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Rabbani v. Enzo Biochem

February 1, 2010

SHAHRAM K. RABBANI, PLAINTIFF,
v.
ENZO BIOCHEM, INC., DR. ELAZAR RABBANI, BARRY W. WEINER, STEPHEN B.H. KENT, IRWIN C. GERSON, BERNARD L. KASTEN, AND MELVIN F. LAZAR, DEFENDANTS.



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION AND ORDER

Plaintiff sought a preliminary injunction to enjoin Enzo Biochem, Inc. ("Enzo") from conducting its annual shareholder meeting ("Shareholder Meeting") on January 29, 2010. The motion seeking a preliminary injunction was denied in an Order dated January 27, 2010, with an opinion to follow. This is the opinion.*fn1

The plaintiff Shahram K. Rabbani ("Rabbani") is a co-founder of Enzo and a member of its board. Rabbani brings claims against Enzo and six individual defendants who are Enzo directors for violations of federal securities laws and New York statutory and common law.*fn2 Rabbani filed a motion for a preliminary injunction on January 11. He seeks, inter alia, a delay of the Shareholder Meeting until no earlier than March 15, 2010.

Pursuant to this Court's individual practices, and with the consent of the parties, the direct testimony of the witnesses for the preliminary injunction hearing was submitted by affidavit. Rabbani submitted declarations from himself; Andre de Bruin, at one time nominated by Rabbani as a candidate for director of Enzo; and Norma J. McDaniel, Avie Roy, William R. Stansbury, Jan W. Vandersande, Marvin Miller, and Richard Miller, all shareholders of record of Enzo.*fn3 The defendants submitted declarations from defendants Barry Weiner ("Weiner"), Stephen B.H. Kent, Irwin C. Gerson, Bernard L. Kasten, and Melvin F. Lazar; Andrew R. Crescenzo ("Crescenzo"), the Senior Vice President of Finance for Enzo; and David C. Goldberg ("Goldberg"), the Vice President of Corporate Development at Enzo. Following the service of the preliminary injunction papers, the parties consented to the submission of this motion on that paper record. Based on those submissions, the following constitutes the Court's findings of fact and conclusions of law.

BACKGROUND

Enzo is a publicly held corporation organized under the laws of the State of New York. It is a life sciences and biotechnology company focused on harnessing genetic processes to develop research tools, diagnostics, and therapeutics. Rabbani co-founded Enzo in 1976 with his brother, Dr. Elazar Rabbani (Dr. Rabbani), and their brother-in-law, Weiner. Rabbani previously served as the company's chief operating officer and chief financial officer. More recently, he served until March 5, 2009 as the president of the company's largest subsidiary; and until November 25, 2009 as Secretary and Treasurer of Enzo. Rabbani owns approximately 3.8% of the outstanding shares of Enzo. Dr. Rabbani is the Chief Executive Officer, Chairman of the Board, and Secretary of Enzo. Weiner is President, Chief Financial Officer, Principal Accounting Officer, Treasurer, and a director of the company.

There are seven members of Enzo's board of directors, split into three classes. Each class serves a term of three years. There were three vacancies on the board to be filled in January 2010.

Enzo's Bylaws

Several of the issues raised in this litigation rest on the application of Enzo's Amended and Restated By-Laws ("the Bylaws"). The pertinent provisions of the Bylaws include its description of the method by which a shareholder may nominate candidates to serve as directors of the Company. The Bylaws require that each notice of intent to nominate directors contain specified information as well as such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board. (Emphasis supplied.) The Bylaws allow the chairman of the meeting to "refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure."

According to the Bylaws, a shareholder may nominate directors on written notice given either sixty or seven days in advance of a shareholder meeting, depending on whether the shareholder meeting is the annual meeting or a special meeting for the election of directors. The Bylaws provide: only if written notice of such shareholder's intent to make such nomination has been given... to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders, 60 days in advance of such meeting, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. (Emphasis supplied.) Under the Bylaws, the annual meeting must take place in the month of January. Specifically, the Bylaws require that the annual shareholder meeting "be held during the sixth month following the close of the Corporation's fiscal year." Since Enzo's fiscal year ends in July, the meeting must be held during the month of January.

The Bylaws also require that shareholders be given written notice of all shareholder meetings:

Notice of the place, date and time of the holding of each annual and special meeting of the shareholders and, in the case of a special meeting, the purpose or purposes, thereof, shall be given personally or by mail in a postage prepaid envelope to each shareholder entitled to vote at such meeting, not less than ten nor more than fifty days before the date of such meeting....

Rabbani Notifies Enzo of Intent to Nominate Directors Enzo's annual Form 10-K, filed with the U.S. Securities and Exchange Commission ("SEC") on October 14, 2009, disclosed that the annual shareholder meeting would be held "on or about January 26, 2010." On October 21, Goldberg informed the board of directors that the annual shareholder meeting would take place on January 19, 2010. As already noted, the Bylaws require the annual meeting to be held no later than January, and that had been the company's practice for approximately the last twenty years.

In an effort to comply with the Bylaws' requirement of sixty days notice of nominations in advance of an annual shareholder meeting, on November 20, Rabbani advised Enzo in writing that he was nominating three persons for election to the board of directors ("the Nomination Letter"): Joseph V. Gulfo, Steven Katz, and Andre de Bruin.

On November 23, Enzo distributed an agenda for a November 25 board meeting that listed a February 9 date for the annual meeting. It read, "Notice of Annual Meeting Information: Record Date-December 14, 2009; Meeting date-February 9, 2010." Consistent with the agenda, on that same date, Crescenzo notified Broadridge Investor Communications Solutions ("Broadridge"), the proxy server hired by Enzo; American Stock Transfer & Trust Company, Enzo's transfer agent ("American Stock Transfer"); and an entity called CEDE & Co., described as the company in whose name most "street named" shares are held (collectively, "the Proxy Entities"), that the annual shareholder meeting date was being changed to February 9.

Almost immediately, however, Enzo reversed course and decided to proceed with its annual meeting in January, as required by its Bylaws. On November 24, Enzo's outside counsel sent an email to Crescenzo that said "Changing annual mtg date to january 29." Crescenzo promptly informed some of the Proxy Entities that the meeting date would be January 29.*fn4 Neither Enzo nor its counsel advised Rabbani at that time of the January 29 meeting date.

November 25 Board Meeting

At the November 25 meeting of Enzo's board of directors, the board removed Rabbani as Secretary and Treasurer. It also established a Stockholder Meeting Committee ("Committee") composed of Dr. Rabbani and Weiner. It explained the reasons for creating the special committee in a resolution, which reads in pertinent part:

WHEREAS, to properly and more efficiently manage... and work with the Company's management and outside professional advisors with respect to planning, strategizing, soliciting votes and convening the Company's 2009 Annual Meeting or, to the extent such meeting is not held on or before January 31, 2010, any subsequent special meeting of the Company's stockholders at which Company directors are to be elected and the matters to be acted upon and presented thereat including, without limitation, communicating with the Company's stockholders and addressing any potential opposition election campaign to be instituted by Shahram K.

Rabbani or any other stockholder of the Company, the Company's directors have determined that it is in the best interest of the Company for a committee of the Board to be constituted and established for the aforementioned purposes. (Emphasis supplied.) The Resolution also states that the Committee "shall report from time to time to the entire Board."

At the November 25 meeting, Rabbani asked Enzo's outside counsel what had happened to the shareholder meeting date of February 9th listed on the agenda, and the outside counsel told him that the "February 9 date was out" and that there was no new shareholder meeting date. No one at the meeting advised Rabbani that the annual meeting would be held in January, although as the Resolution quoted above reflects, the Board was on notice that if the annual meeting was not held before the end of January, any subsequent meeting would be a "special meeting."

Also on November 25, Dr. Rabbani wrote Rabbani to reject the Nomination Letter. Dr. Rabbani's letter asserted that the Nomination Letter "fails to comply with the requirements of Section 15 of Article II of the Company's Amended and Restated By-Laws currently in effect. It is the Committee's and the Board's position, therefore, that your letter is invalid and of no effect." The letter went on to say that, notwithstanding that conclusion, "the Company intends, voluntarily, to provide you a list of the record and beneficial owners of the Company's common stock." It also confirmed that the Board had removed Rabbani as an officer of the Company and reminded him of his fiduciary duties to the company and its stockholders.

Rabbani and Enzo Speak with Two Shareholders

From November 25 until December 30, Rabbani and Enzo and their counsel exchanged a series of letters debating the effectiveness of the Nomination Letter. Rabbani did not resubmit the Nomination Letter to include the information that Enzo alleged was missing or incomplete.

On November 30, the Committee set December 29 as the record date for determining shareholders of Enzo for purposes of voting at the shareholder meeting. Enzo's outside counsel also advised American Stock Transfer on November 30 that Rabbani had been terminated as an officer of Enzo. The letter said:

You are hereby instructed not to communicate with, or divulge any information to, any individual who is not an officer, representative or advisor of the Company regarding any matter relating to the Company, including, without limitation, the 2009 Annual Meeting, the record date therefore or any other matter referenced in this letter. Please advise the undersigned immediately if any request for such information is made by Shahram K. Rabbani or any of his representatives or advisors.

The letter asserted that the date for the shareholder meeting had not yet been set by the board.

On December 1, Enzo contracted with a proxy solicitation firm called Altman Group, Inc. for representation "in a proxy contest for board seats at the 2010 Annual Meeting" and discussed the possibility of filing a preliminary proxy. Also on December 1, Enzo sent Rabbani the names, addresses, and security positions of the shareholders of Enzo, as Rabbani had demanded in his Nomination Letter. It insisted again that it was providing the names "as a courtesy" and not because the Nomination Letter was effective or valid.

During this period of time, Rabbani spoke with two of Enzo's largest shareholders to determine whether they would consider supporting a competing slate of director candidates and to express his dissatisfaction with Enzo's management. In December, each of these shareholders advised Weiner that Rabbani had made allegations about Enzo's poor management and performance. At his deposition, Weiner explained that when he met with each of the shareholders, he presented "facts" in response to their inquiries. He acknowledged in his deposition that it was his hope that the "shareholders will make an appropriate and educated decision as to what is in their interest and the best interest of the company."

On December 9, Broadridge sent an email to Rabbani's proxy solicitor, Mackenzie, in response to Mackenzie's inquiry whether there were any "dates on system." The email replied: "r/d 12/29 meet date 2/23/10," presumably referring to the Record Date and Shareholder Meeting date. Mackenzie conveyed this information to Rabbani's attorney in "mid-December." On December 18, the Committee officially set January 29, 2010 as the date for the annual meeting.*fn5

Enzo Files Proxy Statement

On December 23, Enzo filed its definitive proxy statement ("Proxy Statement") indicating that the annual shareholder meeting was being called for January 29, 2010 (1) to elect to the company's board the slate preferred by management; (2) to ratify the appointment of independent auditors for the upcoming fiscal year; and (3) to transact any other business as may properly come before the Shareholder Meeting. The statement included no mention of Rabbani's Nomination Letter or the existence of a competing slate of director candidates. This was the first public notification of the meeting date and the first time that Rabbani and the other Enzo directors who were not on the Committee learned of the date. Rabbani protested on December 28 that the setting of the record date without board action was "defective." On December 31, Enzo provided Rabbani the names, addresses, and security positions of all holders of common stock as of the Record Date of December 29.

Rabbani Files Preliminary Proxy Statement

On January 8, 2010, the date that Rabbani filed this lawsuit in state court, he also filed a preliminary opposition proxy statement ("Rabbani Proxy Statement") and related solicitation materials with the SEC. The Rabbani Proxy Statement reports that Rabbani will be nominating two directors: Andre de Bruin and Steven Katz. It explains that while Rabbani had originally notified Enzo of an intention to nominate three candidates, only two ultimately agreed to be nominated. It also reports that Rabbani "intends to seek to have the meeting for the election of directors postponed to a later date in order to allow adequate time for stockholders to evaluate the director nominees and for us to solicit proxies for the election of the Independent nominees," and that if the meeting were postponed, he intended to nominate a third candidate.

The Rabbani Proxy Statement contained several required disclosures which were not included in ...


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