The Delaware Court of Chancery has issued a temporary restraining order enjoining ChinaCast Education Corporation from holding its scheduled annual stockholder meeting. The Company filed its definite proxy statement on November 14, 2011, for its 2011 annual stockholder meeting, which included incumbent director Ned Sherwood on its slate of directors. However, on December 8, 2011, less than two weeks prior to the meeting, the Company publicly disclosed that it had removed Mr. Sherwood from the Company's slate and no longer recommended his election. Mr. Sherwood, together with another plaintiff, moved for a restraining order to enjoin the Company from holding its annual stockholder meeting claiming, among other things, that the board of directors breached its fiduciary duty of disclosure when communicating its reasons for his removal from the Company's slate. Mr. Sherwood argued that the December 8 proxy supplement, which accused him of various improprieties, failed to disclose the true reason that the board had removed him from its slate, which he claimed was to silence an independent voice. Mr. Sherwood also argued that absent a restraining order, stockholders would have insufficient time to consider corrective disclosures or Plaintiffs' proxy materials nominating a competing slate of candidates, thus rendering the stockholder vote uninformed and causing irreparable harm to the stockholders.
The Court found that there were at least two ways in which the December 8 proxy supplement may be materially misleading and therefore sufficient to find the existence of a colorable disclosure claim. Furthermore, the Court found that the Company has not simply expressed its disagreement with Mr. Sherwood's positions or dissatisfaction with his personal behavior, but also excluded him from merely running for election. The Court explained that it is not the place of a company's incumbent management or the Court to decide whether one candidate is preferable to another for election to the board of directors. Rather, the law emphatically vests that power in the stockholder franchise. The Court reasoned that 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." Therefore, holding the annual meeting on December 21 would not comport with the "scrupulous fairness" required of corporate elections.
This case serves as an important reminder that while Delaware law provides significant latitude to create processes intended to facilitate the orderly conduct of annual stockholder meetings and election contests, the Court scrupulously protects the voting rights of stockholders.
Sherwood, et al. v. Chan Tze Ngon, et al., CA No. 7106-VCP (Del. Ch. December 20, 2011)