Corporate Governance

The Delaware Chancery Court and the Treatment of Institutional Investors: Portnoy v. Cryo Cell

By J. Robert Brown

While we continue to discuss the article by VC Strine and recently published in the Journal of Corporation Law, we are reminded of Portnoy v. Cryo-Cell, a case examined at some length on this Blog.  In that case, VC Strine found that management had in fact acted in an improper fashion with respect to a shareholder election.  In doing so, however, the Vice Chancellor more or less penalized the institutional investor who brought the suit by not allowing any of his directors to be seated (he reinstated the board that existed before the election, a victory for those in management who had engaged in the improper behavior) and by refusing to award costs, either the fees in challenging the behavior or the costs of the proxy solicitation.  Moreover, he ordered a new election, essentially imposing on the institutional investors the costs of a new proxy solicitation. 

We do not write, however, simply to rehash what has already been discussed.  Instead, we note that thenew election was held on March 4 with the institutional investor not running a competing slate.  We further note that a fee dispute developed between the investor and his counsel.  As a result, it appears that the costs of the litigation exceeded $200,000.  In other words, where management acts improperly and institutional shareholders are forced to litigate to vindicate their rights, the costs can go into the six figures, with VC Strine unwilling to award reimbursement.  No doubt at least in part because of the costs associated with the process, the institutional investor did not incur the costs of a second proxy contest.

If ever there was a case designed to discourage investors from taking these steps, Portnoy is it.  But perhaps that was the intended purpose.   It is consistent with views by VC Strine that suggest deep suspicion of the motivation of and role played by institutional investors, viewing them as grasping and short term. 

Materials on this case, including some of the fee dispute documents, are posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on March 06, 2008 (boomark / email).