Crown Emak Partners, LLC v. Kurz

This is a consolidated appeal from a final judgment entered by the Court of Chancery pursuant to Rule 54(b). This proceeding involves competing requests for relief under section 225 of the Delaware General Corporation Law (the “DGCL”). 1 At issue is which of two competing factions lawfully controls the board of directors (the “Board”) of EMAK Worldwide, Inc. (“EMAK”).

Prior to December 18, 2009, the Board had six directors and one vacancy. On December 18, one director resigned, creating a second vacancy. The plaintiffs-ap-pellees contend that on December 20 and 21, Take Back EMAK, LLC (“TBE”) delivered sufficient consents (the “TBE Consents”) to remove two additional directors without cause, and fill three of the resulting vacancies with Philip Kleweno, Michael Konig, and Lloyd Sems. Incumbent director Donald A. Kurz (“Kurz”) is a member of TBE. If valid, the TBE Consents would establish a new Board majority.

The defendants-appellants contend that on December 18, 2009, Crown EMAK Partners, LLC (“Crown”) delivered sufficient consents (the “Crown Consents”) to *379 amend EMAK’s bylaws (the “Bylaw Amendments”) in two important ways. First, the Crown Consents purportedly amended Section 3.1 of the Bylaws (“New Section 3.1”) to reduce the size of the Board to three directors. Because Crown has the right to appoint two directors under the terms of EMAK’s Series AA Preferred Stock, a by-law reducing the Board to three, if valid, would give Crown a Board majority. Second, the Crown Consents purportedly added a new Section 3.1.1 to the Bylaws (“New Section 3.1.1”) providing that if the number of sitting directors exceeds three, then the EMAK CEO will call a special meeting of stockholders to elect the third director, who will take office as the singular successor to his multiple predecessors. The defendants contend that the Bylaw amendments are valid and that the next step is for the EMAK CEO to call a special meeting under New Section 3.1.1.

The Court of Chancery concluded that the TBE Consents validly effected corporate action and that, therefore, the lawful Board consists of incumbent directors Kurz, Jeffrey Deutschman, and Jason Ack-erman, and newly elected directors Klew-eno, Konig, and Sems. Consequently, one vacancy remains. The Court of Chancery also concluded that the bylaw amendments adopted through the Crown Consents conflict with the DGCL and are void. Therefore, the court held, the Crown Consents were ineffective either to reduce the size of the Board or to require the calling of a special meeting.

The appellants raise three claims in this appeal. First, the appellants submit that the Court of Chancery erred in concluding that Kurz did not engage in impermissible vote buying. In the alternative, they contend Kurz’s purported purchase of the outcome determinative shares from Peter Boutros (“Boutros”) was an improper transfer under the plain language of a Restricted Stock Grant Agreement between EMAK and Boutros. Second, they argue that the Court of Chancery erred when it held that Cede breakdowns should be deemed part of the “stock ledger” under title 8, section 219 of the Delaware Code with the result that the member depository banks and brokers are record holders. They submit that a proxy from DTC, as the only undisputed record holder of shares in “street name,” was required to count the votes of those banks and brokers. Since TBE failed to obtain a proxy from DTC, those votes were invalid and improperly counted. Third, they argue that the Court of Chancery erred when it held that the Crown Consent was void because the amendments to the bylaws conflict with Delaware law.

We hold that Kurz did not engage in improper vote buying, but that his purchase of shares from Boutros was an improper transfer that was prohibited by a restricted stock agreement between Bout-ros and EMAK. Because the Boutros shares could not be voted, that deprived the Kurz faction of the votes required to elect their nominees. We therefore do not reach the issue of whether the Cede breakdowns are part of the “stock ledger” under title 8, section 291 of the Delaware Code. For reasons more fully discussed in this opinion, the Court of Chancery’s interpretation of “stock ledger” under section 219 should be regarded as obiter dictum and without precedential effect. Finally, we hold that the Crown bylaw amendments were invalid because they conflict with Delaware law.

Therefore, the judgments of the Court of Chancery are affirmed in part and reversed in part. This matter is remanded for further proceedings in accordance with this opinion.

*380 Factual Background 2

EMAK’s Capital Structure

EMAK is a Delaware corporation based in Los Angeles, California. EMAK has two classes of stock: common shares and the Series AA Preferred Stock.

EMAK has issued and outstanding 7,034,322 shares of common stock. EMAK’s common shares traded on NASDAQ from 1994 until April 14, 2008, when trading was suspended. On June 17, 2008, EMAK was delisted. EMAK subsequently deregistered, although its common shares continue to trade on the pink sheets.

EMAK has issued and outstanding 25,-000 shares of Series AA Preferred Stock, all held by Crown. The Series AA Preferred has the right to elect two directors to the Board, plus a third director if the Board expands to more than eight members. The Series AA Preferred does not vote in the election of directors. It does vote on an as-converted basis with the common stock on all other matters. The Series AA Preferred can convert into 2,777,777 common shares and carries 27.6% of EMAK’s total voting power on matters where it votes with the common stock.

TBE Consent Solicitation And Exchange Transaction

On Monday, October 12, 2009, TBE delivered an initial consent to EMAK, thereby launching its consent solicitation (the “TBE Consent Solicitation”). Under Section 2.13(c) of EMAK’s bylaws (the “Bylaws”), the Board had the power to set a record date for the TBE Consent Solicitation. During a meeting held on October 19, the Board set October 22 as the record date. Had the Board not exercised its authority, the record date would have been October 12, the date of delivery of the initial TBE Consent.

At the October 19 meeting, the Board also approved a transaction in which Crown exchanged its Series AA Preferred for new Series B Preferred Stock (the “Exchange Transaction”). Unlike the Series AA Preferred, the Series B Preferred voted on an as-converted basis with the common stock on all matters, including the election of directors. The Exchange Transaction thus conferred on Crown the right to wield 27.6% of the total voting power in an election of directors. The October 22 record date enabled EMAK to place the new Series B Preferred into Crown’s hands for the TBE Consent Solicitation.

On October 26, 2009, the plaintiffs filed suit challenging the Exchange Transaction and sought an expedited hearing on an application for preliminary injunction. During the scheduling conference, the parties agreed that the deadline for delivering consents in the TBE Consent Solicitation would be December 21, and the Court of Chancery entered an order implementing that agreement. The Court of Chancery granted the motion to expedite and scheduled a hearing on the plaintiffs’ injunction application for December 4.

To bolster the defendants’ litigation position, EMAK solicited consents to ratify the Exchange Transaction (the “Ratification Solicitation”). Ultimately, however, the Court of Chancery did not have to rule on either the Exchange Transaction or the ratification strategy because on December 3, 2009, the day before the hearing, EMAK and Crown rescinded the Exchange Transaction.

*381 The plaintiffs responded to the rescission of the Exchange Transaction by filing an amended complaint challenging the disclosures made in the Ratification Solicitation. On December 7, 2009, the individual defendants and EMAK filed counterclaims and a third party complaint challenging the disclosures made in the TBE Consent Solicitation. On December 8, the parties agreed to defer litigating their disclosures and fight it out at the ballot box. They agreed to resume any litigation on December 22, after the deadline for the TBE Consent Solicitation.

Three Simultaneous Consent Solicitations

During December 2009, solicitation activity intensified, because three simultaneous consent solicitations were under way. TBE continued its solicitation activities and issued a series of press releases and public statements in support of the TBE Consent Solicitation. On December 7, EMAK began soliciting consent revocations and issued a series of press releases and public statements in support of its efforts.

After the rescission of the Exchange Transaction, Crown designated Jason Ack-erman as the second director authorized by the Series AA Preferred Stock. Then, Crown began soliciting consents to amend the Bylaws in the following manner:

RESOLVED: Article III, Section 8.1 of the Company’s Bylaws is amended to read as follows:

Section 3.1. Number and Term of Office. The Board of Directors shall consist of three members. As provided for in the Amended and Restated Certificate of Designation of the Series AA Senior Cumulative Convertible Preferred Stock, two directors shall be elected by the holders of the Series AA Senior Cumulative Convertible Preferred Stock. The directors shall be elected at the annual meeting of the stockholders, except as provided elsewhere in this Article III, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders, residents of Delaware, or citizens of the United States.

RESOLVED: Article III, Section 3.1.1 is added to the Company’s Bylaws: Section 3.1.1 If at any time the number of members of the Board of Directors shall be greater than three, unless a sufficient number of directors resign to reduce the number of members of the Board of Directors to three, the Chief Executive Officer shall promptly call a special meeting of the common stockholders of the Corporation, which meeting shall be held not later than 20 days following the first date on which the number of directors was greater than three (or in the case of the adoption of the bylaw establishing a three-member Board of Directors, 20 days after such bylaw amendment became effective), for purposes of electing the one director to be elected by the common stockholders of the Corporation, who shall be the successor to all directors previously elected by the common stockholders of the Corporation.

In its opinion, the Court of Chancery referred to these provisions as the “Bylaw Amendments.”

DTC’s And Broadridge’s Roles in TBE Consent Solicitation

TBE conducted a broad-based solicitation in which it sought to obtain consents from a large number of individual EMAK stockholders. Since EMAK’s shares were publicly traded for fourteen years, a significant number of EMAK stockholders owned their shares in “street name.” This *382 practice is summarized in a leading treatise:

The vast majority of publicly traded shares in the United States are registered on the companies’ books not in the name of beneficial owners — ie., those investors who paid for, and have the right to vote and dispose of, the shares — but rather in the name of “Cede & Co.,” the name used by The Depository Trust Company (“DTC”).

Shares registered in this manner are commonly referred to as being held in “street name.” ... DTC holds the shares on behalf of banks and brokers, which in turn hold on behalf of their clients (who are the underlying beneficial owners or other intermediaries). 3

The roles of DTC and the Investor Communications Solutions Division of Broadridge Financial Services, Inc. (“Broadridge”) are important in this case. Broadridge’s role has been summarized as follows:

For many years, banks and brokers maintained their own proxy departments to handle the back-office administrative processes of distributing proxy materials and tabulating voting instructions from their clients. Today, however, the overwhelming majority have eliminated their proxy departments and subcontracted these processes out to [Broadridge], For many years, these proxy processing services were provided by Automatic Data Processing, Inc. (“ADP”), but on March 31, 2007, ADP spun off its Brokerage Services Group into a new independent company, Broadridge, which now provides these services to most banks and brokers.

To make these arrangements work, Broadridge’s bank and broker clients formally transfer to Broadridge the proxy authority they receive from DTC (via the [DTC] Omnibus Proxy) via written powers of attorney. On behalf of the brokers and banks, Broadridge delivers directly to each beneficial owner a proxy statement and, importantly, a voting instruction form (referred to as a “VIF”) rather than a proxy card. Beneficial owners do not receive proxy cards because they are not vested with the right to vote shares or to grant proxy authority — those rights belong only to the legal owners (or their designees). Beneficial owners merely have the right to instruct how their shares are to be voted by Broadridge (attorney-in-fact of the DTC participants), which they accomplish by returning a VIF. 4

DTC is generally regarded as the entity having the power under Delaware law to vote the shares that it holds on deposit for the banks and brokers who are members of DTC. Through the DTC omnibus proxy, DTC transfers its voting authority to those member banks and brokers. The banks and brokers then transfer the voting authority to Broadridge, which votes the shares held at DTC by each bank and broker in proportion to the aggregate voting instructions received from the ultimate beneficial owners.

For the TBE Consent Solicitation, Broa-dridge collected, recorded, and totaled the voting instructions it received from the beneficial owners of EMAK shares held in street name. There is no dispute that the banks and brokers properly authorized Broadridge to vote the EMAK shares held on their behalf by DTC.

*383 What no one ever obtained, and what DTC never provided, was the DTC omnibus proxy. The evidence conflicts as to who had the responsibility to get the DTC omnibus proxy. The Court of Chancery found that neither party clearly had the obligation to secure the DTC omnibus proxy, although both could have done more, neither acted improperly or inequitably with respect to this aspect of the case.

Delivery of the Consents

On December 18, 2009, Crown delivered the Crown Consents to EMAK, along with a certification required by Section 2.13(e) of the Bylaws attesting to Crown’s good faith belief that Crown had received sufficient consents to take corporate action. Given the nearly 28% voting power that Crown could wield on matters other than the election of directors, Crown needed only another 23% to reach the necessary majority of EMAK’s outstanding voting power. Crown obtained that majority from EMAK management and one large institutional holder. With only a few consents to deliver, Crown sidestepped the need for a DTC omnibus proxy by having DTC execute the consents in the name of Cede & Co., a procedure DTC offers to beneficial holders akin to the issuance of appraisal demands in Cede’s name. This approach is not practical for a broad-based solicitation such as that which TBE conducted.

Boutros Purchase Agreement

With the December 21, 2009, deadline looming, TBE and its principals were working feverishly to round up the final consents. On Thursday, December 17, Sems emailed Kurz: “We need to buy someone[s’] shares this weekend.”

One person whose vote remained undecided was Boutros, a former employee and current consultant of EMAK who lived in Australia. Boutros owned 175,000 shares of restricted stock, all entitled to vote. Both sides sought Boutros’s support. On Thursday, December 17, 2009, Boutros told Kurz that he would support Crown. Kurz responded that he would contact Boutros that weekend and encouraged Boutros to reconsider before the December 21 deadline.

As of Friday, December 18, 2009, D.F. King, TBE’s proxy solicitor, showed TBE having consents for approximately 48.4% of the common shares. To prevail, TBE needed another 116,325 votes.

Between Friday, December 18 and Sunday, December 20, 2009, Kurz had a series of telephone calls with Boutros. On Sunday, Kurz had additional calls with Bout-ros’s counsel. The result was a Purchase Agreement dated as of December 20, 2009 (the “Purchase Agreement”), in which Boutros sold to Kurz:

(a) all shares of common stock of EMAK Worldwide, Inc., a Delaware corporation (the “Company”) that Seller owns and is entitled or permitted to sell, transfer or assign as of the date hereof (the “Shares ”), and (b) all rights to receive all other shares of the Company that the Seller is or may hereafter be entitled or permitted to sell, transfer or assign, for a total purchase price of U.S. $225,000.00 (the “Purchase Price ”), with the Purchase Price to be paid by wire transfer to an account designated by Seller upon fall execution of this Agreement.

Boutros originally asked for $2.25 per share. Kurz felt that was too high and bargained Boutros down. Kurz believed he obtained the economic and voting rights (albeit not legal title) to 150,000 shares, resulting in a price of $1.50 per share. At the time, EMAK’s stock was trading on the pink sheets for around $0.95 per share.

*384 The description of what Boutros sold and Kurz bought reflects their efforts to contract around transfer restrictions. A Restricted Stock Grant Agreement dated March 3, 2008, governed 150,000 of Bout-ros’s shares. Section 2 of that Agreement provided: “Prior to [March 3, 2011], [Bout-ros] shall not be entitled to transfer, sell, pledge, hypothecate or assign any shares of Restricted Stock.” Under Section 3 of that agreement, if Boutros was still employed by EMAK on March 3, 2011, then the transfer restrictions would lapse. If Boutros was terminated without cause before March 3, 2011, then the restrictions would lapse upon termination. If Boutros was terminated for cause or resigned before March 3, 2011, then he would forfeit the shares. The cover letter from EMAK that conveyed the grant stated: “The stock will vest equally (one-third per year) over a three year period.” The Court of Chancery found that it was odd to use the term “vest,” because under Section 2, the transfer restrictions and forfeiture provisions seemingly applied to all 150,000 shares until March 3, 2011.

Boutros’ remaining 25,000 shares were governed by a Resale Restriction Agreement dated November 6, 2009. That latter agreement contains a different form of transfer restriction, which provides: “[Boutros] agrees not to sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise transfer or dispose of any Shares (or any interest in any Shares) until the Shares have been released from the foregoing restrictions [on or before November 7, 2010].”

The parties dispute what was actually transferred. Of the shares governed by the Restricted Stock Grant Agreement, the plaintiffs-appellees contended Boutros could transfer 50,000 shares immediately, another 50,000 on March 3, 2010, and the final 50,000 on March 3, 2011. The defendants-appellants contended Kurz got nothing and 150,000 shares if Boutros still holds them on March 3, 2011. For purposes of its opinion, the Court of Chancery assumed the latter to be time.

Section 2 of the Purchase Agreement was critical to Kurz. It provides:

Proxies. As a material part of the consideration for this Agreement, and an express condition precedent to the effectiveness hereof, Seller agrees to execute and deliver to Buyer by facsimile transmittal on the date hereof, time being of the essence, with originals to follow immediately by express delivery, (a) this Agreement, (b) an Irrevocable Proxy, (c) the Revocation, and (d) the White Consent Card solicited by Take Back EMAK, LLC, each in the form attached hereto.

With Boutros’ votes in hand, Kurz believed TBE had the consents it needed to prevail.

Late in the evening on December 20, 2009, Kurz’s counsel sent by email to EMAK’s general counsel an initial Broa-dridge omnibus consent dated November 23, 2009, reflecting voting instructions received through that date (the “Initial Broa-dridge Omnibus Consent”). Kurz’s counsel also sent written consent cards for record holders and a certification attesting to the soliciting parties’ good faith belief that they had received valid and unrevoked consents sufficient to take corporate action. The defendants-appellants question whether Kurz, TBE, and the other soliciting parties could have held that good faith belief on December 20. The Court of Chancery found that the certification was properly given, based on the consents TBE had in hand and the information TBE had from its proxy solicitor about how the street name vote came in.

*385 On the morning of December 21, 2009, the same documents were hand-delivered to EMAK’s registered office in Delaware. That morning, TBE ordered a supplemental omnibus consent from Broadridge dated December 21, 2009 (the “Supplemental Broadridge Omnibus Consent”), showing additional votes, net of revocations, since November 23. The Supplemental Broa-dridge Omnibus Consent was hand-delivered to EMAK’s registered office later that day. TBE also delivered additional consent cards from registered holders to EMAK’s registered office.

The IVS Reports

On December 21, 2009, IVS issued its preliminary tabulation report on the Crown Consents. IVS reported that Crown had delivered consents representing 50.89% of EMAK’s outstanding voting power, sufficient to amend the Bylaws. On December 23, EMAK informed IVS that it was not challenging the preliminary tabulation report. That same day, IVS issued its final report confirming its preliminary tally.

On December 23, 2009, IVS issued its preliminary tabulation report on the TBE Consents. IVS reported that record holders of 2,496,598 shares expressed consent in favor of the TBE Consent Solicitation and that street name holders of 1,055,815 shares consented through the Broadridge omnibus consents. The combined tally of 3,552,413 shares represented a majority of the 7,034,322 common shares outstanding on the record date. The IVS preliminary report, however, treated the street votes as “invalid due to the lack of a DTC omnibus proxy on file.”

On January 14, 2010, TBE delivered a written challenge to the IVS preliminary report. TBE contended that (i) the consents for shares held in street name should be counted and (ii) the tally in favor of TBE should include additional consents delivered on December 21, 2009.

On January 15, 2010, IVS issued its final report. IVS revised its tally to take into account consent cards delivered on December 21, 2009, and now reported that record holders of 2,502,032 shares expressed consents in favor of the TBE Consent Solicitation. IVS declined to count the street name consents, however.

As of October 22, 2009, EMAK had 7,034,322 shares outstanding. In order to prevail, TBE needed to obtain consents for 3,517,162 shares (50% + 1). Backing out the consents for 2,502,032 shares that TBE received from record holders would leave a balance of 1,015,130 votes required for victory.

The IVS preliminary report showed that TBE received consents from street name holders of 1,055,815 shares, which was more than sufficient. Table A shows for each proposal (i) the votes received by TBE through the Initial Broadridge Omnibus Consent and (ii) the additional votes, net of revocations, received by TBE through the Supplemental Broadridge Omnibus Consent. On each issue, the Broa-dridge omnibus consents provided TBE with sufficient votes from shares held in street name for TBE to prevail.

TABLE A

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*386 [[Image here]]

But there was one more step in the process. The sequence of events at the beginning of the TBE Consent Solicitation created confusion about what was the record date. TBE first delivered a consent that would have set October 12, 2009 as the record date, but then the Board exercised its authority to set the record date for October 22. The Broadridge omnibus consents reflected an incorrect record date of October 12. The Court of Chancery ruled that a consent need not identify the record date, and the fact that Broadridge included an incorrect piece of extraneous information on its omnibus consents did not affect their validity.

The Court of Chancery found it necessary, however, to review the number of shares voted by the Broadridge omnibus consents and count only the number of shares actually held by the banks and brokers on the true record date of October 22, 2009. If DTC holds shares of a corporation on behalf of banks and brokers, then the corporation can ask DTC to provide what is technically known as a participant listing and informally referred to as a “Cede breakdown.” The Cede breakdown for a particular date identifies by name each bank or broker that holds shares with DTC as of that date and the number of shares held, respectively, by each. In contrast to the DTC omnibus proxy, which is not governed by any legal authority, federal regulations require DTC to furnish a Cede breakdown promptly when an issuer corporation requests it.

In November 2009, EMAK obtained Cede breakdowns for both October 12 and October 22. The Cede breakdowns show the aggregate decline in the share positions of each of the thirty-one banks and brokers who held EMAK shares through DTC. The total reduction was 29,386 shares, less than the margin of victory on each issue. (The same calculation can be derived by cutting back the overvote on a broker-by-broker basis.) Assuming conservatively that even if TBE lost one consent for each share by which the position of a consenting bank or broker declined, TBE still prevailed. Table B shows the calculations.

TABLEE

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The Court of Chancery found, as fact, that if all of the TBE Consents are counted, including the street votes from the Broadridge omnibus consents, then TBE delivered sufficient consents to EMAK to take valid corporate action.

*387 Analysis

Improper Vote Buying Concern

Shareholder voting differs from voting in public elections, in that the shares on which the shareholders’ vote depends can be bought and sold. 5 Vote buying in the context of corporate elections and other shareholder actions has been and continues to be an important issue. 6 Several commentators have addressed the corporate voting process and techniques by which shareholder voting rights can be manipulated. 7

The Court of Chancery characterized vote buying that does not involve the use of corporate resources as “third party vote buying.” Here, although Kurz is a director of EMAK, he used his own resources to acquire Boutros’s shares. Accordingly, Kurz’s actions as a third party do not involve the problem of insiders using corporate resources to “buy” votes. 8

Vote buying has been described as disenfranchising when it delivers the swing votes. 9 In this case, the Court of Chancery opined that third party vote buying merits judicial review if it is disenfranchising, i.e., if it actually affects the outcome of the vote. 10 Applying those principles to this case, the Court of Chancery concluded that the Purchase Agreement between Kurz and Boutros was potentially disenfranchising and “should be subjected to a vote buying analysis,” because the “Purchase Agreement provided TBE with the votes they [sic] needed to prevail and disenfranchised what would have been a silent majority against the TBE Consent Solicitation.” Therefore, it determined that the Purchase Agreement should be scrutinized closely.

The Court of Chancery noted a 1983 scholarly analysis of shareholder voting which concluded “[i]t is not possible to separate the voting right from the equity interest” and that “[s]omeone who wants to buy a vote must buy the stock too.” 11 The Court of Chancery also recognized, however, that over the last twenty-five years “[ijnnovations in technology and finance have made it easier to separate voting from the financial claims of shares.” 12 Today, “the market permits providers to slice and dice the shareholder’s interest in a variety of ways, and investors are willing *388 to buy these separate interests.” 13

According to a recent scholarly study of corporate voting by Professors Robert Thompson and Paul Edelman, a disconnect between voting rights and the economic interests of shares “compromises the ability of voting to perform its assigned role.” 14 They concluded that “[a] decision-making system that relies on votes to determine the decision of the group necessarily requires that the voters’ interest be aligned with the collective interest. [Therefore, i]t remains important to require an alignment between share voting and the financial interest of the shares.” 15

No Improper Vote Buying

For many years, Delaware decisions have expressed consistent concerns about transactions that create a misalignment between the voting interest and the economic interest of shares. As then Vice-Chancellor (now Chief Justice) Steele explained, “[g]enerally speaking, courts closely scrutinize vote-buying because a shareholder who divorces property interest from voting interest[] fails to serve the ‘community of interest’ among all shareholders, since the ‘bought’ shareholder votes may not reflect rational, economic self-interest arguably common to all shareholders.” 16 Again, in this case, the Court of Chancery recognized that “[w]hat legitimizes the stockholder vote as a decision-making mechanism is the premise that stockholders with economic ownership are expressing their collective view as to whether a particular course of action serves the corporate goal of stockholder wealth maximization.” 17

Accordingly, the Court of Chancery held that “[p]olicing third-party vote buying does not rest on the outdated notion that every stockholder owes every other stockholder a duty to use its best judgment while voting. It flows instead from the legitimating conditions necessary for meaningful stockholder voting.-...” The Court of Chancery concluded that:

Because transactions in which economic interests are fully aligned with voting rights do not raise concern, Delaware law does not restrict a soliciting party from buying shares and getting a proxy to bolster the solicitation’s chance of success. Delaware law presumes that in the sale of the underlying stock, the seller sells and assigns all of its rights, title and interest, “including its right to grant a consent or a revocation with respect to a past record date.... ” Commonwealth Assocs. v. Providence Health Care, 641 A.2d at 158. Delaware law further presumes that “upon request the seller will, in good faith, take such *389 ministerial steps as are necessary (e.g., granting proxies) to effectuate the transfer.” Id. Such transactions are common. John C. Wilcox, John J. Purcell III, & Hye-Won Choi, “Street Name” Registration & The Proxy Solicitation Process, at 10-26 in Amy Goodman, et ah, A Practical Guide to SEC Proxy and Compensation Rules (4th Ed. 2007 & 2008 Supp.) (“[0]ver the course of a proxy contest, it is not uncommon for contestants to attempt to increase their voting power by purchasing additional shares....”); Robert B. Thompson & Paul H. Edelman, Corporate Voting, 62 Vand. L.Rev. 129, 130 (2009) (“A corporate voter who has intense feelings about the matter to be determined can influence, if not control, the outcome by purchasing shares.”).

Guided by these principles, the Court of Chancery scrutinized the Purchase Agreement as follows:

I find no evidence of fraud in the transaction. The record indicates that Bout-ros was fully informed about the ongoing consent solicitations. Both factions had made multiple attempts to get him to commit to their side. Although there is no direct evidence establishing that Boutros knew his shares were the swing shares, I conclude that he must have been cognizant of this fact. He cut his deal with Kurz over the weekend before the Monday on which the TBE Consent Solicitation ended. At a time when EMAK’s stock was trading on the pink sheets for less than a dollar, Boutros asked for $2.25 per share and received $1.50 per share. Boutros was advised by counsel and bargained to obtain specific terms for the deal, including an absence of representations and warranties and contractual indemnification from Kurz. These are the hallmarks of a transaction in which Boutros understood what he was selling, the eireum-stances under which he was selling it, and what he was getting in return.

This brings me to the alignment of interests. Although Kurz did not take title to the 150,000 shares that Boutros owned, and although I assume the Restricted Stock Grant Agreement prohibits Boutros from transferring title to Kurz until March 3, 2011, Boutros nevertheless transferred to Kurz, and Kurz notv bears, 100% of the economic risk from the 150,000 shares. If the value of EMAK’s shares drops further, then Kurz will suffer. If EMAK goes bankrupt and its shares become worthless, then Kurz will have a paper souvenir. Conversely, if EMAK turns itself around and prospers, then Kurz will benefit. Kurz has already paid Boutros. Kurz’s only interest lies in how EMAK performs.

Because Kurz now holds the economic interest in the sha,res, Delaware law presumes that he should and will exercise the right to vote. Commonwealth Assocs. v. Providence Health Care, 641 A.2d at 158; see Len v. Fuller, 1997 WL 305833, at *5 (Del.Ch. May 30, 1997) (barring record holder from voting shares by written consent after corporation exercised option to acquire shares); Freeman v. Fabiniak, 1985 WL 11583, at *7 (Del.Ch. Aug.15, 1985) (“[I]t would be inequitable to allow a holder of record who holds mere legal title to stock to act by consent in a manner contrary to the wishes of the true owner.”). The proxy Boutros granted to Kurz under the Purchase Agreement comports with what our law expects. See generally John C. Wilcox, John J. Purcell III, & Hye-Won Choi, “Street Name” Registration & The Proxy Solicitation Process at 10-27 in Amy Goodman, et ah, A Practical Guid,e to SEC Proxy and Compensation Rules 10-3 (4th ed. 2007 *390 & 2008 Supp.) (explaining that a purchaser typically obtains an irrevocable proxy when shares are acquired from a registered holder). 18

We hold that the Court of Chancery correctly concluded that there was no improper vote buying, because the economic interests and the voting interests of the shares remained aligned since both sets of interests were transferred from Boutros to Kurz by the Purchase Agreement.

Restricted Stock Grant Agreement Violated

The defendants-appellants next argue that, even if the Purchase Agreement did not constitute improper vote buying, Kurz should not be allowed to vote the Boutros shares, because by entering into the Purchase Agreement, Boutros breached the transfer restrictions in the Restricted Stock Grant Agreement. The Restricted Stock Grant Agreement provided that “[p]rior to [March 3, 2011], [Boutros] shall not be entitled to transfer, sell, pledge, hypothecate or assign any shares of Restricted Stock.” The Court of Chancery assumed that the restrictions are operative and binding.

The factual findings made by the Court of Chancery are important. On Thursday, December 17, 2009, Kurz was told “we need to buy someone’s shares this weekend.” As of Friday, TBE had consents for approximately 48.4% of the common shares and needed another 116,325 votes to prevail. Boutros owned 175,000 shares of restricted stock, all of which were all entitled to vote. Kurz was provided with copies of both of Boutros’ stock restriction agreements on Sunday, December 20, 2009, before entering into the Purchase Agreement.

Kurz read the agreements and parsed the restrictions. He focused on the language in the Resale Restriction Agreement that extended beyond any sale to encompass any “contract to sell,” any “option to purchase,” and any transfer of the “economic risk of ownership.” He noted that the Restricted Stock Grant Agreement did not contain similar language and appeared to restrict only an actual sale, transfer, pledge, hypothecation, or assignment. Kurz concluded that he could contract with Boutros to buy however many shares Boutros could sell at the time, and to obtain in the future however many shares Boutros eventually could transfer, if and when Boutros became able to transfer them.

The Court of Chancery held that Kurz and Boutros had successfully contracted around the sale and transfer restrictions, because the Restricted Stock Grant Agreement does not prohibit Boutros from agreeing to take those actions at a future date. The record supports the Court of Chancery’s conclusion that Kurz did not engage in illegal vote buying because that court found that, along with the votes, Kurz simultaneously purchased and immediately received the full economic interests associated with the Boutros shares. That finding, however, leads inexorably to the conclusion that the Purchase Agreement violated the Restricted Stock Grant Agreement. The Court of Chancery’s determination that there was no actual sale or transfer is not supported by the record, the language and purpose of the Restricted Stock Grant Agreement, or the court’s own findings.

In their comprehensive analysis of new vote buying and its corporate governance implications, Professors Henry Hu and Bernard Black have examined modern *391 vote buying techniques. In doing so they defined three terms that are relevant to our review of what was actually transferred immediately by the Purchase Agreement between Kurz and Boutros.

“[F]ormal voting rights” [ — ] the legal right to vote shares under company law (as supplemented by SEC and stock exchange rules governing voting of shares held in street name), including the legal power to instruct someone else how to vote.

“[Ejconomic ownership” [ — ] the economic returns associated with shares. This ownership can be achieved directly by holding shares, or indirectly by holding a “coupled asset,” which conveys returns that relate directly to the returns on the shares. Economic ownership can either be positive — the same direction as the return on shares — or negative — the opposite direction from the return on shares.

“Full ownership” consistís] of voting ownership plus direct economic ownership. 19

Professors Hu and Black also noted:

Our system of record ownership already decouples economic ownership from formal voting rights. The record owner is typically at least two persons removed from the economic owner of the shares. Shares held in “street name” are generally held “of record” by Depository Trust Company or another securities depository, which holds the shares on behalf of another intermediary (such as a broker-dealer or bank), which holds the shares for economic owners. Our legal system has responded by partly recou-pling voting and economic ownership. Depositories pass voting rights to their bank and broker clients, who must request voting instructions from economic owners. If the customer does not provide instructions, New York Stock Exchange (NYSE) Rule 452 allows a bank or broker to vote on routine matters, but not on a contested matter or on a merger or similar transaction which may substantially affect the value of the shares. 20

Professors Hu and Black concluded that the foregoing rules on when record owners can vote provide precedent for an effort to reconnect voting rights to economic ownership, when technology has severed them.

Those observations helpfully aid our analysis of the Purchase Agreement. Kurz paid Boutros for the immediate receipt of all economic interest in the shares. The Restricted Stock Grant Agreement, however, required the continued decoupling of the formal voting rights, by requiring that Boutros remain as the record owner until 2011. Nevertheless, Kurz was able to connect the economic rights he purchased from Boutros with the formal voting rights that Boutros would otherwise retain by requiring Boutros to execute an Irrevocable Proxy.

Therefore, unlike other beneficial owners, Kurz could vote the shares on any future corporate matter without ever again contacting the record owner, Boutros, for another proxy. By reconnecting the voting rights to the economic ownership via the Irrevocable Proxy, the Purchase Agreement immediately conferred upon Kurz the functional equivalent of “full ownership,” in consideration for the $225,000 he paid to Boutros. There was nothing for Boutros to transfer to Kurz in the future, other than the bare legal title.

*392 The Court of Chancery found that “Kurz believed he obtained the economic and voting rights (albeit not legal title) to 150,000 shares” for a price of $1.50 per share. Kurz testified that when he entered into the Purchase Agreement, the financial results and forecasts he received suggested he was overpaying Boutros for his shares. In rejecting the defendants’ insider trading arguments, 21 the Court of Chancery concluded that Kurz’s testimony was credible and that “Kurz bought Boutros’ shares because TBE needed another 116,325 votes to win.”

The purpose of the Restricted Stock Grant Agreement was to “provid[e] employees and consultants of [EMAK] with a proprietary interest in pursuing the long-term growth, profitability and financial success of the Corporation.” That is consistent with the purpose of restricted stock agreements generally. 22 The structure of the Restricted Stock Agreement, providing that Restricted Stock will fully vest in Boutros only after three years of continued employment beyond the grant date, is also consistent with this purpose.

The Court of Chancery found that “although Kurz did not take title to the 150,-000 shares that Boutros owned, and although I assume the Restricted Stock Grant Agreement prohibits Boutros from transferring title to Kurz until March 3, 2011, Boutros nevertheless transferred to Kurz, and Kurz now bears, 100% of the economic risk from the 150,000 shares.” Boutros’ immediate divestiture of all voting and economic rights in his shares frustrates the purpose of the Restricted Stock Grant Agreement, because bare legal title, alone and without more, does not give Boutros a stake in the corporation’s future.

The Restricted Stock Agreement prohibits any “transfer, [sale], pledge or hypothe-cat[ion]” of Boutros’ restricted EMAK shares. The Court of Chancery found that the “odd framing of what Boutros sold and Kurz bought reflects their efforts to contract around those transfer restrictions.” 23 The Boutros/Kurz Purchase Agreement recites that Boutros agrees to “sell” all shares “that he owns and is permitted to sell, transfer or assign.... ” By its very terms, the Restricted Stock Grant Agreement prohibits what the Boutros/Kurz Purchase Agreement purports to do, i.e., sell, transfer or assign his shares. Therefore, we hold that the Purchase Agreement did not operate as a legally valid sale or transfer of Boutros’ shares, and that Kurz was not entitled to vote those shares.

Written Consent Must Be Executed by a Record Holder

The defendants also argue the TBE Consents cannot be effective because of *393 the absence of a DTC omnibus proxy. Section 228(a) of the DGCL provides:

Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders o