August 10, 2022
In a recent bench ruling, the Delaware Court of Chancery enjoined a corporation from holding its annual meeting because of a board-adopted bylaw amendment that reduced the quorum requirement from a majority to one-third of the outstanding shares. The plaintiffs alleged that, in the absence of the bylaw amendment, a majority of the stockholders acting in concert could prevent the establishment of a quorum at an upcoming annual meeting. With the amendment in effect, the board made it easier to convene a quorum and have its slate of nominees reelected under a plurality voting standard. Invoking the Blasius doctrine, the court found that the plaintiffs had a reasonable probability of success in proving that the defendant directors breached their fiduciary duties by lowering the quorum requirement to interfere with the stockholders’ voting rights without a “compelling justification.”
Bray v. Katz involved a proxy fight at UpHealth, Inc., which became a public company in 2021 through a de-SPAC transaction.1 Stockholders allegedly holding a majority of the company’s voting power had entered into a voting agreement allowing the plaintiff to vote their shares, but the dissidents failed to nominate a competing slate of directors by the deadline under the corporation’s advance notice bylaw. Therefore, the upcoming annual meeting was uncontested.
The board’s co-chair, who was aligned with the dissident stockholders, tried to call a special stockholders meeting to amend the advance notice bylaws and allow a competing slate of director nominees, but the board refused to schedule the special meeting. The board majority then amended the bylaws to reduce the quorum requirement for stockholders meetings from a majority to one-third of the outstanding shares. The plaintiffs argued that the quorum change frustrated the stockholders by making it easier for the board to convene the annual meeting and elect its nominees under a plurality vote. With a majority quorum requirement, the dissidents could block a quorum by refusing to attend the meeting (although the incumbent directors would continue to hold office as holdovers).
Co-Chairs Were Required to Jointly Call a Special Meeting
The first claim before the court was whether the co-chair of the board had validly called a special meeting of stockholders. He called the special meeting so that stockholders could vote to amend the advance notice bylaws so as to permit a competing slate of nominees at the 2022 annual meeting. The existing bylaws, however, provided that any special meeting shall be held at the time and place determined by the board, and the board majority refused to schedule a time for the special meeting.
Under the bylaws, special meetings of stockholders could be called “by the Chairman of the Board.” At this corporation, however, there were two “co-chairs” of the board. Vice Chancellor Will explained that whether reference in the bylaws to “the Chairman” meant “both co-chairs acting jointly or that each co-chair independently holds separate powers is not clear from the face of the bylaw” and that it was further unclear “what happens when the two co-chairs disagree.”2
The court found no evidence of prior conduct to shed light on what was contemplated, but the court did look to other case law where the court held that two 50/50 members of a limited liability company, each of whom was vested with managerial authority, could not override each other’s decisions where they were in disagreement.3 The court thus ruled that the plaintiffs did not have a reasonable likelihood of success in showing that either co-chair acting independently could call a special meeting.
Reduced Quorum Requirement was Likely an Invalid Attempt to Interfere With the Stockholder Franchise
The next issue was whether the board majority may have breached its fiduciary duties by amending the bylaws to lower the quorum requirement before the annual meeting. The court applied the Blasius test, which requires the board to show a compelling justification when it acts for the primary purpose of interfering with the stockholder franchise. Here, the court said the board majority was “changing the machinery of the election midstream . . . for the purpose of making it more difficult for the [majority] group of shareholders . . . from voting the incumbent slate down.”4 While the court did not question the board majority’s good faith, it nevertheless concluded that the plaintiffs had a reasonable probability of success in challenging the quorum change. As a result, the court entered a preliminary injunction against the meeting pending a trial on the matter. The litigation settled later.
What is particularly interesting in this case is that the court protected the dissident stockholders’ ability to block a quorum even though they did not have a proper alternative before the meeting. Here, the plaintiffs’ attempt to block a quorum and prevent the annual meeting from being convened was seemingly used as negotiating leverage to allow the dissidents to nominate a competing slate of directors after the advance notice deadline or to otherwise negotiate with the incumbents to change the board’s composition.
1 Bray v. Katz, C.A. No. 2022-0489-LWW, trans. ruling (Del. Ch. June 24, 2022).
2 Id. at 15.
3 Id. at 16-17 (citing Maitland v. International Registries, LLC, 2008 WL 2440521 (Del. Ch. June 6, 2008).
4 Id. at 23.
5 Steven M. Haas, Dilutive Stock Issuances, Deadlocks, and Delaware Law: Blasius Lives (Sept. 21, 2001).
6 See, e.g., Rosenbaum v. CytoDyn Inc., 2021 WL 4775140, at *2 (Del. Ch. Oct. 13, 2021) (concluding Blasius was inapplicable to a dispute over an advance notice bylaw).
7 See Coster v. UIP Companies, Inc., 2022 WL 1299127, at *12 (Del. Ch. May 2, 2022).