Monday, February 15, 2010

Kurtz v. Holbrook

The Delaware Court of Chancery recently issued a decision in the potentially important corporate-governance case of KURTZ v. HOLBROOK, on February 9.

You can read the decision here, or just accept the spoon-feeding below.

The case involved a contest for control of a microcap company named EMAK Worldwide. The Inspector of Elections had disallowed some 1 million voted shares held in their "street name" becaise they had not been accompanied by a DTC "universal proxy." Thus, the incumbents kept their control over EMAK. In the process, the incumbents also secured passage of a bylaw that reduced the size of the board, in effect pulling the chair out from under two of the incumbents who had been insufficiently responsive to the will of the one large preferred stockholder.

The dissidents sued, and the Court ruled in their favor on a range of issues.

1. Street name holders are shareholders of record for purposes of voting rights, even without a DTC "universal proxy"
2. The court invalidated the by-law amendment reducing the size of the board,
3. Any bylaw that sought to achieve the same effect by disqualifying a sitting director and this terminating his services will be invalid under Delaware law;
4. There was also a dispute in this case over the issue of "vote buying," a charge that the incumbents levelled against the dissidents. This is one form of a broader issue I've mentioned here before: how should courts respond as voting interests become severed from economic interests?

See the nice passage on pages 62-63 of the pdf. "'Vote buying' is an incendiary phrase...."

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