DE Courts Tackle Novel Issues Presented by Contested Director Election

Recently, in Kurz v. Holbrook (C.A. No. 5019-VCL (Del. Ch. Feb. 9, 2010), aff'd in part and rev'd in part, No. 64 (Del. 2010)), the Delaware Court of Chancery and Supreme Court confronted dueling consent solicitations over control of the board of directors of EMAK Worldwide, Inc. This contest generated three issues of first impression:

• Whether directors can be removed from office, mid-term, through a reduction in the size of the board effected via a stockholder-approved bylaw amendment;
• Whether a purchase of the “swing votes” necessary to win the contest can constitute illegal vote buying; and
• Whether an omnibus proxy is required from the Depositary Trust Company (“DTC”) in order for banks and brokers to vote “street name” shares on behalf of their customers.

Vice Chancellor Laster tackled these issues head-on in a thoughtful analysis that is likely to impact strategies and outcomes of future battles for corporate control. However, precisely because of the decision's potential precedential impact, the Delaware Supreme Court heard an appeal on an expedited basis. In a unanimous decision, the Supreme Court affirmed the Court of Chancery's decision in part and reversed it in part, thereby blunting the impact of the lower court decision in one area.