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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.

This case also involved an unusual set of facts. To get around the Delaware law requiring a stockholder vote on a sale of substantially all company assets, the board had proposed a voluntary bankruptcy filing. While not applying the strict rules of the Blasius decision that prohibit virtually all interference with the stockholder right to vote, the Court did conclude that this effort to avoid such a vote should be enjoined. The Court noted that the company was solvent and thus had no other reason to file  for bankruptcy and that the proposed deal had given preferred stockholders a vote they would not have had under the corporate charter. Thus, the Court concluded the scheme here was an invalid way to limit common stockholder voting rights. Share


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