Totta v. CCSB Fin. Corp., C.A. No. 2021-0173-KSJM (Del. Ch. May 31, 2022) (McCormick, C.)
In this memorandum opinion following trial on a paper record, the Court of Chancery granted plaintiffs’ request for a declaratory judgment under 8 Del. C. § 225 and invalidated a board election whereby the incumbent board instructed its election inspector not to count a certain number of votes cast in favor of an insurgent stockholder’s proposed director slate pursuant to a voting limitation provision (the “Voting Limitation”) in the company’s certificate of incorporation (the “Charter”). The Court first concluded that it must test the board’s actions twice, first for legal compliance with the Voting Limitation, and second under equitable principles. Applying this “twice-tested” standard, the Court concluded that the board’s actions were neither legally valid nor consistent with the enhanced-scrutiny test set forth in Blasius Industries, Inc. v. Atlas Corporation, 564 A.2d 651 (Del. Ch. 1988).
Defendant CCSB Financial Corporation (“CCSB”) is a holding company that owns Clay County Savings Bank, which operates three branches near Kansas City, Missouri. Plaintiffs are Park G.P. Inc. (“Park”), a stockholder of CCSB, and its nominees (the “Park Nominees”) for the CCSB board of directors (the “Board”) in connection with its 2021 annual election. As of the record date for the annual stockholders meeting, non-party David Johnson and Park, of which Johnson is the sole stockholder, owned 73,948 shares (or 9.95%) of CCSB’s outstanding stock. Johnson had tried, through various entities, to effectuate change at the Board level for a decade. Consistent with this strategy, in connection with CCSB’s 2021 election, Park proposed its own slate of nominees for the three seats up for election that year. At that time, CCSB maintained a staggered seven-member Board.
In response to the Park Nominations, CCSB turned to the Voting Limitation in Article Fourth of the CCSB Charter, which was adopted in 2002 allegedly to protect against a hostile takeover. The Board had never before used this provision in response to a takeover threat or otherwise. The Voting Limitation provided that “in no event” shall any “person” who “beneficially owns in excess of ten percent (10%) of the then-outstanding shares of Common Stock . . . be entitled or permitted to any vote in respect of the shares held in excess of the Limit” (i.e., 10% of the Company’s outstanding common stock). According to the Board, the definitions of “person,” which included, among other things, “a group acting in concert,” and “beneficial owner” in Article Fourth allowed the Board to aggregate shares across owners in applying the Voting Limitation. Thus, on the morning of CCSB’s annual stockholders meeting, the Board held a meeting and determined that Park, Johnson, and others that voted stock in favor of the Park Nominees were acting in concert in connection with Park’s proposed director slate and therefore, as collective owners of 111,723 shares (or approximately 15%), would be subject to the Voting Limitation. The Board then delivered a letter to its election inspector instructing her to exclude 37,416 votes that ultimately would be cast in favor of the Park Nominees. But for this instruction, the Park Nominees would have won the election.
The Court first addressed the applicable standard of review. While CCSB relied upon a “conclusive-and-binding” provision in the Charter to argue that the Board’s actions were subject to business judgment deference, the Court rejected that argument. The relevant provision provided that “[a]ny constructions, applications, or determinations made by the Board of Directors pursuant to this section in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its stockholders.” While CCSB argued that this provision rendered its actions immune from both stockholder and Court review, the Court made clear that a provision in a corporation’s certificate of incorporation cannot foreclose the Court from applying equitable principles in evaluating Board action, in this case the decision to disenfranchise stockholders. The Court held more broadly that, in general, a corporate certificate of incorporation cannot displace traditional fiduciary duties as may be possible in the alternative entity context. To do so, the Court said, would contravene “fundamental principles of Delaware corporate law.”
The Court then turned to an application of its “twice-tested” standard of review. As to the legal aspect of the test, while the Court recognized that the Voting Limitation in the Charter provided a basis for the Board to exclude the votes of stockholders acting in concert, it held that the Board had incorrectly aggregated Johnson’s votes with those of an individual to whom Johnson had transferred Company shares shortly before the record date. While CCSB argued that this transfer was an attempt by Johnson to avoid the Voting Limitation and to have his director slate seated, the Court found the evidence presented was insufficient to support a finding that the individuals were acting in concert. The Court therefore explained that the Board’s decision to aggregate these votes was legally invalid.
Finally, in analyzing whether the Board’s actions were equitable, the Court applied the two-part “enhanced scrutiny” test set forth in Blasius, which requires the Court to analyze (1) whether the Board acted “for the primary purpose of impeding the exercise of stockholder voting power” and, if so, (2) whether the Board has established “a compelling justification for such action.” Under Part 1, the Court held that, “[u]nder these unusual circumstances,” it was “self-evident that the Board took action to interfere with the ability of certain stockholders to vote their shares.” Turning to Part 2, the Court rejected CCSB’s argument that its actions were a justified response to a “corporate raider,” recognizing that, even if Johnson had been able to seat his three preferred directors, he still would not have been able to control the Board, which had seven directors. The Court also held that this purported justification appeared to be “directed at anyone who the Board does not approve.” As such, the Court held that the Board’s actions were neither legally justified nor equitable.