Corporate Governance

Portnoy v. Cryo-Cell: Vote Buying, Manipulation of the Voting Process, and the Race to the Bottom (Part 4)

By J. Robert Brown

An odd portion of the opinion concerns the conduct of the CEO at the meeting.

After calling one of Plaintiff's arguments at the meeting "carp[ing]", the court found that the CEO had improperly delayed completion of the meeting. She did so in two ways. First, she had officers speak on innocuous topics ("unscheduled bloviation" as the opinion described), something the court labeled filibustering.  And, in discussing an assortment of topics, one of them was not the "already prepared" quarterly report that contained "disappointing financial results."

Second, she announced a break around 2:00 pm, ostensibly for lunch. In fact, the real reason was that she was apparently "waiting for confirmation that two large blockholders' votes had been switched before having the vote counted." Rather than give this reason, she could have told shareholders that "she was keeping the polls open to a time certain so that the parties could continue their contest for votes."

Finally, on a number of occasions, she was asked to tally the votes but announced that the request was out of order, a response the court described as "jejune." The Vice Chancellor described the response this way: "It sounds to the court like something out of Robert's Rules of Order that Walton had heard invoked by someone trying to fake their way through a local town council meeting or had seen when watching a congressional debate on C-Span."

The court found the behavior inequitable. " If an electoral contestant assumes the role of presiding over the meeting, she has an obligation to do so fairly." Her inequitable behavior?  "She stalled so that her side could win the game, knowing that if the game ended when it was scheduled to end, her side would lose. Then she was dishonest about the reasons for delay."

The opinion suggests that the CEO's mistake was inaccurately stating that the reason for the delay in the meeting was lunch, rather than to verify how certain shareholders voted.  Any number of comments could be ventured about the conclusion, most notably that the court transformed the manipulation of the meeting into a simple disclosure violation. 

But even more interesting was the contradiction in the analysis with a decision by the same judge on the same issue, where management delayed the meeting without fully disclosing the reasons.  In Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786  (Del. Ch. 2008), the board was losing the vote and, as a result, postponed the meeting.  It did not, however, tell shareholders that this was one of the reasons for the delay.  See Id. at 820 ("Although I am troubled by the coy nature of the press release rescheduling the meeting, I am not persuaded that the plaintiff has demonstrated a reasonable probability of success as to a claim that the Special Committee failed to disclose material facts reasonable to an Inter-Tel stockholder voting on the Merger at the rescheduled meeting."). 

We will, in the next few posts, turn to the remedy in this case. 

Full post as published by The Race to the Bottom on February 12, 2008 (boomark / email).