Portnoy v. Cryo-Cell International, Inc., (Del. Ch., Jan. 15, 2007), read opinion here. This 73-page Chancery Court decision addresses issues raised in a challenge to the election of directors under DGCL Section 225 based on claims that the management engaged in inequitable behavior to entrench themselves, both in proxy battles leading up to the annual meeting, as well as shenanigans during the annual meeting itself. (See slip op. at 39-40 for list of specific claims.)
Many thanks to the highly-respected and prominent Wilmington lawyer Richard DiLiberto, Jr. for forwarding this decision to me.
The court analyzed closely the issue of "vote-buying" to the extent that expression is used to refer to agreements to vote for certain board members in exchange for consent to act in a certain manner, such as working to secure a board seat for a major shareholder. Such arrangements are not per se illegal in the corporate context but will be closely scrutinized for inequitable conduct that interferes with the shareholder franchise especially in connection with the election of directors. See footnotes 150 to 159 and accompanying text.
The court did not reject a deal with management that provided for a major stockholder to be seated on the board (in exchange for supporting management), but the court did find objectionable another part of the deal–that was not disclosed to stockholders prior to the election for the slate of directors–that provided for a new board seat to be created in connection with an expanded board that would be filled by someone whose past raised questions that may have made stockholders hesitate before supporting him. The problem was, as the court explained, that the: "electorate voted in ignorance of the actual board that would govern them in the event the Management Slate won."
However, the court found it was a breach of the CEO’s fiduciary duty to use corporate machinery to coerce and to threaten economic penalties with commercial partners who did not vote in favor of management. See footnotes 176 to 179 and related text.
The CEO announced during the Annual Meeting at 2pm that she was taking a 3-hour lunch break. (The meeting started at 11). The court saw this as a transparent attempt to lobby for more votes for management–which ultimately prevailed by a razor-thin margin.
The court determined that (what it called) the "lupper" break affected the election of the directors and the defendants could not carry their burden to show that the CEO’s actions were "motivated by a good faith concern for the stockholders, and not by a desire to entrench [herself]." See footnotes 181 to 189 and related text.
The customized remedy that the court fashioned in this case was to order a prompt special meeting for the new election of directors–and to make the management slate pay for the costs of such a meeting. The court also ordered the removal of the new director who was elected at the tainted meeting. Moreover, the court declined to award attorneys’ fees in part due to the apparent violation of a confidentiality agreement by the plaintiff.
POSTSCRIPT: For reference, compare these facts to a case involving a large number of shares issued just before the stockholders’ meeting, which were alleged to have been issued for the purpose of entrenchment and for diluting shares of those who had hoped to acquire control, but where the court held that the Blasius standard and the Schnell standard were not violated. Rather, the court reasoned that the new stock purchase was the outgrowth of a long-term plan that management had pursued for a year to obtain needed capital, as opposed to the primary purpose being to maintain control and dilute the shares of a dissident group attempting to wrest control from management. See Glazer v. Zapata Corp., 658 A.2d 176, 186 (Del. Ch. 1993). Cf. id. at 184 (listing cases reaching different result.) An additional basis for the Zapata court’s conclusion was the absence of a voting agreement and thus no provision for any assurance to the incumbent board regarding how long they would remain in office if the holders of the new large bloc of shares became disenchanted with managment.
POSTSCRIPT TWO: Here is a critical commentary on the case by a corporate law professor.