Downing asserts

that any language in the Voting Agreement that purports to restrict the manner in

which Cycle Holdings can exercise that right is invalid. This is so, Downing contends,

because under Delaware law a contract between shareholders that conflicts with the

company’s charter by altering the voting power of those shareholders cannot be given

effect. Simply put, Downing’s argument is that the Voting Agreement is an invalid

attempt to restrict Cycle Holdings’ unfettered right to elect a majority of Cycle Labs’
directors as guaranteed in the Certificate and that any such change in Cycle Holdings’

rights with regard to the composition of the board could only be effectuated through

an amendment to the Certificate itself.

46. Defendants, conversely, contend that the Voting Agreement—which

Cycle Holdings signed as a shareholder—does not conflict with the Certificate and

simply contains permissible restrictions on how Cycle Holdings will exercise the

voting rights granted to it in the Certificate. Defendants argue that the clear

language of the Voting Agreement “restricts Cycle Holdings’ power by only allowing

it to select two directors and forcing it to vote Cycle Labs’ current CEO into the third

seat, regardless of his or her affiliation with Cycle Holdings.” (Defs.’ Resp. Br., at 2,

ECF No. 16.) Thus, Defendants argue, “[a]t bottom, Cycle Holdings only has the

power to select two of the five seats on Cycle Labs’ board. Cycle Holdings does not

have ‘the power to elect, appoint, or designate a majority of the directors’ of Cycle

Labs.” (Defs. Resp. Br., at 3 (quoting N.C.G.S. § 55-16-02(h) (2021)).)

47. Based on the plain language of the Voting Agreement, it is clear that if

the Agreement is given effect Cycle Holdings lacks the power to elect, appoint, or

designate a majority of Cycle Labs’ directors. Instead, Cycle Holdings would only

control two of the five members of the board—falling short of a majority. Therefore,

the ultimate question to be resolved is whether under these circumstances the Voting

Agreement is valid under Delaware law.
48. Voting agreements are expressly authorized under the Delaware

General Corporation Law (“DGCL”). With respect to voting agreements between

shareholders, the DGCL provides as follows:

An agreement between 2 or more stockholders, if in writing and signed
by the parties thereto, may provide that in exercising any voting rights,
the shares held by them shall be voted as provided by the agreement, or
as the parties may agree, or as determined in accordance with a
procedure agreed upon by them.

8 Del. C. § 218(c) (2022).

49. The Delaware Supreme Court has made clear that shareholders possess

significant flexibility in entering into such agreements.

At its core, the [DGCL] is a broad enabling act that allows immense
freedom for businesses to adopt the most appropriate terms for the
organization, finance, and governance of their enterprise provided the
statutory parameters and judicially imposed principles of fiduciary duty
are honored. In fact Delaware’s corporate statute is widely regarded as
the most flexible in the nation because it leaves parties to the corporate
contract (managers and stockholders) with great leeway to structure
their relationships, subject to relatively loose statutory constraints and
to the policing of director misconduct through equitable review.

Manti Holdings, LLC v. Authentix Acquisition Co., 261 A.3d 1199, 1217 (Del. Sep. 13,

2021); see also Schreiber v. Carney, 447 A.2d 17, 25 (Del. Ch. May 11, 1982)

(“Delaware law has for quite some time permitted stockholders wide latitude in

decisions affecting the restriction or transfer of voting rights.”)

50. This flexibility is not limitless, however. “When evaluating corporate

action for legal compliance, a court examines whether the action contravenes the

hierarchical components of the entity-specific corporate contract, comprising (i) the

Delaware General Corporation Law, (ii) the corporation’s charter, (iii) its bylaws, and
(iv) other entity-specific contractual agreements, such as a stock option plan, other

equity compensation plan, or, as to the parties to it, a stockholder agreement.”

Quadrant Structured Prods. Co., Ltd. v. Vertin, 2014 Del. Ch. LEXIS 214, at *9 (Del.

Ch. Oct. 28, 2014). “Each of the lower components of the contractual hierarchy must

conform to the higher components. A bylaw that conflicts with the charter is void, as

is a bylaw or charter provision that conflicts with the DGCL.” Sinchareonkul v.

Fahnemann, 2015 Del. Ch. LEXIS 17, at *17 (Del. Ch. Jan. 22, 2015).

51. Neither the parties’ briefs nor the Court’s own research has disclosed

any case in which a Delaware court has actually held that a shareholder voting

agreement was invalid because it conflicted with the company’s charter. Indeed,

although there is no Delaware case law precisely on point, the two most similar cases

decided by Delaware courts both support Defendants’ position on this issue.

52. In In re Westech Cap. Corp., 2014 Del. Ch. LEXIS 92 (Del. Ch. May 29,

2014), the Delaware Court of Chancery was tasked with deciding whether two

subsections of a voting agreement—which determined how the agreement’s

signatories would designate directors—should be interpreted as either majority of

shares or per capita voting provisions. Id. at *2. One of the two provisions provided

that the Series A Preferred signatories agreed to vote, or cause to be voted, all of the

shares they owned, or otherwise controlled, to ensure that “[t]wo persons elected by

the Key Holders” would be elected to Westech’s board of directors. Id. at *8. The

court noted that this provision was ambiguous and that interpretation of the

“provision turns on the appropriate definition to be applied to the term ‘elected,’
which the drafters of the agreement did not define or contextualize.” Id. at *24, *48.

The court held that this provision was likely a per capita voting provision “because it

appears to be a provision negotiated to empower certain individuals [i.e., the

investors], without reference to their relative status as shareholders.” Id. at *24–25.

53. In reaching this conclusion, the court stated the following in rejecting

the plaintiff’s arguments:

[Plaintiff] next contends that Defendants’ per capita voting theory would
be invalid as a matter of law because the DGCL requires corporations to
specify their election to use per capita voting in their charters.
[Plaintiff] argues the plain language of 8 Del. C. § 212(a) requires such
a result, as does the pertinent case law on point. However, [Plaintiff]’s
argument is inconsistent with the broad provisions found in 8 Del. C. §
218, allowing stockholders to “vote shares as provided by [their]
agreement.” As recent case law has articulated, “the Charter and Bylaws
allocate various rights to the different classes of stockholders, then the
Stockholders’ Agreement adds a contractual overlay that constrains the
manner in which parties to that agreement can exercise their rights.”

...

The signatories to the Voting Agreement are permitted to agree to vote
their shares (each of which has a one vote per share feature articulated
in the Company’s foundational documents) according to whatever terms
they choose assuming they do not otherwise violate the terms of Section
218 or other Delaware law.

[Plaintiff] forwards a related argument, that the voting rights of the
Voting Agreement’s signatories are stated in the Company’s Certificate of
Designation, which provides for majority voting and thus the Court
cannot find in Defendants’ favor. [Plaintiff] correctly states the law, but
the general statements he quotes only go so far. The Certificate of
Designation describes the mechanism for the election and permits each
shareholder one vote per share. The Voting Agreement does not inhibit
its signatories from casting one vote per share; it simply binds them to
cast each of those votes in accordance with the provisions found in the
agreement.

Id. at *56–59 (emphasis added and footnotes omitted).
54. The Westech court’s description of the voting agreement at issue in that

case as a “contractual overlay” to the company’s charter and bylaws was based on the

Court of Chancery’s prior decision in Klaassen v. Allegro Dev. Corp, 2013 Del. Ch.

LEXIS 247 (Del. Ch. September 27, 2013). In Klaassen, the corporation amended and

restated its certificate of incorporation and bylaws as part of a Series A Preferred

Stock transaction. In connection with the transaction, the corporation was made a

party to a stockholders’ agreement entered into by the Series A Investors and the

founder of the corporation. Id. at *4. Overall, “[t]hese documents established a

corporate governance structure in which [plaintiff] and the Series A Investors shared

control at both the director and stockholder levels.” Id.

55. One of the issues before the court in Klaassen was whether the

plaintiff—as the holder of virtually all of the company’s common stock and

representing a majority of that company’s outstanding voting power—permissibly

acted by written consent to remove two incumbent directors, fill the two resulting

vacancies, and fill a preexisting vacancy. In addressing this issue, the Chancery

Court stated as follows:

Under this governance structure, the Charter and Bylaws allocate
various rights to the different classes of stockholders, then the
Stockholders’ Agreement adds a contractual overlay that constrains the
manner in which parties to that agreement can exercise their rights. As
the holder of the majority of Allegro’s voting power, [Plaintiff] possesses
rights under the Charter and Bylaws to elect directors, remove directors,
and fill vacancies that he agreed not to exercise in the Stockholders’
Agreement.
Id. at *70. The Court then explained the interplay between, on the one hand, the

plaintiff’s status as the holder of the majority of the voting power needed to remove

directors and, on the other hand, the agreement which restricted that power:

[Plaintiff] is a party to the Stockholders’ Agreement. By entering into
the Stockholders’ Agreement, [Plaintiff] agreed voluntarily not to exercise
his power as holder of a majority of the corporation’s outstanding voting
power to remove the Remaining Directors without cause. In Section 9.4
of the Stockholders’ Agreement, [Plaintiff] and the other parties to the
agreement committed “to vote, or cause to be voted, all Shares owned by
such Stockholder, or over which such Stockholder has voting control,
from time to time and at all times, in whatever manner as shall be
necessary” such that, subject to two exceptions, no director elected
pursuant to the Stockholders’ Agreement “may be removed from office
other than for cause.” JX 10 § 9.4(a). To reiterate, even though [Plaintiff]
otherwise could remove a director without cause, he agreed in the
Stockholders’ Agreement not to do so unless one of two exceptions applies.

Id. at *79–80 (emphasis added). Finally, in addressing the plaintiff’s ability to

unilaterally fill vacant positions based on his majority status, the Court of Chancery

stated:

By entering into the Stockholders’ Agreement, [Plaintiff] limited his
ability to fill vacancies. He agreed that he could not unilaterally fill an
Outside Director vacancy and bound himself to support only nominees
designated by the CEO and approved by the Series A Directors.

Id. at *85–86.

56. In the present case, the Court concludes that the reasoning of Westech

and Klaassen compels a ruling in favor of Defendants. These cases demonstrate the

critical distinction recognized under Delaware law between (1) an agreement that

expressly takes away a power granted to a shareholder in the company’s charter; and

(2) an agreement that instead simply constrains the manner in which the shareholder

exercises that power. Here, the Voting Agreement does the latter rather than the
former. Although the Voting Agreement—which was signed by all shareholders,

including Cycle Holdings—binds Cycle Holdings to vote its shares in accordance with

the provisions contained therein regarding the election of Cycle Labs’ third Common

Director, it does not impermissibly conflict with the Certificate. Instead, as in

Westech and Klaassen, the Voting Agreement serves as “a contractual overlay that

constrains the manner in which [Cycle Holdings] can exercise [its] rights” under the

Certificate. See Westech, 2014 Del. Ch. LEXIS 92, at *57.

57. Thus, the Court concludes that the Voting Agreement is valid under

Delaware law.

58. As a result, Cycle Holdings does not have the power to elect, appoint, or

designate a majority of Cycle Labs’ board of directors for purposes of N.C.G.S. § 55-

16-02(h). As such, Defendants are entitled to summary judgment on this issue.

CONCLUSION

59. THEREFORE, IT IS ORDERED that partial summary judgment is

GRANTED for Defendants.

60. The parties are DIRECTED to jointly submit to the Court on or before

22 February 2023 their respective positions on what additional issues, if any,

remain for resolution by the Court in this matter.

SO ORDERED, this the 1st day of February, 2023.

/s/ Mark A. Davis
Mark A. Davis
Special Superior Court Judge for
Complex Business Cases