Campbell v. Loew's Inc.
134 A.2d 852, 1957 Del. Ch. LEXIS 93, 36 Del. Ch. 563 (1957)
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Rule of Law:
Stockholders have an inherent power to remove a director for cause, but this power may only be exercised after the accused director is given specific charges, adequate notice, and a full and fair opportunity to be heard by the stockholders. When proxies are solicited for removal, this opportunity requires that the director's defense be presented to shareholders before or alongside the initial solicitation materials seeking their ouster.
Facts:
- Two factions, one led by President Joseph Vogel and the other by Joseph Tomlinson, were engaged in a control battle over Loew's, Incorporated.
- Following several resignations from the board of directors, the Tomlinson faction was left with five directors and the Vogel faction with four, but the Tomlinson group lacked the seven directors required for a quorum to conduct board business.
- Vogel, as president, called a special stockholders' meeting for several purposes, including to remove two Tomlinson-aligned directors, Tomlinson and Stanley Meyer, for cause.
- Vogel's faction sent a notice and proxy statement to stockholders, which included a letter detailing their accusations against Tomlinson and Meyer and solicited votes for their removal.
- The Vogel faction, which had physical control of the corporate offices and records, refused to provide the Tomlinson faction with a list of stockholders.
- This refusal prevented Tomlinson and Meyer from being able to communicate with stockholders to present their side of the story in response to the Vogel faction's charges.
Procedural Posture:
- Campbell, a stockholder, filed a suit in the Delaware Court of Chancery against Loew's, Inc. and four of its directors.
- The plaintiff sought a preliminary injunction to stop a special stockholders' meeting called by the corporate president, Joseph Vogel.
- In the alternative, the plaintiff requested to enjoin consideration of certain matters at the meeting, including the removal of two directors, and to prevent the voting of proxies solicited by the Vogel faction.
- The corporate defendant, Loew's, Inc., appeared in court to oppose the plaintiff's motion for a preliminary injunction.
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Issue:
May a corporate faction in control of the company's proxy machinery solicit proxies to remove directors for cause without first affording the accused directors a fair opportunity to present their defense to the stockholders?
Opinions:
Majority - Seitz, Chancellor
No. When shareholders are asked to vote by proxy on removing a director for cause, the accused director must be given a fair opportunity to present their defense to the shareholders, and this must occur before or concurrently with the initial solicitation of proxies seeking their removal. The court affirmed that stockholders possess the inherent power to remove directors for cause, as it is essential to protect the corporation from directors who might inflict serious harm. This power exists even in corporations with cumulative voting, though its use must be carefully supervised to prevent abuse. However, the exercise of this power is not absolute and is subject to fundamental principles of fairness. The process requires serving the director with specific charges, giving adequate notice, and providing a full opportunity to be heard. In a proxy contest, simply providing a proxy card with a 'for' or 'against' option is insufficient when only one side's accusations are presented. Denying the accused directors access to the stockholder list while soliciting proxies for their removal fundamentally violates their right to be heard. Therefore, any proxies solicited by the Vogel group giving authority to vote for removal are invalid.
Analysis:
This case is a landmark Delaware corporate law decision establishing crucial due process rights for directors facing removal for cause by stockholders. It solidifies the principle that while stockholders hold ultimate power, its exercise must be fair and not arbitrary. The ruling distinguishes a removal-for-cause proxy contest from a standard election, imposing a higher procedural standard to prevent a faction in control of corporate machinery from using its resources to present a one-sided narrative. This precedent ensures that shareholders can make an informed decision by hearing both sides, thereby protecting minority shareholder rights and the stability of the board.
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