Datapoint Corp. v. Plaza Securities Co.

Citations: 496 A.2d 1031; 1985 Del. LEXIS 559

Court: Supreme Court of Delaware; July 31, 1985; Delaware; State Supreme Court

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Datapoint Corporation appealed a Court of Chancery order that preliminarily enjoined its bylaw limiting corporate actions by written shareholder consent, presenting a novel issue regarding the bylaw's validity under 8 Del.C. 228. The Court ruled the bylaw unenforceable as it conflicted with shareholders' powers under the statute. The conflict arose when Asher B. Edelman, owning over 10% of Datapoint's stock, expressed interest in acquiring control but faced opposition from the board. After his proposal was rejected, he indicated plans to solicit shareholder consents. In response, the board adopted a bylaw amendment designed to regulate such consents. Edelman withdrew his offer and announced intentions to solicit consents for board removal. Plaintiffs sued for injunctive relief against the bylaw's enforcement, prompting Datapoint's board to file a counterclaim seeking a declaration of the bylaw's validity. The Supreme Court of Delaware affirmed the lower court's decision.

On February 12, Datapoint's board amended its January bylaw based on recommendations from its investment advisor, Kidder Peabody, who indicated that at least 60 days were necessary to finalize transactions that would benefit all shareholders. The amended February bylaw stipulated that: (1) shareholder consent actions cannot occur until after the 45th day post-record date, (2) the record date must be set within 15 days of a shareholder's notice of intent to solicit consents unless otherwise requested, and (3) no consent action takes effect until any related legal proceedings in the Delaware Court of Chancery or other competent courts are resolved, unless those proceedings are deemed to be pursued in bad faith.

Following Edelman’s notice to solicit consents, Datapoint's board established March 4 as the record date and April 18 as the action date. On February 28, Datapoint filed a lawsuit in the U.S. District Court for the Western District of Texas to invalidate any consents obtained by plaintiffs, initiating the litigation "hold" under the February bylaw. On March 5, the Court of Chancery issued a preliminary injunction preventing Datapoint from enforcing the February bylaw, concluding that it likely conflicted with shareholder powers granted under § 228 and posed a risk of immediate irreparable harm to the plaintiffs' consent solicitation efforts.

Datapoint's appeal claims the Chancellor made legal errors, arguing first that the Court incorrectly interpreted § 228 as not allowing bylaws to regulate consent solicitation procedures. Second, it contends that § 228 does not require immediate effectiveness of consents without legality review. Finally, Datapoint argues that its February bylaw reasonably regulates 228 solicitations, asserting that the waiting period is intended to prevent uninformed shareholder decisions while also allowing management to solicit proxies. The appeal emphasizes that according to § 228’s introductory clause, only provisions in the certificate of incorporation can deny shareholders the right to act by written consent, not bylaws enacted by the board.

Bylaws serve as the appropriate method for internal corporate governance, and the defendant asserts that corporate elections, including those under Delaware law 8 Del.C. 228, can be regulated by such bylaws. The defendant contends that Datapoint's February bylaw is a reasonable regulation authorized by 8 Del.C. 109(b) and does not conflict with 228. In contrast, the plaintiffs argue that 228 does not allow for any restrictions or delays in the execution of valid consent actions and that its introductory phrase limits board bylaw authority over such actions. They assert that Datapoint's bylaw imposes unreasonable delays on shareholder consent actions, directly violating 228.

The core issue is not about the theoretical allowance for delays or board regulation under 228 but rather whether Datapoint's bylaw conflicts with the rights granted to shareholders by 228. The Court found that the bylaw does indeed conflict with 228, highlighting that it contradicts shareholders' rights to immediate action by written consent, as 228 does not permit delays based on non-legal sufficiency grounds. The Chancellor ruled that 228 entitles shareholders to immediate action once sufficient consent is obtained, with no additional waiting period or review required, a conclusion the Court supports. The ruling specifically identifies the February bylaw as conflicting with the intent and provisions of 228.

Datapoint's bylaw imposes a 60-day delay on shareholder actions taken by consent in lieu of a meeting, requiring a review of consent validity by inspectors or the corporation's secretary. This delay, which extends the determination of validity to 45 days after a record date, circumvents statutory provisions under Section 228 that allow for immediate effectiveness of sufficient consents. The bylaw is deemed arbitrary and unreasonable, as it appears designed to provide the incumbent board with time to counter shareholder actions through management's proxy solicitations. Additionally, the bylaw suspends effective action until the resolution of any lawsuits challenging shareholder consent, effectively undermining shareholders' statutory rights. While the court finds the bylaw invalid, it acknowledges that minimal provisions for reviewing consent validity could be permissible. The court affirms the Court of Chancery's decision to grant a preliminary injunction against the enforcement of the bylaw due to its overreach into fundamental shareholder rights.

The January bylaw mandated that any Datapoint shareholder intending to solicit consents for director elections must provide written notice of nominations to the board 60 days prior to executing consents or mailing solicitation materials. The notice had to include comprehensive details about the solicitation and nominees, and the record date could not be set earlier than 30 days from the notice date. Additionally, the bylaw delayed the effectiveness of shareholder consent actions until the 59th day after the record date or during any legal challenge regarding the validity of the consents, contingent upon the corporate secretary determining that the lawsuit was not being pursued in good faith.

Subsequently, Datapoint's board reported a loss of over $15.8 million in the second fiscal quarter and a withdrawal of $15.3 million from working capital, which included $13.1 million allocated for golden parachute contracts and litigation expenses, and $2.1 million spent on annuities for directors. The February bylaw was designed not merely to allow management to assess the legal validity of shareholder consents but also to provide time to contest shareholder actions and gather opposing proxies.

Delaware law, specifically 8 Del.C. 109(b), permits bylaws that relate to corporate business and conduct, as long as they are not inconsistent with legal provisions or the corporation's certificate of incorporation. The court's language suggests that, according to statute 228, shareholders have the right to act by written consent without prior inquiry into other shareholders' voting inclinations unless explicitly restricted in the certificate of incorporation. This contrasts with the precedent set in Gow v. Consolidated Coppermines, where the court upheld a bylaw concerning board size over a conflicting charter provision, emphasizing that 228’s mandate rests solely with shareholders without granting the board regulatory authority over such actions.