Crown EMAK Partners, LLC v. Kurz, Consol. Nos. 64, 2010 and 85, 2010 (Del. Supr. April 21, 2010), read opinion here. This 55-page Delaware Supreme Court decision affirmed in part and reversed in part the Court of Chancery’s 80-page decision involving a control contest that featured issues such as "vote buying" and efforts to reduce the size of the board via a bylaw amendment and written consents of shareholders in lieu of a meeting. The trial court’s initial decision was summarized here, and the Chancery decision on an interim application for attorney’s fees issued shortly thereafter was highlighted here.
This important opinion deserves extensive discussion and commentary which time constraints do not allow today, but the bullet points below provide a glimpse of why practitioners and students of Delaware corporate law need to read the whole opinion. Additional analysis of this opinion should follow soon. In the meantime, the following key points indicate why it will be included in the pantheon of seminal Delaware rulings.
- Although Delaware’s High Court agreed with the Court of Chancery’s decision that there was no improper vote buying, the Supreme Court (unlike the trial court), determined that the purchase of voting rights and other enumerated rights was a breach of the applicable Restricted Stock Agreement, and therefore, those votes could not be counted. The Court’s treatment of this topic is must reading for those interested in the extent to which Delaware will permit a separation of voting rights from economic rights of stock.
- Both Courts reviewed the requirements for written consents of shareholders in lieu of a meeting pursuant to DGCL Section 228, and they both recognized the requirement that such consents be executed by a stockholder of record–and that DGCL Section 219(c) provides that only stockholders of record who appear on the stock ledger can vote. Where the two Courts diverged, however, was at the point that the Court of Chancery determined that "… if a Cede breakdown is part of the stock ledger for purposes of Section 220(b), it logically should be part of the stock ledger for purposes of Section 219(c)…." The Supreme Court determined that due to its finding that the purchased votes were invalidated, it was not necessary to address or decide the issue of whether the Cede breakdown is part of the stock ledger for Section 219 purposes. Thus, it described the trial court’s treatment of that issue as "obiter dictum."
- The Supreme Court also agreed with the Court of Chancery that the bylaw amendment, that purported to reduce the size of the board as a means of eliminating sitting directors, was in violation of DGCL Section 109(b). Rather, the correct procedure would have been for the dissidents to follow a three-step process: First, remove the sitting directors by written consent, and then reduce the size of the board, and then elect new directors.