Opinion
Civil Action No. 11849.
Submitted: April 3, 1991.
Decided: July 25, 1991.
ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT: DENIED; ON DEFENDANTS' MOTION TO DISMISS: GRANTED.
Collins J. Seitz, Jr., Esquire, and John C. Kairis, Esquire, CONNOLLY, BOVE, LODGE HUTZ, Wilmington, DE 19899-2207, Attorneys for the Plaintiff
Craig B. Smith, Esquire, LASSEN, SMITH, KATZENSTEIN FURLOW, Wilmington, DE 19899-0410, Attorney for the Defendant-Cavaliers of Delaware, Inc.
MEMORANDUM OPINION
In this suit plaintiff challenges the election of directors of Cavaliers of Delaware, Inc. ("Cavaliers") at the Annual Meeting held on November 14, 1990. Cavaliers has a classified Board of Directors consisting of 17 members and six of the director positions were up for election at the November 1990 Annual Meeting. Plaintiff is a shareholder of Cavaliers and claims that the management of Cavaliers did not give proper notice of the Annual Meeting in violation of 8 Del. C. § 222(a) and Article II, Section 4(a) of Cavaliers' Bylaws and therefore the election was void as is any attempt to ratify the election.
The Court finds that, although the Notice of the Annual Meeting was defective, the election was not void but voidable and that the election was duly confirmed and ratified at a later meeting after proper notice.
I
Several months prior to the Annual Meeting, a group of shareholders, apparently dissatisfied with the management of Cavaliers, which operates a country club in New Castle County, formed a group known as The Committee for a Better Cavaliers. Its purpose was to oust the existing Directors and replace them with its own nominees. On September 12, 1990 the Better Cavaliers Committee contacted all Cavalier shareholders to solicit the execution and return of a general proxy appointing the chairman of the Better Cavaliers Committee as the shareholder's proxy. The letter questioned several transactions approved by management and stated that the purpose of the proxy was to permit the election of new directors and to adopt amendments to the Cavaliers' Certificate of Incorporation.
About September 20, the Better Cavaliers Committee again contacted shareholders to solicit proxies to permit the election of directors and adopt amendments to the corporation's bylaws.
The president of Cavaliers responded to both the September 12 and 20 correspondence, by letter to the shareholders that attempted to dispel any allegations of wrongdoing by management.
Article VII, Section 1 of Cavaliers' Bylaws creates a Nominating Committee, that is required to nominate persons for election as directors. On September 28, the Nominating Committee, consisting of three non-directors and two directors, notified the shareholders of the seven persons nominated by it for the six director positions available at the November 14th meeting. This letter, without so stating, was purportedly a Notice of the Annual Meeting. It gave the date of the meeting but did not give the time and place.
Pursuant to the Bylaws, the stockholders of Cavaliers may also make nominations by written submission signed by at least 25 stockholders and delivered to Cavaliers at least 15 days prior to the Annual Meeting. Article V, Section 3(b) of the Bylaws. On October 25, 1990, the chairman of the Better Cavaliers Committee attempted to nominate six persons for the election. The Nominating Committee responded to the Better Cavaliers Committee that four of its nominees would not appear on the ballot at the November 14th Annual Meeting because the proper nominating procedure had not been followed. The remaining two proposed candidates had already been properly nominated by others.
The Better Cavaliers Committee responded by filing suit in this Court to force the placement of its nominees on the ballot. Significantly, that suit did not challenge the failure of the corporation to have given notice of the time and place for the Annual Meeting which has traditionally been held at 7:00 p.m. at the Cavalier Club House. On November 14, 1990 this Court issued an Order requiring the Board to place the dissident slate of director-nominees on the ballot. Committee for a Better Cavaliers v. Cavaliers of Delaware, Inc., Del. Ch., C.A. No. 11811-NC, Hartnett, V.C. (Nov. 14, 1990). The Board of Cavaliers complied with the Court Order and both the Nominating Committee's and the Better Cavaliers Committee's slate of nominees appeared on the ballot at the November 14th Annual Meeting.
The Annual Meeting was attended by holders of 985 of the 1,032 outstanding shares, either in person or by proxy. This represented approximately 95.5% of Cavaliers' outstanding stock. Twenty two stockholders, holding a total of 47 shares, did not attend or submit a proxy. Plaintiff attended the meeting, asserted an objection to the defective notice and then left.
The election was close. The six candidates receiving the highest number of votes won the election. The results were:
Ferrara 529 Furguson 471 Simeonefn_ 500 Jonesfn_ fn† 466 Poppitifn_ 493 Ficcafn† 465 DelCoglinfn_ 489 Thomasfn† 458 DiSabatinofn_ 479 McCormickfn† 453 Waymonfn_ 478 Bonvettifn† 4468 Del. C. § 222(b) and Article II, Section 4(b) of the Bylaws of Cavaliers require that written notice of the stockholders' Annual Meeting be sent not less than ten nor more than sixty days prior to the meeting. The Notice is to include the place, date and time of the meeting. As stated, no notice of the time and place had been given.
nominated by the Nominating Committee.
nominated by the Better Cavaliers Committee.
As a result of the objection by plaintiff, the Board of Cavaliers called a Special Meeting for December 18, 1990 for the purpose of affording the shareholders the opportunity to ratify the election results of the November 14th Annual Meeting. The holders of 960 shares representing approximately 93% of the outstanding shares attended that meeting. They were only given the option to vote for or against the ratification of the election results. They were not given the opportunity to vote for any individual candidate. A majority of those present, in person or by proxy, voted in favor of ratification of the November election of directors. (511 shares voted in favor of ratification, 434 voted against it and 15 shares abstained.)
Plaintiff then filed this action, pursuant to 8 Del. C. § 225, seeking a declaration that the Annual Meeting held on November 14, 1990 was invalid because of defective Notice and requested the ordering of a new Annual Meeting held under the supervision of a Court appointed master.
Plaintiff moved for summary judgment and defendants counter moved to dismiss the suit on grounds that the December stockholders' meeting was duly called and the election of directors was duly ratified, thereby rendering plaintiff's claim moot.
II
The defendants claim that the issue of whether the Notice of the Annual Meeting was deficient is now moot because the shareholders have spoken a second time and have ratified the election of the directors.
Plaintiff, on the other hand, argues that the November Annual Meeting was void because the Board of Cavaliers did not give proper notice of the meeting, as required by 8 Del. C. § 222(a) and Article II, Section 4(b) of the Bylaws. The Notice of the meeting admittedly did not include the time and place of the meeting. Because the Notice was defective, plaintiff urges that any attempt to ratify the actions taken at the subsequent meeting is also void.
Only voidable acts and not void acts of a corporation may be cured by ratification. "The essential distinction between voidable and void acts is that the former are those which may be found to have been performed in the interest of the corporation but beyond the authority of management, as distinguished from acts which are ultra vires, fraudulent or gifts or waste of corporate assets. The practical distinction . . . is that voidable acts are susceptible to cure by shareholder approval while void acts are not." Michelson v. Duncan, Del. Supr., 407 A.2d 211, 218 (1979).
The defect in the Notice of the November 14 Annual Meeting caused the election results of that meeting to be voidable and not void. It does not appear, nor is it alleged, that the defect was the result of bad faith or an attempt to mislead the shareholders and the time and place of the Annual Meeting was well known to the shareholders. The Annual Meeting has always been held at the same time and place. The Board had no authority to hold an Annual Meeting without giving notice, but an innocent failure to give notice of the well-known time and place is not a fraudulent act or corporate waste. Therefore, the results of the improperly noticed, November 14, 1990 Annual Meeting are voidable and not void and are susceptible to cure by ratification. 5 W. Fletcher, Cyclopedia of Corporation Law, § 2011 (rev. ed. 1987).
III
A ratification, however, will not cure a defect as to notice unless the ratification was fairly effected and intrinsically fair. Michelson, supra. This requires that the shareholders be fully informed of what they are asked to ratify. Id.
Plaintiff complains that the ratification process was not fair. He contends that the shareholders should have been given the opportunity to vote for individual director-nominees at the December 18th special meeting, just as they did at the November 14th meeting. At the December 18th meeting the shareholders were only given the option to vote for or against the ratification of the election of the directors elected at the November 14th meeting.
Plaintiff also challenges the ratification because the individuals who were nominated by the Nominating Committee voted. He claims that their nomination made them interested shareholders and their votes should not be counted. Plaintiff further asserts that the shareholders' right to participate in the voting process has been compromised and the Board's actions in seeking a ratification of the November vote are invalid.
The Notice of the December 18, 1990 Special Meeting gave the shareholders all the relevant information they needed to fully consider the question of ratification. It stated the date, time, place and reason for the meeting; it informed the shareholders of the prior litigation commenced by the Better Cavaliers Committee and of the present action; it stated that Mr. Lofland, plaintiff, alleged that the November 14th election was invalid because of the improper Notice; and, it listed the proposals which were to be placed on the ballot at the December 18th meeting. By previous correspondence, the shareholders were informed that the Better Cavaliers Committee was unhappy with incumbent management and intended to seek control of the Board. Therefore the notice of the meeting to consider ratification was intrinsically fair and nothing has been presented to show any unfairness in the way the meeting was conducted.
The votes cast by the director-nominees nominated by the Nominating Committee were properly included in the ratification vote. A shareholder is not prohibited from voting his shares in his own best interest, even if he is a director, as long as he does not violate fiduciary duties owed to other shareholders.Bershad v. Curtiss-Wright Corp., Del. Supr., 535 A.2d 840 (1987); Citron v. Sleego, Del. Ch., C.A. No. 10191-NC, Allen, C. (1988). In the present case, no shareholder holds more than 7 of the 1,032 outstanding shares. Therefore no controlling shareholder exists. The director-nominees have no greater voting power than any other shareholder and are entitled to vote as they choose.
A ratification does not require the "re-doing" of the prior action, as plaintiff contends, but rather merely the affirmation of that act. See Gentry-Futch Co. v. Gentry, 106 So. 473, 479 (Fla. 1925). Therefore the Board was not required to separately place all nominees on a ballot at the December 18th meeting.
IV
The last issue raised by plaintiff is his claim that shareholders can only ratify unauthorized acts of directors and not an invalid election of directors. He cites Michelson, supra; and Kerbs v. California Eastern Airways, Inc., Del. Supr., 90 A.2d 652, 659 (1952).
Both cases, however, discuss shareholder ratification of unauthorized acts by the directors. They do not hold that shareholders cannot ratify a prior election where there was a defective notice. All shareholders were duly notified of the December 18th Special Meeting and the purpose for that meeting. Each shareholder was given the opportunity to vote and a majority of shareholders voted to ratify the results of the November election. Nor does plaintiff cite any authority prohibiting shareholder ratification of an election.
V
In sum, the defective Notice of the November 14th Annual Meeting caused the election results to be voidable but the defect was cured by shareholder ratification at the December 18th Special Meeting, which was fairly accomplished. Therefore defendants' motion to dismiss is granted and plaintiff's motion for summary judgement is denied.
IT IS SO ORDERED.