In this letter opinion, the Delaware Court of Chancery denied defendants’ motion to dismiss an action brought pursuant to Section 225 of the Delaware General Corporation Law (the “DGCL”) to determine the composition of the board of directors of L.O.M. Medical International, Inc. (“L.O.M.” or the “Company”), ruling that an attempt to ratify, by stockholder written consent, a vote purportedly cast at an adjourned stockholders’ meeting was ineffective.
The dispute centered on whether certain defendants (the “Challenged Directors”) were validly elected to the Company’s board of directors. On April 17, 2012 the Company convened its first stockholders’ meeting in eleven years, which was to include a vote to elect the board of directors. L.O.M.’s bylaws included a provision permitting the company’s president to adjourn a meeting of its stockholders at “his or her sole discretion.” Pursuant to that authority, and before the directorship vote could be called, the Company’s president, Lionel Matthews, adjourned the meeting. Mr. Matthews thereafter departed with some number of stockholders.
Rather than departing the April 17, 2012 meeting, the Company’s counsel announced a recess. Following that recess, one of the Company’s directors purported to preside over a resumed meeting, at which the remaining stockholders voted to elect the Challenged Directors. Following their election, the Challenged Directors approved a stock option plan for 2012 and fired Matthews as L.O.M.’s president.
After the meeting, the Challenged Directors first sent the Company’s stockholders a letter informing them of the meeting results. Later, an unidentified entity solicited written consents from the stockholders. Those consents purported, among other things, to seek stockholder ratification of the April 17 director election. Specifically, in a “Whereas” clause, the consents recited “the shareholder is delivering this written consent to (a) confirm and ratify the election of [the Challenged Directors] and (b) ratify the Corporation’s 2012 Stock Option Plan.” In a “Resolved” clause, the consents stated “the Shareholder hereby approves and authorizes the election of [the Challenged Directors] as directors of the Corporation and ratifies the Corporation’s 2012 Stock Option Plan.” Defendants asserted that, through these consents, a majority of the voting power of the Company’s stockholders ratified the purported election of the Challenged Directors.
Plaintiff brought this action to challenge the election of the Challenged Directors. Defendants moved to dismiss, arguing that Plaintiffs failed to state a claim under Section 225 because the written consent had validly ratified the election of the Challenged Directors. In connection with their motion, Defendants offered an affidavit from one of the Challenged Directors. Plaintiffs argued, and the Court agreed, that consideration of the affidavit would convert Defendants’ motion to dismiss into one for summary judgment, and would require that the Court grant Plaintiffs an opportunity to take discovery. The Court declined to proceed in such a manner, however, in order to ensure an expedited resolution of this summary proceeding.
The Court first concluded that the consents themselves could not be considered “votes” for a slate of directors. The Court stated that, under Section 211(b) of the DGCL, stockholders may only elect directors by written consent in lieu of an annual meeting if such consent was unanimous or if “all of the directorships to which directors could be elected at an annual meeting held at the effective time of such action are vacant and are filled by such action.” The Court therefore concluded that, in order for a non-unanimous written consent to operate in lieu of an annual meeting, the consent must first remove all sitting directors and then fill the resulting vacancies. The record demonstrated both that the consent was not unanimous and that all of the directorships to which directors could have been elected at the April 17, 2012 meeting were not vacant. The consents themselves, the Court concluded, could therefore not have operated to elect the Challenged Directors. In addition, the Court noted that the consent could not operate to ratify the purported election of directors and cited the holding of Gantler v. Stephens, 965 A.2d 695, 713 (Del. 2009) for the proposition that the doctrine of ratification cannot apply to a vote, such as a vote to elect directors, for which “shareholder approval is statutorily required.”
The Court determined, therefore, that to grant Defendants’ motion to dismiss, it would have to find that the consents operated to ratify a board action that would in some way dispose of Plaintiffs’ claims. The Court was, however, unable to reach such a conclusion because no such board action had been taken. Having concluded that the consents could not have ratified the April 17 stockholder vote, and having also found that the Company’s board had taken no relevant action that the consents could have ratified, the Court denied Defendants’ motion to dismiss.
The Court expressed sympathy for Defendants whose argument, the Court recognized, was at heart that a majority of the Company’s stockholders had, according to Defendants, expressed their will to replace the incumbent board. Although it recognized that the consents had been ineffective, the Court suggested that defendants had other avenues available under the DGCL to reach their objectives. Specifically, Defendants could pursue the instant litigation or seek a new stockholders’ meeting under supervision of the Court pursuant to Section 225(a) of the DGCL.
The full opinion is available here.