In Kinley v. Healthcare Acquisition Corp., C.A. No. 3161-CC (Del. Ch.) (Transcript Ruling), plaintiff Matthew P. Kinley (“Petitioner” or “Kinley”), a stockholder of record and former President and former director of defendant Healthcare Acquisition Corp. (“HAQ,” the “Company” or “Respondent”) n/k/a PharmAthene, Inc. (“New PharmAthene”), a public company whose shares trade on the American Stock Exchange LLC (“AMEX”), filed an action against PharmAthene pursuant to Section 225(b) of the Delaware General Corporation Law (“DGCL”). Petitioner sought a determination or declaration on the validity of the vote by HAQ’s stockholders at a Special Meeting on August 3, 2007, to approve a merger (“the Merger”) between HAQ and the pre-Merger PharmAthene entity (“Old PharmAthene”), pursuant to which a wholly-owned subsidiary of HAQ merged with and into Old PharmAthene and Old PharmAthene became a wholly-owned subsidiary of HAQ. In connection with the Merger, HAQ’s name was changed to “PharmAthene, Inc.”
HAQ, a special purpose acquisition vehicle, was formed for the purpose of acquiring an operating business in the healthcare industry. To fund this acquisition objective, HAQ conducted an initial public offering. Nearly all of the funds generated thereby were to be held in trust and were to be released only upon the consummation of a future acquisition or liquidation. If an acquisition did not occur by a date certain, HAQ’s organic documents required it to liquidate. The Merger was HAQ’s last opportunity to effect an acquisition and avoid mandatory liquidation. An overwhelming majority of HAQ’s stockholders approved the Merger.
Although the Merger was approved by sufficient votes pursuant to the Company’s certificate of incorporation and the DGCL (i.e., a majority), the certificate of incorporation provided that the Merger could not be consummated if more than 20% in interest of HAQ’s stockholders voted against the Merger and contemporaneously demanded, as was their right, to have their shares converted into a pro rata portion of the funds held in trust. During the August 3, 2007, Special Meeting of stockholders to consider the Merger and related proposals, at which these votes were being tallied, the Company’s transfer agent issued an official report that less than 20% of the Company’s stockholders had voted against the Merger and demanded conversion. Thereafter, the Special Meeting was adjourned, and the polls were closed.
Later that same day, the Company learned that its transfer agent had mistakenly reported that less than 20% of the Company’s stockholders had voted against the Merger and demanded conversion. In actuality, more than 20% of the Company’s stockholders demanded conversion, with the result that the Merger, although validly approved, could not then be consummated. At that point, the meeting was re-opened, shares of Company stock were acquired from certain dissenters and those dissenters’ conversion demands were withdrawn such that the percentage of stockholders requesting conversion fell below the 20% threshold, eliminating any obstacle to consummation of the Merger. The Merger was then consummated with the filing of a Certificate of Merger with the Secretary of State of the State of Delaware.
This Section 225(b) proceeding was necessitated by the fact that the Company agreed to release the IPO funds to those stockholders who requested conversion, but refused to release the remaining IPO funds (for the benefit of the Company and its current public stockholders) until the validity of the Merger has been established conclusively. The reason for the Company’s refusal was that as a consequence of the anomalous events surrounding the Special Meeting, it was unable to obtain an unqualified opinion of counsel that the Merger was validly approved and consummated in accordance with Delaware law.
The first question before the Court of Chancery was whether the official stockholder vote was the one taken after the re-opening of the Special Meeting (the “Final Vote”) or the one taken prior to the re-opening in reliance on misinformation provided by the transfer agent (the “First Vote”). Petitioner argued that the Final Vote was the official vote because the Special Meeting was adjourned and re-opened for no other reason than reliance on a mistake of fact officially reported by the Company’s transfer agent, whose qualifications and independence were not at issue. Petitioner argued in the alternative that even if the Special Meeting had not been re-opened, sufficient votes for the approval of the Merger had already been obtained on the First Vote, and the events following the re-opening merely eliminated an obstacle to consummation of the Merger, but had no legal effect on the stockholder vote approving the Merger. The basis for the argument was that the Company’s Charter distinguishes between the vote necessary for approval–i.e., a simple majority, which was at all times obtained–and the conditions to consummation of a stockholder-approved merger, and thus, the events following the re-opening merely eliminated a prohibitory condition to consummation, but had no legal effect on the vote approving the Merger.
The Complaint was filed on August 13, 2007, and the Court promptly set a final hearing date of August 27, 2007. The Court then directed the Company to publicly disseminate notice of the proceedings to all of the Company’s stockholders via a press release and the filing of a Form 8-K with the Securities and Exchange Commission. A hedge fund that purchased shares after the vote sought to intervene and also filed an objection to the relief sought by the Petitioner. The hedge fund alleged that the re-opening of the Special Meeting violated fundamental notice provisions of the DGCL and that management’s stock purchases constituted a breach of fiduciary duty because management lacked a “compelling justification.” The hedge fund also argued that because the Charter stated that demands for conversion must be made “contemporaneous” with the vote, they could not be withdrawn later.
The Court of Chancery first found that the hedge fund (i) lacked standing under Section 225(b) because it was not a stockholder as of the record date for Special Meeting or even as of the date of the vote and (ii) lacked standing to allege breach of fiduciary claims because it was not a stockholder at the time of the alleged harm and was attempting to buy a lawsuit.
The Court then held that, even assuming the hedge fund had standing, the challenge to the Merger lacked merit. The Court first observed that the stockholders, via a proposal listed on the agenda for the Special Meeting, had given pre-approval for management to adjourn the Special Meeting for the purpose of acquiring stock in order to reduce conversion requests and, but for the transfer agent’s mistake, the polls would not have been closed. The Court then held that it did not have to rule on the issue of whether equity would extend mistake-of-fact contract principles to the anomalous events surrounding the vote because the Merger was validly approved and consummated on the First Vote. The Court concluded that majority approval had at all times been obtained and that the later withdrawal of conversion requests did not violate the terms of the Charter. The Court further noted that not only did the later withdrawal of conversion requests not affect the vote, but also that the word “contemporaneous” could be construed to mean around the time of and does not necessarily mean at the exact time of the vote.