About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 37 posts in Corporate Charters.
Delaware courts construe advance notice by-laws against the drafter in favor of stockholder electoral rights. In this case, the defendants had advance notice by-laws that permitted the company to request additional information for certain purposes after receiving notice of a dissident slate of directors, and required a response within 5 days. Pursuant to that by-law, defendants had sent a questionnaire with over 90 questions to the dissident slate. When the dissidents did not supply the requested information within 5 days, defendants advised that their failure to comply resulted in their nominations being defective. The stockholder supporting the dissident slate sued and asked the Court of Chancery to find the nominations complied with the advance notice by-law and to require that the dissidents be freely presented and votes for them counted. Construing the by-law at issue, the Court held that the plaintiff had established that a portion of questions asked exceeded the permissible scope of information requests under the by-laws. Thus, the failure to answer them was not a basis for finding the nominations invalid. The Court therefore ordered that the nominations be presented and that defendants count votes cast for the dissident slate.
Court of Chancery Awards Fees Under the Corporate Benefit Doctrine in Director Qualifications Bylaw Dispute
A representative plaintiff who confers a non-monetary benefit on the represented class will be entitled to an award of attorneys’ fees and expenses under the right set of circumstances. Delaware does not follow the frequently-adopted lodestar method. Rather, it employs a more flexible approach known as the Sugarland factors, which may or may not result in a market hourly-rate. In this decision, the plaintiff conferred such a benefit and earned a handsome reward under the circumstances. Where the company allegedly was selectively enforcing its director qualifications bylaw, the plaintiff was able to seat a director that the board originally opposed and effectively prevented the company from using the bylaw improperly going forward in one respect. For this preservation of shareholder voting rights, the Court entered a fee award of $300,000, equating to a roughly $1,500 hourly-rate.
This is an interesting decision even if only because it is so well written and deals with an unusual family corporation. Its legal significance is that it explains that a vote taken in violation of a bylaw requiring notice is void, rather than voidable, where equitable defenses could apply. The distinction between a void and voidable failure to give proper notice has not always been clear, but Vice Chancellor Laster attempted to reconcile prior cases in the Klaassen decision, and Vice Chancellor Montgomery-Reeves signs onto his approach in this case.
The Rites of Spring are upon us: budding flowers, warmer temperatures, and a Delaware court issuing an important decision just before the annual Tulane Corporate Law Institute begins. This year the honor of issuing that decision fell to Chancellor Bouchard who issued his opinion in Strougo v. Hollander, C.A. No. 9770-CB (Del. Ch.) on March 16, 2015. The opinion addressed plaintiff’s motion for partial judgment on the pleadings that a fee-shifting bylaw adopted after the challenged transaction did not apply to him. The Court found that the fee-shifting bylaw did not apply to the plaintiff in this case, and in reaching this conclusion, made some interesting comments that will undoubtedly further the debate over the proposed legislation to eliminate fee-shifting bylaws and regulate forum selection bylaws. More ›
Salamone v. Gorman, C.A. No. 8770-VCN (July 31, 2014) This is an unusual case involving a director deadlock created by a stockholder voting agreement, despite the presence of a majority stockholder. More ›
When may a large stockholder wait before asserting its voting rights arising out of the failure to pay dividends to preferred stock? The short answer is that it all depends, particularly when the corporation is in the process of raising money by issuing debt that the preferred stock arguably had a right to prevent. For if the stockholder waits until after significant corporate action is taken, it may have acquiesced in that action and lost the right to object to it.
There is still an important distinction under Delaware law between actions that are void and those that are merely voidable. For only voidable actions may be ratified. This decision traces the history of that distinction with respect to calling of directors' meetings. Only meetings called in violation of the bylaws or certificate of incorporation are void. Others subject to some equitable attack are still able to be ratified.
Under the IRS Code, executive compensation over $1,000,000 a year is not deductible absent a stockholder vote to approve a compensation plan that meets certain objective criteria. Here the Court dealt with a complaint that alleged that the approval vote had to include the vote of stock that under the corporation's certificate of incorporation did not normally have the right to vote. The Court rejected that argument and held that only voting stock had the right to approve a compensation plan. Hence, the DGCL was saved from the IRS.
Delaware does not have a separate corporate statute dealing with non-profit corporations. Hence, the non-stock sections of the DGCL usually apply to such entities. It is sometimes hard to decide what parts of the DGCL do apply, however, as the integration of stock with non-stock provisions is less than clear. This decision helpfully explains how to decide what parts of the DGCL to apply to non-stock entities
This is a useful, if not surprising, example of how the Court will interpret a corporate charter regarding the rights of preferred stock. It is also an example of the principle that if you want a veto power in the charter, you had better be clear and complete or the charter will be changed to your detriment.
Section 124 of the Delaware General Corporation Code sets out the Delaware limits on the common law doctrine of ultra vires. This decision holds that Section 124 does not limit suits for breach of fiduciary duty, but does protect corporate transactions that have closed from some attacks alleging a lack of power to do the transaction.
On one level this is not a particularly unusual decision and that is just the point. For here the Superior Court's new CCLD shows that it is going to make the same studied analysis and follow the same precedent as the Delaware Court of Chancery. This will increase confidence in the CCLD and, as this decision shows, its experienced and competent judges, for business disputes.
The Delaware Supreme Court affirmed this decision on MArch 5, 2012.