In the decision of Deann M. Totta, et al. v. CCSB Financial Corp., C.A. No. 2021-0173-KSJM (Del. Ch. May 31, 2022), the Court of Chancery held that the board of directors of Defendant, CCSB Financial Corp. (“CCSB”), misapplied a vote aggregation provision in the corporation’s charter that disenfranchised the shareholder Plaintiffs and, furthermore, was unenforceable under equitable principles.
CCSB’s charter includes a provision which prohibits shareholders from exercising more than 10% of the company’s voting power in an election (the “Voting Limitation”). Facing a proxy contest from one of the named Plaintiffs, Park G.P., Inc., the directors aggregated Plaintiffs’ shares on the grounds that they were acting in concert and, pursuant to the Voting Limitation, did not count Plaintiffs’ votes above the 10% limit. This instruction caused Plaintiffs’ nominees to lose the Board election, and Plaintiffs accordingly filed suit under 8 Del. C. § 225 to invalidate the Board’s instruction.
[For a general discussion of Section 225 of the DGCL, which permits challenges to an election of directors of a Delaware corporation, click here.]
As a threshold matter, CCSB argued that the Court should apply the highly deferential business judgment rule as its standard of review, primarily based on a provision in its charter that states any application by the board of the Voting Limitation “‘shall be conclusive and binding upon the Corporation and its stockholders.’” (Mem. Op. at 4-5.) Chancellor McCormick denied this reasoning on the grounds that a corporation cannot alter its directors’ fundamental fiduciary obligations unless such alteration has been authorized by statute—which it has not. Therefore, the Court applied the well-established standard of review under Delaware corporate law that requires the Board’s actions to be tested twice—first, to determine whether the action was legally compliant and, second, to determine whether the action was equitable.
Applying this two-step analysis, the Court of Chancery found that the Voting Limitation does provide a basis for the Board to exclude stockholder votes when acting in concert, but found that the Plaintiffs had not, in fact, acted in concert. A simple agreement that stockholders vote similarly is insufficient to prove an action in concert—there must be an agreement, arrangement or understanding of the alignment, which was not present here.
Finally, the Court of Chancery also found that the Board’s vote instruction did not satisfy the equitable test articulated under Blasius Industries, Inc. v. Atlas Corp. According to Chancellor McCormick, Defendant’s argument that it must protect its shareholders from Plaintiffs’ alleged effort to take control of the company assumed that the directors knew better than the shareholders, which is not a legitimate reason to limit stockholder votes. Therefore, the Court of Chancery found that the Board’s exercise of the Voting Limitation was both legally invalid and failed under Blasius’s equitable test.
Key Takeaway: An application of a voting limitation will be assessed under the “twice-tested” standard of review to assess legality and equitability. Directors should remember that the shareholders have a fundamental right to exercise their voting power—a right that the Court of Chancery will be hesitant to curtail without a compelling, legitimate reason.