August 11, 2022

Delaware Chancery Court Enjoins Annual Meeting

It’s not every day that the Delaware Chancery Court enjoins a company’s annual meeting of stockholders, but that’s what happened to UpHealth, a recently de-SPACed health care services company. According to this memo from Hunton Andrew Kurth’s Steve Haas, Vice Chancellor Will issued a bench ruling in late June enjoining the company’s annual meeting. Her decision was premised on her conclusion that the board’s likely breached its fiduciary duties by adopting a bylaw lowering the meeting’s quorum requirement.

The memo explains that stockholders allegedly holding a majority of the company’s voting power had entered into a voting agreement allowing a dissident to vote their shares, but the dissidents didn’t nominate a competing slate of directors before the deadline set by the company’s advance notice bylaw. The board’s co-chair, who was aligned with the dissident group, tried to have a special meeting called to repeal the bylaw, but that effort failed. In seeking to enjoin the annual meeting, the dissidents argued that argued that by lowering the quorum requirement from a majority to 1/3rd of the shares, the board prevented stockholders from blocking a quorum by refusing to attend the meeting, which in turn made it easier for the board to convene the meeting and elect its slate.

After rejecting the plaintiffs’ claims relating to the aborted effort to call a special meeting, the Court took up allegations that the board breached its fiduciary duties by enacting the quorum bylaw without a compelling justification. The Vice Chancellor held that the plaintiffs had a reasonable likelihood of success in proving these allegations and enjoined the meeting. This excerpt from the memo summarizes the Vice Chancellor’s reasoning:

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.” 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 ultimately settled, but the memo says that there are a number of key takeaways from it. These include the differing ways Delaware courts approach board actions taken “on a clear day” vs. those taken in the heat of a proxy contest & the importance those courts place on protecting stockholder voting rights – even if the exercise of those rights involving withholding shares from participating in a meeting. The memo also says that the decision is a reminder that Delaware’s demanding Blasius standard is alive and well when it comes to director actions that interfere with stockholder voting rights.

John Jenkins