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Goggin v. Vermillion, Inc.: Court of Chancery Applies Airgas to Address Timing of Annual Meeting

August 1, 2011

In Goggin v. Vermillion, Inc., C.A. No. 6465-VCN (Del. Ch. June 3, 2011), Vice Chancellor Noble, interpreting the Delaware Supreme Court's opinion in Airgas, Inc. v. Air Products and Chemicals, Inc., 8 A.3d 1182 (Del. 2010), denied plaintiff's motion to enjoin the 2011 annual stockholders meeting of Vermillion, Inc. ("Vermillion" or the "Company"), which was scheduled to occur six months after the 2010 annual meeting. Plaintiff requested that the Court delay the meeting by at least one month, determine that stockholder proposals made before any rescheduled meeting be considered, and enjoin any threatened use of Vermillion's rights plan to restrict stockholders' ability to communicate with one another about the Company.

From its inception, Vermillion held its annual meeting of stockholders in June, with one class of its classified board standing for election each year. In March 2009, the Company filed for bankruptcy. While in bankruptcy, the Company did not hold an annual stockholders meeting. After emerging from bankruptcy in January 2010, Vermillion held an annual meeting on December 3, 2010, at which Class III directors (who would have stood for election at the 2009 annual meeting if it had been held) were elected to a two year term and Class I directors were elected to a three year term. The Class II directors were serving for a term expiring at the 2011 annual meeting.

In anticipation of the 2010 annual stockholders meeting, the Company issued a proxy statement in October 2010 notifying stockholders of the 2010 annual meeting. Vermillion included in the proxy statement language requiring stockholders to submit proposals for the 2011 annual stockholders meeting—including proposals for director nominees—by January 1, 2011. Vermillion then announced on February 28, 2011 in its annual report that the 2011 annual meeting would take place in June—approximately six months after the 2010 annual meeting.

In early 2011, plaintiff began communicating his dissatisfaction with Vermillion's board of directors and management to Vermillion's board and requested that the board call an emergency stockholder meeting to consider the CEO's tenure, to adopt more stockholder-friendly bylaws and to remove the Company's rights plan. After considering plaintiff's request, the Company's board amended Vermillion's bylaws to include an advance notice provision for future annual meetings relating to stockholder proposals and director nominations, and determined to not remove the rights plan or take any other action. After receiving similar complaints from four other stockholders, Vermillion requested information from plaintiff and the other stockholders relevant to the stockholders' communications for purposes of the rights plan. Instead of responding to the Company's request for information, plaintiff filed suit alleging that the Company's directors were entrenching themselves in office.

In denying plaintiff's motion for a preliminary injunction, the Court addressed three issues: (i) the scheduling of the 2011 annual stockholders meeting, (ii) the advance notice requirement for stockholder proposals to be presented at an annual meeting, and (iii) the allegedly preclusive effect of the rights plan on stockholder communications.

First, plaintiff relied on the Delaware Supreme Court's decision in Airgas, Inc. v. Air Products and Chemicals, Inc. to argue that the 2011 annual meeting, scheduled only six months after the 2010 annual meeting, violates Delaware law "because it is not approximately twelve months after the 2010 annual meeting and future annual meetings held in June will truncate the terms of the Vermillion directors elected in 2010." The Court of Chancery disagreed and determined that the scheduling of the 2011 annual stockholders meeting was consistent with Delaware law and the Company's charter, bylaws and practices pre-bankruptcy. Thus, the 2011 annual stockholders meeting did not "run afoul of Airgas; there, the Supreme Court invalidated a shareholder bylaw that advanced the annual meeting with the effect of 'so extremely truncat[ing] the directors' term as to constitute a de facto removal....'" Accordingly, plaintiff failed to demonstrate a reasonable probability of success with respect to his annual meeting claim.

Second, plaintiff argued that the advance notice requirement for stockholder proposals to be presented at the 2011 annual stockholders meeting was unwarranted and entrenched the board. The Court noted that "Delaware law does not require that shareholders provide advance notice of proposals or of director nominations to be raised at an annual meeting, unless the corporation has duly imposed such a requirement." Here, the Company set forth its notice requirement for the 2011 annual stockholders meeting in the October 2010 proxy. The Court determined that since the advance notice requirement was in place before plaintiff expressed any dissatisfaction with the Company's board of directors, the record did not support an entrenching or defensive motive on behalf of the board.

Third, plaintiff sought to limit the board's use of the Company's rights plan. Plaintiff asserted that the Company's letter requesting information concerning the dissatisfied stockholders' relationships was an indication of the board's willingness to use the rights plan as a defensive device against Vermillion's stockholders. Plaintiff also argued that the amended bylaws expanded the board's power to utilize the rights plan "by adopting and defining the phrase 'acting in concert.'" The Court held, however, that a complete reading of that provision indicated that whether a person is "acting in concert" was relevant only to the proper form of notice required by a stockholder giving advance notice of a meeting proposal or a director nomination. As a result, the events triggering the Company's rights plan remained unchanged from the original rights plan adopted by Vermillion's board of directors.

The Court of Chancery also addressed the cumulative effect of (i) the scheduling of the 2011 annual stockholders meeting, (ii) the advance notice requirements, and (iii) the Company's rights plan. Plaintiff argued "that the record reflects 'a pattern of conduct in which Defendants manipulate[d] Vermillion's corporate machinery to ensure that the incumbent Board and management are perpetuated in office indefinitely....'" The Court disagreed and denied plaintiff's motion for a preliminary injunction.