Portnoy v. Cryo-Cell International, Inc., C.A. No. 3142-VCS (Del. Ch. Jan. 15, 2008)
In this opinion, the Court of Chancery ordered a Delaware corporation to hold a special meeting of stockholders for the election of directors, with the costs of the meeting and of the re-solicitation of proxies to be paid by the management slate. After plaintiff advised the company that he would be waging a proxy contest, the CEO, the sole inside director, agreed to form an alliance with another stockholder group (the “Filipowski Group”). The CEO and the Filipowski Group agreed that the board would be increased by one seat effective as of the date of the annual meeting, adding Filipowski to the management slate, notwithstanding the fact that Filipowski did not have industry experience and did not meet the board’s own guidelines for determining the suitability of board members. Prior to the meeting, the company’s proxy solicitor advised the CEO that plaintiff’s slate held a large lead over the management slate. Subsequently, the CEO played matchmaker by putting Filipowski and another large stockholder in contact with stockholders wanting to sell their shares. In exchange for buying additional shares of the company, Filipowski wanted an additional seat on the board, which the CEO made clear would happen in the event that management prevailed. The CEO also pressured another large stockholder (“Saneron”) into agreeing to vote for management’s slate by threatening to withhold the company’s cooperation on joint projects and by agreeing to provide an opinion of the company’s counsel in order to remove a restrictive legend from Saneron’s stock certificates (which the company’s had previously refused). Shortly before the meeting, Filipowski’s associate purchased a large block of shares; however, it was unclear that the votes could be switched to management before the polls were scheduled to close. Thus, the CEO ruled plaintiff’s motion to close the polls out of order, and instructed several members of management to give unscheduled presentations. After an extended lunch break, and only after it became clear that management had secured a sufficient number of votes to prevail, the CEO closed the polls. Preliminarily, the Court found that defendant’s arrangement with Filipowski did not constitute illegal vote-buying and was not an entrenchment-motivated decision. Vice Chancellor Strine noted that he did not believe that an arrangement where incumbents offer a potential insurgent a seat on management’s slate in exchange for the insurgent’s voting support should trigger heightened scrutiny. The Vice Chancellor reasoned that there was a danger that all voting agreements would be subject to intrinsic fairness and would create “litigable issues about a large number of useful compromises.” In the Court’s opinion, if the only arrangement at issue is an agreement to add an insurgent to management’s slate in exchange for support, the arrangement can be tested at the ballot box. In the instant case, stockholders were aware that the Filipowski group had contracted to vote its shares for management’s slate and that Filipowski had been added to the slate. Accordingly, stockholders had an opportunity to decide for themselves whether Filipowski should serve on the board. In respect of plaintiff’s claims concerning the agreement to increase the size of the board to appoint a second Filipowski representative, the Court found that such agreement was improper and inequitably tainted the election process because it was a material event that was not disclosed to stockholders. It was particularly material given that the likely nominee was an individual who had previously been the subject of an SEC investigation. Again, the Court emphasized that courts should not “jump too quickly to the conclusion that voting pacts of this kind should automatically be seen as inequitable.” In respect of management’s influence over Saneron, the Court found that “threats and promises of the kind directed at Saneron are much less problematically dealt within the Schreiber framework [which subjects alleged vote-buying by management to the test of entire fairness] than properly disclosed agreements that involve a give-and-take about the shape of a board slate.” Here, the Court found that the CEO used the company’s assets to secure votes for herself and the other incumbent directors, thereby breaching her fiduciary duty of loyalty. Finally, the Court found that the CEO’s actions at the meeting were not taken in good faith. Because the Court found that defendants had committed numerous breached of their fiduciary duties, the Court ordered the company to hold a special meeting of stockholders for the election of directors, to be presided over by a special master. Because the management slate in fact received more votes than the insurgents, the Court refused plaintiff’s request to seat the insurgent slate immediately. The Court ordered the management slate to bear personally the company’s costs in holding the special meeting, as well as the costs of the special master and of the company’s proxy solicitation. The Court did not, however, require defendant’s to bear the cost of plaintiff’s proxy solicitation efforts, finding that plaintiff’s hands were not entirely clean (given that plaintiff had worked with a former employee to acquire information in violation of a confidentiality agreement).
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