Sunday, March 09, 2008

Vice-Chancellor Strine Distinguishes Rulings Involving Delay of Shareholder Vote

By James Hamilton, J.D., LL.M.

Recently, I blogged about a decision by Vice Chancellor Strine that a contested corporate election of directors was so tainted by management’s inequitable conduct that the Delaware Chancery Court set the results aside and ordered a new election. The court ruled that management failed to disclose an agreement to obtain the votes of one insurgent shareholder by promising to expand the board and let the insurgent name the new director. Similarly, in an effort to secure another key bloc of votes, management used a combination of threats of ending a key project and the inducement of removing a restrictive legend on the shares of the shareholder it sought to enlist. Management also delayed the annual meeting in order to win the election, was dishonest about the reasons for the delay, and failed to use the time to release an adverse 10-Q. (Portnoy v. Cryo-Cell International, Inc., Del. Chan Ct, CA No. 3142)

Some people may have been wondering if and how the Vice Chancellor distinguished the Portnoy ruling on delay with his earlier ruling in Mercier v. Inter-Tel Inc., Del. Chancery Court, Aug 14, 2007, CA No. 2226, that a special committee of independent directors could reschedule an imminent meeting of stockholders to consider an all cash, all shares offer from a third-party acquirer when they believed that the merger was in the best interests of the stockholders and knew that if the meeting proceeds the stockholders wouldl vote down the merger and the acquiror would irrevocably walk away from the deal and the company’s stock price will plummet.

Please allow me to note that, in footnote 188 of his Portnoy opinion, Vice Chancellor Strine did distinguish the two rulings. He said that the situation in Inter-tel, where the directors advocated an affirmative vote on a transaction because they believed in good faith that the transaction would benefit the stockholders, was importantly distinct from an actual election of directors, like in Portnoy, in which the insiders delay because they believe the stockholders are making a mistake in choosing new leadership. In the Inter-tel situation, directors who faced no risk of removal were asking for more time to make their case that a non-self dealing transaction should receive approval.

By contrast, in the Portnoy situation, reasoned the Vice-Chancellor, the directors were trying to insulate themselves from ouster by forcing the insurgents to continue the fight beyond when the election was supposed to be held. In Portnoy, unlike in Inter-Tel, management gave the assembled stockholders false reasons for delay and was not acting in good faith to ensure that stockholders had more time to consider an arms-length transaction that was at danger in a time of economic tumult.