DealLawyers.com Blog

October 29, 2024

Del. Chancery Addresses Petition for Validation of Retroactive Record Date

In August, Vice Chancellor Lori Will issued a post-trial memorandum opinion in TS Falcon I, LLC v. Golden Mountain Financial Holdings Corp. (Del. Ch.; 8/24). The case involves a board’s decision to set a retroactive record date for an annual stockholder meeting, which the defendants sought to validate under Section 205 of the DCGL. This Sidley blog explains the circumstances of the retroactive record date, which was evidently not, based on the facts, accidental.

This act was undertaken after a 35% stockholder provided notice of its intent to exercise a contractual option to increase its stake from 35% to 44.9%.  The defendants did so to sidestep the plaintiff stockholder’s notice and, ultimately, to shortchange the plaintiff’s voting rights regarding board nominees.  This effort was effective: at the annual meeting, the defendants’ preferred nominees won the vote.

I suspect nearly every reader of this blog is aware that this is not permitted by the DGCL. But, just in case, the blog has this reminder:

Section 213 of the Delaware General Corporation Law addresses the fixing of dates for determination of stockholders of record for annual meetings.  Part (a) thereof states expressly that “the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors.”  In other words, if the board meets on June 15 and passes a resolution on that same day to set a record date, the record date cannot precede June 15.

Plaintiff, the disenfranchised stockholder, filed suit challenging the annual meeting and seeking invalidation of the election results and restoration of the prior directors. Defendants petitioned for validation under Section 205, asking the court to overlook the deliberate violation of Section 213(a).

The court weighed [the five non-exhaustive factors under Section 215(d)], and held that due to the lack of “ambiguity or potential uncertainty” in Section 213(a), “I cannot conclude that the Director Defendants set the record date believing that they were following Section 213(a)” because defendants “purposefully” violated the DGCL with the goal of “set[ting] a record date of one day before Falcon sent notice of its intent to exercise” its option.  The court also concluded that the remaining factors weighed against the defendants, including that granting validation of the record date would harm the plaintiff and other shareholders because “the record date was purposefully fixed in contravention of the DGCL to frustrate a large stockholder.”

Vice Chancellor Will stated that “Section 205 is not an equitable eraser for purposeful violations of clear statutes” and ordered that the prior directors be reinstated.

Meredith Ervine