## Facts

- EMAK Worldwide, Inc., a Delaware corporation, faced a control contest between a Crown-aligned faction and an insurgent stockholder group, Take Back EMAK, LLC (TBE).
- Before the dispute, EMAK had seven authorized director seats with vacancies; a resignation on December 18, 2009 increased the number of vacancies.
- Crown held Series AA preferred stock with contractual rights to appoint two directors and sought to secure board control through stockholder action by written consent.
- On December 18, 2009, Crown delivered written consents adopting bylaw amendments that (i) reduced the board’s size to three and (ii) required a special meeting mechanism to elect a “third” director.
- On December 20–21, 2009, TBE delivered written consents purporting to remove two directors without cause and fill resulting vacancies with three TBE-aligned directors, which would have produced a TBE board majority if valid and sufficiently supported.
- The consent solicitation relied heavily on shares held in “street name” through DTC, with Cede & Co. as record holder; Broadridge processed voting instructions for beneficial owners.
- Due to an error not attributable to either faction, DTC did not deliver the expected omnibus proxy, raising questions whether Broadridge-processed consents could be counted under DGCL § 219(c).
- Separately, on December 20, 2009, incumbent director Donald Kurz entered a purchase arrangement for 175,000 shares from a former employee; 150,000 shares were subject to a restricted stock agreement barring transfer or alienation before March 3, 2011.
- The arrangement postponed legal title transfer but immediately granted Kurz an irrevocable proxy to vote the restricted shares; those votes were outcome determinative for TBE’s consent tally.
- In a DGCL § 225 proceeding, the Court of Chancery upheld TBE’s consents and treated the Cede breakdown as part of the stock ledger for voting, invalidated Crown’s bylaw amendments as conflicting with the DGCL, and rejected Crown’s challenge to the Kurz share arrangement.
- Crown and a Crown-aligned director/CEO appealed; the Delaware Supreme Court affirmed in part, reversed in part, and remanded.

## Issues

1. Whether stockholder-adopted bylaw amendments reducing board size and imposing a special-meeting mechanism conflicted with the DGCL and were void.
2. Whether, for DGCL § 219(c), records such as the “Cede breakdown” could be treated as part of the corporation’s stock ledger so that Broadridge-processed consents could be counted despite the missing omnibus proxy.
3. Whether votes cast via an irrevocable proxy tied to restricted shares violated the restricted stock agreement and therefore could not be counted in a § 225 control determination.
4. Which faction lawfully controlled EMAK’s board after excluding any invalid consents or votes.

## Decision

- The court affirmed the invalidation of Crown’s bylaw amendments to the extent they conflicted with the DGCL, rejecting Crown’s attempt to secure control solely through those amendments.
- The court affirmed the determination that, on these facts, the Cede breakdown could be treated as part of EMAK’s stock ledger for § 219(c), permitting counting of Broadridge-processed consents notwithstanding the absent omnibus proxy.
- The court reversed the approval and counting of the Kurz–Boutros restricted-share votes, holding the arrangement violated the restricted stock agreement’s non-transferability provisions.
- Because the excluded votes were outcome determinative, TBE lacked sufficient valid consents to obtain a new board majority.
- The case was remanded for further proceedings to determine the proper board composition consistent with the exclusion of the invalid votes.

## Legal Principles

- Stockholder-adopted bylaws are invalid to the extent they conflict with the DGCL’s statutory scheme governing board structure, elections, and vacancies.
- For DGCL § 219(c), voting eligibility focuses on shares “recorded in the stock ledger”; in the street-name system, reliable DTC/Cede-related records functioning as the ownership record may be treated as part of the ledger for consent/vote validation on the case’s facts.
- Courts evaluate restricted-stock voting arrangements by substance, and an irrevocable proxy designed to shift voting power in violation of explicit non-transferability covenants is ineffective; votes cast under such an arrangement may not be counted in a § 225 proceeding.
- DGCL § 225 proceedings provide a summary mechanism to resolve board-control disputes by determining the validity of elections, consents, and resulting director positions.

## Conclusion

The Delaware Supreme Court upheld a practical method for counting street-name consents through DTC/Cede records under DGCL § 219(c) but disallowed outcome-determinative votes obtained through an irrevocable proxy that contravened restricted stock transfer limits, thereby preventing the insurgent faction from establishing board control and requiring remand to fix the board’s lawful composition.


Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010)