## Facts

- Joseph Adlerstein founded SpectruMedix Corporation (SMC), a Delaware corporation, in 1992 and served as its Chairman and CEO.
- By 2000, Adlerstein controlled a majority of SMC’s voting power.
- In early 2000, Steven Wertheimer and Judy Mencher joined SMC’s board of directors.
- SMC experienced serious liquidity problems. Wertheimer and Mencher retained an outside consultant to evaluate operations and prospects.
- Wertheimer and Mencher concluded Adlerstein had not been fully candid about SMC’s condition and had tried to obstruct the consultant’s efforts to implement operational changes.
- By June 2001, Wertheimer and Mencher believed SMC could not survive unless Adlerstein was removed from leadership.
- Without informing Adlerstein in advance, Wertheimer and Mencher began discussions with investor Ilan Reich and developed a plan under which Reich would invest capital and obtain majority voting control.
- On July 9, 2001, the directors convened a meeting at which Wertheimer and Mencher first presented Adlerstein with the Reich transaction and governance changes.
- Over Adlerstein’s objections, the board approved actions that included terminating Adlerstein as CEO for cause, installing Reich as CEO, and implementing a control-shifting financing that would give Reich majority voting power.
- After the July 9 actions, Reich (as the new majority holder under the challenged transaction) executed a stockholder consent removing Adlerstein from the board and reconstituting the board.
- Adlerstein sued Wertheimer, Mencher, Reich, and SMC, challenging (i) whether the July 9 meeting was properly noticed under SMC’s bylaws and (ii) whether the directors’ conduct in engineering a surprise control shift breached fiduciary duties.
- SMC’s bylaws allowed the president to call a board meeting on 48 hours’ notice and did not require written notice, but it was undisputed that Adlerstein learned of the Reich takeover plan only at the July 9 meeting.

## Issues

1. Whether the actions taken at the July 9, 2001 board meeting were void because the meeting was not properly noticed under SMC’s bylaws and Delaware law.
2. Whether Wertheimer and Mencher, as directors, breached fiduciary duties by approving a transaction that transferred voting control to Reich through a process that withheld the plan from Adlerstein—SMC’s controller and a sitting director—until the meeting itself.
3. Whether, in a DGCL § 225 proceeding, the Court of Chancery may consider fiduciary-duty flaws that bear on the validity of corporate acts used to change board composition.

## Decision

- The court addressed Adlerstein’s notice-based attack on the July 9 board meeting under SMC’s bylaws and Delaware corporate law, including whether any notice defect was cured or waived by Adlerstein’s attendance and participation.
- The court held that the control-shifting transaction approved on July 9—and the downstream governance acts that depended on it—could not stand because the process used by Wertheimer and Mencher was inequitable and inconsistent with fiduciary obligations in a transaction designed to alter voting control.
- The court treated the issuance or other mechanism conferring majority voting power on Reich (and Reich’s resulting ability to act by stockholder consent to remove Adlerstein as a director) as ineffective for purposes of determining the lawful directors under DGCL § 225.
- Accordingly, the court refused to recognize board changes accomplished through Reich’s post-transaction stockholder consent to the extent those changes relied on the challenged control transfer.

## Legal Principles

- DGCL § 225 provides a summary method to determine the lawful directors and officers, and the Court of Chancery may consider equitable and fiduciary-duty defects to the extent they affect the validity of the corporate acts that purportedly changed board composition.
- Board-meeting notice questions are evaluated under the corporation’s bylaws and Delaware law; a director’s conduct at a meeting (including attending and participating without a timely objection) can bear on whether notice objections are available.
- Directors must act loyally and for proper corporate purposes when approving transactions that alter voting power or board control; actions taken for the primary purpose of shifting or entrenching control are subject to exacting review.
- Even if a board can technically call a meeting on short notice, directors may not use secrecy and surprise to push through a voting-control transfer that deprives an existing controller (particularly a controller who is also a director) of a fair chance to respond with the tools that stock ownership and board membership provide.
- Corporate acts that depend on an inequitable control-shifting issuance (including later stockholder consents made possible only by the disputed voting power) may be disregarded as invalid in determining the rightful board.

## Conclusion

Adlerstein v. Wertheimer holds that, in a DGCL § 225 fight over who lawfully sits on the board, the Court of Chancery will look past formalities when directors engineer a surprise transaction to transfer voting control. Where directors withhold a control-shift plan from a controller-director until the meeting itself and then use the resulting voting power to restructure the board by consent, the court may treat the control transfer—and the board changes that flowed from it—as ineffective for purposes of determining the corporation’s lawful directors.


Adlerstein v. Wertheimer, 2002 WL 205684 (2002)