Crown EMAK Partners, LLC v. Kurz

Section 219(c) of Delaware’s General Corporation Law provided that only the record owners of a corporation’s stock—i.e., the owners listed on the corporation’s stock ledger—could vote in corporate elections. Many stocks in Delaware corporations were legally owned by the Depository Trust Company (DTC) on behalf of the DTC’s client banks and brokers. The banks and brokers in turn owned such stocks on behalf of their clients, who were the beneficial owners of the stocks. The beneficial owners were the persons or entities that paid for the shares and had the right to direct how the stocks should be voted and to sell the stocks. Corporate stock ledgers reflected DTC-owned stock as being owned by Cede & Co. (Cede), which was known as the street name. Typically, the DTC (the record owner) would provide omnibus proxies to the relevant banks and brokers, authorizing the banks and brokers to vote the DTC-owned shares. The banks and brokers would then transfer their rights to vote such shares to Broadridge Financial Services, Inc. (Broadridge). Broadridge would then distribute proxy-solicitation material and voting instruction forms (VIFs) to the beneficial owners. The beneficial owners would return their VIFs to Broadridge, which would vote the shares in accordance with the instructions of the beneficial owners. Crown EMAK Partners, LLC (Crown) (plaintiff) was embroiled in a battle for control of the corporation between two competing factions. As of December 19, 2009, Crown had two vacancies on its seven-member board. On December 20 and 21, one of the factions, Take Back EMAK, LLC (TBE), submitted sufficient shareholder consents to remove two directors and to elect three new board members with TBE candidates. Because incumbent board member Donald Kurz (defendant) supported TBE, TBE would control Crown’s board if the TBE consents were valid. However, due to human error that was not the fault of either faction, the DTC never provided its bank and broker clients with omnibus proxies regarding DTC’s Crown shares. Due to this failure, Crown argued that TBE’s shareholder consents for DTC-owned shares were invalid because only the DTC could vote those shares. The validity of the TBE consents was submitted to the Delaware Chancery Court, which was overseeing preexisting litigation between the parties. The vice chancellor ruled that the Cede breakdown—the DTC’s list of the banks and brokers for which it held Crown stock—was part of Crown’s stock ledger for the purposes of § 219(c) and thus that the TBE consents were valid. The vice chancellor also rejected Crown’s attack on Kurz’s acquisition of certain stock from Peter Boutros that Kurz voted in favor of TBE’s candidates. Crown appealed.