Kerbawy v. McDonnell

Court of Chancery of the State of Delaware · 2015 · Corporations

CorporationsDGCL § 225Written consentsStockholder franchiseDisclosureTortious interferenceFiduciary dutySection 225

Facts

ACell was a privately held Delaware corporation whose board became divided after a DOJ investigation derailed an anticipated IPO and contributed to the removal of director-CEO DeFrancesco and officer Bosley. In early 2015, stockholder Kerbawy organized a written-consent solicitation to replace the incumbent board with a new slate; DeFrancesco, still a director, and Bosley, a former officer subject to a separation agreement, assisted him and provided some internal company materials. Kerbawy obtained consents representing about 53.3% of the outstanding voting shares and delivered them on March 10, 2015. The incumbents refused to recognize the consents, arguing that the solicitation was tainted by misleading disclosures, tortious interference with Bosley's separation agreement, and misuse of confidential company information.

Issue

Should the court, in a DGCL § 225 proceeding, set aside otherwise valid written consents delivered by a majority of stockholders because the solicitation allegedly involved misleading disclosures, interference with a separation agreement, and misuse of company information? More specifically, did any of that conduct inequitably taint the election process enough to justify invalidating the consents?

Rule

In a § 225 action, consents that are technically valid under DGCL § 228 are presumptively valid, and the party challenging a director's removal or election bears a heavy burden to prove invalidity. A fiduciary disclosure violation warrants equitable relief only if the misstatement or omission is material and inequitably taints the election process; materiality exists when there is a substantial likelihood that a reasonable stockholder would consider the fact important in deciding how to vote, or when it would significantly alter the total mix of information. The court was unwilling to impose a general fiduciary duty of disclosure on a mere minority stockholder who is not a director, officer, controlling stockholder, or control-group member, though a participating director would himself be subject to fiduciary disclosure obligations.

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Summit Biologics, Inc., a privately held Delaware corporation based in Cleveland, has a charter that permits stockholder action by written consent. Nina Velez, a 7% stockholder, delivers dated consents from holders of 54% of the voting shares removing the incumbent board and electing a new slate. The incumbents concede there are no technical defects under the statute but ask the Court of Chancery in a Section 225 action to disregard the consents because the challengers ran an aggressive campaign that the board views as unfair.

How should the court approach the incumbents' request?

Explanation. Where written consents are technically valid under Section 228, they are presumptively valid in a Section 225 action. The party challenging the election bears the burden, and when a majority has acted by written consent that burden is heavy. The court may consider equitable claims, but it will not set aside the stockholder majority absent a sufficient showing that misconduct inequitably tainted the election process. (Derived from Kerbawy v. McDonnell (n.d.).)