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Delaware Chancery
Jeff Peterson

DELAWARE CHANCERY CASE HAS SIGNIFICANT IMPLICATIONS ON USE OF SUPERMAJORITY PROVISIONS WITH DELAWARE CORPORATIONS

February 13, 2017/in Corporate Transactional Law, News /by Jeff Peterson

A recent case from the Delaware Chancery Court has cast doubt on the validity of bylaws containing supermajority voting requirements on items where Delaware’s General Corporation Law (“DGCL”) contains a specific voting threshold.

Frechter v. Zier, C.A. No. 12038-VCG (Del. Ch. Ct. Jan. 24, 2017)

In Frechter v. Zier, C.A. No. 12038-VCG (Del. Ch. Ct. Jan. 24, 2017), a shareholder of Nutrisystem, Inc. sued the company and its directors for declaratory judgment to invalidate a provision in Nutrisystem’s bylaws requiring a vote of two-thirds of the company’s shares before a director could be removed from the board.

The plaintiff relied on Section 141(k) of the DGCL, which provides that “[a]ny director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors” (with certain exceptions that were not applicable). Defendants argued that the board was empowered to adopt the bylaw pursuant to DGCL Sections 109(b) and 216 of the DGCL —which provide for, respectively, the adoption of bylaws not inconsistent with law or the certificate of incorporation, or bylaws specifying the required vote for a transaction subject to other provisions of the DGCL.

Chancery Court Chancellor & Plaintiff Agree

The Chancery Court Chancellor agreed with plaintiff, concluding that Section 141(k) prohibits any bylaw requiring a supermajority vote for director removal because any such requirement would be inconsistent with “the plain language of the statute.”  The Chancellor added that any contrary interpretation would render Section 141(k) “an effective nullity.”

This opinion has significant implications for any bylaw provision requiring supermajority shareholder votes for any item for which the DGCL provides a specific voting threshold. Corporations should consider removing any such supermajority voting requirements from their bylaws and instead placing them in the certificate of incorporation.

Placement of supermajority provisions in the certificate of incorporation is preferable because Section 102(b)(4) of the DGCL permits a corporation to include in its certificate of incorporation “

Provisions requiring for any corporate action, the vote of a larger portion of the stock or of any class or series thereof, or of any other securities having voting power . . . than is required by this chapter.” The DGCL has no similar provision with respect to bylaws.

https://lawofficesjtp.com/wp-content/uploads/2017/02/iStock-1181528815-1-scaled.jpg 1438 2560 Jeff Peterson https://lawofficesjtp.com/wp-content/uploads/2021/11/JTPlogo-01.png Jeff Peterson2017-02-13 12:21:002022-02-10 10:43:44DELAWARE CHANCERY CASE HAS SIGNIFICANT IMPLICATIONS ON USE OF SUPERMAJORITY PROVISIONS WITH DELAWARE CORPORATIONS
Words insider trading written on a book.
Jeff Peterson

SEC CHARGES CHINESE NATIONAL CITIZENS WITH INSIDER TRADING, OBTAINS ORDER FREEZING $29 MILLION IN U.S. ACCOUNTS

February 13, 2017/in News, Securities Law /by Jeff Peterson

Emergency Court Order – Securities & Exchange Commission

The Securities and Exchange Commission announced Friday that it obtained an emergency court order freezing brokerage accounts holding more than $29 million in allegedly illegal profits from insider trading that took place prior to the April 2016 acquisition of DreamWorks Animation SKG, Inc. by Comcast Corp.

In its complaint, the SEC alleged that in the weeks leading up to news of the acquisition, Shaohua (Michael) Yin attained more than $56 million of DreamWorks stock in U.S. brokerage accounts of five Chinese nationals, including his parents. The stock was allegedly obtained over a three-week period after a confidential bid had been placed to buy the studio. After the acquisition was announced, DreamWorks stock price rose over 47%.  

S

$29M In Profit From The DreamWorks Trade

The SEC’s complaint further alleged that the five accounts gained $29 million in profits from the DreamWorks trades, and that the accounts profited from other suspicious trading in another U.S.-based company and three China-based companies ahead of market-moving news.

Yin, a partner at Summitview Capital Management Ltd., a Hong Kong-based private equity firm, allegedly did not trade in DreamWorks stock through his own account but instead through five accounts from addresses in Beijing and Palo Alto and on a computer that also accessed his email accounts.

Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office, stated in the SEC press release that, “Despite the defendant’s alleged attempts to hide his control over these accounts, the SEC’s data analytic investigative tools enabled us to determine who was behind the suspicious trades. Our action today shows that the SEC will not hesitate to freeze the assets of foreign traders when they use our markets to conduct illegal activity.”

SEC Restraining Order Was Successful

The SEC was successful in securing a temporary restraining order freezing the assets in the five brokerage accounts in the U.S. District Court for the Southern District of New York. A hearing on an order to show cause why an injunction and other relief should not be issued has been scheduled for February 17.

The SEC’s complaint charges Michael Yin with securities fraud and names the holders of the five brokerage accounts – Lizhao Su, Zhiqing Yin, Jun Qin, Yan Zhou and Bei Xie – as relief defendants.  The SEC is seeking a permanent injunction, return of all allegedly ill-gotten profits, civil money penalties, and other relief.

The SEC’s press release can be viewed at the following link:

https://www.sec.gov/news/pressrelease/2017-44.html

https://lawofficesjtp.com/wp-content/uploads/2017/02/iStock-490556036-scaled.jpg 1707 2560 Jeff Peterson https://lawofficesjtp.com/wp-content/uploads/2021/11/JTPlogo-01.png Jeff Peterson2017-02-13 12:11:002022-02-10 10:43:44SEC CHARGES CHINESE NATIONAL CITIZENS WITH INSIDER TRADING, OBTAINS ORDER FREEZING $29 MILLION IN U.S. ACCOUNTS
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