DealLawyers.com Blog

Here’s news from Steven Haas of Hunton & Williams:

On December 20th, the Court of Chancery issued a temporary restraining order in Sherwood v. Chan barring a company from holding its annual stockholders meeting in Beijing later that day. The court found that the plaintiff/dissident had sufficiently alleged colorable disclosure claims and irreparable harm with respect to the company’s proxy materials and the dissident’s proxy contest.

By way of background, the dissident, who was an incumbent director, initially had been included in management’s slate for reelection as a director. After the company mailed its definitive proxy statement and approximately 12 days before the stockholders meeting, the board removed the dissident from its slate. The company cited, among other things, the dissident’s alleged disruptive behavior and certain trading activity that had been reported to the SEC. In response, the dissident initiated a proxy contest but was unable to solicit proxies under Rule 14a-6 until after the date scheduled for the annual meeting. The company also argued that the dissident did not comply with the company’s advance notice bylaw.

Here are a few key points from the court’s decision granting the dissident’s request for a TRO:

– The court found that the plaintiff had sufficiently alleged two colorable disclosure claims for purposes of obtaining a TRO. The first related to whether the dissident was removed from management’s slate due to his alleged disruptive behavior or over “sincere policy disputes.” “A reasonable shareholder,” the court stated, “likely would perceive a material difference between, on the one hand, an unscrupulous, stubborn, and belligerent director as implied by the Proxy Supplement and, on the other hand, a zealous advocate of a policy position who may go to tactless extremes on occasion.” The second claim related to the company’s description of the status of an SEC review into the dissident’s stock trades, which disclosure may have been misleading in light of the dissident’s claim that the SEC had informed him it was not pursuing the matter.

– The court found that there would be irreparable harm even if the dissident was unable to wage a proxy contest. The company argued that, in the absence of a proxy contest, there was no irreparable harm because directors were elected under a plurality standard. Thus, according to the company, the alleged disclosure violations would not affect the legal outcome of the election. The court disagreed on the issue of irreparable harm, finding that the ability to “withhold” a vote was an important decision that should be fully and fairly informed.

– The court also found the defendants’ argument that the company’s advance notice bylaw precluded the dissident was waging a proxy contest to be “less than compelling.” The advance notice bylaw required the dissident to, among other things, provide notice of his intent to nominate a person for election as director no later than the close of business on the tenth day after the meeting date was announced. Although the dissident failed to give notice within the ten-day period following the initial announcement of the annual meeting date, the company had postponed the annual meeting.

The company argued that compliance with the advance notice requirement was based on the announcement of the initial meeting date, while the dissident argued that he only had to provide notice within ten days after the announcement of the meeting as postponed. While not providing any definitive ruling, the court found a “fair possibility that Plaintiffs can nominate an opposing slate.” The court also noted that the advance notice bylaw did not contain a clause found in other companies’ bylaws expressly stating that an adjournment or postponement does not commence a new time period for providing notice.

– The court emphasized that its role was not to judge which candidate was preferable over another, which Delaware law leaves to the “shareholder franchise.” Rather, the court’s role was to provide stockholders with “a fair opportunity to vote their preference on the future direction of the Company.”