Corporate Governance

Portnoy v. Cryo-Cell: Vote Buying, Manipulation of the Voting Process, and the Race to the Bottom (Part 5)

By J. Robert Brown

We are discussing Portnoy v. Cryo-Cell, CA No. 3142-VCS, Del. Ch., Jan. 15, 2008, a 73 page tome.  Primary materials, including the case, can be found at the DU Corporate Governance web site.

One of the more interesting aspects of the opinion was the criticism heaped on Plaintiff for talking to a former employee.  The opinion examined an allegation that Plaintiff had unclean hands because he communicated with a whistleblower who shared concerns about mismanagement.  The whistleblower was a former employee subject to a confidentiality agreement.

Plaintiff, however, denied knowing there was any violation of the confidentiality agreement.  In addition he did not publicly disclose information received from the whistleblower, and defendants "failed to identify any confidential information [from the whistleblower] that was truly of a sensitive nature, much less that it was misused by" Plaintiff.  Moreover, the court noted that there "is as much reason to believe that the defendants were wielding the confidentiality agreement against [the whistleblower], not to keep her from revealing trade secrets or business strategies in a way that could aid Cryo-Cell's competitors, but to keep her from discussing improper conduct she observed while at Cryo-Cell."

Despite all of this, the court chose to lecture the Plaintiff about the interaction.

• I do not agree that [Plaintiff] comes to this court with hands dirty enough to deny him any relief. [Plaintiff's] conduct was far from ideal. Although one can understand his frustration at the board's refusal to undertake a disinterested review of the concerns [the employee] brought to his attention, [Plaintiff] responded by engaging in conversations that, I have little doubt, involved literal violations of [the whistleblower's] confidentiality agreement.  Had he behaved most scrupulously, [Plaintiff] could have pressed Cryo-Cell to take her concerns more seriously, by filing suit if necessary. Responding to one perceived wrong with a furtive course of contractually-questionable conduct is not laudable.

Although not finding unclear hands (an least hands unclear enough to preclude a remedy), the court would eventually make the Plaintiff pay a severe price for having communicated with the whistleblower.  In other words, the Delaware courts already impose extraordinary pleading burdens on shareholders seeking to get past the demand futility stage.  In the case of inspection rights, the courts have imposed obligations to produce credible evidence that mismanagement occurred.  Yet despite all of this, the Chancery Court has all but held that the imposition of a confidentiality agreement on a former employee will render them unavailable to a plaintiff.  

This case is less about uncovering the truth and more about chastising or limiting the ability of shareholders to ensure that management acts within its fiduciary obligations.    

Full post as published by The Race to the Bottom on February 12, 2008 (boomark / email).