February 7, 2008

VC Strine Blesses Accommodation with Dissident Shareholder – But Emphasizes Need for Disclosure

Here is some analysis of a recent Delaware case from Davis Polk & Wardwell:

In light of surging shareholder activism, boards and issuers may be interested in a recent decision handed down recently in the Delaware Chancery Court. In Portnoy v. Cryo-Cell International, Inc. C.A. No 3142-VCS (Del. Ch. January 15, 2008), Vice Chancellor Strine blessed an agreement by management to accommodate a dissident shareholder by including him on the management slate in exchange for his agreement to vote for the incumbent board. Drawing a distinction between this type of accommodation and a traditional case of vote-buying, Vice Chancellor Strine refused to apply the heightened standard of review applicable under some Delaware cases to a compromise among candidates about the shape of a board slate.

Even though the Vice Chancellor ultimately decided the case for plaintiffs (ordering a re-vote due in part to a lack of disclosure regarding a second voting arrangement), the opinion makes clear that a voting arrangement to accommodate board service that is subject to an informed shareholder vote will not be presumed to be unfair, but rather is subject to a determination that the parties’ subjective motives were fair.

The court reached a different conclusion, however, with regard to a second bargain involving a promise by the board to give the dissident shareholder a second board seat if the management slate won. Vice Chancellor Strine based his conclusion on the fact that “… it was a very material event that was not disclosed to the Cryo-Cell stockholders.” In addition, unlike the prior arrangement, which was subject to the approval of an informed shareholder vote, this second arrangement was not.

In deciding the appropriate framework of review, the court distinguished “give and take” arrangements such as the one previously described from the more “traditional” vote-buying arrangements that involve the misuse by management of a corporate asset to secure a vote for itself (such as a promise by the board to continue a strategic relationship with a shareholder in exchange for support).

A conclusion that one may draw from this ruling is that an issuer should consider providing shareholders with full and fair disclosure of voting arrangements whenever possible, absent other circumstances. For example, had full disclosure been provided regarding the arrangement for a second board seat, the arrangement would have likely passed muster under Vice Chancellor Strine’s analysis.

The ruling also underscores a reluctance on the part of Vice Chancellor Strine to have courts interfere in the area of director elections. This wariness was also on display in Mercier v. Inter-Tel, 929 A.2d 786 (Del. Ch. 2007) where the Vice Chancellor upheld a decision by the board to postpone a merger vote under a more relaxed reformulation of the standard of review adopted in Blasius. While the case is interesting for both its result and reasoning, it is by no means clear whether the Chancery Court more broadly, or a higher court, will agree with the line of reasoning adopted by Vice Chancellor Strine in these cases.