Corporate Governance

Portnoy v. Cryo-Cell: Vote Buying, Manipulation of the Voting Process, and the Race to the Bottom -- The Last Word

By J. Robert Brown

We just completed a five part series on Portnoy v. Cryo-Cell.  This was a case where management learned it was losing a reelection bid to dissident shareholders and pulled out the stops to defeat the dissidents, encouraging allies to buy up dissident votes, offering board seats to supportors, and filibustering their own meeting to make sure certain shares were voted properly.  While the court ordered a new election, the Plaintiff did not get his litigation costs or proxy solicitation costs reimbursed or get any positions on the board.  As a result of the remedy, he was effectively required to incur yet another round of proxy soclicitation costs. 

This case can be compared with Inter-Tel v. Mercier, another case where managment discovered that it was losing the vote.  We have commented on that case here.  Aware that it was losing, management canceled the meeting, changed the record date thereby allowing arbs and other short term investors to vote, and ultimately won.

Both cases illustrate just how much shareholdres are up against when they challenge management in Delaware.  They must pay their own costs.  They have to confront the problems of collective action.  Yet even when they are winning, management can cancel the meeting or cut deals with shareholders to purchase just enough dissident shareholder votes.  In Inter-Tel, where shareholders were voting on a merger, the Chancery Court justified the behavior because management believed it was in the best interests of shareholders to approve the transaction.  In Cryo-Cell, where management bargained away seats on the board to win the election, the Chancery Court justified the behavior because management believed it was in the best interests of shareholders to reelect management. 

In other words, when management knows it is losing, it can take extreme steps to prevent that from occurring and the courts (at least VC Strine) will defer to management's judgment.   Is there a better set of cases for increased federal oversight of the shareholder voting process? 

Full post as published by The Race to the Bottom on February 14, 2008 (boomark / email).