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Canmore Consultants Ltd., v. L.O.M. Medical Int'l, Inc., C.A. No. 8645-VCG (Del. Ch. Sept. 19, 2013) (Glasscock, V.C.)

September 19, 2013

In this decision, the Court of Chancery addressed a novel question of law:  Which party bears the burden of persuasion under Section 223(c) of the Delaware General Corporation Law (the “DGCL”)?  Section 223(c) permits stockholders to petition the Court of Chancery to direct, in its discretion, that a special meeting of stockholders be held to fill vacancies on a company’s board of directors.  The Court determined that plaintiffs bear the burden of demonstrating that the equities support convening a special meeting of stockholders and held that, in this case, plaintiffs had not met that burden.

At the 2012 annual meeting of L.O.M. Medical International, Inc. (the “Company”), a slate of five directors, including plaintiffs Ralph Woloschuk and Ronald Roteliuk who are also stockholders of the Company, were elected to the Company’s board.  After litigation concerning the validity of this election, the factions agreed to hold a second annual meeting under Court supervision, overseen by a special master.  At the second meeting, held on March 13, 2013, the stockholders elected a different slate of directors consisting of one incumbent director and four new directors (including Charles Clements and Alan Lawrence, the two individual defendants in this case).  Within three months of the second election, three of the five directors had resigned, leaving only Messrs. Clements and Lawrence as board members (representing a minority of the whole board).  These two remaining directors executed written consents appointing a new director on June 13, 2013 (the afternoon on which the third director resigned), and the board acted to fill the two remaining vacancies by July 18, 2013.

The plaintiffs petitioned the Court to direct that a special stockholders meeting be held to elect directors because a minority of the whole board had acted on June 13, 2013 to fill the first vacancy.  Section 223(a) of the DGCL provides that, unless otherwise provided in a corporation’s certificate of incorporation or bylaws, vacancies and newly created directorships may be filled by a majority of the directors then in office, although less than a quorum.  8 Del. C. § 223(a).  Section 223(c) provides that if, at the time of filling any vacancy, the directors then in office constituted less than a majority of the whole board, any stockholder or stockholders holding at least ten percent of the outstanding voting stock with the right to elect directors may petition the Court of Chancery to summarily order an election to be held to fill any such vacancies.  The parties agreed the plaintiffs satisfied the requirements for standing to bring this action under Section 223(c):  (1) they collectively held at least ten percent of the voting stock, and (2) at the point in time when the individual defendants filled the first vacancy, they constituted a minority of the whole board of directors.

The Court rejected the plaintiffs’ argument that merely satisfying Section 223(c)’s requirements for standing required the Court to grant plaintiffs’ request for an election.  Instead, the Court held that, to perfect the right to a special election under Section 223(c), plaintiffs must show:  (1) only a minority of directors remained on the board at the pertinent time, (2) plaintiffs represent at least ten percent of outstanding shares, and (3) the equities support their request.  Emphasizing the permissive nature of Section 223(c), the Court held that plaintiffs should bear the burden of persuasion thereunder because the statute provides a limited exception to the authority to fill vacancies that Section 223(a) grants to directors.  The Court reasoned that, since a corporation has the ability to entirely eliminate the authority of directors to fill vacancies without a stockholder vote, Section 223(c) creates a narrow avenue whereby the Court may override the directors’ decision to fill board vacancies where doing so is necessary to avoid some identifiable inequity.  The Court determined that where, as in this case, a corporation has chosen to forgo a provision in its certificate of incorporation or bylaws restricting directors’ ability to fill vacancies, Section 223(c) permits the plaintiffs to request a new election to fill vacancies but places on them the burden to demonstrate the equities require such an election.

In considering the equities, the Court weighed the right of the stockholders to exercise their voting franchise and select directors against the cost-effective ability of directors to fill vacancies.  The Court gave considerable weight to the fact that the Company had held a stockholder meeting to elect directors in March 2013 (six months prior to the date of the opinion), the plaintiffs’ slate of directors had lost at that meeting, and there was no indication a new election would result in a different outcome.  Moreover, the Court found the plaintiffs could point to no persuasive equitable reason why stockholder interests were not protected by the current board.   The Court also gave weight to the fact that the Company could not afford to hold another stockholder meeting.

For these reasons, the Court determined the equities did not justify ordering a new election to fill vacancies and granted defendants’ motion for summary judgment.

The full opinion is available here