Delaware Court Intervenes to Protect Shareholder Voting Rights

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn Client Alert by Mr. Gallardo, Brian Lutz, and Aaron Holmes. Gibson Dunn represents Mr. Sherwood in the Delaware litigation discussed below. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On December 20, 2011, Vice Chancellor Parsons of the Delaware Court of Chancery issued an opinion and entered a temporary restraining order enjoining ChinaCast Education Corporation from holding its annual meeting, scheduled for later that day, until January 10, 2012. See Sherwood, et al. v. Chan Tze Ngon, et al., No. 7106-VCP (Delaware Court of Chancery). The Court found that ChinaCast’s actions, having removed incumbent director Ned Sherwood from its slate of nominees less than two weeks before the scheduled annual meeting, did not “comport with the ‘scrupulous fairness’ required of corporate elections.” The opinion serves as an important reminder for companies that while Delaware law provides significant latitude to create processes intended to facilitate the orderly conduct of annual stockholder meetings and election contests, actions that improperly infringe upon the shareholder franchise will be viewed skeptically by Delaware courts.

As set forth in the Delaware opinion, Mr. Sherwood controls approximately 7% of ChinaCast and has been a member of the ChinaCast Board since 2009. On November 14, 2011, ChinaCast filed its definitive proxy statement for its 2011 annual meeting of stockholders and included Mr. Sherwood on the Company’s slate of directors. On December 8, 2011, the Board publicly disclosed that it had removed Mr. Sherwood from the Company’s slate and no longer recommended his reelection. The Board also announced the postponement of the 2011 annual meeting, previously scheduled for December 17, 2011, until December 21, 2011. Mr. Sherwood argued that his removal from the Company’s slate was retaliatory in nature and resulted from his opposition to various actions taken by other Board members, including a slowdown of the Company’s publicly announced share buyback program. As such, Mr. Sherwood argued that the Company’s proxy statement filed on December 8, which accused him of various improprieties, failed to disclose the true reason the Board removed him from its slate: to silence an independent voice.

On December 9, 2011, Mr. Sherwood announced his intention to solicit proxies in favor of the election of a slate of directors that he would nominate at the annual meeting. However, as a result of ChinaCast’s eleventh-hour removal of Mr. Sherwood from the Company’s slate and SEC filing requirements, without a delay of the annual meeting, Mr. Sherwood would have been precluded from soliciting proxies from ChinaCast’s stockholders in advance of the annual meeting. Mr. Sherwood therefore sought a temporary restraining order enjoining ChinaCast from going forward with the scheduled annual meeting so that ChinaCast stockholders could consider corrective disclosures to the Company’s proxy statement and Mr. Sherwood’s competing slate of nominees.

In its opinion, the Court concluded that Mr. Sherwood had met the requirements for the extraordinary relief of a temporary restraining order: the existence of at least a colorable disclosure claim, the existence of irreparable harm absent a temporary restraining order and that the balance of harms weighed in favor of injunctive relief.

In his opinion, Vice Chancellor Parsons reiterated the longstanding primacy of the stockholder franchise under Delaware law, holding that:

‘[t]he corporate election process, if it is to have any validity, must be conducted with scrupulous fairness and without any advantage being conferred or denied to any candidate or slate of candidates. In the interests of corporate democracy, those in charge of the election machinery of a corporation must be held to the highest standards in providing and conducting corporate elections. ‘Defendants have not simply expressed their disagreement with Sherwood’s positions or dissatisfaction with his personal behavior; they have also excluded him from merely running for election. [1]

The opinion serves as an important reminder that courts will scrupulously protect the voting rights of stockholders and that corporations and their advisors must carefully monitor and comply with advance notice bylaw requirements and other timing mechanisms that impact the ability of stockholders to run competing director slates at annual meetings.


[1] Sherwood, et al., at 38 (quoting Aprahamian v. HBO & Co., 531 A2d 1204, 1206-07 (Delaware Court of Chancery)).
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