Goggin v. Vermillion, Inc., C.A. No. 6465-VCN, 2011 Del. Ch. LEXIS 80 (June 3, 2011).
Key Issues Decided
The Court of Chancery denied a motion for preliminary injunction that sought to prevent both: (i) an annual meeting of shareholders within 6 months of the last annual meeting, because the terms of the staggered board members would only be shortened by a few days; and (ii) the threatened use of a poison pill to restrict stockholders’ ability to communicate with one another about stockholder proposals and director nominations, because the Court found no such restriction.
Vermillion went public in the year 2000 and then filed for bankruptcy in 2009. On December 3, 2010, after emerging from bankruptcy, it held an annual meeting. In October 2010, in its proxy for the December 2010 annual meeting, Vermillion announced that shareholder proposals for the 2011 annual meeting (that had not yet been noticed), had to be submitted by January 1, 2011. The board has three staggered classes of directors with staggered three-year terms. In February 2011, Vermillion announced that its next annual meeting would be held on June 6, 2011.
The complaint in this case was filed on May 9, 2011. Afterwards a motion for preliminary injunction was filed to enjoin the June 6 meeting. This thorough decision was issued a few short days prior to the meeting–less than one month after the complaint was filed.
Short Overview of Legal Analysis
1) Timing of annual meeting. Goggin argued that Delaware corporate law requires that annual meetings of companies with staggered boards must be held “approximately one year apart”, and by scheduling their annual meeting within only 6 months of the last one, Vermillion allegedly violated the Delaware General Corporation Law (DGCL).
The plaintiff’s argument was rejected by the Court because the only directors up for election had been elected on June 11, 2008, and at worst would only have their terms shortened by a few days. What impact might be suffered by other classes of directors at future annual meetings, was not before the court and thus the court did not address that issue. See Airgas, Inc. v. Air Products ad Chemicals, Inc., 8 A.2d 1182, 1194 (Del. 2010).
Bottom line: One way to read this aspect of the opinion is that the focus of the Court in this type of litigation will not necessarily be the time period between annual meetings but what impact a “less than annual” meeting would have on the term of the staggered directors who are standing for election that year–based on when they had been elected originally.
2. Advance notice bylaw. Goggin’s next argument was that the advance notice bylaw was unreasonably early and that the net result was to entrench the board. Although advance notice requirements are frequently upheld as valid in Delaware, the Court recognized that “if notice requirements unduly restrict the stockholder franchisor or are applied inequitably, they will be struck down”. See footnotes 24 and 25. In this case, however, the Court did not find a problem with the advance bylaw for at least two reasons: First, the practice of the company had been to require notice in January for their June meetings for many years prior to the complaint by Goggin, so it was not a reaction or defensive measure in respone to Goggin’s pre-complaint criticism of the board. Second, the period of about 150 days for prior notice of proposals for director nominations is not an unreasonable period of time.
3. Poison Pill. Goggin did not seek rescission of the poison pill, but sought to “relax the operation” of the pill to avoid the chilling impact Goggin claims that it had on communication and collaboration among shareholders. The Court recognized the long history of Delaware law validating poision pills (see footnote 29), but acknowledged that “enhanced scrutiny has been applied universally when stockholders challenge a board’s use of a rights plan as a defensive device.” See footnote 32. There was no evidence on the limited record before the Court that the pill was being used defensively against Goggin. In addition, even if the Court applied enhanced scrutiny, it found that: (i) the disinterested and independent board used the pill in a good faith effort to promote shareholder value, and (ii) the pill did “not disenfranchise any stockholder in the sense of preventing them from freely voting and does not prevent a stockholder from soliciting revocable proxies.” See footnoes 32 to 34.
The Court concluded that when examining the prerequisties that need to be satisfied for a preliminary injunction (see footnote 10), no irreparable harm could be demonstrated and because there was no likelihood of success on the merits, the balance of equities also tilted in favor of the defendants. Althought the Court highlighted the settled Delaware law that “corporate management subjects shareholders to irreparable harm by denying them the right to vote their shares”, it is also true that “the alleged injury must be imminent and genuine.” See footnotes 40 and 41. In this matter, the Court found the alleged injury to be merely theoretical and placed emphasis on the concession of Goggin’s counsel at oral argument that Goggin did not himself intend to nominate a director at the meeting so his claims were hypothetical to the extent he argued that management was thwarting efforts to nominate a new slate.