Source: https://caselaw.findlaw.com/de-court-of-chancery/1128126.html
Timestamp: 2019-04-19 11:24:55+00:00

Document:
SEIDMAN AND ASSOCIATES, L.L.C. and Lawrence B. Seidman, Plaintiffs, v. G.A. FINANCIAL, INC. and John M. Kish, Defendants.
Gregory P. Varallo,Richard P. Rollo, Richards, Layton & Finger, P.A., Wilmington, Delaware; Peter R. Bray, Bray, Chiocca & Miller, LLC, Parsippany, New Jersey, for the Plaintiffs. William M. Lafferty, Charles D. Reed, Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware; Jeffrey J. Bresch, Reed Smith, LLP, Pittsburgh, Pennsylvania, for the Defendants.
The plaintiffs in this case mounted a proxy contest to unseat the chairman of the board of directors of a publicly held Delaware corporation at its 2003 annual meeting. The outcome of the election was close, but the independent inspector of elections preliminarily reported that the insurgents' candidate lost by over 190,000 votes. In reaching that conclusion, the inspector disqualified two proxy cards submitted by a bank representing a total of 232,376 shares after concluding that those proxy cards represented an overvote of the bank's position. Although 203,800 of those shares were voted in favor of the insurgent, 29,400 were voted in favor of the incumbent. Thus, the exclusion of those cards did not affect the outcome of the election.
In this lawsuit, the insurgents argue that the inspector of elections improperly defined the “overvote” at issue by excluding all of the shares covered by two other “omnibus” proxies given by the same bank in favor of two other banks holding shares as fiduciaries for several company-sponsored employee compensation plans. According to the insurgents, the inspector of elections should have defined the “overvote” to include all of the proxies given by the first bank because (they say) the inspector was never able to obtain adequate reliable information to form a judgment as to the validity of any of the proxies. Thus, the insurgents argue for the exclusion of all 859,430 shares voted either by the first bank or pursuant to the authority transferred in its omnibus proxies. If all of those votes are disregarded, the insurgent nominee will have gained a plurality of the votes cast and will have been elected.
The issues presented are whether the inspector of elections properly discharged its duties in defining the “overvote” in a way that disqualified some but not all of the proxy cards given by the first bank. If the answer to that question is “no,” the court must then determine whether it may now take note of the facts adduced in discovery in this matter to validate the proxy cards reflecting the votes of the employee participants in those company-sponsored plans since the record shows that those proxy cards voted exactly the right number of shares.
Defendant G.A. Financial, Inc. (“GAF”) is a Delaware corporation with its principal place of business in Pittsburgh, Pennsylvania. Defendant John Kish is the Chief Executive Officer and Chairman of the Board of Directors of GAF. Shares of GAF common stock are registered under the Securities and Exchange Act of 1934 and are listed for trading on the American Stock Exchange. On or about January 3, 2003, GAF issued a press release announcing that its 2003 Annual Meeting of shareholders would take place on April 23, 2003 (the “Annual Meeting”). The record date for the Annual Meeting was March 10, 2003 (the “Record Date”). In connection with the call of the Annual Meeting, the GAF board of directors nominated Kish and another incumbent director, Hess, for re-election as directors to three-year terms.
In addition, GAF retained Georgesen Shareholder Communications, Inc. and the Committee retained D.F. King & Co., Inc. to serve as their respective proxy solicitors.
In conjunction with the issuance of the Preliminary Tabulation, CES issued an Overvote Report disclosing a voting discrepancy attributable to The Bank of New York (“BONY”) position. According to that report, CES preliminarily determined that two proxies given by BONY to Automated Data Processing (“ADP”) (which acts as agent for many banks and brokers in connection with proxy solicitations), attempting to vote 233,376 shares, overvoted the BONY position by 824 shares. Because CES had been unable to resolve the overvote issue in its communications with ADP and BONY, it invalidated those two proxies.
When it issued its Overvote Report, CES knew the following information about the source of the overvote.
• Cede & Co., the nominee name of the Depository Trust Company (“DTC”), was the record holder of 4,422,673 shares of GAF common stock as of the Record Date.
• In connection with the Annual Meeting, Cede issued an “omnibus” proxy in favor of BONY for 859,647 shares of GAF common stock, reflecting BONY's entire Record Date position at DTC. This proxy is dated as of the Record Date. This “omnibus” proxy was executed for the purpose of granting to BONY voting power over that number of shares.
• CES held two other proxies that bore on the issue. First was a proxy given by First Bankers Trust voting only 625,554 of the shares covered by the omnibus proxy given by BONY in its favor. The second was a proxy given by First Bank of Clayton (Missouri) voting all of the 1,500 shares covered by the omnibus proxy given by BONY in its favor.
Before issuing its Overvote Report, CES took certain measures to resolve the overvote. On April 23, 2003, CES contacted the proxy clerk at ADP and explained that there was an overvote. That clerk stated that he would contact BONY and get back to CES. On April 28, 2003, the proxy clerk at ADP reported that BONY was unable to ascertain the reason or reasons for the overvote and suggested that CES contact BONY directly. CES contacted a representative of BONY the same day. According to the Stipulated Record, the BONY representative “acknowledged the issuance of” the two omnibus proxies in favor of the two banks and reported that “she had checked her system, the votes looked fine, she could not see any obvious overvote and would have to further research the issue.” 6 CES informed her that “a review and challenge session was scheduled for May 2, 2003 and she was asked to contact CES if she discovered anything with respect to the overvote.” 7 This BONY representative did not further contact CES.
CES then certified the results of the election, reporting that Seidman lost by 190,276 votes. As mentioned earlier, the results of the election are not changed by including the 233,376 share proxies, as Seidman gains fewer net votes on those cards than necessary to overcome the vote differential. However, if all of the BONY shares are disqualified, the result is different, In that case, Seidman would win the contest by 347,826 votes.
As a result of discovery taken in this action, the parties learned that the proxy card actually given by First Bankers Trust to ADP (625,554) voted exactly the right number of shares. In other words, the omnibus proxy BONY gave in favor of First Bankers Trust for 625,771 shares overstated the latter bank's Record Date position by 217 shares. Discovery also established that the omnibus proxy for 1,500 shares given by BONY in favor of First Bank of Clayton (Missouri) was correct. There is nothing in the Stipulated Record that explains the remaining overvote found in the two proxy cards BONY gave to ADP voting the 233,376 shares.
• CES was actually mistaken in concluding that First Bankers Trust had undervoted its position. Instead, the error lay in the omnibus proxy BONY gave in favor of First Bankers Trust.
• BONY's overstatement of First Bankers Trust's position by 217 shares in that proxy did not fully account for the overvote of 824 shares identified by CES.
• Even if CES had learned the correct information regarding the First Bankers Trust position as of the Record Date, CES would not have been able to resolve the remaining overvote on the two proxies BONY gave to ADP voting 233,376 shares.
The first question presented on the record in this case is whether CES had a reasonable basis in fact upon which to conclude that the First Bankers Trust and First Bank of Clayton proxies were not part of the overvote. The court is satisfied that the information reported by BONY to CES provided a reasonable basis for CES's decision to limit the “overvote” issue to the 233,376 shares BONY attempted to vote. Because CES was not able to obtain reliable information to resolve that overvote, it properly excluded the two proxy cards reflecting those votes.
CES specifically inquired of BONY about both of the omnibus proxies given by BONY in favor of the other two banks. In both cases, according to the Stipulated Record, BONY specifically “acknowledged the issuance of” those omnibus proxies and reported that, after a check of BONY's system, “the votes looked fine.” In the case of omnibus proxies, this is the sort of information that CES could ordinarily be expected to regard as reliable. Unlike a proxy card that purports to “vote” shares, an omnibus proxy merely creates a paper record of a transfer of voting power to another bank or broker down the chain of ownership or title.19 The single piece of relevant information was the number of shares held by that other bank or broker as of the Record Date. That information should have been readily obtainable by the BONY proxy clerk from a review of BONY's internal records. Thus, it was reasonable of CES to rely upon information from BONY verifying the accuracy of the omnibus proxies.
Nevertheless, the Delaware Supreme Court recognized that, in the case of plan participants who would be disenfranchised by a voting error committed by the plan administrator or some similar fiduciary, an exception to the general rule of law is appropriate. “Where stockholders are forced, by statute, to give up [control over the registration of shares], we conclude that they should not bear the risk of the trustee's mistake.” 25 Thus, the Supreme Court affirmed a decision in a Section 225 action that gave effect to the apparently irreconcilable proxies in a manner designed to give effect to the actual intent of the stockholders discovered during the course of the litigation.
For all of the foregoing reasons, judgment is entered in favor of the defendants, and the complaint is dismissed with prejudice. IT IS SO ORDERED.
1. The parties presented this matter to the court for its final decision on the basis of the Stipulated Record for § 225 Challenge (“Stipulated Record”). All of the facts discussed in this opinion are taken from that stipulation.
2. Because the Committee was only seeking one seat (of the two up for election) on the GAF Board of Directors, its proxy cards also included Hess. Hess's re-election is not challenged in this action.
3. Stipulated Record, Ex. B at 2.
4. Stipulated Record at para. 34 and 43.
5. Id at para. 49, 50 and 60.
7. Id. at para. 42.
8. Id. at para. 63.
9. Preston v. Allison, 650 A.2d 646, 649 (Del.1994).
10. Id. (quoting Centaur Partners v. National Intergroup, Inc., 582 A.2d 923, 927 (1990)); Concord Fin. Group, Inc. v. Tri-State Motor Transit Co., 567 A.2d 1, 5 (Del.Ch.1989) (“Delaware courts have vigilantly guarded against stockholder disenfranchisement in contested corporate elections”).
11. Concord Fin. Group, Inc., 567 A.2d at 6.
13. 8 Del. C. § 231(d) (emphasis added).
14. See Official Synopsis, 67 Del. Laws Ch. 376, § 9 (1990) (emphasis added).
16. R. Balotti & J. Finkelstein, 2 The Delaware Law of Corporations & Business Organizations § 7.33 n. 415 (3d ed. 1998 & Supp. 2003).
17. R. Balotti, J. Finkelstein, and G. Williams, Meetings of Stockholders, § 10.3. at 10-9 to 10-10 (1987 & Supp. 2003) (footnotes omitted).
18. D. Drexler, L. Black & A. Sparks, Delaware Corporation Law & Practice § 24.05 at 24-19 (1998 & Supp. 2002) (emphasis added).
19. See generally, R. Thomas and C. Dixon, Aranow & Einhorn on Proxy Contests for Corporate Control § 15.05 at 15-35.
20. Id. § 8.03(D) at 8-57 to 8-59.
21. Preston, 650 A.2d at 649.
24. Id. at 649. Perhaps because the inspector of elections in Preston treated the problem as one involving irreconcilable proxy cards, not an overvote, the opinion does not discuss the then recent amendments to Section 231(d) discussed above. It should be noted, however, that the same result could have been reached by reference to that statute.
26. Apparently, First Bank of Clayton acted as plan trustee in a much smaller plan holding only 1,500 shares.
27. The court notes, but rejects, Seidman and Associates's efforts to distinguish the decision in Preston. In particular, the court is persuaded that it makes no difference that this case involves an overvote and Preston did not. Nor should it matter that the error in Preston was actually committed by the plan fiduciary, whereas here the error, if any, was committed by BONY either by overstating First Bankers Trust's Record Date position in the omnibus proxy or in voting the 233,376 shares. The rationale of Preston is simply not so limited.

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