Portnoy v. Cryo-Cell International, Inc.
940 A.2d 43 (2008)
Rule of Law:
A corporate election's results will be invalidated when incumbent management engages in inequitable conduct, such as failing to disclose a material agreement to appoint a director in exchange for votes, using corporate assets to coerce a shareholder's vote, and manipulating the timing of a shareholder meeting for an entrenchment purpose.
Facts:
- Cryo-Cell International, Inc., led by CEO Mercedes Walton, was a struggling company facing a proxy contest from a dissident stockholder group led by David Portnoy.
- To counter the threat, Walton and the incumbent board added another large stockholder, Andrew Filipowski, to their 'Management Slate' in a publicly disclosed agreement in exchange for his group's voting support.
- When preliminary vote counts showed the Management Slate was losing, Walton secretly promised Filipowski that if their slate won, the board would expand by one seat and appoint his designee, Matthew Roszak, in exchange for Filipowski purchasing more shares to vote for management.
- Walton also used corporate leverage to secure the vote of Saneron CCEL Therapeutics Inc., a company in which Cryo-Cell held a 38% stake. Walton threatened to halt cooperation on joint projects and offered to remove a restrictive legend from Saneron's shares, something Saneron had sought for years.
- On the day of the annual meeting, still fearing defeat, Walton intentionally delayed the closing of the polls for several hours by staging unscheduled presentations and declaring a nearly three-hour 'lunch break.'
- Walton only reconvened the meeting and closed the polls after receiving confirmation that last-minute vote switches in favor of the Management Slate had been processed.
- The Management Slate was declared the winner by a narrow margin, after which Walton began preparing to fulfill the secret promise to add Roszak to the board.
Procedural Posture:
- David Portnoy filed suit in the Delaware Court of Chancery under 8 Del. C. § 225, challenging the validity of a corporate election.
- The plaintiffs were the Portnoy Group, a dissident stockholder faction, and the defendants were Cryo-Cell International, Inc. and its incumbent directors (the 'Management Slate').
- The plaintiff sought to have the declared victory of the Management Slate overturned and the Portnoy Slate seated on the board.
- The case proceeded to a full trial on the merits before the Vice Chancellor.
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Issue:
Do a corporate board's actions, including making an undisclosed promise of a board seat in exchange for votes, using corporate assets to coerce a shareholder's vote, and manipulating the annual meeting's timing, constitute inequitable conduct sufficient to invalidate the election results?
Opinions:
Majority - Strine, Vice Chancellor
Yes, the election results were tainted by inequitable behavior and must be set aside. The court found that management's actions, when viewed together, unfairly tilted the electoral process. The secret promise to give the Filipowski Group a second, unelected board seat in exchange for buying more votes was a material fact that was not disclosed to shareholders, who voted in ignorance of the true composition of the board they were electing. Additionally, Walton's use of corporate assets to improperly influence Saneron's vote—through both threats of withholding business cooperation and inducements of lifting a stock restriction—constituted a breach of the duty of loyalty and amounted to illegal vote-buying under the framework of Schreiber v. Carney. Finally, Walton's conduct at the annual meeting, including the disingenuous filibustering and the lengthy 'lunch break,' was not motivated by a good faith concern for shareholders but by a selfish desire to stall for time until her slate could secure a victory, which is prohibited under the equitable principles of Schnell v. Chris-Craft.
Analysis:
This decision reinforces the Delaware courts' role as guardians of the corporate election process, emphasizing that inequitable conduct can invalidate an election even if the actions are technically legal. The case sharply distinguishes between permissible, disclosed compromises with dissidents (like adding Filipowski to the slate) and impermissible, secret side-deals that mislead the electorate. It serves as a strong warning to incumbents that using corporate assets to coerce votes or manipulating meeting procedures for entrenchment purposes will be scrutinized and condemned under principles of equity. The opinion's detailed factual analysis provides a clear roadmap of what constitutes prohibited conduct in a heated proxy fight.
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