Law School Case Brief
Adlerstein v. Wertheimer - No. 19101, 2002 Del. Ch. LEXIS 13 (Ch. Jan. 25, 2002)
In the absence of a bylaw or other custom or regulation requiring that directors be given advance notice of items proposed for action at board meetings, there is no reason to believe that the failure to give such notice alone would ordinarily give rise to a claim of invalidity. Nevertheless, when a director either is the controlling stockholder or represents the controlling stockholder, Delaware law takes a different view of the matter where the decision to withhold advance notice is done for the purpose of preventing the controlling stockholder/director from exercising his or her contractual right to put a halt to the other directors' schemes.
Joseph Alderstein, CEO, loaned $500,000 to SpectruMedix Corporation, to avoid a liquidity crisis, in exchange for stock and a controlling voting interest. Alderstein was also a company board member. Subsequently, other board members claimed he was doing a bad job, and the company was insolvent. Some of the board members got together, without telling Alderstein, and made arrangements to bring in cash and hire a replacement for Alderstein. Although Alderstein was notified of the meeting, it was not until the meeting that he was informed of the other board members' proposal. Alderstein then filed an action, pursuant to the Delaware General Corporation Law, against the company and the board members. Alderstein sought a determination that the board meeting was not proper, and the actions taken at or in conjunction with the meeting were null and void.
Could the board members, without telling the Company’s CEO, make arrangements to bring in cash to the company and propose a replacement for the CEO, notwithstanding the fact that the CEO holds the controlling voting interest?
The court found that Alderstein was entitled to know of the plan ahead of time, as the plan destroyed his voting control over the company. The decision to keep Alderstein in the dark about the plan was significant because Alderstein possessed the contractual power to prevent the passage of the proposal by executing a written consent removing other members from the board. He may or may not have exercised the power had he been told about the plan in advance, but the court found he was fully entitled to the opportunity to do so. The court averred that the machinations of those individuals who deprived Alderstein of the opportunity were unfair and would not be countenanced by the court.
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