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Court of Chancery Applies Internal Affairs Doctrine to Stockholder Vote on Merger

Posted In M&A
Examen, Inc. v. VantagePoint Venture Partners 1996, 873 A.2d 318 (Del. Ch. 2005). The plaintiff, a Delaware corporation, sought a judicial declaration that Delaware law governed a stockholder vote on a pending merger because if the vote was governed by Delaware law, common stockholders and preferred stockholders would vote on the merger as a single class. The defendant, a large venture capital firm owning 83% of the corporation's preferred stock, argued that California law controlled because if California law were to apply in determining the voting rights of the Delaware corporation's stockholders in connection with the proposed merger, the preferred stockholders would have the right to vote as a separate class, effectively giving the defendant a veto over the merger. The court granted plaintiff's motion for judgment on the pleadings finding that Delaware law applied because this case was governed by the internal affairs doctrine. Plaintiff Examen argued that under its charter documents and Delaware General Corporation law, all stockholders vote together as a single class, and that a stockholder vote is governed by the internal affairs doctrine, which states that the internal affairs of a corporation are governed by the law of its state of incorporation. Defendant VantagePoint argued that there is no choice of law issue because the California statute did not conflict with the Delaware statute. The court held that there was a conflict, and as a result, Delaware law applied. Therefore, in applying Delaware law to Examen's certificate of incorporation, the court found that the proposed merger must be authorized by a majority of all Examen stockholders voting together as a single class. Requiring that Examen's preferred stockholders vote as a separate class was inconsistent with this rule and in derogation of the rights of Examen's other stockholders. Because the proposed stockholder vote implicated the relationship between a corporation and its stockholders, the court analyzed Examen's motion pursuant to the internal affairs doctrine. The Delaware Supreme Court defines "internal corporate affairs" as "those matters which are peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders." McDermott, Inc. v. Lewis, 531 A.2d 206, 215 (Del. 1987). The court concluded that a merger vote by stockholders plainly concerned the relationship between the corporation and the stockholders; therefore, the internal affairs doctrine controlled the stockholder vote at issue. Since Examen is a Delaware corporation, Delaware law applied to its internal affairs and all stockholders were permitted to vote on the proposed merger as a single class. Share


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