Posts in Stockholders' Meetings

Supreme Court Clarifies Vote Buying Rules

Crown EMAK Partners LLC v. Kurz,  C.A. 64, 2010 (Del. April 21, 2010)

This important decision focuses on the increasingly controversial issue of vote buying in stockholder elections.  In general, vote buying occurs when a party acquires the right to vote stock it does not have legal title to or hold the beneficial interest in that stock.  It just buys the right to vote the stock.  On the other hand, when the buyer acquires the economic interests represented by the stock along with the right to vote it, that is not vote buying even if he does not then acquire legal title to the stock. The distinction may be critical as votes acquired by vote buying are invalid.

Exactly how this will play out is not clear.  For example, if the buyer obtains the right to vote and all appreciation in the value of the stock, but not title, that seems to satisfy the test and is not  vote buying. That is so even if he never has title transfererd to him or, possibly, even if all the buyer's rights revert to the seller a moment after a stockholder election. We shall see.

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Delaware Supreme Court Clarifies when a Bylaw may Provide for Reimbursement of Proxy Expenses

CA, Inc. v. AFSCME Employees Pension Plan, C.A. 329,2008 (Del. 2008) (en banc)

In response to questions certified to it by the SEC, the Delaware Supreme Court has decided if a bylaw may mandate reimbursement of proxy solicitation expenses. No is the short answer.

As pension plans and other institutional investors seeks representation on corporate boards, they are looking for ways to make that process less expensive. Under the current Delaware law, even a successful proxy contestant will not be reimbursed for expenses unless it elects the majority of the board. Given how difficult that is to do as an outsider, few want to go through the expense of the effort. Here the bylaw proposed mandatory reimbursement for any successful election campaign, even if only one slot was filled.

The Court makes a distinction between bylaws that affect "process and procedures" of the board from bylaws that affect "substantive business decisions." Only process and procedure bylaws are valid, and a bylaw may not dictate the decision a board must make in the exercise of its fiduciary duty. As the Court acknowledges, that distinction is a tight one to make as some process bylaws affect the decision to be made.

The Court leaves open the possibility that a provision in a certificate of incorporation may mandate proxy solicitation reimbursement. However, as such a change in the certificate must be proposed by the board itself, that route seems a long road to travel.

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Court of Chancery Declines To Enjoin Meeting

Wayne County Employees' Retirement System v. Corti, C.A. 3534-CC (Del. Ch. July 1, 2008)

In this disclosure case, the Court declined to order additional disclosures for all the usual reasons. The opinion is fun to read and makes the point that stopping a merger vote when, as now, the market is so uncertain, runs a real risk the deal will unravel. Hence, it is harder to stop the vote for less than material omissions.

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Court of Chancery Enjoins Vote

David P. Simonetti Rollover IRA v. Margolis, C.A. 3694-VCN (Del. Ch. June 27, 2008)

What must be disclosed to stockholders in a proxy for a merger vote is now well established. This decision again repeats that the interest of the investment firm giving a fairness opinion must be disclosed. Moreover, that does not just include its fees but also any gain it expects to make on the deal through its ownership of stock or other securities in the target.

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Court of Chancery Upholds Right To Nominate Directors

Levitt Corp. v. Office Depot, Inc., C.A. No. 3622-VCN (Del. Ch. April 14, 2008)

This is a case of bylaws gone bad. While the obvious intent of the company's advance notice bylaw was to obtain notice of what directors a dissident slate might want to nominate, the language of the bylaws was fatally deficient. Thus, this decision gives a good drafting lesson .

The bylaw required advanced notice of an intent to bring a matter before the annual meeting. However, the bylaw made an exception for any matter the company itself had noticed for the meeting. When the company, as always, noticed the meeting would include the election of directors, the court held that included the nomination of directors as part of the matters to be considered. Thus, the court held that the intent to nominate a dissident slate need not be noticed again by the dissidents in accordance with the advance notice bylaw provisions.

The way to avoid this mistake is to make it clear in the bylaws that the intent to nominate a slate different than that proposed by the company is subject to a reasonable advance notice provision in the bylaws. In short, state the rules of the game clearly.

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Court of Chancery Explains Bylaw on Proxy Solicitation

JANA Master Fund, Inc.v. CNET Networks, Inc., C.A. 3447-CC (Del. Ch. March 13, 2008) 

This is a useful decision on the proper interpretation of a bylaw that governs stockholder proxy proposals in light of SEC Rule 14a-8.  The Court held that the bylaw only applied to stockholder requests to have a proposal included in the company's proxy materials under rule 14a-8.  In that way the Court again emphasized that Delaware interprets bylaws so as to increase the ability of stockholders to vote.

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Court of Chancery Defines Illegal Vote Buying

Portnoy v. Cryo-Cell International Inc., C.A. No. 3142-VCS (January 15, 2008).

This is the definitive decision on when arrangements to secure a stockholder's vote are invalid. "Vote buying" has long been criticized without much thought. After all, the Delaware General Corporation Code specifically authorizes arrangements to lock up a stockholder's vote. However, paying for that vote seems somehow wrong, perhaps because of political reasons. Here, the court carefully sets out the policy considerations and decides when paying for a vote is invalid.

In general, when a stockholder's agreement to cast his vote for management pursuant to a contract with the corporation is publicly announced, then it will be valid. If the other stockholders do not like it, then they can vote the other way. The exceptions to this are when corporate assets are used to buy the vote and then it becomes more troublesome. The arrangement will be struck down when it is not in furtherance of a proper corporate purpose and is unreasonable.

This decision also comments on how to conduct a stockholder meeting. Postponing votes by lying about why there is a delay is frowned upon, to say the least.

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Court of Chancery Orders Meeting For Bankrupt

Fogel v U.S. Energy Systems, Inc., C.A. No. 3271-CC (January 15, 2008).

This is another in a line of decisions holding that the Court of Chancery may order the holding of a stockholders' meeting even if the company is in a bankruptcy proceeding. The automatic stay does not apply.

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Court of Chancery Adopts New Standard of Review

Mercier v. Inter-Tel (Delaware) Incorporated, C.A. No. 2226-VCS (August 14, 2007).

In a precedent setting opinion, the Court of Chancery has recast the standard of review that applies when determining if a board has acted to affect a stockholder vote. Under the previous Blasius standard, the board had to prove a "compelling justification" before taking any action, such as postponing a stockholder meeting, that affected the stockholders' right to vote.

This opinion recasts the standard closer to the familiar Unocal test where director action that affected a proposed takeover had to be a reasonable response to a perceived threat to corporate policy or interests. Now, in the case of board action that may affect the stockholders' vote, the board must show its actions were: (1) designed to achieve a legitimate corporate objective; (2) taken for a proper motive in good faith; and (3) were reasonable means to their proper objective. This test should be substantially easier to meet than the "compelling justification" standard.

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Court of Chancery Extends Date For Meeting

Louisiana Municipal Police Employees Retirement System v. Crawford, C.A. No. 2635-N (Del. Ch. February 13, 2007).

The question sometimes comes up of whether a stockholder meeting should be postponed to permit supplemental proxy materials to be sent and read by the stockholders. Here, the Court did extend the meeting based on the facts presented to it. Hence, this decision provides guidance on this issue.

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Court of Chancery Upholds Special Committee Action

Perelegos v. Atmel Corporation, C.A. No. 2320-N (February 8, 2007) The actions of special committees of  a board are often questioned, but this decision strongly affirmed the power of a properly organized and functioning  special committee. Indeed, given that the committee here removed the corporation's founder as its CEO, there can be few corporate actions more important than the act upheld here. There are still limits on that power, however, as the Court of Chancery also held that the board could not cancel the special stockholders' meeting called by the fired chairman to review the acts of the Special Committee. This reflects the strong Delaware respect for the rights of stockholders to vote on who should be on the board. More › Share

Stay In Voting Case Denied By Court of Chancery

B.F. Rich Co., Inc. v. Gray, C.A. No. 1896-N (Del. Ch. December 15, 2006).

After losing a  case involving the right to vote shares that were a controlling block, the loser sought  a stay to permit an appeal to the Delaware Supreme Court. The Court of Chancery denied the stay after applying the usual standards for such stays. The decision is interesting because the Court was faced with a change in control of the Delaware entity as a result of its decision and the obvious impact that might have on corporate affairs was carefully considered by the Court. More ›

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Court of Chancery Resolves Conflict With SEC Rule

Esopus Creek Value LP v. Hauf, C.A. No. 2487-N (Del. Ch. November 29, 2006).

Delaware law requires an annual stockholder meeting. The SEC rules prohibit calling a stockholder meeting when the company is delinquent in its SEC filings. In this case and in its decision in Newcastle Partners LP v. Vesta Insurance Group, Inc., 887 A.2d 975 (Del. Ch. 2005), aff'd., 906 A.2d 807 (Del. Ch. 2005) the Delaware Court of Chancery has resolved this apparent conflict. Here, the Court held that a stockholder meeting should go forward with adequate disclosures to the stockholders entitled to vote on the proposed sale of substantially all of the company's assets. The Court ordered the company to apply to the SEC for an exemption from the rules prohibiting the calling of a meeting. More ›

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Court of Chancery Holds Series B Director Has Immediate Right To Sit On Board

FGC Holdings Ltd. v. Teltronics, Inc., C.A. No. 883-N, 2005 WL 2334357 (Del. Ch. Sept. 14, 2005). Plaintiff FGC Holdings Limited, owner of Series B Preferred Convertible Stock in Defendant Teltronics, Inc. sought declaratory judgment that its Series B Director designee had an immediate right to sit on Teltronics' board of directors. More › Share

Court of Chancery Denies Plaintiffs' Motion To Temporarily Enjoin Annual Shareholders' Meeting Or To Amend Proxy Materials

Frenz v. Gencor Indus., Inc., C.A. No. 1204-N, 2005 WL 2266594 (Del. Ch. Sept. 9, 2005). Plaintiffs sought a temporary injunction barring the 2005 annual shareholder's meeting of Gencor Industries, Inc., or, in the alternative, to amend proxy materials to include a nominee for independent director. More › Share