Aprahamian v. HBO & Co.

• Decision Date: 11 May 1987
• Docket Number: No. 8989,8989
• Citation: 531 A.2d 1204
• Parties: Ronald V. APRAHAMIAN, Ronald L. Holden, Andover Group, Donald C. Carner, L. Wayne Greenberg, Robert E. Raitz, William A. Reppy, Jr., and the Committee for Full Value of HBO & Company, Plaintiffs, v. HBO & COMPANY, Walter S. Huff, Jr., John M. Clark, Jr., John W. Lawless, Larry G. Gerdes, Donald L. Lucas, and James V. Napier, Defendants. Civ. A. . Submitted:
• Court: Court of Chancery of Delaware

Page 1204

531 A.2d 1204

Ronald V. APRAHAMIAN, Ronald L. Holden, Andover Group Donald C. Carner, L. Wayne Greenberg, Robert E Raitz, William A. Reppy, Jr., and the Committee for Full Value of HBO & Company, Plaintiffs, v. HBO & COMPANY, Walter S. Huff, Jr., John M. Clark, Jr., John W. Lawless, Larry G. Gerdes, Donald L. Lucas, and James V. Napier, Defendants.

Civ. A. No. 8989.

Court of Chancery of Delaware New Castle County.

Submitted: May 11, 1987.

Decided: May 14, 1987.

Revised: May 28, 1987.

Grover C. Brown, Henry N. Herndon, Jr., Edward M. McNally and Lewis H. Lazarus, Morris, James, Hitchens & Williams, Wilmington (Hogan & Hartson, Washington, D.C., of counsel), for plaintiffs.

Charles S. Crompton, Jr., Donald J. Wolfe, Jr., William J. Marsden, Jr., Kathleen T. Furey, and Laurie A. Silverstein, Potter, Anderson & Corroon, Wilmington (Hansell & Post, Atlanta, Ga., of counsel), for defendants.

HARTNETT, Vice Chancellor.

Plaintiffs, in effect, seek a preliminary injunction preventing defendants from further postponing the annual meeting of the stockholders of HBO & Company ("HBO"), a Delaware corporation, which was originally scheduled to be held on April 30, 1987, but has been rescheduled by the directors for September 22, 1987. I find that the meeting must go forward.

I

In the brief time available to consider this matter, it is not possible to set forth all the background facts, but the essential facts, which are uncontroverted, are as set forth.

On February 10, 1987 the Board of HBO designated that the annual meeting of the corporation be held on April 30, 1987, at 9:00 a.m., with March 15, 1987, as the record date for determining the stockholders entitled to vote. Public announcement of the meeting was made on March 20, 1987, with the distribution of the annual meeting proxy materials by the corporation. Management recommended reelection of the incumbent Board.

On March 28, 1987, plaintiffs formed a committee to oppose the reelection of the six directors of the corporation and on March 30, 1987, the Committee filed its preliminary proxy solicitation materials with the Federal Securities and Exchange Commission, proposing an alternate slate of directors. On April 10, 1987, the Committee mailed its initial proxy solicitation materials in which it proposed its own slate of directors and proposed a program which would allegedly maximize the value of the corporation by the creation of a special committee which would propose transactions, including the possible sale of the corporation.

The incumbent directors of the corporation, who along with the corporation are the defendants, thereupon issued additional proxy materials opposing the proposals and opposing any near term actions to increase the value of the stock of the corporation.

On Saturday, April 25, 1987, three business days before the scheduled date of the annual meeting, the incumbent Board of HBO decided to embrace plaintiffs' platform and undertook to convince the stockholders of the corporation that the Board would now pursue a plan similar to plaintiffs' and that the present management was better qualified to successfully complete a plan than would be the plaintiffs.

On Monday, April 27, 1987, the incumbent directors placed an advertisement in The Wall Street Journal announcing that they had decided to appoint a special committee of two incumbent directors to seek a sale of the corporation or propose other transactions which would enhance the value of the stock of the corporation.

In the late afternoon of April 29, 1987 (the day before the scheduled date for the annual meeting), the directors received information from their proxy solicitor that the election result was too close to call. At the same time, plaintiffs were receiving reports that they would win.

The incumbent Board, upon receiving the preliminary report of its proxy solicitor, acted to postpone the annual stockholders meeting until September 22, 1987, with an August 1987, record date.

The previous annual meeting was held on September 22, 1986, only seven months ago, but the traditional date for the annual meeting of the corporation has been in April.

Almost two years ago, in July of 1985, defendant Walter S. Huff, Jr., the present Chairman of the Board and a director of HBO, sold 500,000 shares of the corporation's stock to the corporation for $23.125 per share. Ever since that time the value of the stock has declined--eventually reaching a low of $8.50 per share during December of 1986.

If the annual meeting does not convene by May 15, 1987, the proxies submitted by the stockholders may expire because of the provisions of 8 Del.C. § 213 which provide that a record date shall not be fixed for a date more than 60 days before the date of the annual meeting. It is therefore argued by plaintiffs that if the annual meeting does not convene before May 16, 1987, a new record date will be fixed which will invalidate the proxies solicited by plaintiffs.

Plaintiffs seek a preliminary injunction preventing defendants from continuing to postpone the convening of the annual meeting past May 15, 1987.

II

Plaintiffs rely heavily on Gries v. Eversharp, Inc., Del.Supr., 69 A.2d 922 (1949) in which the Delaware Supreme Court held that the directors of a corporation could not postpone the scheduled annual meeting as long as it was possible to hold the meeting at the time originally scheduled. The Court pointed out that a different holding would "authorize directors to change a meeting date for any year, at any time in advance of a meeting, for any reason of convenience to the directors, provided no fraud, bad faith, or improper motive was shown."

Defendants assert that the holding in Gries is no longer applicable because of subsequent amendments to the statutes relating to annual meetings. The amendments to the statutes since Gries, however, merely give greater flexibility to the board in selecting the date and place for the annual meeting and are still silent as to whether the directors have the power to postpone an annual meeting once the date has been designated.

8 Del.C. § 211 now provides that "an annual meeting of stockholders shall be held for the election of directors on a date and at a time designated by or in the manner provided in the bylaws." HBO's bylaws provide that the annual meetings of the stockholders shall be held at such place, within or without the State of Delaware, in April or as shall be provided from time to time by the board of directors. The amendments to the statutes since Gries therefore do not change its holding.

Defendants also urge that the holding in Gries has been superseded by recent Delaware cases ascribing new vitality to the business judgment rule especially where an independent committee recommends a course of conduct. See, Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701 (1983); and Unocal Corp. v. Mesa, Del.Supr., 493 A.2d 946 (1985).

Defendants point out that the postponement of the annual meeting was recommended by a special committee recently appointed by the incumbent board to examine alternatives for maximizing stockholder value and therefore the court should defer to its recommendation. This argument is not valid, however, because the special committee consisted of two incumbent directors, both of whom are seeking reelection. They are obviously interested in the outcome of the election and the business judgment rule cannot be a shield as to acts taken by an interested director. Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984).

In terming these directors "interested" I am not ascribing any improprieties to them. A candidate for office, whether as an elected official or as a director of a corporation, is likely to prefer to be elected rather than defeated. He therefore has a personal interest in the outcome of the election even if the interest is not financial and he seeks to serve from the best of motives.

The corporate election process, if it is to have any validity, must be conducted with scrupulous fairness and without any advantage being conferred or denied to any candidate or slate of candidates. In the interests of corporate democracy, those in charge of the election machinery of a corporation must be held to the highest standards in providing for and conducting corporate elections. The business judgment rule therefore does not confer any presumption of propriety on the acts of the directors in postponing the annual meeting. Quite to the contrary. When the election machinery appears, at least facially, to have been manipulated, those in charge of the election have the burden of persuasion to justify their actions.

I, therefore, hold that the holding in Gries is still binding on this court.

III

In Gries the court did not address the issue of whether an annual meeting, after being designated, could be postponed if it was in the interests of the stockholders.

This issue, however, was faced in Steinberg v. American Bantam, W.D.Pa., 76 F.Supp. 426 (1948), app. dis., 3rd Cir., 173 F.2d 179 (1949), and that court held that an...