Platinum Partners Value Arbitrage Fund L.P. v. Echo Therapeutics, Inc., C.A. No. 10303-VCN (Del. Ch. Nov. 14, 2014) (Noble, V.C.)
In this letter opinion, the Court of Chancery denied a motion to expedite proceedings in which a stockholder sought to call a special meeting to remove a majority of the corporation’s directors.
Plaintiff Platinum Partners Value Arbitrage Fund L.P. and its affiliates were stockholders in defendant Echo Therapeutics, Inc., a medical device company (the “Company”). According to plaintiff, over the last several years, three of the five directors on the Company’s Board (the “Defendant Directors”) had excluded the remaining two directors from all Board-related activities, were running the Company for their own benefit, and had failed to address problems that caused revenues to decline. Based on these allegations, plaintiff sought to remove the Defendant Directors for cause pursuant to 8 Del C. § 141(k).
Under the Company’s certificate of incorporation, directors could be removed by unanimous written stockholder consent. Directors also could be removed through a special stockholder meeting, which, under the Company’s by-laws, could be called for any purpose at any time by the Chairman of the Board, the CEO, a majority of the Board, or the request of stockholders owning 75% of the voting power of Company stock. Unable to obtain the consent necessary to remove the directors or to call a special meeting, plaintiff filed suit in the Court of Chancery.
In its complaint, plaintiff requested that the Court declare the super-majority requirement in the by-laws invalid and require that the Company hold a stockholder meeting to vote on the removal of the Defendant Directors. In support of its claim that the super-majority requirement was invalid as applied, plaintiff argued that stockholders have a fundamental right to vote to remove directors for cause, there must be a timely and effective mechanism to assert that voting right, and, in this case, there was no such mechanism. Plaintiff sought to expedite its claims on the grounds that the Company was in dire financial straits and would possibly go into liquidation under current management. The Company opposed expedition and argued that the annual stockholder meeting—last held five months before the Court’s decision—would provide an effective mechanism for stockholders to vote on whether to remove directors.
In declining to expedite the proceedings, the Court held that plaintiff had not identified a threatened irreparable harm that was both imminent and non-speculative. The Court noted that stockholders often could allege that a company’s weak financial position and poor management posed a danger that further delay would impair the stockholders’ ability to obtain effective ultimate relief. The Court concluded, however, that plaintiff did not provide concrete support for how imminently the Company would run out of money or how a new Board would be able to stem the Company’s decline. As a result, the Court held that the costs of expedition were not justified. The Court nevertheless acknowledged that the Company was under financial duress and that its stockholders might have good reason to replace the Defendant Directors. Accordingly, the Court requested that the parties agree on a case management schedule that would have the case ready for a decision in approximately ninety days.