Cogentix Board Reduction Plan Halted by Del. Court

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By Michael Greene

May 19 — The Delaware Chancery Court May 19 put the brakes on a plan to shrink Cogentix Medical Inc.'s board from seven to five directors.

Vice Chancellor J. Travis Laster granted a preliminary injunction preventing Cogentix directors from implementing a board reduction plan at its May 20 annual meeting. Laster found that Cogentix directors acted inequitably in attempting to reconstitute the structure of the company's board.

“For good or ill, the Company's stockholders—not this court—have the right to elect the individuals who, as members of the board, will direct and oversee the business and affairs of the corporation,” Laster wrote. “The preliminary injunction preserves their right to do that, pending the final disposition of the case.”

Enhanced Scrutiny Applies

The lawsuit arose from a leadership dispute at Cogentix, a company that was formed from the merger between Vision-Sciences Inc. (VSI) and Uroplasty Inc.

Cogentix's board consisted of both former VSI and Uroplasty directors. According to the court's opinion, Cogentix director and incumbent chief executive officer Robert Kill and other directors aligned with him developed the reduction plan to preserve control over the company in the face of an anticipated proxy contest from another director, Lewis Pell. Kill was the former CEO and president of Uroplasty and Pell was a co-founder and former chairman of VSI.

Pell sued Kill to stop the plan.

The court found that Pell had established a reasonable probability of success on his claims. In reaching this conclusion, the court applied enhanced scrutiny—a tougher standard of review compared to the business judgment rule—to Kill and his co-defendants.

Laster said that the reduction plan had a “clear and obvious effect” on the ability of stockholders to replace incumbent directors. He also determined that the enhanced scrutiny standard applied because the plan touched on matters of corporate control.

“Both types of conduct are sufficiently suspect to warrant review under the enhanced scrutiny test,” he said.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com