Document: Johnston v. Pedersen, C.A. No. 6567-VCL (Del. Ch. Sept. 23, 2011)
The Court of Chancery found that written consents representing a majority of the outstanding voting power of Xurex, Inc. (“Zurex”) were effective to remove and replace Zurex’s incumbent directors even though Zurex’s Certificate of Incorporation also required a class vote of the holders of a class of Zurex’s preferred stock where Zurex’s directors had breached their fiduciary duty of loyalty in issuing the preferred stock. The preferred stock had been issued by Zurex to select friendly investors and management to thwart off a change in control of the board after Zurex, a financially troubled company, had a series of proxy contests that were further destabilizing the company. While the Court stated that it believed that the defendant directors honestly believed that they were acting in the best interests of the company in issuing the preferred stock, the Court held that their actions nonetheless could not pass enhanced scrutiny. Drawing from Mercier v. Inter-Tel (Del.) Inc., 929 A.2d 786 (Del. Ch. 2007) and Blasius Industries Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), the Court determined that the defendants bore the burden of proving that their motivations were proper and not selfish, and that they did not preclude the stockholders from exercising their right to vote or coerce them into voting in any particular way. Further, because the vote involved the election of directors and matters of corporate control, the directors were required to support their actions with a compelling justification. The Court held that an intent to raise capital by the issuance of the preferred stock was not a compelling justification where the stock possessed a class vote on every issue subject to a stockholder vote.