Ann Lipton reports on an interetsing new case:
Daktronics is incorporated in South Dakota of all places (is it lonely there?). South Dakota mandates cumulative voting, which makes it much, much easier for a minority blockholder to gain board representation, as Matt Levine explains here.
And such a blockholder has emerged, in the form of Alta Fox. Alta Fox is both a shareholder and a holder of Daktronics notes, but the notes are convertible into shares, so on a fully diluted basis, Alta Fox owns over 11% of Daktronics’ voting power. Given that, at least some of Alta Fox’s director nominees would likely have been seated in a proxy contest but – plot twist! – Daktronics called a special meeting of its shareholders to vote on reincorporation to Delaware, where cumulative voting is not the default.
And, as I understand it, Daktronics is calling for that vote before Alta Fox’s shares convert, so that Alta Fox will be heading into the meeting with less than its full voting power. In response, Alta Fox filed a lawsuit (in federal court, presumably because it just likes the judges and/or procedures better), alleging that Daktronics’s proposal represents a breach of fiduciary duty and shareholder oppression.
Ann points out that the reincorporation "is intended to thwart shareholder voting rights in the context of a particular, threatened proxy contest."
Like Ann, I don't know what specific South Dakota law says, but general corporate law principles says you can't change the rules of the game in the middle of an election contest. From my book Corporate Law:
This effect is nicely illustrated by Coalition to Advocate Public Utility Responsibility, Inc. v. Engels.[1] Northern States Power Company (NSP) had 14 directors, each elected annually for a one-year term by means of cumulative voting. In 1973, CAPUR (a coalition of consumer and environmental groups) sought to elect to the board a “public interest” candidate named Alpha Smaby (really).[2] Smaby promised that, if elected to the board, she would promote the ‘‘public interest” with special concern for environmental and consumer issues. NSP’s board opposed Smaby’s election and sought to prevent it by (1) reducing the number of directors to 12 and (2) classifying the board into three groups of four directors with staggered three-year terms. As a result, only four directors would be up for election in any given year. Under the old rules, Smaby needed the cumulated votes of just over 7% of the shares to be elected. The changes made by the board raised the number of shares needed to assure her election to about 20%.
Both changes were permitted by statute. Most corporate law codes give the board power to make unilateral changes in its size. Most likewise permit the corporation to have a staggered board. The trial court nonetheless granted a preliminary injunction against the board. Why? Because it is inequitable to change the rules in the middle of the game—or so the court opined. Consistent with well-established principles of Delaware law,[3] the court held that otherwise lawful actions can be enjoined as if they unfairly injure rights of minority shareholders. By implementing these changes in the middle of an election campaign, without disclosure, and for the purpose of defeating a minority candidate, the board breached its fiduciary duties. Although the election thus went forward under the old rules, Smaby ultimately did not receive a sufficient number of votes to be elected.[4] The case nevertheless reaffirms the principle that otherwise lawful board action becomes impermissible if undertaken in the midst of an election campaign for the purpose of obstructing a legitimate effort by dissident shareholders to obtain board representation. From the perspective of corporate counsel working with the incumbent directors, of course, the transactional implication is that such changes should be undertaken in mid-year long before any insurgent shareholders begin making noise.
[1] 364 F.Supp. 1202 (D.Minn.1973).
[2] Smaby’s obituary does not relate whether Alpha was her original birth name, but does tell us that she was “a former Minnesota state lawmaker active in opposing the Vietnam War and in promoting liberal causes. . . . Smaby served two terms in the state House of Representatives. During the 1968 presidential campaign, she was a delegate to the Democratic National Convention and supported anti-war candidate Eugene McCarthy.” Orlando Sentinel Trib., July 20, 1991, at A16.
[3] See, e.g., Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437 (Del.1971); Condec Corp. v. Lunkenheimer, 230 A.2d 769 (Del.Ch.1967).
[4] Michael P. Dooley, Fundamentals of Corporation Law 382–85 (1995).
