Delaware Court of Chancery Invalidates Board’s Application of a Voting Limitation Pursuant to Company Charter

In the decision of Deann M. Totta, et al. v. CCSB Money Corp., C.A. No. 2021-0173-KSJM (Del. Ch. May possibly 31, 2022), the Court of Chancery held that the board of directors of Defendant, CCSB Monetary Corp. (“CCSB”), misapplied a vote aggregation provision in the corporation’s charter that disenfranchised the shareholder Plaintiffs and, additionally, was unenforceable less than equitable ideas.

CCSB’s constitution includes a provision which prohibits shareholders from training far more than 10% of the company’s voting electricity in an election (the “Voting Limitation”).  Experiencing a proxy contest from a single of the named Plaintiffs, Park G.P., Inc., the administrators aggregated Plaintiffs’ shares on the grounds that they ended up acting in live performance and, pursuant to the Voting Limitation, did not depend Plaintiffs’ votes over the 10% restrict.  This instruction brought about Plaintiffs’ nominees to shed the Board election, and Plaintiffs accordingly filed fit underneath 8 Del. C. § 225 to invalidate the Board’s instruction.

[For a general discussion of Section 225 of the DGCL, which permits challenges to an election of directors of a Delaware corporation, click here.]

As a threshold make any difference, CCSB argued that the Court docket should apply the highly deferential company judgment rule as its typical of overview, largely primarily based on a provision in its constitution that states any application by the board of the Voting Limitation “‘shall be conclusive and binding upon the Corporation and its stockholders.’”  (Mem. Op. at 4-5.)  Chancellor McCormick denied this reasoning on the grounds that a corporation can not change its directors’ fundamental fiduciary obligations unless this kind of alteration has been approved by statute—which it has not.  Therefore, the Courtroom applied the nicely-proven standard of assessment beneath Delaware company regulation that needs the Board’s steps to be analyzed twice—first, to identify irrespective of whether the action was lawfully compliant and, 2nd, to establish whether the motion was equitable.

Making use of this two-move examination, the Court docket of Chancery observed that the Voting Limitation does provide a basis for the Board to exclude stockholder votes when performing in concert, but found that the Plaintiffs had not, in truth, acted in live performance.  A straightforward settlement that stockholders vote in the same way is inadequate to establish an motion in concert—there ought to be an agreement, arrangement or comprehending of the alignment, which was not current here.

Finally, the Court docket of Chancery also discovered that the Board’s vote instruction did not satisfy the equitable examination articulated under Blasius Industries, Inc. v. Atlas Corp.  In accordance to Chancellor McCormick, Defendant’s argument that it should safeguard its shareholders from Plaintiffs’ alleged effort and hard work to acquire management of the company assumed that the administrators understood improved than the shareholders, which is not a reputable motive to limit stockholder votes.  Hence, the Court of Chancery discovered that the Board’s work out of the Voting Limitation was both equally legally invalid and failed below Blasius’s equitable test.

Essential Takeaway: An application of a voting limitation will be assessed underneath the “twice-tested” regular of assessment to evaluate legality and equitability.  Administrators need to remember that the shareholders have a elementary suitable to exercising their voting power—a right that the Courtroom of Chancery will be hesitant to curtail without a powerful, legitimate explanation.

Carl D. Neff is a partner with the legislation company of FisherBroyles, LLP, and practices in Delaware.  You can arrive at Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.