The Delaware Chancery Court ruled that incumbent directors breached their duty of loyalty in connection with a contested election of directors. The incumbent directors were found to have granted a class vote provision in a preferred stock designation intended to prevent holders of a majority of the outstanding voting power from electing a new board of directors. The court imposed the drastic remedy of removing the class vote provision from the preferred stock designation and installing the opposition slate of directors. In reaching its decision, the court subjected the actions of the incumbent directors to an enhanced scrutiny test. Under this test, the incumbent directors bore the burden of persuading the court that their motives were proper and not selfish, that they did not preclude stockholders from exercising their right to vote or coerce them into voting a particular way, and that the incumbent directors' actions were reasonably related to a legitimate objective. In addition, as a result of the class vote provision affecting an election of directors and touching upon a matter of corporate control, the court further required the incumbent directors to provide a "compelling justification" for their actions.
Johnston v. Pedersen, 2011 WL 4435806 (Del. Ch. Ct. Sept. 23, 2011).