The Delaware Court of Chancery has jurisdiction to determine whether an election of a director of a Delaware corporation is proper, and frequently adjudicates disputed elections pursuant to Section 225 of the Delaware General Corporation Law.

If an election of a board member is deemed improper, the Court of Chancery may order a prompt special meeting for the new election of directors—and the management slate may be ordered to pay for the costs associated with such a meeting.  This was the case in Portnoy v. Cryo-Cell International, Inc., No 3142-VCS (Del. Ch. Jan. 15, 2008), wherein the Court of Chancery addressed a challenge to the election of directors under Section 225, based upon claims that the management engaged in inequitable behavior to entrench themselves, both in proxy battles leading up to the annual meeting as well as improprieties during the annual meeting itself.

In Portnoy, management engaged in improprieties at an annual meeting, including a three-hour “lupper” break at 2:00 p.m., which allowed the CEO to lobby for more votes for management, and ultimately allowed such management to prevail by a slim margin.  The court found that it was a breach of the CEO’s fiduciary duty to use corporate machinery to coerce and to threaten economic penalties with commercial partners who did not vote in favor of management.  In addition to ordering a new special meeting to allow a re-election to occur, the Court also ordered the removal of the new director who was elected at the tainted meeting.

In sum, there are many rights afforded to shareholders, directors, officers and the corporation itself through a Section 225 action, but recent Delaware decisions, such as Portnoy, should be consulted by anyone asserting a Section 225 action, and also by corporations that desire to act within the relevant boundaries imposed by the Delaware General Corporation Law.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.