Jay Frechter v. Cryo-Cell International, Inc.

• Court: Court of Chancery of Delaware
• Decided: October 7, 2016
• Docket: CA 11915-VCG
• Status: Published

Opinion

COURT OF CHANCERY OF THE SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE VICE CHANCELLOR 34 THE CIRCLE GEORGETOWN, DELAWARE 19947

Date Submitted: October 7, 2016 Date Decided: October 7, 2016

Jessica Zeldin, Esquire Megan Ward Cascio, Esquire Rosenthal, Monhait & Goddess, P.A. Eric S. Klinger-Wilensky, Esquire 919 N. Market Street, Suite 1401 Glenn R. McGillivray, Esquire Wilmington, DE 19899 Morris, Nichols, Arsht & Tunnell LLP 1201 N. Market Street Wilmington, DE 19801

Re: Jay Frechter v. Cryo-Cell International, Inc. Civil Action No. 11915-VCG

Dear Counsel:

This matter involves the application for a fee award in a mootness proceeding.

The Plaintiff, a stockholder of Cryo-Cell International (“the Company”), sued the

Company, seeking a declaration that a provision in its bylaws (the “Provision”) was

illegal. The Provision indicated that directors could be removed “for cause” at a

“special meeting” of stockholders. Under Section 141(k) of the Delaware General

Corporation Law, stockholders have the right to remove directors without cause.

After the Plaintiff moved for summary judgment, the Company amended its bylaw

to remove the language complained of, mooting the action. I find that the Provision, while not explicitly illegal, was misleading to

stockholders and could have a chilling effect on the exercise of their franchise under

Section 141, because providing a procedure to remove directors for cause (and

remaining silent as to removal without cause) could indicate to a reasonable

stockholder that cause was a requisite for removal. Thus, this suit was meritorious

when filed. The Company concedes that it removed the provision as a result of the

litigation. Since, as I have found, a potential chilling effect on the exercise of the

stockholder franchise was removed by the action, a benefit was worked on the

stockholders. Therefore, a mootness fee is appropriate under the Corporate Benefit

Doctrine. The remaining issue is the appropriate size of the fee.

I have evaluated this matter using the Sugarland factors.1 Most important

here is the value of the benefit. I find that the benefit resulting from removing the

Provision is mostly theoretical. I note that the Company has never attempted to use

the Provision defensively, and that the current board was seated following a proxy

contest, as a result of which prior board members were removed without cause.

While it is impossible to determine whether stockholders have ever been dissuaded

from mounting a proxy contest by the misleading language of the bylaw, I note that

sophisticated investors, or those interested enough to hire counsel, would likely have

been undeterred. In light of the theoretical modest benefit worked here, and the other

1 Sugarland Indus., Inc. v. Thomas, 420 A.2d 142 (Del. 1980). 2 factors addressed below, I find a fee in the amount of $50,000, inclusive of expenses,

to be reasonable.

First, I note that this action—unlike the action in In re VAALCO Energy, Inc.

Stockholder Litigation,2 which generated a higher award—was not brought in light

of any pending proxy contest, or indeed, any contemplated action which might have

been deterred by the Provision. It was entirely an action to remove a bylaw provision

that was theoretically improper, in a vacuum, untethered to any immediate practical

result. Next, I consider that one of the factors mandated by the Supreme Court in

Sugarland is consideration of the contingent nature of the litigation. This is because

a fee award should reflect the risk undertaken by Plaintiff’s counsel, in computing a

fee which encourages wholesome litigation. Here, in light of the outcome in

VAALCO which provided the impetus for this action, this was largely a risk-free

pursuit, and the contingency factor is of negligible importance. It is worth pointing

out, I think, that had the Company changed its bylaw upon suit being filed (or upon

pre-suit demand, had one been made), rather than resisting the relief requested

through the time of the filing of an amended complaint and a nine-page summary

judgment motion, a nominal fee at most would have been warranted. Some effort

was required here on the part of the Plaintiff and his counsel, however, making a

more-than-nominal fee appropriate.

2 C.A. No. 11775-VCL (Del. Ch. Dec. 21, 2015) (TRANSCRIPT). 3 I also note that the original complaint included a second count, seeking to hold

the Company’s directors liable for breaches of fiduciary duty in enacting the

Provision. In fact, the current directors did not create the Provision. While that

count was withdrawn, it required some effort by the Corporation and its counsel,

which was a cost imposed, ultimately, on stockholders. This count was not

meritorious when filed, and I have adjusted the contemplated fee downward, as I

believe equity requires, in reaching a fee award of $50,000.

I find the other Sugarland factors (including effort expended by Plaintiff’s

counsel) do not militate against a $50,000 fee award.

Therefore, a mootness fee in the amount of $50,000, inclusive of expenses, in

favor of the Plaintiff is appropriate. To the extent the foregoing requires an Order

to take effect, IT IS SO ORDERED.

Sincerely,

/s/ Sam Glasscock III

Sam Glasscock III