Kurz v. Holbrook
| Decision Date | 09 February 2010 |
| Docket Number | C.A. No. 5019-VCL. |
| Citation | 989 A.2d 140 |
| Parties | Donald A. KURZ and Sems Diversified Value, LP, Plaintiffs, v. James L. HOLBROOK, Jr., et al., Defendants. James L. Holbrook, Jr., et al., Counterclaim Plaintiffs, v. Donald A. Kurz and Sems Diversified Value, LP, Counterclaim Defendants, and James L. Holbrook, Jr., et al., Third-Party Plaintiffs, v. Take Back EMAK, LLC, Third-Party Defendants, Crown EMAK Partners, LLC, Counterclaim and Third-Party Plaintiff, v. Donald A. Kurz, et al., Counterclaim and Third-Party Defendants. |
| Court | Court of Chancery of Delaware |
LASTER, Vice Chancellor.
This post-trial opinion resolves competing requests for relief under Section 225 of the Delaware General Corporation Law (the "DGCL"). 8 Del. C. § 225. At stake is control of the board of directors (the ") of EMAK Worldwide, Inc. ("EMAK" or the "Company").
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 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 vacancies with Philip Kleweno, Michael Konig, and Lloyd Sems. Incumbent director Donald Kurz is a member of TBE. The TBE Consents, if valid, would establish a new Board majority.
The defendants contend that on December 18, 2009, Crown EMAK Partners, LLC ("Crown") delivered sufficient consents (the "Crown Consents") to amend EMAK's bylaws 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, 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.
I hold that the bylaw amendments adopted through the Crown Consents conflict with the DGCL and are void. They were therefore ineffective to shrink the Board or to require the calling of a special meeting. I hold that the TBE Consents validly effected corporate action. The Board therefore consists of incumbent directors Kurz, Jeffrey Deutschman, and Jason Ackerman, and newly elected directors Kleweno, Konig, and Sems. One vacancy remains.
In addition to seeking relief under Section 225, the parties have asserted a panoply of claims, cross-claims, and third-party claims, and they have amassed an extensive record relating to those claims. My decision addresses only the requests for relief under Section 225, and I have sought to avoid resolving factual disputes that could have collateral implications if the other claims proceed. Contemporaneously with the issuance of this opinion, I am entering a partial final judgment under Rule 54(b) to implement my decision, thereby facilitating a prompt appeal should the defendants wish to pursue it.
I recount the facts as proven at trial by a preponderance of the evidence. The burden of proof rested on the plaintiffs. The parties commendably stipulated to a number of facts in the pre-trial order.
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 votes 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 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 pursuant to 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 get 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 I entered an order implementing that agreement. I 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"). I 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 rescinding 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 any interim litigation over 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 with three consent solicitations 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.
Crown joined the fray. After the rescission of the Exchange Transaction, Crown designated Jason Ackerman as the second director authorized by the Series AA Preferred Stock. Crown also began soliciting consents to amend the Bylaws in the following manner RESOLVED: Article III, Section 3.1 of the Company's Bylaws is amended to read as follows:
Section 3.1. Number and Term of Office. The Board of Directors shall consist of three members. As provided for in the Amended and Restated Certificate of Designation of the Series AA Senior Cumulative Convertible Preferred Stock, two directors shall be elected by the holders of the Series AA Senior Cumulative Convertible Preferred Stock. The directors shall be elected at the annual meeting of the stockholders, except as provided elsewhere in this Article III, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders, residents of Delaware, or citizens of the United States.
RESOLVED: Article III, Section 3.1.1 is added to the Company's Bylaws:
Section 3.1.1 If at any time the number of members of the Board...
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