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Goggin v. Vermillion, Inc., C.A. No. 6465-VCN (Del. Ch. June 3, 2011) (V.C. Noble)

June 3, 2011

In this memorandum opinion, the Court of Chancery denied plaintiff’s motion to enjoin the annual meeting of defendant Vermillion, Inc. (“Vermillion” or the “Company”), finding that (i) the timing of the annual meeting did not conflict with the Supreme Court of Delaware’s decision in Airgas, Inc. v. Air Products and Chemicals, Inc., 8 A.3d 1182 (Del. 2010), (ii) an advance notice provision established by the Company for stockholder proposals in the Company’s proxy statement was not unduly restrictive of plaintiff’s franchise rights, and (iii) the scope of a rights plan adopted by the Company (the “Poison Pill”) did not disenfranchise the Company’s stockholders.

Vermillion, a publicly traded corporation that develops diagnostic tests, emerged from bankruptcy in January 2010, at which time plaintiff acquired shares of the Company. Vermillion failed to hold an annual meeting in 2009 while the Company was in bankruptcy proceedings, and held its first annual meeting after emerging from bankruptcy on December 3, 2010, at which time the Company’s seven-member board consisted of three classes of directors with staggered terms. Prior to the entry of the Company into bankruptcy, Vermillion typically held its annual meeting in June.

The Company’s October 2010 proxy statement notified stockholders of Vermillion’s December 3, 2010 annual meeting, and included language requiring stockholders to submit proposals for the Company’s contemplated June 2011 annual meeting no later than January 1, 2011. Vermillion subsequently announced in its annual report that the Company’s 2011 annual meeting would take place on June 6, 2011.

In January 2011, plaintiff contacted Vermillion to request a special stockholders meeting to adopt “more shareholder-friendly bylaws,” and to remove the Company’s Poison Pill. Although the Company’s board of directors (the “Board”) ultimately adopted amended bylaws on May 6, 2011, that included advance notice provisions for future annual meetings, the Board declined to invalidate the Poison Pill. Following additional expressions of dissatisfaction with the Company’s management from other Vermillion stockholders, plaintiff filed his initial complaint, which was subsequently amended to request interim injunctive relief.

In seeking to enjoin the Company’s June 6, 2011 annual meeting, plaintiff first contended that by holding the 2010 annual meeting and the 2011 annual meeting within a six month period, the Company violated Delaware law requiring annual meetings to be held “approximately one year apart.” Plaintiff further argued that the requirement that stockholder proposals for the June 6, 2011 annual meeting be submitted no later than January 1, 2011, operated to entrench the current Board by discouraging the nomination of an alternative slate of directors. Finally, plaintiff claimed that the Poison Pill adopted by Vermillion had a preclusive effect upon stockholder communications.

Analyzing plaintiff’s contention that holding the Company’s 2010 and 2011 annual meetings six months apart violated Delaware law, the Court noted that the Company typically held its annual meeting in June prior to entering bankruptcy, and that the proposed timing of Vermillion’s 2011 annual meeting was consistent with the Company’s bylaws, which provide that an annual meeting shall be held each year “on a date and time designated by the board of directors.” In addition, the Court determined that the timing of Vermillion’s 2011 annual meeting “does not run afoul of Airgas,” since the directors up for re-election at the 2011 annual meeting were last subject to a stockholder vote on June 11, 2008, and “truncating a director’s three-year term by a few days appears to be permitted under Airgas.” Although future annual meetings could potentially truncate the terms of directors elected in December 2010, plaintiff failed to raise this argument, and in the Court’s view, the issue was not yet ripe for adjudication.

Turning to plaintiff’s claim that the advance notice requirement for stockholder proposals represented “entrenching behavior” by the Vermillion’s Board, while acknowledging that the advance notice provision included in the 2010 proxy statement “was not in the form of a bylaw,” the Court characterized advance notice provisions as “commonplace,” and stated that such provisions would only be struck down if they “unduly restrict the stockholder franchise or are applied inequitably.” Noting that the Company’s advance notice provision was adopted by the Board on a “clear day,” prior to plaintiff expressing dissatisfaction with the Company’s Board, and citing Vermillion’s past practice of requiring stockholder notice in January, the Court determined that plaintiff was unlikely to succeed on a claim that the advance notice provision was unduly restrictive of plaintiff’s franchise rights.

Finally, in considering plaintiff’s request that the Court “relax the operation” of the Poison Pill to permit stockholders to confer with one another, the Court found that the Company acted properly by investigating the nature of communications between plaintiff and other Company stockholders, reasoning that a failure by the Board to discern whether certain terms of the Poison Pill pertaining to affiliates and associates were implicated by ongoing stockholder discussions could subject the Board to a future breach of fiduciary duty claim. The Court also determined that plaintiff’s challenge to the Poison Pill was unlikely to succeed, given (i) there was limited evidence suggesting that the Board utilized the Poison Pill as a defensive device against the Company’s stockholders, (ii) nothing in the record suggested that the Board improperly maintained or exercised the Poison Pill, (iii) the Board’s use of the Poison Pill likely fell within the range of reasonableness, and (iv) the Poison Pill did not prevent stockholders from voting or from soliciting proxies to vote their shares.

Concluding that the Board’s actions following the Company’s emergence from bankruptcy evidenced an effort by the Board to strengthen Vermillion’s governance practices, and finding that the required showing of irreparable harm to stockholders was absent and a balancing of the equities “tips in favor of the defendants,” the Court denied plaintiff’s request to enjoin the Company’s annual meeting.

The full opinion is available here