Corporate Governance

Kurz v. Holbrook: Shareholder Voting, Omnibus Proxies, and the Role of DTC: The Facts

By J Robert Brown Jr.

The Board of EMAK consisted of five directors and two vacancies.  The fact pattern involved two separate consent solicitations, with each having the goal of acquiring control of the board. 

In one case, Crown Emak Partners, a shareholder holding 28% of the voting shares, solicited consents to reduce the size of the Board to three directors.  Because Crown had the right to designate two directors on the board, the effect would give Crown a majority.  A second bylaw provided that a special meeting would be called to elect the third director.  Crown succeeded in obtaining sufficient consents to adopt the bylaws.  The consents were executed by DTC on behalf of the beneficial owners. 

One group of shareholders (Take Back EMAK or TBE) sought to obtain the consents to replace two of the five directors and fill three of the vacancies, thereby obtaining control.  As the soliciation proceeded, the TBE Group obtained consents equal to 48.4% of the common stock.  In order to obtain the additional votes.  Donald A. Kurz, an incumbent director and member of the TBE Group, agreed to purchase from another shareholder, Boutros. 

Because, however, the shares were subject to restrictions on sale, Kurz could only obtained title after the restrictions were lifted.  Despite the future date of delivery, Boutros executed an irrevocable proxy.  According to the purchase agreement:

• Proxies.As a material part of the consideration for this Agreement, and an express condition precedent to the effectiveness hereof, Seller agrees to execute and deliver to Buyer by facsimile transmittal on the date hereof, time being of the essence, with originals to follow immediately by express delivery, (a) this Agreement, (b) an Irrevocable Proxy, (c) the Revocation, and (d) the White Consent Card solicited by Take Back EMAK LLC, each in the form attached hereto.

The consents apparently provided TBE with enough shares to implement their plan to take control of the board.  While the TBE Group appeared to have a majority, a portion of its support came from street name owners.  Because an omnibus proxy had not been obtained from DTC, the street name votes were disallowed.

In the litigation that followed, Vice Chancellor Laster had to determine:  (1) the legality of a bylaw that reduced the size of an incumbent board; (2) the validity of the purchase of votes by Kurz under vote buying analysis; and (3) the consequence of the failure to obtain the omnibus proxy.  We will deal with the issues seriatim. 

For more on the entire system of beneficial ownership and the role of the depositories, see The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility? 

The opinion and a number of primary materials are posted at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on March 08, 2010 (boomark / email).