By Mark S. Nelson, J.D.
A group of former directors on the board of Cano Health, Inc. were not entitled to a preliminary injunction requiring the company to waive its advance notice bylaw regarding its changed annual shareholder meeting date because, under a subset of cases applying the Schnell doctrine, the accelerated meeting date did not constitute a radical change of position by the company or a material change in circumstances. The former directors had sought to oust the company’s CEO and force the sale of the company. Ultimately, several Cano directors resigned, an action the company disagreed with via press release as focusing too much on short-term goals and too much on actions alleged to have been taken by the company’s CEO/Chair. The company did eventually split the CEO and Chair roles and, upon winning in the Chancery Court, proceeded to hold its annual shareholders’ meeting (Sternlicht v. Hernandez, June 14, 2023, Fioravanti, P.).
Focus on CEO and selling Cano. The several former directors, one of whom whose term would have expired at the 2023 annual meeting, objected to how Cano co-founder and CEO/Chair Dr. Marlow Hernandez conducted himself regarding a pledge of securities and several loan arrangements involving Hernandez and Hernandez’s wife. Cano became a public company via a de-SPAC transaction with JAWS Acquisition Corp. in June 2021. The former directors held 35.7 percent of Cano’s voting power.
The former directors, in addition to the various dealings of Hernandez, also were concerned that Cano could not be effectively sold because they believed Hernandez had told two potential suitors that Cano was not for sale. As a result, the former directors planned a two-phase strategy: (1) in phase I they would demand an auction coupled with the removal of Hernandez as CEO; if this approach failed, they would engage in a “noisy resignation” aimed at getting the remainder of the Cano board to back them; (2) in phase II, the former directors would conduct a proxy contest, threaten litigation, sell their shares to a buyer interested in conducting a proxy contest, or some combination of these alternatives.
At the heart of the former directors’ preliminary injunction suit was the fact that Cano moved up the date of its annual shareholders’ meeting by several weeks and set a new record date. The former directors eventually began the process of planning for a proxy contest but abided by several self-imposed delays amounting to several weeks before seeking to nominate their own slate of directors. The Chancery Court held expedited proceedings and ruled in favor of Cano shortly before the mid-June 2023 annual shareholders’ meeting date.
Schnell and radical business changes. The legal aspects of the case turned on an application of the equitable doctrine announced in the well-known case of Schnell v. Chris-Craft Industries, Inc. (Del. 1971). That doctrine holds that equity may enjoin corporate activities (oftentimes involving changed shareholder meeting dates) even if the action would be legal because the effect of the action is somehow unfair (i.e., “…inequitable action does not become permissible simply because it is legally possible.”). Here, the vice chancellor set aside other potential theories not properly raised by the parties and focused solely on the former directors’ reliance on a subset of legal principles that are part of the Schnell doctrine.
Specifically, the former directors relied on Hubbard v. Hollywood Park Realty Enters., Inc. (Del. Ch. Jan. 14, 1991), dealing with the right to nominate a competing slate of directors, a corollary to the more general and fundamental corporate right to vote. The process of conducting director nominations is, under Delaware law, typically addressed by companies through the adoption of advance notice bylaws. The court in Hubbard concluded that a company would have to waive its advance notice bylaw per the Schnell doctrine if, once the nomination deadline had elapsed, there was a “radical shift in position, or a material change in circumstances” regarding the company’s business.
To obtain a preliminary injunction, Cano’s former directors would have to show a reasonable probability of success on the merits of their claims, irreparable harm if no injunction is issued, and that the balance of harms tips in their favor. The Chancery Court easily found that the last two requirements were not satisfied because the only harm to the former directors was “self-imposed,” and the balance of harms tipped in favor of the corporate defendants. As result, the vice chancellor emphasized the various permutations of Hubbard and how the former directors failed to show they could win on the merits.
In making this latter determination, the court said multiple factors ran against the former directors. For one, the former directors knew of a committee chairs meeting before the February 2023 deadline. Claims that four Cano directors formed a “Shadow Board” were insufficient because the claimed failings did not involve board action and the claims were otherwise speculative. The formation of a post-deadline special committee was not a radical shift in position, or a material change in direction, added the court. Likewise, a March 2023 decision by the company to retain Hernandez as CEO but not as Chair was not a radical shift in position or a material change in direction of the business. Moreover, the appointment of a new chair did not materially change the company’s operations and management, nor did the various dealings of Hernandez’s wife change the company’s path.
For these reasons, the court concluded that the former directors were not entitled to a preliminary injunction to forestall Cano’s annual shareholders’ meeting. In reaching this conclusion, the court further determined that the former directors’ multiple, self-imposed delays in seeking relief were unreasonable.
The case is No. 2023-0477-PAF.