Document: Canmore Consultants Ltd. v. L.O.M. Medical International, Inc. C.A. No. 8645-VCG (Del. Ch. September 19, 2013)

In the first case before the Court of Chancery turning on application of 8 Del. C. § 223(c), Vice Chancellor Sam Glasscock, III, rejected the stockholder plaintiffs’ contention that the statute created a presumption in favor of a new election, holding instead that stockholders must prove the equities weigh in their favor to prevail in a Section 223(c) action.

Two months after five directors were elected to L.O.M’s board, two of them resigned, followed shortly by a third. This left only two directors, who then executed written consents appointing a third director. By July 2013, the three directors had appointed two more men to fill the remaining vacancies. In addition to the presumption argument noted above, the plaintiffs argued that a new election was necessary because the appointed directors had authorized a private placement that favored one faction of stockholders over another.

The Court held that Section 223(c) provided only a limited exception to directors’ authority to fill board vacancies, given the caveat in the statute that “directors may fill board vacancies only where doing so is not prohibited by a company’s certificate of incorporation or bylaws. Because a company has the ability to entirely eliminate the authority granted to directors under 223(a), the utility of 223(c) to constrain directorial authority is minimal; Section 223(c) merely creates a narrow avenue whereby the Court may prevent directors from filling board vacancies where doing so is necessary to avoid some identifiable inequity.” Plaintiffs bear the burden of demonstrating this inequity, and the allegations in this case regarding the private placement were not enough to outweigh the fact that the company lacked the necessary funds to hold another stockholder meeting and election, the Court said.