Portnoy v. Cryo-Cell Int'l, Inc., 940 A.2d 43 (Del. Ch. 2008).

This was a case where plaintiff challenged management's efforts to manipulate the process for electing directors. With a proxy contest underway and management apparently about to lose, the court descirbed the CEO of Cryo-Cell as "desperate" and tried to get the FBI to intervene. In addition, she obtained votes through "a combination of threats . . . and inducements." The court agreed that the elections were "tainted by inequitable behavior by [the CEO] and her allies and must be set aside." So, having proved these facts, the shareholder won, right?

Not in Delaware. The plaintiff, Portnoy, incurred the costs of the tainted proxy contest and the litigation expenses associated with vindicating his rights. The remedy of a new election meant that he had to again incur the costs of a proxy contest and, had there been a repeat of the behavior, any litigation expenses.

Having overturned an "inequitable" election, he reasonably asked that his costs be reimbursed but VC Strine declined. He did so as punishment because Portnoy had talked with a former corporate official who was subject to a confidentiality agreement. Denial of reimbursement would be "a fitting consequence for Portnoy's alliance with Archibald, a course of conduct that I do not believe disentitles him to a remedy but that ought to have some consequence."

This was true even though the court recognized that:

• Archibald, the employee, revealed to Portnoy her view that misconduct and misuse of corporate assets was occurring at Cryo-Cell. Portnoy attempted to communicate that information to the four outside directors on Cryo-Cell's board.
• Nor did he publicly disclose any information that he received from Archibald other than to note the board's failure to investigate "unsubstantiated, troubling information from a purported former Cryo-Cell employee."
• Defendants did not "identify any confidential information of Cryo-Cell possessed by Archibald that was truly of a sensitive nature, much less that it was misused by Portnoy or even communicated to him."
• Morover, the court conceded that there "is at least as much reason to believe that the defendants were wielding the confidentiality agreement against Archibald, not to keep her from revealing trade secrets or business strategies in a way that could aid Cryo-Cell's competitors, but to keep her from discussing improper conduct she observed while at Cryo-Cell."
• Finally, Portnoy did not "believe that Archibald was violating her confidentiality agreement" because she "was looking to, I believe, protect the assets of the company by providing me with that information."

In other words, Portnoy talked with an employee who had possible information about corporate wrongdoing that was not particularly sensitive, he conveyed the information to the board, which did not act, and never revealed the information to the public. Moreover, the confidentiality agreement signed by the employee may have been designed to prevent disclosure for corporate wrongdoing.

The consequence of this conversation was to have Portnoy denied any reimbursement of expenses. The clear message in the case was that in VC Strine's court, shareholders would be subjected to a heavy financial penalty even when they vindicated their rights. Whether by design or accident, the consequence was to discourage shareholders from vindicating their rights in the Delaware Chancery Court even when there was proof of "inequitable behavior by management." As for impact of the decision, it could be seen from Portnoy's behavior. He declined to incur the costs of a new proxy contest (and the possible litigation expenses) when the required election was held. Management's slate ran unopposed and, as an anonoymous post to the Blog noted, was likely to recover its costs from insurance carriers.