Canada: Delaware Supreme Court Addresses Vote Buying, Record Ownership of Shares and By-law Effectiveness in Kurz v. Holbrook

On April 21, 2010, the Delaware Supreme Court issued an important opinion addressing Delaware law principles regarding improper vote buying, record ownership of stock, and the propriety of a by-law amendment purporting to remove directors by reducing the size of the board. The Court's opinion in Kurz v. Holbrook, which affirms in part and reverses in part the earlier opinion of the Delaware Court of Chancery, also discusses whether an agreement to sell shares violated an existing agreement restricting the sale of such shares.

The Kurz case arose out of a contest for corporate control of EMAK Worldwide, Inc. ("EMAK") in which Take Back EMAK, LLC ("TBE"), a group of insurgent stockholders, through resolutions adopted by written consent, purported to remove two directors from a board of seven directors and fill the two vacancies with TBE's nominees. Crown EMAK Partners, LLC ("Crown"), a holder of EMAK preferred stock that was contractually entitled to elect separately two of the seven directors, then launched a consent solicitation to adopt a by-law amendment purporting to reduce the size of the board to three members. If the number of directors then in office exceeded three, the by-law amendment would also require the holding of a special meeting of stockholders to elect a single director as the successor to all of the directors other than the two directors elected separately by the holders of the preferred stock. Crown did not solicit consents to remove any of the directors.

Crown obtained and delivered a sufficient number of consents to approve its proposed by-law amendment (the preferred stock was not entitled to vote generally on the election of directors but voted on an as-converted basis with respect to other matters). TBE also obtained and delivered a sufficient number of consents to remove and replace the directors, but the inspector of elections invalidated the votes of shares held in "street name" because an "omnibus proxy"1. from Cede & Co., the nominee of The Depository Trust Company ("DTC") in whose name "street name" shares are held (as is customary for U.S. public companies), was not obtained. The shares voted by TBE included shares held by a former employee of EMAK who had signed a Restricted Stock Grant Agreement with EMAK that prohibited the sale of those shares before March 2011. Immediately prior to the delivery of the consents, TBE and the former employee had entered into an agreement pursuant to which the former employee agreed to sell those shares to TBE and granted TBE a proxy to vote the shares.

At the trial court level, the Court of Chancery held that the by-law amendment violated the Delaware General Corporation Law ("DGCL") by improperly reducing the size of the board without formally removing any directors. The Chancery Court further held that the DTC participant list (the list of brokers and other nominees who have positions in the DTC-held shares) constituted part of the EMAK stock ledger for purposes of the DGCL and, therefore, that it was not necessary for the DTC participants to obtain the "omnibus proxy" from DTC to vote the shares. Finally, the Chancery Court held that the purchase agreement between TBE and the former employee did not constitute improper vote buying under Delaware law and did not violate the Restricted Stock Grant Agreement.

The Supreme Court affirmed the Vice Chancellor's opinion that TBE had not engaged in improper vote buying. The Court agreed that because the purchase agreement resulted in Crown voting the shares that determined the outcome of the consent solicitation the arrangement should be reviewed in light of Delaware's prohibition on improper vote buying. Under that scrutiny, however, the Supreme Court determined that the transaction was not illegal because it did not involve fraud and did not result in a "misalignment between the voting interest and the economic interest of shares" to which Delaware courts have historically objected. However, in a reversal of the Chancery Court decision, the Supreme Court found that that the purchase agreement breached the Restricted Stock Grant Agreement because it effected a transfer of both the economic ownership and the formal voting rights of the shares, despite the parties' efforts to comply technically with the Restricted Stock Grant Agreement by having the former employee retain legal title to the shares during the restricted period. Consequently, the Court held that TBE could not vote those shares.

Because TBE could not vote the restricted shares, TBE did not have sufficient votes to act by written consent. As a result, the Court found it unnecessary to make a formal judgment on whether the DTC participant list constituted part of the stock ledger for purposes of the DGCL. However, the Supreme Court did say that the Chancery Court's decision on this point is "obiter dictum and without precedential effect," and the rather lengthy discussion in the opinion of the depository system and the judicial precedents regarding record ownership under Delaware law implies strongly that the Court would have overturned the Chancery Court's determination that the DTC participant list should be deemed part of the stock ledger.

As noted above, the Supreme Court upheld the Chancery Court's decision that the by-law purporting to reduce the size of the board without removing directors violated the DGCL. The Court noted that giving effect to the by-law amendment would have resulted in the anomalous situation in which there would be more members of the board than board seats and would also have conflicted with the provision of the DGCL that provides the exclusive means by which a director of a Delaware corporation may be removed from office. The legally proper sequence for reducing the number of currently sitting directors in a contested election would be to remove the challenged directors, reduce the number of directorships and then fill any vacancies. In this instance, the preferred stockholders did not have the right to vote their shares to remove directors, and their attempt to achieve the same objective indirectly through a by-law amendment ran afoul of the DGCL.

1. An omnibus proxy is a proxy given by DTC to the various DTC participants (i.e. brokerage firms, banks and other entities whose customers are the beneficial owners of the shares registered in the name of Cede & Co.) to enable those entities to vote the shares.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.