In Kerbawy v. McDonnell, the Delaware Court of Chancery affirmed the validity of a solicitation of written consents that removed certain directors and appointed new directors. A key theme of the opinion is that stockholders are free to act unilaterally by written consent and an incumbent board is not entitled to a “full and fair debate” in the course of a consent solicitation.
Plaintiff Kerbawy was a stockholder of ACell, Inc. and initiated the consent solicitation. He was assisted to some extent by Mr. DeFrancesco, a member of the ACell board during the consent solicitation and who was also ACell’s largest stockholder. Kerbawy filed the action in the Delaware Court of Chancery the same day he delivered the consents to ACell. He sought a declaratory judgement that the Defendant directors were validly removed by the written consents. Because the burden of proving that a director’s removal or election is invalid rests on the party challenging the invalidity, the burden fell on the Defendant directors that were removed.
Among other things, the Defendants claimed Kerbawy made misleading disclosures in the course of the consent solicitation. The court found that Kerbawy did not have a duty of disclosure because he was not a director, officer, controlling stockholder or member of a control group. Defendants also contended that DeFrancesco’s duty of disclosure as a director was imputed to Kerbawy as a result of DeFrancesco’s participation in the consent solicitation. The court declined to follow the Defendant’s reasoning, noting that the challenged disclosures were Kerbawy’s, and not DeFrancesco’s. The court, however, ultimately did not rule on the issue because the court found even if Kerbawy did owe a duty of disclosure, the disclosure violations identified by Defendants were not sufficient to justify setting aside the consents on equitable grounds.
The Defendants also argued DeFrancesco provided Kerbawy with confidential information that was used in the consent solicitation in violation of DeFrancesco’s duty of loyalty. While acknowledging that disseminating the information without obtaining confidentiality agreements from recipients might be negligent or grossly negligent, the court found several problems with the Defendant’s argument. First, the documents were fairly unremarkable that were subject to inspection under a books and records demand and did not constitute trade secrets or valuable proprietary information. Second, the Defendants could not point to any harm to ACell as a result. While the Defendants argued that the misuse of confidential information allowed Kerbawy to keep the consent solicitation secret, the court rejected this premise as the board has no right to prevent a stockholder from engaging in a “secret” solicitation.