Schnell v. Chris-Craft Industries, Inc.

Supreme Court of Delaware · 1971 · Corporations

Corporationscorporate democracyproxy contestsannual meeting date manipulationinequitable conductDelawareboard actionbylaw amendment

Facts

The corporation's by-laws had previously set the annual stockholders' meeting for January 11, 1972, but management amended the by-laws to move the meeting to December 8, 1971. The Court of Chancery found that management had resisted producing a stockholder list, hired proxy solicitors, and expanded a directors' meeting agenda to include the by-law amendment after learning that dissident stockholders intended to wage a proxy fight. The court below also found that the earlier meeting date left the dissidents little chance to conduct a successful proxy contest because of time pressures, including SEC clearance requirements. The dissident stockholders learned unofficially of management's action on October 27, 1971 and filed suit on November 1, 1971.

Issue

May corporate management, while complying with the Delaware corporation statute, advance the by-law date of an annual stockholders' meeting when the purpose and effect are to obstruct dissident stockholders' proxy contest and perpetuate management in office? Also, was the stockholders' request for injunctive relief filed too late?

Rule

Directors may not use corporate machinery and Delaware law for the inequitable purpose of perpetuating themselves in office or obstructing the legitimate efforts of dissident stockholders in a proxy contest. Inequitable action does not become permissible simply because it is legally possible. In the absence of fraud or inequitable conduct, courts will not enlarge a duly established meeting date merely because of a proxy contest.

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Blue Mesa Robotics, a Delaware corporation based in Phoenix, had bylaws fixing its annual stockholders' meeting for June 20. After a stockholder group in Denver filed preliminary proxy materials to challenge incumbent directors, the board amended the bylaws to move the meeting to May 18, even though management knew the challengers had been preparing their campaign around the June date and would have far less time to complete solicitations.

If the board argues that Delaware law and the bylaws authorized the date change, how should a court most likely rule?

Explanation. The controlling principle is that directors may not use corporate machinery and corporate law for the inequitable purpose of perpetuating themselves in office or obstructing the legitimate efforts of dissident stockholders. A legally possible action does not become permissible if taken for an inequitable purpose. Here, the accelerated meeting date appears designed to deprive challengers of the time they reasonably expected under the bylaw date. (Derived from Schnell v. Chris-Craft Industries, Inc. (1971).)