Crown Emak Partners, LLC v. Kurz
| Decision Date | 21 April 2010 |
| Docket Number | No. 64,85,2010,64 |
| Citation | 992 A.2d 377 |
| Parties | CROWN EMAK PARTNERS, LLC, Defendant/Counterclaim Plaintiff, Appellant, v. Donald A. KURZ, Sems Diversified Value, LP, Lloyd M. Sems, Philip S. Kleweno, Michael Konig, and Take Back EMAK, LLC, Plaintiffs/Counterclaim Defendants, Appellees. James L. Holbrook, Jr., Defendant Below, Appellant, v. Donald A. Kurz and Sems Diversified Value, LP, Plaintiffs Below, Appellees. |
| Court | Supreme Court of Delaware |
Stephen E. Jenkins, Esquire (argued), Catherine A. Gaul, Esquire, and Andrew D. Cordo, Esquire, Ashby & Geddes, Wilmington, Delaware; Steven K. Talley, Esquire, Gibson, Dunn & Crutcher LLP, Denver, Colorado, for appellant, Crown EMAK Partners, LLC.
Collins J. Seitz, Jr., Esquire, and Bradley R. Aronstam, Esquire, Connolly Bove Lodge & Hutz LLP, Wilmington, Delaware, for appellant, James L. Holbrook, Jr.
Andre G. Bouchard, Esquire and Joel Friedlander, Esquire (argued), Bouchard Margules & Friedlander, P.A., Wilmington, Delaware, for appellees Donald A. Kurz, Sems Diversified Value, LP, Lloyd M. Sems, Philip S. Kleweno, Michael Konig and Take Back EMAK, LLC.
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY, Justices, constituting the Court en Banc.
This is a consolidated appeal from a final judgment entered by the Court of Chancery pursuant to Rule 54(b). This proceeding involves competing requests for relief under section 225 of the Delaware General Corporation Law (the "DGCL").1 At issue is which of two competing factions lawfully controls the board of directors (the ") of EMAK Worldwide, Inc. ("EMAK").
Prior to December 18, 2009, the Board had six directors and one vacancy. On December 18, one director resigned, creating a second vacancy. The plaintiffs-appellees contend that on December 20 and 21, Take Back EMAK, LLC ("TBE") delivered sufficient consents (the "TBE Consents") to remove two additional directors without cause, and fill three of the resulting vacancies with Philip Kleweno, Michael Konig, and Lloyd Sems. Incumbent director Donald A. Kurz ("Kurz") is a member of TBE. If valid, the TBE Consents would establish a new Board majority.
The defendants-appellants contend that on December 18, 2009, Crown EMAK Partners, LLC ("Crown") delivered sufficient consents (the "Crown Consents") to amend EMAK's bylaws (the "Bylaw Amendments") in two important ways. First, the Crown Consents purportedly amended Section 3.1 of the Bylaws ("New Section 3.1") to reduce the size of the Board to three directors. Because Crown has the right to appoint two directors under the terms of EMAK's Series AA Preferred Stock, a by-law reducing the Board to three, if valid, would give Crown a Board majority. Second, the Crown Consents purportedly added a new Section 3.1.1 to the Bylaws ("New Section 3.1.1") providing that if the number of sitting directors exceeds three, then the EMAK CEO will call a special meeting of stockholders to elect the third director, who will take office as the singular successor to his multiple predecessors. The defendants contend that the Bylaw amendments are valid and that the next step is for the EMAK CEO to call a special meeting under New Section 3.1.1.
The Court of Chancery concluded that the TBE Consents validly effected corporate action and that, therefore, the lawful Board consists of incumbent directors Kurz, Jeffrey Deutschman, and Jason Ackerman, and newly elected directors Kleweno, Konig, and Sems. Consequently, one vacancy remains. The Court of Chancery also concluded that the bylaw amendments adopted through the Crown Consents conflict with the DGCL and are void. Therefore, the court held, the Crown Consents were ineffective either to reduce the size of the Board or to require the calling of a special meeting.
The appellants raise three claims in this appeal. First, the appellants submit that the Court of Chancery erred in concluding that Kurz did not engage in impermissible vote buying. In the alternative, they contend Kurz's purported purchase of the outcome determinative shares from Peter Boutros ("Boutros") was an improper transfer under the plain language of a Restricted Stock Grant Agreement between EMAK and Boutros. Second, they argue that the Court of Chancery erred when it held that Cede breakdowns should be deemed part of the "stock ledger" under title 8, section 219 of the Delaware Code with the result that the member depository banks and brokers are record holders. They submit that a proxy from DTC, as the only undisputed record holder of shares in "street name," was required to count the votes of those banks and brokers. Since TBE failed to obtain a proxy from DTC, those votes were invalid and improperly counted. Third, they argue that the Court of Chancery erred when it held that the Crown Consent was void because the amendments to the bylaws conflict with Delaware law.
We hold that Kurz did not engage in improper vote buying, but that his purchase of shares from Boutros was an improper transfer that was prohibited by a restricted stock agreement between Boutros and EMAK. Because the Boutros shares could not be voted, that deprived the Kurz faction of the votes required to elect their nominees. We therefore do not reach the issue of whether the Cede breakdowns are part of the "stock ledger" under title 8, section 291 of the Delaware Code. For reasons more fully discussed in this opinion, the Court of Chancery's interpretation of "stock ledger" under section 219 should be regarded as obiter dictum and without precedential effect. Finally, we hold that the Crown bylaw amendments were invalid because they conflict with Delaware law.
Therefore, the judgments of the Court of Chancery are affirmed in part and reversed in part. This matter is remanded for further proceedings in accordance with this opinion.
EMAK is a Delaware corporation based in Los Angeles, California. EMAK has two classes of stock: common shares and the Series AA Preferred Stock.
EMAK has issued and outstanding 7,034,322 shares of common stock. EMAK's common shares traded on NASDAQ from 1994 until April 14, 2008, when trading was suspended. On June 17, 2008, EMAK was delisted. EMAK subsequently deregistered, although its common shares continue to trade on the pink sheets.
EMAK has issued and outstanding 25,000 shares of Series AA Preferred Stock, all held by Crown. The Series AA Preferred has the right to elect two directors to the Board, plus a third director if the Board expands to more than eight members. The Series AA Preferred does not vote in the election of directors. It does vote on an as-converted basis with the common stock on all other matters. The Series AA Preferred can convert into 2,777,777 common shares and carries 27.6% of EMAK's total voting power on matters where it votes with the common stock.
On Monday, October 12, 2009, TBE delivered an initial consent to EMAK, thereby launching its consent solicitation (the "TBE Consent Solicitation"). Under Section 2.13(c) of EMAK's bylaws (the "Bylaws"), the Board had the power to set a record date for the TBE Consent Solicitation. During a meeting held on October 19, the Board set October 22 as the record date. Had the Board not exercised its authority, the record date would have been October 12, the date of delivery of the initial TBE Consent.
At the October 19 meeting, the Board also approved a transaction in which Crown exchanged its Series AA Preferred for new Series B Preferred Stock (the "Exchange Transaction"). Unlike the Series AA Preferred, the Series B Preferred voted on an as-converted basis with the common stock on all matters, including the election of directors. The Exchange Transaction thus conferred on Crown the right to wield 27.6% of the total voting power in an election of directors. The October 22 record date enabled EMAK to place the new Series B Preferred into Crown's hands for the TBE Consent Solicitation.
On October 26, 2009, the plaintiffs filed suit challenging the Exchange Transaction and sought an expedited hearing on an application for preliminary injunction. During the scheduling conference, the parties agreed that the deadline for delivering consents in the TBE Consent Solicitation would be December 21, and the Court of Chancery entered an order implementing that agreement. The Court of Chancery granted the motion to expedite and scheduled a hearing on the plaintiffs' injunction application for December 4.
To bolster the defendants' litigation position, EMAK solicited consents to ratify the Exchange Transaction (the "Ratification Solicitation"). Ultimately, however, the Court of Chancery did not have to rule on either the Exchange Transaction or the ratification strategy because on December 3, 2009, the day before the hearing, EMAK and Crown rescinded the Exchange Transaction.
The plaintiffs responded to the rescission of the Exchange Transaction by filing an amended complaint challenging the disclosures made in the Ratification Solicitation. On December 7, 2009, the individual defendants and EMAK filed counterclaims and a third party complaint challenging the disclosures made in the TBE Consent Solicitation. On December 8, the parties agreed to defer litigating their disclosures and fight it out at the ballot box. They agreed to resume any litigation on December 22, after the deadline for the TBE Consent Solicitation.
During December 2009, solicitation activity intensified, because three simultaneous consent solicitations were under way. TBE continued its solicitation activities and issued a series of press releases and public statements in support of the TBE Consent Solicitation. On December 7, EMAK began soliciting consent revocations and issued a series of press releases and public statements in support of its efforts.
After the...
To continue reading
Request your trial
- Manti Holdings, LLC v. Authentix Acquisition Co.
- In re MFW Shareholders Litig.
- Richardson v. United States
-
New Enter. Assocs. 14 v. Rich
...held company. 989 A.2d 140, 183 (Del. Ch. 2010), aff'd in part, rev'd in part on other grounds sub nom. Crown EMAK P'rs, LLC v. Kurz, 992 A.2d 377 (Del. 2010). The court explained that when directors seek stockholder action, the duty of disclosure applies "regardless of whether a corporatio......
-
Enhanced Scrutiny on the Buy-side
...the voting rights of shareholders who hold greater voting than economic ownership.").201. See, e.g., Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377, 387-90 (Del. 2010) (discussing cause of action and remedies for vote-buying)....
-
Why We Should Keep Teaching Dodge v. Ford Motor Co.
...three craigslist stockholders"). (287.) Id. at 31 (quoting Kurz v. Holbrook, 989 A.2d 140, 183 (Del. Ch. 2010), rev'd on other grounds, 992 A.2d 377 (288.) See Stephen M. Bainbridge, Much Ado About Little? Directors' Fiduciary Duties in the Vicinity of Insolvency, 1 J. BUS. & TECH. L. 3......