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Limits on Postponing a Shareholder Meeting: Steel Partners v. Point Blank Solutions

By J. Robert Brown

We have on this Blog occasionally dealt with Delaware cases that seemed to give inordinate discretion to management to manipulate the voting process.  Thus, Delaware courts have upheld the right of management to delay a meeting more or less because they know from the proxy tabulator that they are going to lose the vote. 

The discretion, however, apparently has limits.  In Steel Partners v. Point Blank Solutions, the Delaware Chancery Court dealt with a company that had not held an annual meeting for three years.  The complaint alleged that six of the seven directors had never been elected by shareholders but had been appointed by the board.  The Company scheduled a meeting for April 22 but after Steel Partners, a shareholder holding more than 8% of the shares, filed proxy materials in order to elect five directors, the Company opted to delay the meeting until August. 19.  Steel Partners filed suit under Section 211 (chancery court has jurisdiction to "summarily order a meeting" whenever a period of 13 months has elapsed since the last meeting) and requested an order requiring the Company to "promptly hold its annual meeting" and "designating a time and place" for the meeting. 

The parties came to agreement and the court issued an order providing that:  "Unless otherwise approved by this Court, for good cause shown and on notice to plaintiff, defendant Point Blank . . . shall hold its annual meeting of stockholders no later than August 19, 2008."   The stipulation, therefore, removed all discretion from the board and conditioned any change upon court approval.  Point Blank moved to delay the meeting for 60 days, arguing that it needed more time.  According to the court, it based the request on the following:

• the Company points to its concern that Steel Partners and the former CEO of the Company, David H. Brooks ("Brooks"), together control approximately 40% of the vote. Their combined vote, Point Blank contends, is enough to warrant the requested postponement. First, as to Steel Partners, a potential buyer of the Company that has nominated a slate of directors, Point Blank argues that, if elected, these directors will be conflicted and will seek to purchase the Company for Steel Partners' own investors for the lowest possible price. Second, the Company insists, Brooks has a personal interest adverse to the majority of the Company's stockholders because Brooks is currently litigating his claim to advancement fees against the Company, which has asserted the defense of unclean hands, and is also defending a breach of contract action that the Company filed against him in federal court in New York. In addition, Point Blank notes that Brooks has voting control over 22% of the 29% of the Company's stock he owns with his former wife. Though his former wife has beneficial economic ownership of these shares, Brooks has voting control, highlighting the disparity of Brook's interests as compared to those of other stockholders.

In resolving the matter, the Chancery Court did not determine whether the appropriate standard was "good cause" or "extraordinary circumstances" since neither was met. 

• Though I do not fail to recognize the influence that Steel Partners and Brooks may have on the outcome of a shareholder vote, the Company's proper recourse under the circumstances is to communicate its concerns directly to its shareholders. Should the Company wish to communicate its concerns with the shareholders to inform them, for example, of the perceived hazards that may befall the Company if the Steel Partners' slate of directors is elected or, for another example, of the report of the findings of the Institutional Shareholder Services, Inc., then the Company certainly may make any and all communications it determines are necessary and appropriate (and in fact appears to already be doing so). After evaluating all the information made available to them, the stockholders will then decide to stay the course with the Company's current management or else elect a new slate of directors.

The case is a difficult one to characterize.  It suggests some limit on a board's ability to reschedule a meeting.  The Chancery Court rejected the board's argument that it needed more time to consider "strategic options."  As such, the opinion arguably conflicted with the decision in Inter-Tel that a meeting could be postponed where the board argued that a particular acquisition was in the best interests of shareholders. 

But this is Delaware.  More likely, the case will have limited impact, standing merely for the proposition that when you don't hold an annual meeting for three years and then condition any postponement on judicial approval, you have less discretion to change the meeting date.

Oh, and by the way, the outcome of the vote?  As the Company predicted, all of the plaintiffs candidates won, receiving approximately 65% of the vote. 

Primary materials (although not the opinion, unfortunately) are posted on the DU Corporate Governance web site. 

Full post as published by The Race to the Bottom on August 26, 2008 (boomark / email).