Lions Gate Entertainment Corp. v. Image Entertainment, Inc., (download file) .  Previously summarized on this blog here was a decision on a  procedural dispute in this case. In this opinion,  the Chancery Court described this matter as involving “novel issues regarding the construction of corporate instruments providing for a classified board of directors and the reformation of bylaws of a publicly traded company.” The court was called upon to determine whether the Certificate of Incorporation provision involving a classified board became effective immediately or at the next annual meeting. Lions Gate also sought a declaration that the board did not have authority to amend the bylaws and that the board did not have authority to amend the Certificate of Incorporation without a vote of  shareholders. The court observed the common rules of contract interpretation and noted that the proper construction of any contract is purely a question of law and noting numerous Chancery Court decisions interpreting Certificates of Incorporation and bylaws on Motions for Summary Judgment.

The court also reiterated Delaware canons of interpretation that: “When a corporate charter is alleged to contain a restriction on fundamental electoral rights of stockholders under default provisions of the law . . . the restriction must be ‘clear and unambiguous’ to be enforceable.” The court found that annual director elections were fundamental electoral rights under the default provisions of Delaware law and a classified board was a fundamental governance change which has an obvious disenfranchising affect, and any ambiguity must be construed against the drafter. See generally, here, for recent post here from Gordon Smith’s blog on the importance of the shareholder franchise enshrined  in the Blasius case.

The court described the requirements for reformation of a contract. The purpose of reformation is to make an erroneous instrument express correctly the intent of, or the real agreement between, the parties. The court relied on the Delaware Supreme Court decision of Waggoner v. Laster, 581 A.2d 1127, 1135 (Del. 1990) to clarify that the existence of a scrivener’s error, without more, is not sufficient to meet the clear and convincing standard that must be satisfied for reformation. That level of evidence must establish the intent of all interested parties, which in connection with the reformation of a Certificate of Incorporation, includes all the stockholders  For this publicly held corporation that  was virtually an impossible task. 

The court concluded in granting summary judgment for the plaintiff, that there was no authority to support the proposition that equity may be invoked to rescue a corporate act that violates a statutory command and the Delaware Supreme Court has made it clear that equitable principles cannot be employed to change the terms of authoritatively binding corporate documents.