Delaware Court of Chancery Invalidates Consent Due to Inadequate Disclosures

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The Delaware Court of Chancery recently invalidated a written consent of a Delaware pharmaceutical corporation due to inadequate disclosures to stockholders. 

A board member (Plaintiff) of CardioVascular BioTherapeutics, Inc. asked the court to ratify a board appointed through a written consent action led by one of Cardio’s largest creditors, Calvin Wallen. Wallen negotiated a deal with a Cardio board member and stockholder’s bankruptcy trustee, whereby Wallen would purchase one million shares from the bankruptcy estate in exchange for money and a director seat on the Cardio board for the trustee’s designee. However, proxy solicitation materials failed to disclose the negotiations or the details of the stock purchase agreement, including the granting of a director seat.  

The court, emphasizing the importance of stockholders’ right to vote and choose directors, denied Plaintiff’s request to ratify the consent. The court found that the directors owed a duty of candor to the stockholders, and the promise to grant a board seat to the trustee’s designee should have been disclosed to stockholders either in the initial solicitation materials or in a supplement. The court then ordered an annual election for Cardio’s board.   

Flaa v. Montano, et al., No. 9146-VCG (Del. Ch. May 29, 2014).

 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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