Source: https://www.delawarelitigation.com/2015/08/articles/chancery-court-updates/chancery-determines-proper-board-members-in-section-225-action/
Timestamp: 2019-04-22 08:02:57+00:00

Document:
The Delaware Court of Chancery in Kerbawy v. McDonnell, C.A. No. 10769-VCP (Del. Ch. Aug. 18, 2015), addresses whether written consents of stockholders were effective in replacing the board members of the company involved. The case features the interplay between DGCL § 225 and § 228 in this corporate litigation over control of the company. DGCL § 228 is the provision that allows written consent of stockholders in lieu of a meeting and without prior notice to the minority stockholders. DGCL § 225 is the provision that allows for summary proceedings on an expedited basis to determine who the proper directors of a company are, for example, when there is a dispute about the results of an election or, as in this case, the validity of written consents of stockholders purporting to remove directors or elect directors, or both.
This case provides a playbook of sorts on how to take control of a board via written consents.
DGCL § 228(a), unless otherwise provided in the Certificate of Incorporation, allows stockholders to take action by written consent that might otherwise be taken at an annual or special meeting of stockholders. The written consent is effective “without a meeting, without prior notice and without a vote.” The written consents must be signed and bear the date of signature of each stockholder who signs the consent. Action by written consent is effective only if the required number of consents are delivered within 60 days of the earliest date of consent. See § 228(c).
The court observed that when a majority of stockholders have executed written consents to remove a board, the burden of proving that a director should not be removed or that an election is invalid, rests with the party challenging its validity. This is a heavy burden, especially in light of “the importance Delaware law places on protecting the stockholder franchise, which has been characterized as the idealogical underpinning upon which the legitimacy of the director’s managerial power rests.” See footnote 115.
The parties did not dispute the validity of the consents on technical grounds, but rather the argument was made that the court should set aside the otherwise valid consents on equitable grounds, based on allegations that: (1) the consents were based on misleading disclosures; (2) they were based on the misuse of confidential information; and (3) they were procured by tortious interference with an applicable agreement.
The court emphasized that a minority stockholder does not owe a fiduciary duty in general nor a duty of disclosure in particular.
Although directors of Delaware corporations have a duty to disclose fully and fairly all material information within the board’s control when seeking shareholder action, a party who is neither a director nor an officer, controlling stockholder or member of the control group has no such obligation. The court distinguished cases cited at footnote 118 where equitable relief was available for failure to disclose material facts in soliciting consents.
The court explained that: “Just as Delaware law does not require directors-to-be to comply with fiduciary duties, former directors owe no fiduciary duties.” See footnote 127 (discussing the theoretical basis of the duty of disclosure).
But, if the written consents were procured by misleading disclosures, as opposed to the absence of any required disclosure, that fact could support an equitable claim to set those consents aside. One takeaway that a skeptic might extract from this opinion is that consent solicitations might more easily be performed by a person without a fiduciary duty.
The court describes the limited scope of a § 225 action and the limited relief available in such an action in light of its status as an in rem proceeding. See footnotes 148 through 149.
The court found that the sharing of confidential information that the fiduciary should have not shared was not ideal, but no harm was shown from the sharing of that information such that it would impact the analysis to set aside the written consents on an equitable basis.
DGCL § 228 enables stockholders to act independently of the board, and allows them to act without prior notice, and without discussion. By definition, that allows for a “secret compilation of consents” which might otherwise surprise the board when the board members learn of it.
In sum, there was no breach of fiduciary duty, fraud or other wrongdoing that “so inequitably tainted the election” for the court to intervene.

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