Last month, the Delaware Court of Chancery issued an opinion in Kerbawy v. McDonnell that addressed how holders of a majority of a company’s shares should take control of a board of directors by executing written consents. The case involved interpretation of Section 228 of the Delaware General Corporation Law, which provides that, unless otherwise set forth in a corporation’s certificate of incorporation, shareholders may act by written consent upon any action that may be taken at any annual or special meeting of shareholders, “without a meeting, without prior notice and without a vote.”
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Kerbawy offers several important reminders and other interesting takeaways relating to Section 228, including:
- Written consents delivered pursuant to Section 228 are required to bear the date of signature of each shareholder who signs the consent.
- Action by written consent is effective under the statute only if a number of consents sufficient to take the action are delivered to the corporation within sixty days of the earliest dated consent.
- A duty of disclosure does not generally apply to the solicitation of Board consents by non-controlling shareholders. Any duty of disclosure would derive solely from the fiduciary duties of care and loyalty.
- Generally, non-controlling shareholders do not owe any fiduciary duties, even if they are attempting to become directors, and, just as Delaware law does not require directors-to-be to comply with their fiduciary duties, former directors owe no fiduciary duties.
- If a majority of shareholder consents were procured at least in part by materially misleading disclosures, that could support such a finding of inequity that would warrant a court’s intervention. A statement, omission or partial disclosure is considered material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote,” or if, “under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder[,] . . . [or] would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”
- Incumbent directors that have been purportedly removed by consent of a majority of shareholders, “have a heavy burden in asking the Court potentially to disenfranchise a majority of the stockholders, and a breach of the duty of disclosure . . . only supports that result if it ‘inequitably taints the electoral process.'”
- Disclosure by a fiduciary of confidential information of the corporation in connection with a consent solicitation may have been actionable conduct, particularly in the absence of a confidentiality agreement intended to protect the information. However, a plaintiff would have to demonstrate harm to persuade a court to set aside written consents on an equitable basis.
- Section 228 permits shareholders to act independently of the Board and without prior notice or discussion. In other words, they can engage in a “secret compilation of consents” and surprise the Board if they so choose.
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