On January 15, 2008, the Court of Chancery issued an important decision in Portnoy v. Cryo-Cell Int’l., Inc., et al., C.A. No. 3142-VCS, in which Vice Chancellor Strine found that the “Management Slate” (including Cryo-Cell’s CEO and Cryo-Cell’s directors, all of whom were seeking election), breached their fiduciary duties by engaging in inequitable conduct in the course of a hard-fought proxy fight for control of Cryo-Cell. Specifically, the Court found that:
1. Cryo-Cell’s CEO, with at least the implied authority of the Cryo-Cell board, promised a dissident stockholder a second seat on the Cryo-Cell board (a seat not subject to election by the stockholders) if the dissident stockholder and his affiliates would, in the days leading up to the meeting, buy additional shares from stockholders that either had not voted or had voted for the insurgent’s slate—all without disclosing this arrangement to the Cryo-Cell stockholders.
2. Cryo-Cell, through its CEO, engaged in impermissible vote-buying by using corporate assets to coerce a large stockholder (“LS”) to vote for the Management Slate. Cryo-Cell was a 38% owner of LS, and the two companies were engaged in ongoing business relationships. When LS would not commit its vote to the Management Slate in the days leading up to the meeting, Cryo-Cell’s CEO was found to have coerced that vote by threatening LS with the loss, or at least a “cooling,” of a strategic relationship, and by inducing it through the lifting of a restrictive legend on the Cryo-Cell shares owned by LS (a request LS had repeatedly made over the course of several years).
3. Cryo-Cell’s CEO improperly prolonged the Annual Meeting by including unscheduled presentations and the ordering of a nearly three-hour lunch break solely for the purpose of allowing the 11th-hour completion of certain aspects of the Management Slate’s campaign to entrench themselves.
As a remedy for such conduct, the Court ordered that Cryo-Cell promptly convene a special meeting, presided over by a Court-appointed special master, and hold an election for directors to the Cryo-Cell board. Moreover, the Court ordered that the costs of holding the special meeting, including the costs of any campaign for re-election, must be borne by the members of the Management Slate.
This decision is significant for its discussion of the standards by which management’s conduct during a contest for election will be judged, and for its relatively rare finding that an incumbent slate had engaged in impermissible vote-buying. A team of Ashby & Geddes lawyers in the firm’s Corporate Litigation and Counseling practice group (Richard D. Heins, Philip Trainer, Jr., Carolyn S. Hake, Richard L. Renck, and Tiffany G. Lydon) represented Mr. Portnoy in this litigation. (Read opinion here.)