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Canmore Consultants Ltd. v. L.O.M. Medical International, Inc.

Court of Chancery of Delaware

September 19, 2013

CANMORE CONSULTANTS LTD., MIRAGE CAPITAL INC., RALPH E. WOLOSCHUK, MARGARET WOLOSCHUK and RONALD ROTELIUK, Plaintiffs,
v.
L.O.M. MEDICAL INTERNATIONAL, INC., ALAN J. LAWRENCE, and CHARLES L. CLEMENTS, Defendants.

Date Submitted: September 4, 2013

Charles Brown, Michael Busenkell and Brya Keilson, of Gellert Scali Busenkell & Brown, LLC, Attorneys for Plaintiffs.

Paul D. Brown and Joseph B. Cicero, of Cousins Chipman & Brown LLP, Attorneys for Defendants.

OPINION

GLASSCOCK, Vice Chancellor

This matter is the first case to turn on the sole application of 8 Del. C. § 223(c). That statute allows stockholders in certain limited circumstances to petition—but not compel—this Court to direct that a special stockholder's meeting take place to fill vacancies on the corporate board through exercise of the stockholders' franchise, rather than through appointment by the remaining directors. The Plaintiffs here fulfill the statutory requirements for standing to make such a request. The statute commits the decision whether to grant a petition under Section 223(c) to the discretion of the Court, but is silent as to how that discretion is to be exercised, presenting a simple but until now unanswered question: which party bears the burden of persuasion under Section 223(c)? I find in this Opinion that that burden is borne appropriately by the Plaintiffs. Under the facts presented here, I find that the equities do not support a special meeting of the stockholders, and that the directors appointed by the remaining elected directors should continue in office until the next annual meeting, at which time they will be subject to the will of the stockholders expressed at that election.

I. BACKGROUND

A. The Gentili Action

This action is a sequel to another action before this Court, Gentili v. L.O.M. Medical Int., Inc. In that action, twenty-three plaintiffs representing the interests of a stockholder faction known as the "Gentili group, " which included current directors of L.O.M. Medical International, Inc. ("L.O.M.") Alan Lawrence and Randy Hayward, sought under 8 Del. C. § 225 to challenge the validity of incumbent directorships elected at the company's annual meeting held on April 17, 2012. At that meeting then-incumbent directors Ralph Woloschuk, Ronald Roteliuk, Carolyn Wallace, Ian Mavety, and Charles LaPointe (the "Incumbent Directors") accepted votes in favor of their election after the company's President had prematurely adjourned the meeting. I denied the Incumbent Directors' motion to dismiss in a Letter Opinion dated August 17, 2012, noting that:

"It appears to me that the Defendants have two courses of action open to them here: (1) they can answer the Complaint and we can go forward, on a schedule appropriate to a summary proceeding, to a hearing on the validity of the adjournment, and the attempt to override that adjournment, of the meeting held on April 17, 2012, or (2) in the alternative, the Defendants can seek a new stockholders' meeting, done under the supervision of this Court, with appropriate safeguards in place to ensure that the meeting does not adjourn for improper reasons."[1]

The Incumbent Directors opted for the latter, and the parties stipulated to holding a second stockholders' meeting, to be overseen by Special Master John Mark Zeberkiewicz acting as Chairman at the meeting.[2]

B. The Loan

On July 13, 2012, during the pendency of the Section 225 matter, I entered a status quo order which prevented the company from taking any material action out of the ordinary course of business.[3] On January 17, 2013, the Incumbent Directors filed a Loan Notice indicating the L.O.M. board's intention to enter into a loan agreement with director and current-Plaintiff Ralph Woloschuk, whereby Woloschuk would loan the company $200, 000 under "commercially reasonable terms." The Gentili group objected to the loan, and I held a hearing resulting in my Order of March 26, 2013, approving the loan based on representations that the company had insufficient funds to pay costs associated with holding the March election.[4] Although the draft budget submitted with the application indicated that the loan would be used to pay meeting expenses, including payment to the Special Master, L.O.M.'s board allocated $100, 000 of the loan to U.S. legal fees and $100, 000 to Canadian legal fees. That misallocation is the subject of a pending Motion for Contempt in the Gentili action.

C. The Election

In accordance with the Court's January 31, 2013 Order, the company held a new meeting on March 18, 2013. Proxy materials provided stockholders the opportunity to (1) elect five directors to serve on the company's board of directors until the company's next annual meeting, and (2) ratify, confirm and approve the company's 2012 Stock Option Plan. The vote resulted in the election of Carolyn Wallace, Charles Clements, Lyle Bauer, Alan ...


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