Goggin v. Vermillion, Inc.,
C.A. No. 6465-VCN, 2011 Del. Ch. LEXIS 80 (June 3, 2011).
Key Issues Decided
The Court of Chancery denied a motion for preliminary
injunction that sought to prevent both: (i) an annual meeting of shareholders
within 6 months of the last annual meeting, because the terms of the staggered
board members would only be shortened by a few days; and (ii) the threatened
use of a poison pill to restrict stockholders' ability to communicate with one
another about stockholder proposals and director nominations, because the Court
found no such restriction.
Vermillion went public in the year 2000 and then filed
for bankruptcy in 2009. On December 3, 2010, after emerging from bankruptcy, it
held an annual meeting. In October 2010, in its proxy for the December 2010
annual meeting, Vermillion announced that shareholder proposals for the 2011
annual meeting (that had not yet been noticed), had to be submitted by January
1, 2011. The board has three staggered classes of directors with staggered
three-year terms. In February 2011, Vermillion announced
that its next annual meeting would be held on June 6, 2011.
The complaint in this case was filed on May 9, 2011.
Afterwards a motion for preliminary injunction was filed to enjoin the June 6
meeting. This thorough decision was issued a few short days prior to the
meeting-less than one month after the complaint was filed.
Short Overview of Legal Analysis
1) Timing of annual meeting. Goggin argued that
Delaware corporate law requires that annual meetings of companies with
staggered boards must be held "approximately one year apart", and by scheduling
their annual meeting within only 6 months of the last one, Vermillion allegedly
violated the Delaware General Corporation Law (DGCL).
The plaintiff's argument was rejected by the Court
because the only directors up for election had been elected on June 11, 2008,
and at worst would only have their terms shortened by a few days. What impact
might be suffered by other classes of directors at future annual meetings, was
not before the court and thus the court did not address that issue. See
Airgas, Inc. v. Air Products ad Chemicals, Inc., 8 A.2d 1182, 1194 (Del.
One way to read this aspect of the opinion is that the focus of the Court in
this type of litigation will not necessarily be the time period between annual
meetings but what impact a "less than annual" meeting would have on the term of
the staggered directors who are standing for election that year-based on when
they had been elected originally.
2. Advance notice bylaw. Goggin's next argument
was that the advance notice bylaw was unreasonably early and that the net
result was to entrench the board. Although advance notice requirements are
frequently upheld as valid in Delaware, the Court recognized that "if notice
requirements unduly restrict the stockholder franchisor or are applied
inequitably, they will be struck down". See footnotes 24 and 25.
In this case, however, the Court did not find a problem with the advance bylaw
for at least two reasons: First, the practice of the company had been to
require notice in January for their June meetings for many years prior to the
complaint by Goggin, so it was not a reaction or defensive measure in respone
to Goggin's pre-complaint criticism of the board. Second, the period of about
150 days for prior notice of proposals for director nominations is not an
unreasonable period of time.
3. Poison Pill. Goggin did not seek rescission of
the poison pill, but sought to "relax the operation" of the pill to avoid the
chilling impact Goggin claims that it had on communication and collaboration
among shareholders. The Court recognized the long history of Delaware law
validating poision pills (see footnote 29), but acknowledged that
"enhanced scrutiny has been applied universally when stockholders challenge a
board's use of a rights plan as a defensive device." See footnote 32.
There was no evidence on the limited record before the Court that the pill was
being used defensively against Goggin. In addition, even if the Court applied
enhanced scrutiny, it found that: (i) the disinterested and independent board
used the pill in a good faith effort to promote shareholder value, and (ii) the
pill did "not disenfranchise any stockholder in the sense of preventing them
from freely voting and does not prevent a stockholder from soliciting revocable
proxies." See footnoes 32 to 34.
The Court concluded that when examining the prerequisties
that need to be satisfied for a preliminary injunction (see footnote
10), no irreparable harm could be demonstrated and because there was no
likelihood of success on the merits, the balance of equities also tilted in
favor of the defendants. Althought the Court highlighted the settled Delaware
law that "corporate management subjects shareholders to irreparable harm by
denying them the right to vote their shares", it is also true that "the alleged
injury must be imminent and genuine." See footnotes 40 and 41. In
this matter, the Court found the alleged injury to be merely theoretical and
placed emphasis on the concession of Goggin's counsel at oral argument that
Goggin did not himself intend to nominate a director at the meeting so his
claims were hypothetical to the extent he argued that management was thwarting
efforts to nominate a new slate.
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