Red Oak Fund, L.P. v. Digirad Corp.

Red Oak Fund, L.P. (Red Oak) (plaintiff) was a shareholder of Digirad Corporation (Digirad) (defendant). Jeffrey Eberwein was chairman of Digirad’s board. Eberwein and Digirad’s four other directors (collectively, directors) (collectively, defendants) were up for reelection at Digirad’s May 3, 2013, annual meeting. The directors were opposed by candidates sponsored by Red Oak. During the campaign, Digirad and Red Oak received interim voting reports from Broadridge Financial Services, Inc. (Broadridge), a third party that collected proxy votes. Broadridge did not provide its reports to Digirad’s shareholders or the public. At the request of a Digirad director, John Grau (Digirad’s proxy solicitor) advised stock analyst Tyson Bauer about Digirad’s optimistic view of the interim voting results. Grau did so in the mistaken belief that Bauer was Digirad’s agent and did not expect Bauer to share this information with outsiders. Additionally, Eberwein discussed interim election results with a major Digirad shareholder but did not reveal specific voting numbers. Digirad owned approximately one million treasury shares in an account at broker Raymond James & Co. (RJ). The treasury shares were not eligible to be voted, but for unknown reasons, RJ sent a proxy solicitation to the Digirad employee who managed the RJ account. Believing the solicitation related to his personal Digirad stock, the employee voted those shares for the directors. Broadridge did not know that Digirad’s treasury shares were voted for the directors and thus included those votes in its interim reports. By late April, Grau and certain Digirad executives knew that Broadridge’s interim reports may have included the treasury shares, but they did not tell Red Oak. After the directors won the election (in which the treasury shares were not counted), Red Oak sued in Delaware Chancery Court, alleging that the directors (1) improperly shared nonpublic, preliminary election information and (2) breached their fiduciary duties and created an unfair election by failing to disclose that Broadridge’s interim reports may have included improperly voted shares. Per Red Oak, it would have campaigned more vigorously if it had known that the interim Broadridge reports were incorrect. After a trial, the vice chancellor issued his ruling.