## Facts

- Red Oak Fund, L.P. owned about 5.6% of Digirad Corp.’s common stock and launched a proxy contest to elect a competing slate of five directors at Digirad’s May 3, 2013 annual meeting.
- Red Oak lost the election and filed a summary proceeding under 8 Del. C. § 225 seeking to invalidate the election and require a new one.
- During the contest, both sides received nonpublic interim vote reports from Broadridge Financial Services, Inc., the proxy vote tabulator.
- Digirad’s proxy solicitor communicated an optimistic view of interim voting to a stock analyst, believing the information would not be shared broadly; a Digirad director also discussed preliminary results generally with at least one large stockholder without providing specific tallies.
- Approximately one million Digirad treasury shares were mistakenly voted in favor of management after an employee erroneously returned a proxy card; Broadridge’s interim reports reflected these votes and overstated management’s lead.
- Digirad personnel later had reason to suspect the interim reports included improperly voted treasury shares but did not notify Red Oak; the final tabulation excluded the treasury shares, and management still prevailed.
- Red Oak argued Digirad delayed releasing negative quarterly financial information until after the election.
- Red Oak also argued Digirad failed to disclose that the board was considering a potential rights plan aimed at protecting net operating losses.

## Issues

1. Whether selective communications about interim voting results, and the failure to correct suspected inaccuracies in third-party interim vote reports, rendered the election unfair under 8 Del. C. § 225.
2. Whether fiduciary duties required Digirad to disclose negative quarterly financial results before the timing required by federal securities laws in connection with a contested election.
3. Whether fiduciary duties required disclosure that the board was considering a potential rights plan to protect net operating losses.
4. Whether any alleged misstatements or omissions, alone or in combination, were materially misleading or coercive so as to justify invalidating the director election.

## Decision

- The Court of Chancery upheld the validity of the May 3, 2013 election and entered judgment for Digirad and the director-defendants.
- The court found no fiduciary-duty breach and no conduct creating an unfair election process.
- The selective communications about interim vote trends were deemed immaterial and not intended to mislead stockholders.
- The mistaken treasury-share voting and resulting inaccurate interim reports did not require judicial relief where the error was accidental, the final count excluded the treasury shares, and Red Oak did not show the alleged informational deficiency affected the election outcome.
- The court held Digirad had no duty to accelerate disclosure of quarterly results or preliminary figures beyond applicable federal timing requirements on the record presented.
- The court held Digirad had no duty to disclose preliminary board deliberations about a possible rights plan where no concrete plan had been adopted.

## Legal Principles

- In a § 225 challenge to a director election, relief generally requires a showing that stockholder communications or omissions were coercive or materially misleading and undermined the integrity of the vote.
- Delaware fiduciary law does not impose a general obligation to disclose informal interim vote tallies or internal campaign assessments absent materially misleading statements.
- Accidental voting irregularities reflected only in nonpublic, third-party interim reports, without proof of material deception or outcome-changing effect, do not warrant invalidating an election.
- Absent misleading partial disclosures or other special circumstances, directors are not required by state fiduciary law to accelerate disclosure of routine quarterly results beyond federal securities-law deadlines.
- Board “consideration” of a potential defensive measure, without adoption or a concrete transaction, is ordinarily treated as internal deliberation not subject to mandatory disclosure for an election vote.

## Conclusion

The Court of Chancery declined to overturn Digirad’s contested director election because the complained-of selective communications, interim-report inaccuracies caused by an accidental treasury-share vote, and alleged nondisclosures about financial results and a possible rights plan were not shown to be materially misleading or coercive, nor sufficiently connected to the election outcome to justify relief under § 225.


Red Oak Fund, L.P. v. Digirad Corp., C.A. No. 8559-VCN (Del. Ch. Oct. 23, 2013)